27four Investment Managers
6th August 2015
The art of preserving capital
South African investors appear hesitant to invest in multi asset medium equity funds, with just R48 billion allocated to this category out of R614.4 billion allocated to multi asset funds in general, according to figures from the Association for Savings and Investment South Africa.
Writing in a related story (here), journalist Patrick Cairns theorises that because medium equity funds sit in a place between being aggressive and conservative, this makes them neither-here-nor-there. Their 60% equity limit puts them in a kind of investing middle ground, he suggests.
However for investors who require a low risk investment that delivers a stable income, this may just be the perfect place to be.
The objective with these funds is to protect capital in these uncertain times, says Charles de Kock who manages all of Coronation’s absolute return funds including the Capital Plus unit trust. “We have been warning investors that they should expect lower returns. The party cannot continue forever. Equities remain highly rated and cash and bond yields also offer only single-digit returns. No single asset class stands out as offering exceptional value.”
The beauty of multi asset portfolios is that managers invest across the equity, bond, money and property markets, and have the discretion to adjust their portfolio allocations as economic circumstances change.
What is interesting is that none of the fund managers approached by The Investor are making major adjustments to their portfolios, rather it’s a tweak here and a tweak there. “Right now with the market skittish and uncertain, the best bet is to have the courage of your convictions and let your investment thesis play out,” says Claire Rentzke head of manager research at multi manager firm 27four.
The decisions that will make the most difference relate to asset allocation, says Simon Peile, co-head of investing at Sygnia Asset Management, include: “Are you in equities, or fixed interest or something else? If you are in equities are you overweight or underweight and by how much? And within this, are you invested in domestic markets or international markets?”
Those decisions, he says, will dominate everything.
The Sygnia fund managers, like many other medium equity multi asset fund managers have downweighted their domestic equity holdings from about 35% of the fund to about 28%. “We are being careful not to be more aggressive. We are conscious that any decision has a reasonable chance of being wrong. You can destroy performance quite easily,” says Peile.
In the case of its multi asset medium equity funds, Sygnia, and the fund managers that invest on its behalf, is avoiding resource companies, consumer facing companies and other companies with a heavy SA bias. The fund does however have quite a chunky allocation to financials. “We are forced to,” says Willem Van der Merwe, co-head at Sygnia with Peile. “It is the prettiest out of a bad selection.” That said, the whole section is not a buy. Instead it is a “stock pickers market”.
27four also outsources stock selection to carefully selcted fund managers. “We are actively managing our exposure to the various styles of managers. You read that value is dead, but we have stuck with an allocation to the value managers, and been very specific as to the type of value though we didn’t carry value at its full allocation,” says Rentzke. “You never know when the market is going to turn.”
As bottom-up stock pickers, Coronation seeks out specific stock opportunities and in its Capital Plus fund it holds Anglo American, British American Tobacco, Naspers, MTN, Standard Bank as well as platinum and other resource stakes.
In some cases, where valuations were on the sharper end, certain holdings were sold down. “There is also a risk in the very high ratings. That is why our overall exposure is quite low in terms of our history,” says De Kock. We have been trimming back. We allow up to 60% in risky assets (local and global equities and property) and we are at 53% currently.”
Of this allocation, 25% is in domestic equities, and of that 18% is in resources (4.5% of total portfolio). “Our positions have not worked out perfectly in the near term but we are not going to day trade and change the composition a lot. We like to own things that are cheaper, but sometimes cheap stays cheap for long,” says De Kock.
Sygnia is a little more resource averse. “Resource stocks are now unbelievably cheap by any possible measure, but I think the negative sentiment will remain for as long as we don’t know where the floor in the Chinese economy is,” says Van der Merwe. “To what extent are they lying about their growth rate? We have invested with equity managers that are nimble and can keep close to this and have resource stocks that are less China-sensitive, such as Sasol, and paper.”
Coronation has additional exposure to commodities through platinum, gold, and palladium ETFs. “These have lower risks but less upside than equity, says De Kock. “But these things are unpredictable. I’m happy to have some bets on the table but will not put the whole fund at risk.”
All of the fund managers are betting on offshore markets to the fullest extent possible, which is usually between 20% and 30% of the fund.
At Coronation for instance the past quarter has seen an increase in the fund’s effective global exposure by 2.5%. It now has 25% invested offshore, which is the maximum allowed. “This was achieved via currency futures, where we bought back the long ZAR/USD positions as we became more concerned about the South African rand,” says De Kock.
In the case of 27four, global exposure is divided between international equities and property. “We think the US is looking a little full. Instead we have added a little more Europe and selected emerging markets – with the exception of China and Russia. That is more than our blood pressure can can handle and more volatility than our investors in this product need,” says Rentzke.
Sygnia is also overweight on its international assets. “We have a heavy tilt towards the US and other developed markets and little exposure to emerging markets. In terms of the global recovery the US is not strong but it is the strongest by some margin,” says Van de Merwe.
For the most part the fund managers are steering clear of fixed-income markets. That is understandable given that global bond yields have fallen to very low levels and locally they are not much better. “At one point global government bonds were trading at negative real rates, which means investors were guaranteeed a loss,” says Van der Merwe. “Fixed income has been in a 30-year bull market, so you have an entire generation of consultants with an ingrained idea that fixed income is a safe place to invest.”
27four hasn’t had a meaningful, dedicated allocation to nominal bonds or inflation linked bonds in its medium equity fund for the last 18 months preferring more flexible fixed income mandates. “Our managers have found selected opportunities in the corporate bond market for instance,” says Rentzke. “But the big risk in this market is liquidity – if you need to get out in a hurry you might battle.”
When it comes to cash, yields are low or close to zero. Even locally where money market interest rates may move up a little, they are unlikely to beat inflation by more than 1% per annum over the next few years. This is not enough to interest any of the fund managers and they hold limited reserves.
The outlook for assets might be a little uncertain, says De Kock, but it is nothing that hasn’t been seen before. The bottom line is to protect the downside; buy assets that are trading below their intrinsic value, and then have patience. “That is the hardest part,” he says. “Human nature is to try to fiddle when the right thing to do is sit on your hands.”