Post on 20-Jun-2020
transcript
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The Benefits of Knowing Your True Asset Allocation
Richard Simpson
The Traditional View
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Equities
Property
Bonds
Offshore
Cash
The problem
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Asset Class A
Asset Class B
Correlated
Equity A
Equity B
Uncorrelated
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
How should you look at Asset Allocation?
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Deep Cyclicals
I-Sensitive Rand Hedge Defensive
Growth
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
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
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
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 %
The blind spot of Passive Asset Allocation
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4% p.a. outperformance
13% p.a. outperformance
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
• 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
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.