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The case for
Head of Multi-Strategy, Sanlam UK
Oct 08, 2020
Since the global financial crisis (GFC) of 2007-2008, the levels of economic intervention and support by authorities worldwide have been unprecedented, and the stimulus measures have driven bond yields lower and equity prices higher. Although these support measures have been welcomed, they do leave investors relying on a combination of traditional equities and bonds with a conundrum: where and how to allocate their funds. The challenge is greatest in the bond markets where, unlike equities that can grow their earnings over time, most interest payments are fixed.
To put this into perspective: since the start of the GFC, the 10-year government bond yields in the US, the UK and Germany have fallen from highs of 5.3%, 5.5% and 4.7% respectively to 0.67%, 0.19% and -0.49%. These moves have been driven by the responses to firstly the GFC and more recently the COVID-19 pandemic. It is very difficult to make a case for owning a bond yielding less than 1% over any meaningful length of time, let alone a bond with a negative yield where a loss is all but guaranteed.
In this challenging environment there is certainly a strong case to be made for investing in alternative assets or strategies. The list of alternative investments available is as long as it is broad – it covers areas as diverse as private equity, high-yield bonds, hybrid capital bonds, equity and bond derivatives, structured products, property, renewable energy, infrastructure, volatility and even cryptocurrencies.
Some investors may choose to follow single-asset-class strategies, but for others, an allocation to a multi-strategy option will be more suitable. As an alternative investment to bonds, any solution chosen should be managed with an absolute-return objective and should seek to reduce the downside risk for investors.
One of the main attractions of a multi-strategy fund is the flexibility to adapt to changing market conditions. This flexibility is a function of not having a set asset allocation benchmark, and allows the fund manager the freedom to defend when needed and to attack when opportunities present themselves.
For example, during the COVID-19 sell-off earlier this year, the Sanlam Multi-Strategy Fund reduced its equity exposure from 30% at the high to -10% at the low through active position management and the impact of equity index put options. This defensive stance allowed the fund to take advantage of prevailing market weakness by buying high-yield bonds and equity call options. The defensive action helped limit the drawdown at the peak of the sell-off, and set the stage for the attacking action that helped the fund to post a new all-time high as markets rallied back.
Unsurprisingly, selecting which fund to own is far from simple. The Morningstar database currently lists 687 funds in its alternative multi-strategy sector. Over the past year the average fund has returned -0.56%, with the best-performing fund rising 75% and the worst falling 63%. The top-performing fund was focused on distressed investments, while the worst was focused on fixed-income derivatives. To complicate things further, both funds, according to their Bloomberg data, had assets of less than US$1 million, which would have made them uninvestable for most people.
The low interest rate environment looks set to continue for the foreseeable future. The need for portfolio diversification remains unchanged and with bonds offering little or no return, an allocation to a flexible, multi-strategy, absolute-return fund that can dynamically shift its asset allocation and has the freedom to seek opportunities in multiple asset classes makes a lot of sense. However, outcomes are not guaranteed and there can be huge deviations in returns. As always when selecting a fund, understanding a manager’s style and investment process is key.
Note by Alwyn van der Merwe, Director of Investments at Sanlam Private Wealth
Since the material global equity recovery in late March, we’ve argued that the prospective upside for this asset class looks rather muted from this high starting point. Although we acknowledge the uncorrelated behaviour or lower risk associated with global government bonds and offshore cash, the extremely low to zero yields have become cumbersome for investors who need to beat inflation over time.
The strategy and process of the Sanlam Multi-Strategy Fund provide an absolute-return building block for balanced fund solutions to our clients. Against this background, we’re advocating an approach in which global cash holdings are restricted and exposure to this strategy is increased – which is likely to beat inflation without incurring asymmetrical risk in the portfolios.
Mike Pinggera is the manager of the Sanlam Multi-Strategy Fund, a diversified, absolute-return investment fund incorporated in Ireland. The fund aims to participate in rising markets and defend capital during downturns.
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Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
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