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This site is for retail investors. We recommend that you seek independent financial advice to ensure our Funds are suitable for your investment needs. Please remember capital is at risk and past performance is not a guide to the future.

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The importance of maintaining a balance of exposures in current market conditions

Paul Hutchinson, Sales Manager

Investec Cautious Managed Fund Investec Opportunity Fund Download article PDF

We do not position our portfolios for specific event risk

Clyde Rossouw, Co-Head of the Quality capability at Investec Asset Management and Portfolio Manager of the Investec Cautious Managed and Opportunity funds, continues to emphasise the importance of maintaining a balance of exposures that offer protection in a number of different investment environments.

In a recent article1, Clyde concluded: “Political and event risk are part of the investment landscape. But as bottom-up quality investors, we do not position our portfolios for specific event risk ... With a variety of unforecastable binary risks coming to the fore, we do not believe that it is appropriate to position the portfolio(s) for a particular outcome.”

Short-term performance, a random walk?

While financial studies show that investing in equities is the best way to beat inflation over the long term, determining which will be the top performing asset class over the shorter term is extremely difficult. Consider Table 1, which ranks the relative annual performance of various local and international asset classes for the past 20 years.

Table 1: Local and offshore asset class annual returns in rands (%)


Source: Morningstar as at 31.12.16. BofAML USD Libor used as proxy for Offshore Cash; Citi WGBI used as proxy for Offshore Bonds; MSCI ACWI used as proxy for Offshore Equities; STeFI Composite used as proxy for SA Cash; S&P Global Property used as proxy for Offshore Property. Returns based in ZAR.

The relative ranking of the annual performance of these asset classes appears random. During the 20-year period all the asset classes, bar South African cash have been the top performing asset class at least once, and all eight have been the worst performing asset class at least once.

It is also worth noting the volatility of asset class returns from one year to the next. In 1999, for example, the return for South African equities was 70.8% (making it the top performing asset class), 0.4% in 2000 (making it the worst performing asset class), 32.6% in 2001 and -8.3% in 2002!

Time counts

Table 1 clearly illustrates how difficult it is for the average investor to select the best performing asset class for the next year. However, as expected over the full 20-year period, returns normalise and growth assets (equities and property) outperform fixed income assets (cash and bonds), as illustrated in Table 2.

Table 2: Local and offshore asset class 20-year annualised returns in rands (%)

ZAR ALSI ALBI SA cash SA listed property Offshore equities Offshore cash Offshore bonds Offshore property
20 year 14.5 12.1 9.5 20.4 11.7 8.1 9.8 12.5

Source: Morningstar as at 31.12.16. BofAML USD Libor used as proxy for Offshore Cash; Citi WGBI used as proxy for Offshore Bonds; MSCI ACWI used as proxy for Offshore Equities; STeFI Composite used as proxy for SA Cash; S&P Global Property used as proxy for Offshore Property. Returns based in ZAR.

Multi-asset portfolios: one-stop solutions

In recognition of the challenges investors face in selecting single asset classes, professional money managers, including Investec Asset Management, offer what are termed managed or balanced portfolios, where the complex asset allocation decisions are made by a portfolio manager who has the experience, support, access to information and time to do so. The benefits of these multi-asset funds have been recognised by investors and their financial advisors. The Association of Savings and Investment South Africa (ASISA) quarterly statistics show that investors continued to favour South African multi-asset portfolios, with net inflows of R49 billion for the year ended 30 June 2017. And following multiple years of strongly positive net inflows, SA multi-asset portfolios now hold 50% of the unit trust industry’s R2.09 trillion assets under management.

The Investec Cautious Managed and Opportunity funds* – your asset allocation solutions

The Investec Cautious Managed Fund is a defensive, low-equity balanced portfolio of high quality local and foreign stocks and fixed income assets. It has a strong focus on capital preservation and income generation.
The Investec Opportunity Fund is a balanced portfolio of high-quality local and foreign stocks and fixed income assets. It seeks to create real wealth over the long term while minimising downside risk.

Both funds are managed by the globally integrated Quality team led by Clyde Rossouw who joined Investec Asset Management in 1999. The team comprises 16 investment professionals who are based in Cape Town, London and New York, and who are highly experienced in analysing stocks and fixed income assets in line with their philosophy.

In managing these funds, the team have always recognised the importance of growing investors’ capital and providing sustainable, inflation-beating returns over time. Their focus, therefore, is not on outperforming a particular benchmark or peers but on compounding investors’ wealth over time, thereby helping them to keep their purchasing power intact. Importantly, the team’s risk, quality and valuation framework means that they only invest in opportunities where they are paid to take on risk, where there is a sufficient margin of safety. By way of example, by carefully managing risk, the Investec Opportunity Fund has achieved attractive real returns at lower volatility than the average fund in the Multi-Asset High Equity sector since inception, as can be seen in Figure 1.

Figure 1: Risk versus return since inception

Inception date: 02.04.00, A class. Source: Morningstar as at 31.08.17. Returns are calculated on a NAV-to-NAV basis, net of A class fees, with gross income reinvested. Market indices are gross of fees. Highest and lowest 12-month rolling performance since inception is 43.8% and -15.7% respectively.
*The total expense ratio of the Investec Cautious Managed and Opportunity funds are 1.78% and 1.84% respectively.

A balance of exposures

Portfolio construction is key to managing volatility in a portfolio. Different asset classes provide different returns at different points of the economic cycle, helping to smooth returns over time. For instance, when the rand depreciates against major currencies, we find that SA bonds usually come under pressure and bond yields rise. In such a situation, the fund’s offshore equity position helps to mitigate rand weakness, thanks to its foreign currency exposure. Offshore returns will be further bolstered when the underlying stocks enjoy a rerating. On the other hand, when the rand appreciates and SA bonds do well, the fund’s bond and local currency exposure will help to smooth returns when our foreign currency position deteriorates.

In constructing these portfolios, we therefore seek a balance of exposures with both levers and shock absorbers so that we can generate consistent returns in multiple environments. Importantly though, we will take aggressive positions in areas of the market where we have high conviction.

Who should invest and how

The Investec Cautious Managed and Opportunity funds are suited for investors who do not want to make the complex asset allocation decisions themselves, as they provide one-stop investment solutions that effectively reflect the Quality team’s investment view. As both funds comply with Regulation 28 of the Pension Funds Act, they are also suitable as the underlying investment options in respect of retirement funding investments (pension or provident funds, preservation funds or retirement annuities). Investors can access these funds directly, via Investec Investment Management Services or via all the linked investment service providers.

Important information

1Celebrating 20 years of beating the inflation bogeyman. Taking Stock Autumn 2017.

All information provided is product related, and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security.
Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing, up to 10% of fund net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).
This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Issued by Investec Asset Management, October 2017.