Asset managers’ insistence on consistence
Managers look to multi-asset funds for consistent performance, writes
Local asset managers face unprecedented challenges in the hunt for returns and income with adequate capital preservation in volatile markets.
Sticky inflation and an interest rate cycle that is yet to peak continues to put pressure on equity and bond markets. At the same time, a recession for the local economy now seems inevitable due to the intensity and severity of load-shedding.
Faced with this combination of risks, multi-asset funds that combine bonds, money market instruments, equities, and real estate in a single fund offer suitable diversification opportunities.
“Portfolios include highrisk equities for their potential to deliver inflation-beating returns, with bonds and money market instruments included for risk reduction and income generation,” says Laurette Ndzanga, research analyst at PPS Investments.
However, not all multiasset funds are created equal, as the fund manager typically determines the asset allocation based on the investment objective. For example, performance dispersion across multi-asset low equity funds — funds that aim to provide capital growth over the long term with low short-term risk, and maximum exposures to equities, property and offshore assets of 40%, 25% and 45% respectively — varies widely.
“Analysing net-of-fee returns for all the funds in the Asisa multi-asset low equity category over the past decade reveals a wide dispersion of returns for each calendar year of between 9.5% in 2017 and 31.1% in 2021,” says Ndzanga.
“For example, in 2020, the dispersion was 21%, with the best performing fund returning 11.6% and the worst performing -9.6%.”
Ndzanga adds that funds with a defensive asset allocation tend to lag their peers.
“Simply having access to a well-diversified portfolio is not enough to guarantee consistent performance as a
fund manager’s investment style will influence how they allocate to different asset classes and select stocks.”
Ndzanga explains that allocations to offshore assets have materially affected the return dispersions. The recent increase in the offshore allowance from 30% to 45% will likely also widen dispersions in future.
“High conviction equity views also tend to have a significant impact on whether a fund leads or lags from a performance perspective due to the relatively low weighting to equities in these portfolios.”
The duration or interest rate risk is another factor that determines whether a fund will out- or underperform, adds Ndzanga. “However, its impact is muted by the contribution to the performance of the riskier asset classes.”
From a broader multi-asset fund perspective, prevailing local and global market conditions create opportunities to deliver returns across asset classes.
“Local equity and bond valuations have been trading below their historic averages and offer attractive potential returns, especially compared with their offshore counterparts,” says Michael Moyle, co-head of multi-asset at M&G Investment Managers.
“We look to asset valuations when determining asset class preferences for our portfolio as low or cheap valuations often indicate higher prospective returns.”
As valuations currently compensate investors for holding local equities and nominal government bonds, Moyle highlights a preference for these assets in portfolios.
“The weak valuation of the rand against major global currencies supports our preference for local over global assets. However, we continue to hold global equities and bonds in our multi-asset portfolios, but in more neutral positions because inflation, interest rates and growth still pose risks to global assets that valuations do not adequately compensate for.”
Moyle highlights inflationlinked bonds as an additional source of real returns. “Currently, real yields are relatively attractive in comparison to their history and our long-run fair value assumption. However, compared with nominal bonds, their valuations are less attractive, with lower return potential, which makes them less desirable for other types of portfolios.”
Asset managers can also achieve more consistent performance by selecting best-in-class fund managers within a particular style and blending fund managers with different styles, suggests Ndzanga. “While it is impossible to predict the markets, an in-depth understanding of a fund manager and how they construct their portfolio can provide some predictability into how they are likely to perform through the cycle.
“This understanding can only come from wellresearched, repeatable manager research and a selection process that considers recent performance and rigorously assesses whether the fund manager’s investment philosophy, approach and risk management processes reflect in their portfolios,” says Ndzanga.