Managing risks in an increasing interest rate environment – The Nedgroup Investments Opportunity Fund

Managing risks in an increasing interest rate environment – The Nedgroup Investments Opportunity Fund

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Tour de Opportunity

Watch the latest interview with Fund Manager, Omri Thomas here

Last year, the Nedgroup Investments Opportunity Fund delivered an impressive 31% return for the year - outperforming the ASISA Multi-Asset Medium Equity category average, up 17%, and 29% for the ALSI. For the ten years ended 31 January 2022, the Fund delivered an annualised return of 10.2%, outperforming the peer group average by 2% per annum over this period. The Fund’s long-term return objective is to achieve returns of inflation +5%, with the risk objective of preserving capital over rolling two-year periods. 

How does the Fund achieve these dual objectives? 

One of the characteristics that makes the Nedgroup Investment Opportunity Fund unique is its asymmetrical return profile. The Fund Manager, Omri Thomas and Abax Investments use implicit and explicit investment mechanisms to construct a portfolio that not only achieves returns but importantly, effectively protects investors capital in down markets. 

‘Implicit tools’ refers to their approach to portfolio construction and asset class weighting and specifically, the security selection within those asset classes. Abax Investments also make use of ‘explicit’ investment strategies such as including structured notes and hedging to achieve the desired portfolio mix. 

Is there a cost to this investment approach? 

We typically try and structure the hedges and structured notes so that there is a zero explicit cost to the portfolio. There is however an opportunity cost – usually in the form of some upside that is given away. But given where markets are now, we are comfortable with giving away the “super-returns” for the benefit of the added capital protection. This capital protection element of the portfolio enables investors to sleep better at night knowing they are sufficiently protected from a shock or downturn. 

How is the portfolio positioned for the current changing economic environment? 

There is a continual balancing act between return on capital and return of capital. Monetary policy has been extremely accommodative for the last 5-years (in fact since the global financial crisis) and this has been very supportive for risk assets and equity markets, so investors were encouraged to take on risk. However, the current environment with rising interest rate and inflation risk means that the return of capital and the protection of capital has become much more, if not vitally, important. This makes the objective of this Fund with its dual focus on returns and capital protection even more relevant now. 

Given the risks in the market, this Fund is now a lot more defensively positioned. This has been achieved by reducing equity exposure and becoming more defensive within the equity holdings. We are however still finding sufficient opportunities to achieve attractive real and nominal returns. The equity reduction has been substituted by using other building blocks like South African government bonds. We are able to buy a 14-year government bond for example, now yielding 10.5% with inflation at 4-5%. This offers a 5.5-6.5% real return which is similar to an equity risk premium. This provides a built-in buffer for further macro shocks and taking a three- to- five year view, on balance of probabilities, we expect bonds to provide a healthy return within the Fund, albeit with some potential volatility as interest rates rise. 

What is your view on Naspers given the large sell-off we have experienced in the last year? 

Naspers, which is one of the more significant holdings in the portfolio, suffered its largest single year decline in the stock in more than a decade. This has highlighted the important role of hedging in the Fund in protecting investors from the full impact of this downturn. 

Over the last year to date, Naspers has fallen approximately 30%. Given the size of our position in Naspers, one would have expected a much bigger impact on the Fund – however there was a large hedge over a big portion of that position which really worked well in protecting investors. Naspers remains a cornerstone holding of this portfolio. Given the substantial sell-off in global tech that we have seen, the fund management team believes the risks are currently more balanced and that the regulatory risks are now being priced in. 

Naspers is still trading on a significant discount to NAV on a much-reduced price for Tencent and therefore remains attractive. 

Where do you see this Fund fitting into an investor’s overall portfolio? 

The objective of the Fund is to compound returns at an inflation beating rate. This Fund is therefore well suited to a buy and hold strategy over the longer term in order to grow one’s real wealth. In addition, one of the characteristics of the Fund is how differentiated it is in its approach to achieving these objectives from a wide array of asset classes, tools and strategies. The Opportunity Fund enjoys a relatively low correlation to other multi-asset funds, both within its category (multi-asset medium equity) as well as the multi-asset high-and-low equity categories. This makes it ideal to blend with other multi-asset funds to improve the overall risk and return profile on an investor’s portfolio through a full market cycle. 

To find out more about the Nedgroup Investments Opportunity Fund click here or contact your Nedgroup Investments Relationship Manager.