Multi-asset fund shies away from risk

[First published in Personal Finance, September 2014]

The multi-asset fund with a constraint on its equity exposure that performed best on a risk-adjusted basis over periods up to five years, is a fund with a relatively conservative mandate, including a target to avoid losses over any one-year period.

Despite this constraint, the Prescient Positive Return QuantPlus Fund achieved the best and most consistent returns on a risk-adjusted basis, as measured by the PlexCrown Fund Ratings.

The Positive Return QuantPlus Fund is a medium-equity fund that is required to keep its equity exposure within 60 percent of the fund.

The fund returned, on average, 7.32 percent a year over five years, the second-worst return over that period out of the 39 funds in the multi-asset medium equity sub-category, according to ProfileData.

However, the fund achieved the highest PlexCrown rating of five PlexCrowns for periods up to five years, beating all its peers in the multi-asset high-, medium- and low-equity sub-categories despite the fact that high-equity multi-asset funds can have equity exposure of up to 75 percent of the fund.

On the basis of the PlexCrowns, a measure of the consistency of its risk-adjusted returns, the Prescient fund qualified for the Raging Bull Award.

On straight performance over 10 years, the Positive Return QuantPlus Fund returned 11.55 percent a year, and it was ranked eighth out of 10 funds with a 10-year performance history in the multi-asset medium equity sub-category.

In addition to its equity exposure constraint, the Prescient Positive Return QuantPlus Fund was designed to provide real long-term returns, without any downside over a rolling 12-month period.

The fund’s asset allocation to equities, cash and bonds is done through active management, but its equity exposure is managed passively by tracking the FTSE/JSE All Share 40 Index (Alsi40).

The fund’s managers, Guy Toms and Liang Du, also protect investors from losses on the equity market by investing in derivatives.

This means that if a share or index specified in the contract drops below a specified level, the derivative will pay the fund the difference between its actual level and the specified level.

Due to its structure, the fund will always give away return on the upside, to reduce equity risk down to zero in negative markets.

Du says this derivative exposure is actively managed – the fund manager makes calls on which contracts to buy.

The manager must decide at what level of the Alsi 40 to buy protection, for how long to buy the protection and at what price.

Du says the protection the fund derives from investing in derivatives results in the fund giving up three to four percentage points of the returns it could have earned from equities.

However, Prescient believes the protection has been worth it, because the fund has achieved an average annual return of 11.2 percent since its inception in April 2004. This return is, on average, 5.36 percentage points above the average inflation rate (Consumer Price Index) for the period of 5.84 percent.

More importantly, in periods of extreme stress the fund removes all downside. In 2008, when the market was down 30 percent, the fund was up 11 percent for the year.

Du says the asset allocation of the Positive Return QuantPlus Fund is determined by the cost of equities and the cost of protecting against losses on the equity market relative to fixed-income assets.

In 2008, the fund’s exposure to equities was reduced to virtually zero. The fund started to push back into equities in 2009, with exposure reaching about 50 percent in March of that year – the month in which the market bottomed after its crash.

Du says the exposure to equities has been about 50 percent since then.

The fund struggled in 2011, when the equity market, as measured by the FTSE/JSE All Share Index (Alsi), showed virtually no price appreciation and the Alsi earned only two percent from dividends. The fund earned a total return of three percent that year, he says.

Du says the fund’s exposure to fixed-interest assets is actively managed – he and Toms decide on the average duration to maturity of the instruments in which the fund invests, as well as the credit risk to which the fund should be exposed.

With a maximum duration of around three years, the average duration of the bonds and other fixed-income assets tends to be quite low, Du says.

The credit risk is also kept quite low, with exposure to high-quality corporate bonds and bank bonds.

The fund has no exposure to listed property, but it may include some of these shares in the future, Du says.

Prescient’s Positive Return QuantPlus Fund is ideal for investors who want higher returns than they can earn in cash, but without incurring too much risk, he says.

Du expects that the fund will return four to six percent above inflation over the market’s next business cycle (which includes an upward and downward phase).

The Prescient fund had a total expense ratio of 1.16 percent for the quarter to the end of September 30 last year.

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