Paul Marais and Mike Estment pose with Raging Bull Award and certificate for the NFB Ci Cautious Fund of Funds. Photo: Bheki Radebe
Paul Marais and Mike Estment pose with Raging Bull Award and certificate for the NFB Ci Cautious Fund of Funds. Photo: Bheki Radebe

Low-equity fund takes on and beats bigger players

By Martin Hesse Time of article published Feb 7, 2018

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Raging Bull Award for the Best South African Multi-asset Equity Fund on a risk-adjusted basis over five years to December 31, 2017

Certificate for the Best South African Multi-asset Low-equity Fund on a risk-adjusted basis over five years to December 31, 2017

The NFB Ci Cautious Fund of Funds, a low-equity multi-asset portfolio, has again beaten its multi-asset equity fund peers on risk-adjusted performance over five years to win the Raging Bull Award in this category for the second year in a row. 

The fund’s performance is remarkable considering that, as a low-equity fund, restricted to investing no more than 40% in equities, it competed with multi-asset medium-equity and high-equity funds, which, in the case of the latter, can invest up to 75% in equities.

As its name suggests, the fund is aimed at risk-averse investors.

As a fund of funds, the NFB Ci Cautious Fund of Funds holds a mix of unit trust funds and exchange traded funds (ETFs).

According to its latest fact sheet (December 2017), its largest holdings are three income funds – the Coronation Strategic Income Fund (19%), the Investec Diversified Income Fund (19%) and the Prescient Income Provider Fund (18%) – a global equity index fund, the Sygnia Itrix MSCI World Index Exchange ETF (16%), and a local equity index fund, the Ci Equity Index (10%).

To December 2017, the fund had returned an average of 9.73% a year net of fees, ahead of the 7.62% achieved by its benchmark, Consumer Price Index inflation plus 3% over three-year rolling periods.

Interviewed for last year’s Raging Bull Awards, Paul Marais, the managing director of NFB Asset Management and the manager of the fund, said NFB’s investment philosophy is based on the company’s key beliefs: that asset allocation drives a significant portion of overall investment returns and that markets are inefficient and swing between periods of over- and under-valuation.

Marais said markets revert to their average returns, but they don’t spend much time earning average returns. “And we believe we are able to exploit these circumstances to the benefit of investors invested in the portfolios we manage.” 

This week, Marais told Personal Finance that the objective of the NFB Ci Cautious Fund of Funds is to provide investors with real (after-inflation) returns in line with the fund’s benchmark.

“We believe that getting the asset allocation decision right is key to successfully achieving this. To ensure we get the performance of the asset class we’re aiming to allocate towards, we use ETFs and other passive strategies. Fixed income, however, is difficult to allocate to on a passive basis, and often the correct investment instruments just aren’t available. We therefore use income funds for local cash, bond and credit exposures,” he said.

When asked how often the performance of the underlying funds is reviewed, Marais said: “We believe that a robust due diligence process should lead to a low turnover in fund selection, but we will change funds as soon as the investment rationale for selecting them in the first place changes. We review asset class performance whenever markets are open and formally review the performance of underlying funds monthly, with an in-depth quantitative analysis every six months.”

The fund’s offshore allocation (at December 2017) is at 17%, and Marais says this remains fairly constant.

“We don’t believe we’re smart enough to correctly and sustainably forecast the value of the rand. We prefer having a reasonably-sized long-term offshore allocation to benefit from long-term structural weakness in the rand and to only occasionally trade around the fringes of this when the currency has rallied or weakened significantly,” he says.

Many multi-asset low-equity funds are used by retirees to provide an income, and the NFB fund is no exception. However, Marais says although a significant portion of its investors do draw income from the fund, generating an income is a by-product of the strategy to deliver real returns.

“Over the past few years, it has been possible to generate inflation-beating returns from interest-bearing investments, but that’s partly because interest rates haven’t come down, while inflation has nudged lower. 

“Forecasting is not part of our investment philosophy, but if you’re prepared to accept 10-year South African government debt, a yield (in nominal terms) of 8% a year is possible, which may prove to be very attractive to the large swathes of South African investors with their investments in cash or near-cash,” Marais says. 

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