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John Stopford
Head of Multi-Asset Income

At a global level, South Africa is a small, open economy. This has three critical implications for South African investors: Firstly, the domestic market is limited in terms of the opportunity set. Secondly, a narrow emerging market typically experiences higher volatility. And thirdly, as a small economy, a large portion of a consumer’s basket is imported and therefore sensitive to import prices and the fluctuation of the country’s exchange rate. We believe that South African investors should consider allocating some of their assets offshore to meet their long-term objectives.

Going beyond traditional fixed income assets

Low interest rates and low bond yields globally mean that investors are increasingly looking at other asset classes, such as equities and high yield bonds, to generate an attractive and sustainable level of income. Individually, these assets tend to be more risky, but a multi-asset portfolio can help to reduce overall volatility. The Investec Global Multi-Asset Income Fund goes beyond traditional fixed income assets, uncovering attractive opportunities across a broad spectrum of asset classes such as government bonds, investment grade and high
A multi-asset portfolio can help to reduce overall volatility
yield corporate bonds, emerging market debt, equities, property and infrastructure. When assessing opportunities and determining their role in a portfolio, we do not think in terms of ‘equities’, ‘bonds’ and ‘alternatives’, but rather three distinct categories of ‘growth’, ‘defensive’ and ‘uncorrelated’ assets, as illustrated in Figure 1. We believe a blend of these characteristics results in superior diversification and therefore more consistent outcomes.

Figure 1: Focusing on asset class behaviours, not labels

Growth assets tend to move in line with expectations of real economic growth: they react positively to increasing risk appetite. Defensive assets do the opposite and should be seen as safe havens in times of a crisis. On the flip side, uncorrelated assets are generally unrelated to real economic and corporate earnings growth, i.e. they have little relationship with the business cycle.

Seeking attractive income with long-term capital growth

This defensive multi-asset strategy aims to deliver an attractive income with capital growth over the long term. We recognise that equities can make an important contribution to income generation, with dividends being a significant driver of total returns over the long term. As such, we may invest up to 40% of total assets in equities. Our objective is to provide a sustainable yield of 4-6% per annum, with bond-like volatility. In other words, we aim to achieve overall volatility of less than half that of the equity market. Diversifying risk and focusing on more defensive and higher quality investments within asset classes, have helped us to reduce overall fund volatility. Figure 2 shows the yield versus volatility for the Fund and the different asset classes. As can be seen in Figure 2, the Fund has delivered an attractive yield at bond-like volatility.

Figure 2: Targeting bond-like volatility

Past performance should not be taken as a guide to the future. Data is not audited. Source: Morningstar, Bloomberg, BofA Merrill Lynch, Investec Asset Management, in USD, as at 31.03.17. For specific indices, please see Important information‡. Annualised standard deviation of monthly returns over 3 years. Global Multi-Asset Income Fund: Distribution yield and volatility of A Inc-2 net share class.

Built from the bottom up

We construct the portfolio from the bottom up, with every holding chosen for its contribution to the Fund’s investment objective. Firstly, we only choose securities with a reasonable yield. Secondly, we will only buy securities which our analysis shows to have resilient and sustainable income-generating characteristics. Finally, we will only select assets which we believe have capital gain potential, considering fundamentals, valuation and market price behavior. So we assess whether the investment is likely to benefit from the prevailing economic environment, whether it is cheaply valued and if it is likely to attract increasing investor buying interest.

Outlook and positioning

Economic data and leading indicators continue to point to a synchronised global upswing lasting through much of 2017. This should continue to underpin a recovery in earnings expectations and broadly support growth assets. However, a number of indicators suggest that the business cycle and the growth asset bull market are becoming more mature. Given the somewhat demanding nature of asset class valuations, markets are likely to be sensitive to a downturn in data or negative event surprises. Risk events look limited in the immediate future, although we still have concerns about China, trade policy and the sustainability of the euro zone over the medium term.

For now, we will maintain a moderately long growth exposure. Our preference is for equities over high yield debt – Europe, Australasia and the Far East over the US. We also favour growth-linked stocks over bond proxies. In fixed income, we would consider adding duration in higher yielding developed government bonds on any further rise in yields. We believe that much of the relative good news supporting the dollar is already in the price. If President Trump can implement any of his agenda, this would probably give the US currency one more push higher. We do, however, have a generally constructive view on higher yielding emerging market currencies. Overall, we continue to emphasise a selective bottom-up approach across asset classes as the best way to identify attractive opportunities in a world of mostly lower potential future returns at the asset class level.

RDR: moving into implementation

Important information

All information is as at 31.04.17 unless otherwise stated. The distribution yield reflects the amount that may be expected to be distributed over the 12 months, as a percentage of the mid-market unit price of the Fund. Based on a snapshot of the portfolio as at 31.03.17. The yield is not guaranteed, will vary over time and take no account of any preliminary charge. ‡Global High Yield: BofAML Global High Yield TR USD, Investment Grade Debt: BofAML Global Brd Mkt Corp TR USD, Global Equities: MSCI ACWI TR; Global Property: S&P Global REIT TR; Global Infrastructure: S&P Global Infrastructure TR, EM Debt: EMD 50% GBI-EM / 50% EMBI (pre Dec 02, 50% ELMI+ / 5-% EMBI); DM Govt Debt: BofAML Global Governments Bond II TR USD;
This communication is not for general public distribution and is for general information only. If you are a private investor and receive it as part of a general circulation, please contact us on +44 (0)20 7597 1800. The value of this investment, and any income generated from it, 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 in which it invests. The Fund’s investment objective will not necessarily be achieved and there is no guarantee that these investments will make profits; losses may be made. This Fund may not be appropriate for investors who plan to withdraw their money within the short to medium term. Performance shown is that of the Fund and individual investor’s performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. It is not an invitation to make an investment nor does it constitute an offer for sale. Before making an investment, please read the Prospectus and Key Investor Information Document, which sets out the fund specific risks and is available from Investec Asset Management. The portfolio may change significantly over a short period of time. The Fund is traded at the ruling price and can engage in borrowing, up to 10% of the portfolio net asset value to bridge insufficient liquidity, and scrip lending and may be closed in order to be managed in accordance with the mandate. The Fund is a sub-fund of the Investec Global Strategy Fund, which is a UCITS organised as a Société d’Investissement à Capital Variable under the law of Luxembourg. For further information on the Fund including application forms and a schedule of fees and commissions, please contact Investec Asset Management. Fund prices and English language copies of the Prospectus, Report & Accounts and Articles of Incorporation and local language copies of the Key Investor Information Documents may be obtained from our website and free of charge from the following country specific contacts: Luxembourg – Investec Global Strategy Fund, 49 avenue J.F. Kennedy, L-1855 Luxembourg. In South Africa, Investec Asset Management is an authorised financial services provider. Those sub-funds offered for public sale in South Africa are approved under the South African Collective Investment Schemes Control Act. Issued by Investec Asset Management, May 2017.