Andrew Swarts

Peter Brooke collects the Raging Bull Award for the Old Mutual Real Income Fund from Prieur du Plessis (left), chairman of Plexus.

OLD MUTUAL REAL INCOME FUND

Raging Bull Award for the Best Domestic Asset Allocation Prudential Fund – the top-performing fund on a risk-adjusted basis over five years to December 31, 2011

A fund focused on generating an income off a growing capital base for the benefit of retired investors won the award for the top-performing domestic prudential fund on risk-adjusted returns over periods up to five years at this week’s Raging Bull Awards.

The Old Mutual Real Income Fund provides a growing income by investing across fixed-interest securities, listed property and high dividend-yielding equities. Its income-focused mandate prevents it from investing more than 25 percent in either equities or listed property and 35 percent of these asset classes combined.

Peter Brooke, the portfolio manager and head of Macro Strategy Investments (MSI) at Old Mutual Investment Group SA (Omigsa), says the fund’s income focus sets it apart and it has delivered competitively high returns with less volatility risk than its peers.

The fund achieved an average return of nine percent a year over the past five years (according to ProfileData).

Among all domestic asset allocation prudential funds, the Old Mutual Real Income Fund was outperformed by the three top performers in the domestic prudential variable equity sub-category and two other low-equity prudential funds.

But Raging Bull Awards for asset allocation funds are made on the basis of risk-adjusted performance as determined by the PlexCrown Ratings.

The Absa Absolute Fund obtained the highest PlexCrown Rating among the prudential funds but was not eligible for a Raging Bull Award as it changed sub-categories last year.

The Old Mutual Real Income Fund had the second-highest PlexCrown Rating, based on consistently good performance over the periods up to five years.

Brooke says that making the most of opportunities to generate good income, rather than moving the fund in and out of equities as is usually the case with asset allocation funds, has resulted in the fund’s good performance.

He says MSI’s skills in managing multiple asset classes have benefited the fund, and he has been able to consider asset classes such as preference shares and convertibles, which other asset managers have not had in their portfolios.

For example, the fund invested in preference shares when these got really cheap in 2009 and offered a good yield, he says.

At the end of 2011, the fund’s bond exposure was 36 percent and there was a further 36 percent in cash.

Equity exposure over the past five years did not exceed 20 percent, Brooke says, and at times the fund held as few as five or 10 shares. The fund ended last year with 15.1 percent in equities.

All the shares the fund invests in are high-quality defensive ones. So when the share market crashed in 2008, the fund’s equity portfolio held up well, Brooke says.

After the crash, Omigsa expected interest rates to fall and felt that cash would therefore not provide a good inflation-beating income. As a result of this and because the prices of many high-divided shares had fallen so much, the fund’s allocation to equities was almost doubled.

The fund benefited from the subsequent appreciation in the price of these shares as well as from their good dividends.

The mandate of the Real Income Fund prevented it from investing in offshore equities until late last year when the mandate was amended.

MSI also made good calls on listed property for the Real Income Fund, taking a view that it would deliver good returns and increasing the exposure as high as 16 percent before the best returns were delivered in 2010 and last year.

Once listed property prices had appreciated strongly, the fund decreased its exposure to this asset class – to 8.6 percent at the end of last year. – Laura du Preez