Low-equity fund wins award for risk-adjusted performance

[First published in Personal Finance, January 2017]


Raging Bull Award for the Best South African Multi-asset Equity Fund on a risk-adjusted basis over five years to December 31, 2016

Certificate for Best South African Multi-asset Low-equity Fund on a risk-adjusted basis over five years to December 31, 2016

The NFB Ci Cautious Fund of Funds scored the highest PlexCrown rating and rank of all the funds in the South African multi-asset high-equity, medium-equity and low-equity sub-categories on a risk-adjusted basis.

The PlexCrown system combines risk-adjusted returns based on performance statistics from ProfileData with standard risk measures, consistency measures and measures of downside and managerial risk.

The fund’s performance is remarkable considering that it is in the multi-asset low-equity sub-category and is therefore restricted to investing no more than 40 percent in equities, both locally and globally, and has an offshore limit of 25 percent. As its name suggests, the fund is aimed at risk-averse investors.

As a fund of funds, the Cautious Fund of Funds invests in other unit trust funds. According to the fund’s latest fact sheet, it has holdings of 18 percent in each of the following funds: the Prescient Income Provider Fund, the Coronation Strategic Income Fund and the Investec Diversified Income Fund. Its next biggest holding is in a global equity index fund, the DB X-Tracker MSCI World ETF.

Fund manager Paul Marais says the fund’s out-performance is the result of three factors:

  • Maintaining significant offshore exposure without making any significant changes to the portfolio throughout the period under review;
  • Significant exposure to flexible-income strategies, which produced strong returns without much capital volatility; and
  • Low exposure to local risk assets, particularly listed property and equities, where returns have been under pressure for the past 12 to 18 months.

Marais says it has been difficult to time periods of rand strength and weakness, during which offshore exposure alone would have resulted in good returns for investors, because the rand has depreciated over five years. “The offshore exposure has, however, been tactically traded – 10 to 15 percent of offshore exposure has been moved in and out at critical times: Nene’s firing, for example.”

The fund’s benchmark is the Consumer Price Index plus three percentage points a year over rolling three-year periods, but it has not managed to beat it over any one year.

Marais says the benchmark has been “a very high hurdle” to clear over the past year, but the relative under-performance is slight and is attributable mainly to a strong rand and recent exposure to local listed property that has not performed well. Marais says NFB Asset Managers’ investment philosophy is based on their key beliefs: “First, that asset allocation drives a significant portion of overall investment returns. We also believe that markets are inefficient and that they swing between periods of over- and under-valuation.”

Marais says markets revert to their average returns, but they don’t spend much time earning average returns.

“And we believe we are able to exploit these circumstances to the benefit of investors invested in the portfolios we manage. We do not believe in optimisation, back-testing or forecasting, as these are all materially flawed processes in one way or another,” he says.

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