Given the current uncertain environment, some investors are wanting to protect their portfolios that may currently be predominantly in equity.
Fairtree Balanced Prescient Fund manager Jacobus Lacock says investors may be looking to move some of their money from equity towards cash, but that balanced funds offer a good alternative vehicle to park money in the interim leaving it up to an asset manager to make asset allocations, as the manager balances exposure to growth with a certain amount of portfolio protection.
“The main objective of balanced funds is to provide investors with diversified exposure to asset classes including equity, fixed income, cash and property,” Lacock says. Balanced funds are a way to provide investors with exposure to growth assets and provide protection and diversification when needed.
The Fairtree Balanced Prescient Fund is an actively managed multi-asset class fund aimed at investors wanting moderate to high capital growth in excess of inflation with moderate to strong risk appetite. Around 75% of the fund is allocated to local and global equity markets and property. Its major equity investments are Naspers, Sasol, Anglo American, Impala Platinum and Richemont. Its significant sector exposures are to resources, followed by consumer services and financials.
“We believe the asset allocation decision is the most important decision in terms of the risk and performance of a balanced fund,” says Lacock. “In particular we believe the decision to be invested in capital markets or not – whether we should be in cash or growth assets – is of the utmost importance. We spend a lot of time figuring this out and are constantly looking for signs of recession or earnings contraction.”
The current global cycle expansion phase will soon be the longest in history, and there is no shortage of commentators saying that the bubble is about to burst. Lacock, however, disagrees, believing that cycles don’t die of old age, but due to tight financial conditions, high valuations or shocks to economies.
“We don’t see that playing out at the moment,” he says. “We don’t expect a global recession soon, as global financial conditions are not tight and growth looks to improve over the next few quarters. We remain neutral to overweight growth assets and in particular South African equities as we still see opportunities there.”
Nevertheless, there are some risks worth monitoring, the biggest local risk being Eskom, operationally and financially, which could impact economic growth and the ability of National Treasury to stimulate growth in the rest of economy. This could lead to further rating agency downgrades. “This is the key risk locally, while globally, the risk is the ongoing US and China tension around trade which could affect business confidence, financial conditions and capital markets. We are worried about the recent turn of events and have built protection in the portfolio.”
Fairtree protects against these external factors by keeping some gold stocks in the portfolio as these provide protection against rising geopolitical risks and rising inflation while also holding stocks with rand hedge attributes to protect against local risks. “In terms of asset allocation, we are slightly underweight fixed income, local property and also underweight foreign equity, due to the impact trade conflicts could have on global equity markets.”
The fund’s portfolio is managed by Lacock, who focuses on top-down macro input, and Stephen Brown, who has an equity-focused bottom-up approach to asset allocation. They are jointly responsible for day-to-day performance and monitoring, while specialist portfolio managers manage individual asset classes. The focus and positioning of the fund’s managers is on tactical asset allocation and protection against a crash.
“Due to the top-down nature of our process, we can express our macro views using asset allocation or security selection, as we are fortunate with the breadth of our local equity market,” says Lacock. “We can protect against specific risks without necessarily using asset allocation. For example, we like gold stocks as a form of protection against geopolitical risk and given weak growth dynamics in South Africa we can invest in global cyclical stocks that can also act as a rand hedge to protect against local risks.
Over time, around 75% of the portfolio will be exposed to growth assets. “People invest in a balanced fund to have diversified exposure to growth, so our strategic asset allocation reflects this but, in a crash scenario, we will meaningfully tilt to cash.”
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