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
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