Over the last few years, South African investors have lost some of their enthusiasm for cautious asset allocation funds. With many managers having struggled in the low return environment, a lot of money has moved away from this category.
After growing rapidly in size from R57.8 billion in 2010 to R253.9 billion in 2017, the cautious asset allocation category has fallen to R240 billion over the last 24 months.
For Gavin Wood, chief investment officer of Kagiso Asset Management, fund managers in this category should focus on extracting a consistent real return for investors, and not being distracted by market noise.
“We are obsessively focused on delivering at least inflation plus 2% after fees,” he says. “We couldn’t care what the competition is doing. I don’t know what anyone else is holding. We just want to have a very balanced mix in the portfolio that we feel will be able to deliver on the mandate, which is nothing to do with the competition and everything to do with real returns.”
Getting this right has not been easy, particularly because returns from the local equity market have been so low. Traditionally, this is where fund managers have been able to find consistent growth, but they have not had that luxury over the past five or six years.
“Maybe we were all a bit spoilt to have had great equity returns in the past, but the last few years have been messy, and returns have been hard to come by,” says Eben Maré, fund manager at Absa Asset Management.
Holding the line
What this has required from fund managers is that they not fall into the temptation of taking on more risk to try to boost returns. Rather, what has been required is even more discipline.
“We try to make sure that what we deliver is sustainable and consistent,” says Maré. “We look for appropriate risk-adjusted returns. That might be boring, but boring is good, especially when times are tough. Boring might lag when everyone is running away in a bull market, but when you have these tough markets you have to find something that just keeps the pot cooking.”
Often, this means resisting the urge of always wanting to act.
Often doing nothing is actually the best course of action.
“What’s also dangerous about this market is that people do feel that they have to do things and they run into inappropriate assets,” Maré says. “That to me is a big worry.”
As an example he cites Ecsponent preference shares, which were offering what seemed like extremely attractive yields of as much as 10% above inflation. However, the company has now run into trouble and has been unable to pay out preference share dividends.
This also highlights the need to be deliberate in coming to an understanding of what different assets are worth, which is critical for Wood. He considers it vital to work on carefully thought-through valuations and to be obsessive about the price you are being asked to pay.
“In general, we find ourselves out of popular things and weighting a little more towards assets that are unpopular,” Wood says. “We find that pricing is on our side when things are less popular, and often they are less popular because they have disappointed.
“We look at where there is negative sentiment to see if its undue,” Wood explains. “Often it is the case that investors are overreacting on the downside and that is what’s giving us a good price. The key thing is not to be in assets that have gone up a lot and are very expensive, because their prices are baking in huge expectations.”
Ultimately, Maré believes a manager in this space has to be able to demonstrate the ability to deliver consistent, risk-adjusted returns.
“Because, in truth, if that’s not what you are doing, people may as well go and buy a combination of index funds and cash,” he says. “If you are not offering some extra information, some risk management, or some better quality of returns, you should just own up and say an index is just as good.”
The Absa Inflation Beater Fund was recognised as the best cautious allocation fund at this year’s Morningstar Awards. The Kagiso Stable Fund was runner-up in the category.