By: David Crosoer, Executive of Research and Investments at PPS Investments
PPS’s multi-managed funds have built credible long and short-term track records as a result of the consistent application of our investment approach to both the construction and evaluation of our portfolios.
Several funds within the range have up to ten-year track records, while the PPS Balanced Fund of Funds has a seven year-track record, and the PPS Balanced Index Tracker Fund and PPS Global Balanced Fund of Funds are approaching their three-year track records.
The ten-year period includes the financial crisis of 2008 where the SA equity market fell more than 40%, the most recent five-year period where SA equities have underperformed SA cash, and the past three-year period where SA equities have even underperformed SA inflation.
While the subdued recent performance of SA equities has had a negative impact on the ability of our funds to deliver inflation-targeted returns over the shorter-term, international equities (i.e. equities not domiciled in South Africa) have delivered more substantial returns over a comparable period, and boosted returns. In addition, our portfolios have benefitted from an allocation to Prudential whose relative value approach has delivered significant outperformance within SA equities.
So, despite holding SA equities over the past five years (initially at an underweight, now a neutral position) when measured against their benchmarks over their stated investment horizons or against their peer-group over a shorter investment horizon, our funds have delivered reasonable outcomes. This is only possible because we have remained diversified across asset classes and manager strategies, and have identified managers that have skill.
Our willingness to take a longer-term view has been critical in building and sustaining our track record.
Currently, we are finding SA equities increasingly attractive and have been prepared to be buyers into SA bond weakness this year. SA bonds now offer investors an attractive CPI+4% return should they hold them to maturity while on valuation grounds SA equities are now priced to deliver on our long-term expectation for this asset class.
Furthermore, because we never completely neglected SA equities in our portfolios over the past seven years (where SA equities have compounded at our long-term expectation of CPI+7% per annum) our portfolios have performed reasonably well over the longer term too.
Our investment approach is designed to allow for some manager underperformance by including other managers that should perform at different times. Here the portfolio manager’s job is to sensibly combine managers to achieve more consistent outcomes. This allows us to carry manager underperformance provided other managers are doing well, and taking a longer-term view means we can tolerate short-term manager underperformance provided that it is temporary.
Of course, assessing whether manager underperformance is temporary is very difficult to do! Our rigorous research process combines both qualitative and quantitative factors to help inform this view, and this has been particularly helpful in allowing us to persist with managers whose strategies may temporarily be out of favour.
Recent market weakness has been beneficial for more active (unconstrained) manager strategies that were previously out of favour, and our funds have benefited from these now.
There is a natural evolution of any investment process.
Core to our track record has been the application of a consistent investment framework over time, the establishment of long-term partnerships with exceptional asset managers, a fierce investment team and sensible oversight from our Investment Policy Committee.
Our multi-manager approach has been deliberately constructed to buffer against any unintended consequences. In an environment where the future is uncertain, this remains the appropriate strategy to deliver consistent outcomes for our funds.