Nedgroup Investments Stable Fund

The Nedgroup Investments Stable Fund has recently reached its seven-year anniversary, a significant milestone that coincided with the fund reaching R30bn of assets under management. The fund boasts nearly a 14% market share in a fiercely competitive sector that is very popular among a wide range of investors from young people saving for shorter-term goals to those in their golden years who require a consistent performing fund to form the key pillar of their living annuity drawdown strategy. Foord Asset Management, who have managed the fund since inception have certainly done a praiseworthy job over this period.

The Nedgroup Investments Stable Fund is a low-risk balanced fund, mandated with a maximum equity exposure of 40% and maximum offshore exposure of 25%. The fund is also Regulation 28 compliant which means that it is an appropriate solution for a number of applications such as:

• Provident funds
• Retirement annuities
• Preservation funds
• Living annuities

It is also suitable for a variety of discretionary savings purposes. The fund is very well suited to risk-averse investors who prefer high levels of capital protection while also being able to receive regular income distributions and moderate levels of capital growth.

Since its launch, the fund has outperformed its peers by 2.5% p.a. on average. The chart below shows the relative outperformance of all the funds in the ASISA MA Low Equity category that have been in existence since at least November 2007 when the Nedgroup Investments Stable Fund was launched:

As can be seen, the Nedgroup Investments Stable Fund has been among the top performers over the period, particularly delivering a great outcome for investors who have been invested for long periods of time. Along with the good long-term performance, it is also worthwhile to consider performance over shorter time frames, particularly since investors monitor and measure their investments in this fund in line with its benchmark of outperforming Inflation + 4% p.a. measured over rolling three-year periods.

Absolute returns have been very good, consistently outperforming the inflation + 4% p.a. benchmark by a healthy margin over time - as shown by the grey shaded area that represents the difference between the green and orange lines on the chart above.

In fact, the worst period of underperformance occurred during the height of the financial crisis, when global stock markets had fallen drastically. The situation was further exaggerated by significant investor outflows from emerging markets which caused the rand to fall sharply over a very short period of time.

The combined effect of these influences led to lower stock market returns along with higher than normal levels of inflation. Nevertheless, the fund achieved a respectable return of inflation + 2.5% p.a. over the three years to 31 October 2010, displaying not just its capital protection capabilities, but its consistency of returns as well.

It is worth commenting about the ability of the fund manager to produce consistently good returns – as he needs to carefully choose which asset classes to be invested in, at which point in the market cycle he is going to do so, which underlying counters to hold within each asset class, as well as to decide how much fund capital to allocate to each opportunity. If done correctly, this will result in strong, consistent returns, low volatility and high levels of capital protection. The Nedgroup Investments Stable Fund’s asset allocation through time is shown in the chart below.

This chart also shows the willingness of the fund manager to vary the asset allocation within the fund in order to best reflect their views of current opportunities across a number of different asset classes. Furthermore, through conservative portfolio construction techniques, the fund is able to lower effective volatility by 50% compared to the underlying asset classes that it invests in.

As can be seen from the chart above, realised volatility of approximately 4.5% is significantly lower than predicted volatility of 9% based on the fund’s long- term average asset allocation. Along with the drastic reduction in capital volatility, the fund is also able to meaningfully reduce the maximum drawdowns to which investors are exposed.

It is clear from this chart that the fund’s maximum drawdown compares very favourably against all of the asset classes in which it invests. In fact, the combination of high returns and low volatility results in the fund having the highest possible risk-adjusted returns, outpacing the nearest individual asset class by a wide margin.

Fund manager comments on current positioning
The Nedgroup Investments Stable Fund continues to have a reasonable weighting to equity markets, with a preference to non-SA equities as this asset class remains best placed to achieve returns in excess of inflation over the next 18 – 36 months.

The shorter-term outlook on domestic shares continues to deteriorate, and investors should not expect the same high real returns they have become accustomed to in the past five years. As a result, the domestic share position remains defensively positioned, with very little mining company exposure, where the risk of material downgrades to earnings is high.

The majority of the fund’s equity allocation is invested in global companies. It is both a view on the currency where further depreciation is a high probability event, and the potential returns achievable from global share markets. We continue to find many well-managed companies on attractive multiples which should contribute positively to returns.

The interest bearing component of the portfolio remains conservatively positioned. Credit exposure is mostly through bank notes, while the duration of the fund remains relatively short.

The foreign asset position remains at the prudential maximum of 25% with a preference to real assets such as equities.