Nedgroup’s offshore multi-asset fund wins with value bias

[First published in Personal Finance, January 2017]

Raging Bull Award for the Best FSB-Approved Offshore Global Asset Allocation Fund on risk-adjusted performance over five years to December 31, 2016

Certificate for the Best FSB-Approved Offshore Global Asset Allocation Fund on risk-adjusted performance over three years to December 31, 2016

Investing in shares, bonds, listed property or cash on the basis of their price in the investment market relative to their future performance earned Nedgroup Investments the Raging Bull Award for the best global flexible fund.

The Nedgroup Investments Global Flexible Fund’s United States dollar returns stated in rands were 19.22 percent a year over five years to the end of December last year, according to ProfileData, while out-performing 40 of the 41 Financial Services Board-approved funds in ProfileData’s category for global flexible funds.

The top performer on straight performance was the Contrarius Global Absolute Fund (Ireland), with an annual return of 20.27 percent over five years, and the average annual return of the category was 16.27 percent. But Raging Bull Awards for multi-asset funds are made on the basis of risk-adjusted returns as measured by the PlexCrown Ratings, and on this measure the Global Flexible Fund was the leader in its category.

Nedgroup Investments outsources the management of its funds to what it believes are the best-of-breed managers. The Global Flexible Fund is outsourced to a US investment manager, First Pacific Advisers, which has managed the fund since June 2013.

The fund manager may invest across asset classes without restriction, but First Pacific is a bottom-up value manager. This means it does not start by selecting how much to invest in each asset class, but looks at securities across the asset classes and selects them on the basis of their valuations – or future earnings relative to price.

One of three managers for the fund at First Pacific, Brian Selmo, says, when picking equities, the fund looks for quality multinational companies that are likely to deliver good returns.

It looks for companies that have a “competitive moat” that keeps them safe from losing out to their competitors and ensures that they will be more valuable enterprises in future, Selmo says.

Two investment decisions that have benefited the fund over the past three-and-half years during which First Pacific has been managing the fund have been decisions to invest in financial shares and corporate bonds that have high yields because they are low investment grade or because the company issuing them is distressed.

In the middle of 2015, as the oil price dropped, First Pacific bought more high-yield bonds and financial shares for the fund.

Selmo says the falling oil price forced investors to sell the bonds of companies in the oil and gas sector, and financial companies with credit exposure to this sector were also expected to be affected.

Investors also expected a stricter regulatory environment for banks and other financial companies. The fund saw an opportunity to buy these shares cheap, benefiting when the prices recovered last year.

He says concerns about corporate bonds in the oil and gas sector proved to be overblown, because companies continued to pay interest on their bonds. The European Central Bank’s bond-buying programme also helped to improve yields last year.

Since then, the up-tick in interest rates has increased the earnings potential of financial companies, and it is expected that the administration of US President Donald Trump will change how they are regulated. This has led to a recovery in financial shares.

At the end of December last year, the fund had just over 57 percent in equities, 40.7 percent in cash and the rest in bonds.

Selmo says that, over the past few years since First Pacific has managed the fund, opportunities have been scarce and the cash holding has averaged between 40 and 45 percent, which is high relative to history.

He says it is difficult to say where future opportunities will lie, but opportunities turn up regularly and deliver good returns over three- to five-year rolling periods.

Valuations are currently high, however, and this means investors must expect returns to be modest, Selmo says.

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