The strategy aims to achieve a return of cash +4% with half the level of equity volatility, over rolling five-year periods. We place equal emphasis on both the return and risk components of the objective. Our integrated risk-management approach and active risk allocation strategies are vital to meeting the risk objective.
Figure 1: Market context and risk allocation
Risk management is an integral part of the investment process. The strategy benefits from the embedded risk management resource within the Investec Multi-Asset team. For example, we assess new potential positions prior to implementation to determine their role within the portfolio and the optimal size from a risk/return perspective. The team also undertakes scenario analyses and stress testing. We believe that risk mitigation strategies at a position and portfolio level are key to reduce the occurrence and magnitude of performance drawdowns, thereby helping to achieve the risk objective.
The Multi-Asset team comprises seven specialist research groups, focusing on uncovering compelling investment ideas. All ideas are classified as either Growth, Defensive or Uncorrelated and there is a strong emphasis on generating all three types of positions. Defensive assets, which are expected to be negatively correlated to equities, can offer either implicit or explicit portfolio protection. Implicit protection strategies are those positions that are designed to result in a reduction in portfolio risk and/or an increase in portfolio diversification.
Examples include increasing diversification within Growth exposure, adding defensive bond duration, increasing exposure to defensive currencies such as the US dollar, or shorting Growth currencies (such as Asian developed currencies).
Explicit protection strategies are those positions that are specifically designed to generate or sustain returns in falling markets. For this to be explicit, the protection mechanism must be direct. They can therefore be seen as a form of portfolio insurance. Examples include option strategies and cash allocations. The table below shows some of our recent positions.
Figure 2: Recent explicit protection positions
|PROTECTION STRATEGY||NOTIONAL AS % OF EQUITIES||DATE IMPLEMENTED||DATE CLOSED|
|US equity put spread||43.9||April 2016||August 2016|
|US equity put option||26.7||March 2015||September 2015|
|SGI Vol Invest Beta Short Term Note||N/A||December 2013||October 2015|
|US equity put option||16.6||September 2013||October 2013|
|Australia equity put option||51.5||February 2013||June 2013|
|Korea equity put option||37.9||May 2011||August 2011|
As part of the position proposal process, analysts are required to articulate upside and downside ‘review levels’. Hence, they indicate the level at which their conviction in a position should be tested and where retention of the position should be reconsidered. These review levels should provide greater upside potential compared to downside potential, so that there is a positive skew. This upside/downside review ratio is typically two to one and is indicative of the conviction in the position.
It is not a necessary requirement, however, for positions to reach these review levels before a decision is taken. Real-time monitoring of positions and ongoing discussions with the co-portfolio managers ensure that we take decisions on a timely and appropriate basis. This discipline helps us to minimise drawdowns so that we can meet our risk objective.
Figure 3: Some recent and future risks, and how we managed or are managing them.
|Prospective events||Probability||Protection strategy|
|Abe loese his leadership||35%||Buy Janpanese Yen and options|
|Five Star Movement led Italian government||30%||Buy German bonds, sell Italian bonds|
|Brexit negotiations reslut in UK having to trade under WTO||20%||Currency put option on sterling|
|Central bank unwind shock||25%||Equity options|
|Greater US protectionism||15%||Short developed Asian currencies, equity options|
|Unexpected China growth slowdown||15%||Short developed Asian currencies|
Our risk management process is reflected in our returns and volatility relative to equities.p>
Investec Diversified Growth (GBP Strategy) used for illustrative purposes due to longer track record
Investec Diversified Growth (GBP Strategy – EUR Hedged) Strategy performance
This is not actual performance, hedging is synthesised based on actual GBP returns converted to EUR and does not include transaction costs. The portfolio of the GDG (Euro) and the DGF (GBP Strategy) will not necessarily be the same. Most notably as they are denominated in different currencies, they may take different currency positions. Past performance is not a reliable indicator of future results, losses may occur. For further information on indices, investment process and performance targets, please see the Important Information section. Source: Investec Asset Management, 30 September 2017, gross of all fees, in EUR. Performance would have been lower had management fees been included. Composite inception date: 1 May 2008. Drawdown characteristics of monthly returns. * Equities defined as MSCI World hedged to EUR.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivative counterparty: A counterparty to a derivative transaction may fail to meet its obligations thereby leading to financial loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses. This may lead to large changes in value and potentially large financial loss. Developing market: Some countries may have less developed legal, political, economic and/or other systems. These markets carry a higher risk of financial loss than those in countries generally regarded as being more developed. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates and/or inflation rises. Multi-asset investment: The portfolio is subject to possible financial losses in multiple markets and may underperform more focused portfolios. Investing in China: Investment in mainland China may involve a higher risk of financial loss when compared with countries generally regarded as being more developed.
The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. The value of investments, and any income generated from them, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets invested in.
There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Any decision to invest in securities or strategies described herein should be made after reviewing the prospectus and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the Prospectus or other disclosure document for the fund or Strategy. Copies of such documents are available free of charge upon request. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.
There is no assurance that the persons referenced herein will continue to be involved with investing for this Strategy or Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Strategy or the Fund at any time without notice.
Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular Strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective.
The target is based on Manager’s good faith estimate of the likelihood of the performance of the asset class under current market conditions. There can be no assurances that any Strategy or Fund will generate such returns, that any client or investor will achieve comparable results or that the manager will be able to implement its investment strategy. Actual performance of investments and the Fund or Strategy overall may be adversely affected by a variety of factors, beyond the manager’s control, such as, political and socio-economic events, adverse changes in the interest rate environment, changes to investment expenses, and a lack of suitable investment opportunities. Accordingly, Performance Targets may be expected to change over time and may differ from previous reports.
Specific Portfolio Names
References to particular investment or strategies are for illustrative purposes only. Unless stated otherwise, the specific companies listed or discussed are included as representative of the Strategy or Strategies. Such references are not a complete list and other positions, strategies, or vehicles may experience results which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. More information is available upon request.
Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.
If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.If applicable FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2017. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf