The Benefits of Knowing Your True Asset AllocationRand Hedge Defensive. Growth. How should you look...
Transcript of The Benefits of Knowing Your True Asset AllocationRand Hedge Defensive. Growth. How should you look...
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The Benefits of Knowing Your True Asset Allocation
Richard Simpson
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The Traditional View
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Equities
Property
Bonds
Offshore
Cash
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The problem
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Asset Class A
Asset Class B
Correlated
Equity A
Equity B
Uncorrelated
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The consequences
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• True positioning and risk of portfolio not clear
• Returns may not be what you expected
• Difficult to hold investment manager accountable
• Blind spot of Passive Asset Allocation
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How should you look at Asset Allocation?
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Deep Cyclicals
I-Sensitive Rand Hedge Defensive
Growth
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How should you look at Asset Allocation?
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Deep Cyclicals
Bonds(EM)
I-SensitiveRand Hedge
Defensive Domestic bonds
I-Sensitive(EM)
Property
Cash (DM)
Bonds (DM)
Equity (DM)
Domestic Cash Growth
DM = developed marketEM = emerging market
Weaker rand
Stronger rand
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Interest Rate Sensitive equity correlated to Bonds
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I-Sensitive correlated to Bonds (EM)
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Property correlated to bonds
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Rand Hedges and Deep Cyclicals are usually mutually exclusive
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Guidelines
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• Total equity exposure is a blunt measure: Which equity is owned?
• Interest rate sensitive equity, property, and bonds are correlated
• SA domestic equity and emerging market equity are correlated
• Deep cyclical and EM assets are correlated
• Rand hedge shares and offshore assets are correlated
Note: Extreme valuations can cause correlations to break down
A disciplined stock-selection process is essential
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Our traditional asset allocation
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12,5
01,41,2
4,1
11,9
8,3
14,1
Interest rate sensitive equity
Property
Domestic Bonds
Emerging market equity & bonds
Growth Equity
Deep cyclical equity
Rand hedge equity
Developed market equity & bonds
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How we view asset allocation
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Investment type %
Interest rate sensitive equity 12,5
Property 0,0
Domestic Bonds 21,3
Emerging market equity & bonds 12,1
Growth equity 4,1
Deep cyclical equity 11,9
Rand hedge equity 8,3
Developed market equity & bonds 14,1
Supported by weak
rand
Supported by strong
rand
Cash, commodities, and other equity make up residual %
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The blind spot of Passive Asset Allocation
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4% p.a. outperformance
13% p.a. outperformance
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Benefits of knowing Your True Asset Allocation
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• Better understand how a portfolio is positioned
• Less risk of fund not doing what you expected
• Ability to ask managers more insightful questions
• Help you to more effectively manage client solutions as a whole
Integrate Asset Allocation with Sector Selection
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• A multi asset framework optimal• Asset allocation and stock selection together drive real returns• You buy Equities for real growth in earnings• Earnings override everything in the long run, ratings critical I
short term• The power of yield• Mean-reversion critical• Asset rotation a “multi-year event”• “Cannot invest in a vacuum” – relative valuation• Asset allocation and Sector selection are “joined at the hip”
“Marry Valuation with the Cycle”
Our Asset allocation beliefs
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Benefits of a multi asset approach
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Disclaimer• Investors should take cognisance of the fact that there are risks involved in buying or selling any financial product.
• Past performance of a financial product is not necessarily indicative of future performance.
• The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions.
• Illustrations, forecasts or hypothetical data are not guaranteed and are provided for illustrative purposes only.
• Investment performance is calculated by taking the actual initial fees and all ongoing fees into account for the amount shown and income is reinvested on the reinvestment date.
• A schedule of fees and charges and maximum commissions is available on request from the manager.
• This document does not constitute a solicitation, invitation or investment recommendation.
• Prior to selecting a financial product or fund it is recommended that investors seek specialised financial, legal and tax advice.
• The laws of the Republic of South Africa shall govern any claim relating to or arising from the contents of this document.
• The manager does not provide any guarantee either with respect to the capital or the return of a portfolio.
• Collective investment schemes are generally medium to long-term investments.