Eq­uity-like re­turns at lower risk The PSG Flex­i­ble Fund aims to pro­vide eq­uity-like re­turns but at lower lev­els of risk. Since 2004, it has done just that, mak­ing it a good choice for in­vestors who want near-eq­uity re­turns but with sig­nif­i­cantly less vola

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PSG Flex­i­ble Fund has the most flex­i­ble man­date of all the PSG As­set Man­age­ment funds. As­set al­lo­ca­tion is cru­cial to the fund meet­ing its ob­jec­tives, and it has tra­di­tion­ally had a sim­ple as­set al­lo­ca­tion. Eq­uity ex­po­sure can vary from 0% to 100%, and up to 25% of the fund may be in­vested out­side South Africa. His­tor­i­cally, the fund’s eq­uity ex­po­sure has var­ied be­tween 60% and 100%, with an av­er­age ex­po­sure of 75%.

At the end of the first quar­ter of 2016, the fund’s eq­uity ex­po­sure was 45.8% and was well diver­si­fied across ge­ogra­phies and in­dus­tries.

As­set al­lo­ca­tion is done based on op­por­tu­nity. If we can find many un­der­val­ued shares, we have a higher eq­uity ex­po­sure and a lower cash ex­po­sure. If we can find fewer op­por­tu­ni­ties, we are happy to wait pa­tiently, dur­ing which time the fund will have a higher cash ex­po­sure.

Pa­tient cap­i­tal al­lo­ca­tion

Cap­i­tal al­lo­ca­tion is done pa­tiently. There is not a lot of trad­ing in the fund as we wait for op­por­tu­ni­ties to arise. Un­like a pure eq­uity fund, which must have an eq­uity ex­po­sure of be­tween 75% and 100% at all times, the PSG Flex­i­ble Fund does not have this lim­i­ta­tion.

When com­pany val­u­a­tions are high, the fund tends to have a higher level of cash, and vice versa. For ex­am­ple, in 2007, we be­gan to find fewer and fewer com­pa­nies that met our in­vest­ment cri­te­ria. This was pri­mar­ily due to the fact that high- qual­ity, well-man­aged com­pa­nies were not trad­ing at a suf­fi­cient mar­gin of safety. When these com­pa­nies reached what we felt were their in­trin­sic val­ues, we sold them and were un­able to use the pro­ceeds of these sales ef­fec­tively. At the time, the cash in the fund was at rel­a­tively high lev­els.

Dur­ing the fi­nan­cial cri­sis of 2008, the fund was well po­si­tioned to both limit the draw­down in its value and then, as val­u­a­tions be­came ever more at­trac­tive, to take ad­van­tage of the sale-level prices. As a re­sult, the fund was able to buy shares in com­pa­nies that had be­come sub­stan­tially cheaper. Dur­ing the cri­sis, the value of the FTSE/JSE All Share In­dex (Alsi) fell 45.4%, while the value of the fund only fell 27.3%. Within 15 months, the fund had re­cov­ered to its pre-cri­sis val­u­a­tion, whereas the Alsi took twice as long. By the time the Alsi re­cov­ered, the value of the fund had grown by 35% from its pre-cri­sis level (as shown in the graph be­low).

Moat, man­age­ment and mar­gin of safety

PSG As­set Man­age­ment has a well- es­tab­lished eq­uity process. Our Eq­uity In­vest­ment Com­mit­tee con­sists of 10 mem­bers who are all fund man­agers or an­a­lysts. Since 2004, these com­mit­tee mem­bers have re­ceived 10 in­dus­try awards for the funds that they have man­aged.

The team spends most of its time re­search­ing com­pa­nies listed not only on our lo­cal ex­change, but also on stock ex­changes across the world. We look for com­pa­nies that have a sus­tain­able

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