William Fraser of Foord Asset Management, who have managed the Nedgroup Investments Stable Fund since inception, provides an overview of the Fund’s performance and how the portfolio is positioned.
Last year was a spectacular year for the Fund. Given the volatility we’ve seen in local and international markets, a return of almost 13.5% after fees is a good result for a fund that aims to preserve capital. We’ve consistently managed to preserve capital over a 12-month rolling period despite the volatility in returns over the last 12 months. The two asset classes that were the main contributors were local fixed interest assets contributing just over 4% and foreign assets contributing almost 12%. While our investment in gold is low, the appreciation of the gold price as well as the depreciation of the Rand has contributed towards a very good return for investors from a contribution perspective. Local equities were down slightly as was property.
Fixed interest allocation
We took a decision to be in the 3-7 year duration bucket for bonds, which has been a major contribution decision for investors. This bucket has outperformed the longer duration buckets of the All Bond Index (ALBI) over the past 6-12 months and is where we see certainty in return of capital. The decision to be in the shorter end was driven by several factors including local and global inflation movements, with inflation in South Africa moving below the inflation target band of 3%. We believe that further rate cuts will be positive for bonds like the R186 given the short duration of the bond relative to other parts of the curve. We don’t want to be as heavily invested in the long end of the curve given South Africa’s debt profile, which is becoming unsustainable. We think growth is going to be extremely difficult to achieve and believe that bonds as an asset class is the safest place to be invested in South Africa.
We think that gold is a valuable asset class in a scenario where the future for currencies and the value of currencies is unknown. What we’ve seen is that as the assets on the balance sheets of the central banks of the US, Japan and ECB increased, so has the value of gold. The reduction in economic growth around the world as a result of COVID-19 and attempts by Treasury to support the economy has led to significant deficits, which has in turn led to further rounds of quantitative easing to stabilize economies. The gold allocation to some extent protects against the view that in time what we’re seeing today may well lead to significantly higher inflation. This is true for South Africa as well. Gold also offers some protection against an increase in volatility from a geopolitical perspective.
The portfolio has remained relatively stable with approximately 30% in global assets. This is based on the valuation of the Rand, which we think has been trading at quite expensive levels for a long time. We believe that we will get better outcomes by being invested in foreign assets compared to local assets. Fund flows are becoming slightly more positive for SA. The trade balance has improved. We think that the flow of funds may dwarf the income account over time. One way to protect against an appreciation in the currency is through the options market. Within the Stable Fund, we entered into a zero cost collar position. We hedged about 11% of the foreign component of the portfolio (4% of the total portfolio) against further appreciation of the currency at levels below R17.95. We funded that with a call option at about R19.25. This has allowed us to retain quality investments while reducing our effective currency position.
Foord International Fund
A large contribution has been made by the foreign team and the foreign assets within the portfolio, which came in two parts. The first is from the Foord International Fund, which is a flexible asset allocation portfolio. Asset allocation has been one of the major drivers of returns and preservation of capital. This has been achieved through the purchase of put options on the S&P which protected a significant amount of investors’ capital at values on the S&P below 3000. Even though the puts have helped to preserve capital, we have partly rolled some of the hedges anticipating that the markets are optimistic about earnings on the global markets. The second most important contributor to the foreign component has been the selection of global equity stocks. The Foord global equity fund, after fees, relative to the MSCI AC World Index produced almost 11% alpha over the last 12 months. We remain extremely optimistic about the companies we’re invested in, most of which are not reliant on fiscal stimulus to further grow their earnings.
We still believe that local equities and the prospects for earnings from local businesses is uncertain. The allocation towards SA focused businesses is low with overall SA equities at 10% and foreign equities at 25% with a total equity allocation of 35%. The majority of assets are still within mandate in fixed interest and focused on the R186 bond. We have extended the duration of the portfolio slightly. Commodities, through the gold allocation will remain quite an important part of investors’ portfolios globally given the current levels of uncertainty. We have a 3% allocation to property. This will remain low given the uncertainty on the local property front where we think distributions and capital will be under pressure.