This Fund of Funds targets CPI+4% per annum (p.a) over rolling five years. Diversification is achieved both on an asset class and manager level. Approximately half the Fund of Funds is invested according to our house-view allocation (that aims to achieve CPI+4% p.a. over rolling five years at the lowest possible risk) while the remainder is invested with multi-asset class managers that follow their own strategies (and help mitigate our internal model risk). Over the five-year investment horizon of the Fund of Funds, SA equities (up 3.7% p.a.) have materially underperformed foreign equities (up 12.6% p.a.) and our expectation for this asset class, while SA nominal bonds (up 7.7% p.a.) and SA cash (up 7.2% p.a.) have both delivered returns that comfortably exceeded CPI (averaging 4.9% p.a.). In contrast, SA inflation-linked bonds (up 3.1% p.a.) has underperformed SA fixed interest, while foreign bonds (up 6.0% p.a.) have outperformed CPI, thanks in part to the 3.9% p.a. depreciation of the rand against the US dollar. The Fund of Funds over this five-year period has benefited from our house-view being overweight foreign equities relative to SA equities, and overweight SA nominal bonds relative to SA inflation-linked bonds. Despite this, the underperformance of SA equities has been a material detractor to performance, given the strategy’s dependence on SA equities to deliver on Fund of Funds objectives. For the 2019 calendar year, foreign equities (up 23.1%) have substantially outperformed SA equities (up 6.8%), while SA nominal bonds (up 10.3%) have outperformed both SA cash (up 7.3%) and SA inflation-linked bonds (up 2.6%). Within SA equities, both SA industrials (up 11.0%) and SA resources (up 25.3%) delivered double digit returns, while SA financials (up 0.9%) just managed a positive return. The recent change to the PPS Equity Fund building block, where Fairtree was introduced to replace Coronation and Perpetua, has helped to deliver a strong performance relative to the Capped SWIX benchmark over the calendar year. This has meant that both asset allocation and manager selection has contributed to the Fund of Funds achieving its inflation objective for the year.
Over the five-year investment horizon though, the fund lags the CPI+4% target, as a result of the lacklustre domestic equity performance over that period. After increasing the domestic bond exposure and in turn, reducing the domestic property exposure in the third quarter, there were no further changes to the house-view asset allocation in the fourth quarter. No changes were made to the multi-asset (MA) component of the Fund of Funds this quarter, which consists of a combination of MA managers from various ASISA sectors to achieve an overall MA Medium equity allocation. The strategy remains sensibly diversified and strives to strike the appropriate balance between capital protection and capital growth in the way its underlying managers are combined.