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Investment Strategy
Saturday, August 1, 2015
Take your pick

May is notorious for market corrections and 2015 was no exception. The All Share Index lost 4% during the month, while property fell 6%. Many investors experienced the see-saw ride of asset fluctuations during May - but not those invested in the Sanlam Investment Management (SIM) Inflation Plus Fund, according to the company.

“Although markets declined, the fund managed to produce a positive return and protect capital for our clients, displaying its true-to-label defensive nature,” says Philip Liebenberg, head of Absolute Return at Sanlam Investment Management.
  With capital protection over one-year periods, the aim of the fund is to avoid large negative returns. Since 2009, investors have been fortunate not to have experienced any negative rolling one-year returns.
Liebenberg points out, “Protection is explicit. We differentiate ourselves in that respect.”
Since Liebenberg has taken over the management of the fund, it has delivered a positive return for 71 out of the 76 rolling one-year periods (with a one-month shift) from January 2009 to May 2015.
“The SIM Inflation Plus Fund is a cautiously managed absolute return fund that has consistently been protecting investors from the whims of the market, while delivering attractive real returns,” he says. It currently holds a PlexCrown Fund Rating of 5, the highest score, awarded only to funds with competitive returns generated with much less volatility than that of their competitors. This was partly achieved by limiting the fund’s net (hedged) exposure to shares.
“We are very pleased that ASISA has approved the move of the SIM Inflation Plus Fund from the SA Multi Asset Medium Equity category to the SA Multi Asset Low Equity category, which means that it is now mandated to invest no more than 40% in shares, down from the 60% cap when it was still in the Medium Equity Category. This is a much more accurate reflection of the historical asset allocation of the fund.
“This is in line with how we‘ve been managing this fund for many years – very defensively”, he says, who manages the fund with Gerhard Cruywagen. “So, the re-classification has no impact on our investment process. It simply reflects what we’ve been doing all along.”
How does the fund fare relative to its Low Equity peers? In terms of protection relative to peers, the SIM Inflation Plus Fund has displayed superior downside protection relative to the other funds in the ASISA SA Multi Asset Low Equity category. On a monthly return basis, the fund not only delivered a higher number of positive periods than its main competitors, but also a lower number of negative periods.
This means that not only is the fund excellent at handling market corrections, but clients still get the benefits of upside when markets are trending upwards.
The FTSE/JSE All Share Index (ALSI) has a strong inverse relationship to bond rates. When rates go up, the ALSI tends to fall. “To investigate exactly how sensitive the SIM Inflation Plus Fund is to interest rate changes,” explains Liebenberg, “ we looked at the biggest four monthly 10-year bond rate movements over the past two years: June 2013 (rates up), January 2014 (rates up again), February 2015 (rates down) and May 2015 (rates up). Our results show that the fund is significantly less susceptible to rate changes than its main competitors in the SA Multi Asset Low Equity category.

How is the fund managed?

The fund is a flexible (not strategic) asset allocation fund that aims to deliver smooth, positive real returns. It achieves downside risk, as managed through:
• diversification across asset classes (local and offshore); and
• the explicit use of derivatives to protect capital over any 12-month period.
The portfolio managers consider the risk/return budget of every single asset position in the fund.
Liebenberg warns against unrealistic expectations. “The SA stock market has corrected, but is still expensive. The SIM Inflation Plus Fund is therefore partly hedged out of SA equities.”
All in all, investors should not expect the fund to beat inflation by much more than CPI + 4% over the next three years. Still, the fund remains a good solution for investors who desire a good balance between income and growth, and explicit downside protection.”
 

Copyright © Insurance Times and Investments® Vol:28.8 1st August, 2015
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