Nick Balkin of Foord Asset Management, Fund Manager of the Nedgroup Investments Stable Fund provides an overview of the Fund’s performance for the last quarter and positioning going forward
We are very proud of our performance both over the short term and the long-term. Over the year the Fund has returned 11% in what is a maximum 40% equity fund. But the long-term performance is the really important figure and over 10 years, the Fund has returned 9.5% and is number one out of 50 funds.
Performance drivers (1 year)
• JSE equities (10.4%) and JSE property (3.6%) yielded a negative return over 1 year, with JSE equities at -1.3% and JSE property at -1.4%.
• Interest bearing asset classes (46.8%) had a positive return of 4.8% over the year,
• Other asset classes (4.9%) yielded 1.9% over the 1 year and foreign assets (34.3%) had a positive return of 8.9%
The fund return over the quarter was 1.0%.
Foord International – protection in the building block
When we talk about being big long-term holders and trying to look through short-term blips, it does not mean that we aren’t dynamic or flexible in the management of the Fund. In January and February, Foord International, which is a building block within the Nedgroup Investments Stable Fund, increased allocation to hedged equities. This happened as we saw the risks of COVID-19 coming up as well as various other risks that we had spoken about. This allocation enabled us to protect a significant bucket of equity before the risks came through which protected investors substantially. Subsequent to that the net unprotected equity exposure has gone up a bit which reflects the way we see markets currently - making sure we are in solid companies with pricing power that can continue to do well. As cash becomes a losing asset over time, we think there are better ways that we can protect investors in Foord International right now.
Protection through global equities
Equity selection remains paramount. While Foord International was one building block that provided protection, the Foord Global Equity Fund which is another key building block for the Nedgroup Investments Stable Fund was also a crucial source of protection. The past year has been a very good stock selection period for the Foord Global Equity Fund with significant alpha against peers and the world index. Importantly, the Fund is not invested in the typical big stocks like Amazon and Facebook. The only one of the big-name stocks that we have is Alphabet which we consider a big value-play in the tech sector.
Yield curve positioning was important – we were in the right place
Bond allocation has also been a key driver of performance. Bonds have had mixed performance for investors allocated over the maturities. Investors reaching for yield in the long-duration (anything over 7 years) in the SA Government bond market actually got a negative or very low return over the year. We made it clear that we were focussing on a more stable return out of a mid-duration (3-7 year) bonds and that is where we have allocated a significant amount of our bond allocation and that is where the returns have come through over the years. That has been a key driver of performance – not only to due the allocation to bonds but also the selection within bonds.
Gold: Known unknowns
We believe that the extent of monetary printing by reserve banks across the world is leading to the real potential of hyperinflation further down the road. We have alluded to this in a previous roadshow. One protection against this is have a good allocation to a gold ETF which is uncorrelated and performs well in a hyperinflation world.
Our job as the Fund Manager is to balance risk and reward for our investors. We see risk as permanent loss of capital rather than volatility. We think that, globally, the scales are tilted towards risk now - especially if you are in the big indexes. However, if you box smart and you can own stocks that are smaller and uncorrelated with the market there are ways to make money. It’s a very good market for stock selection.
Why are the risks high at the moment?
• Money printing
While money printing is not something that will create instability in the next 6 months, we believe it has brought about a lot of consumption in the current period that is being channelled directly through the consumer. Government across the world have tried to stop the cycles, while at Foord we believe you can only postpone a cycle – the cycle will come eventually.
• Our view on the rand
We also believe the rand will depreciate substantially over times from current levels. Tactically we remain protected to a certain extent to a small percentage of our fund on currency options. So we own currency options that will protect a portion of our global fund should the rand temporarily strengthen. That will add to the resilience of the fund because we think that the equity market and the stocks that we have selected will do well and then we have some rand protection.
• Government debt increasing to unsustainable levels
The only reason US consumer spending went up post-COVID was due to a few trillion-dollar government transfer into the economy. This is not a sustainable base to work from in our opinion – where you have seen record retail sales at a time when you should expect the opposite. We are watching this carefully and erring on the side of caution.
Other risk factors:
• Longer-term growth and earnings risk remains
• Interest rates lower for longer – inflation in the long term?
• Increasing risk of corporate bond defaults
• US bourse especially expensive
• Geopolitical risks elevated
• US election in November
There has been very little change over the quarter.
• Foreign assets remain at 30%
• We still have the large allocation to Governement bonds (36.1%),
• JSE property 2.6%,
• SA Money Market 13.0%
• JSE Corporate Bonds 1.8%
• JSE Gold ETF 5.6%
• JSE equities 10.8%
We are aware the market has come off a lot recently and we are keeping an eye on this. To a certain extent we are finding opportunities in the SA equities side which we are being very cautious about. While we are looking for good opportunities, we don’t see things changing very much in the portfolio at the moment.