Wednesday, 01 June 2016 - 20:00
Seed Weekly - Tactical Asset Allocation ? Enhancing your Experience
My last article was on how our funds/portfolios are structured with different Strategic Asset Allocations (SAAs) for investors with different investment horizons and risk appetites. This week I’ll take a closer look at Tactical Asset Allocation (TAA), i.e. how we adjust the asset allocation away from the SAA in order to improve the fund’s risk/return profile.
While we are comfortable that a fund’s SAA should generate sufficient returns over its recommended time horizon, our research indicates that by systematically applying a valuation based tactical overlay the investment experience (either through reduced risk or increased returns – or both) can be enhanced.
Practically speaking, we believe in mean reversion. This is where cheap and expensive assets will both revert to fair value over time. We therefore look to systematically increase our allocation to cheap assets, while at the same time we reduce our allocation to expensive assets.
For the purposes of this article I’ll show a couple examples of how our valuation models have filtered into the positioning of the Seed Balanced Fund. Firstly, when looking at the allocation to local equities, as Cor showed in his May article, local markets are currently as expensive as they have been for at least the past thirty years. The chart below shows the local market’s valuation at the end of April 2016 (for a refresher on how to read the chart please click through the link above to Cor’s article). Based on this valuation, the allocation to local equities is hovering near the fund’s all-time lows (35% at the end of April versus SAA of 50%). We expect substandard returns from the local equity market and have therefore reduced our exposure to this asset class.
Four years ago the picture was different. The chart below shows the local market’s valuation in April 2012. At this juncture, the fund was slightly overweight to local equities (53% vs SAA of 50%) as the market was offering slightly better value than its long term history suggested. Over the intervening four years we have been gradually reducing the fund’s exposure to local equity as the market became ever more expensive.
The other asset class that is currently at extreme levels when using our valuation techniques is our currency (the Rand). With all the weakness that has been experienced by the Rand in the last few years it is easy to think that it has always been a one way bet, but this is not the case.
At the end of 2010, the Rand had strengthened by more than 50% over the previous two years. From the end of the Global Financial Crisis (GFC) in 2008 the Rand strengthened from over R10/$ to R6.60/$. Investors (particularly those who had taken their money offshore in the panic of 2001) did not want to hear about investing offshore. Remember, this was just after our successful hosting of the football world cup and emerging markets (especially BRICS) were also the flavour of the month in the investment world. The chart below shows the ZAR vs USD and our best estimate of fair value (PPP) at the end of 2010.
It was at the end of 2010 that the Seed Balanced Fund’s allocation to global assets was moved to its maximum mandate limit, and this allocation has been broadly maintained (to much success) over the past 5 years. With the currency blow out in December 2015, and subsequent weakness, the Rand is now trading at levels (vs PPP) rarely seen – the chart below shows the extreme weakness witnessed over the past 5 years.
We continue to favour global assets over local assets, and have therefore retained our global allocation at its mandate limit (25% + 5% Africa) but since the beginning of the year, in a series of transactions, we have implemented zero cost structures that protect half of the global assets from any currency strength, while at the same time allowing the Fund to profit from any weakness up to around R19.50/$.
While we don’t have a crystal ball that will tell us what the return of the ALSI will be in 2016 or where the Rand will end the year vs the US dollar, our research indicates that there’s a good probability that investors in the local market will be disappointed over the next 5 years, and that we shouldn’t be surprised if the Rand strengthens going forward. We have therefore positioned our portfolios in such a way that they are able to capture these expected moves.
Since the launch of the Seed Balanced Fund in 2010 our TAA decisions have consistently added value (both by reducing risk and enhancing returns) and as we develop our TAA process further we expect this to continue.
Tel +27 21 914 4966
Fax +27 21 914 4912
Seed is hiring: Visit the Seed Investments and Seed Analytics LinkedIn Profiles to view vacancies.
Please click here to view our disclaimer. For more information please visit our website.
Wed, 01 Jun 2016
South Africa's rand firmed on Wednesday as the dollar pulled back from a recent rally, but traders said the local unit was likely to tread a narrow range as investors await Friday's credit rating review from Standard & Poor's.
Recent shocks to growth and inflation in South Africa have created much uncertainty, the central bank governor said on Wednesday, adding he could not predict the outcome of a rating review due on Friday.
Thousands of U.S.-backed fighters opened a major new front in Syria's war, launching an offensive to drive Islamic State out of a swathe of northern Syria it uses as a logistics base, and were reported on Wednesday to be making rapid progress.
Iraq has delayed its assault on the city of Falluja because of fears for the safety of civilians, Prime Minister Haider al-Abadi said on Wednesday, as his forces halted at the city's edge in the face of ferocious resistance from Islamic State fighters.
Chancellor Angela Merkel has public commitments that mean she will miss a disputed vote in Germany's parliament on Thursday on a resolution that labels the killings of up to 1.5 million Armenians by Ottoman forces as genocide, a spokeswoman said.
World Markets (Spot Prices)
|JSE Top 40||17:00||47510.07||-464.02||-0.97%|
|JSE Indust 25||17:00||73450.29||-527.80||-0.71%|
|USD / ZAR||19:59||15.6353||-0.0760||-0.48%|
|GBP / ZAR||19:55||22.4741||-0.2584||-1.14%|
|AUD / ZAR||19:55||11.3228||-0.0457||-0.40%|
|USD / JPY||19:59||109.5340||-1.1880||-1.07%|
|EUR / USD||19:59||1.1181||0.0053||0.47%|
|GBP / USD||19:59||1.4411||-0.0070||-0.48%|
Click here for the Sharenet Spot Price page
The JSE Today
* Includes all listed instruments on the JSE
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||75,862.65||-482.12||-0.63%|
|Oil & Gas ||7,195.69||.00||0.00%|
|Oil & Gas Producers ||38,689.88||.00||0.00%|
|Basic Materials ||21,468.97||-560.83||-2.55%|
|Forestry & Paper ||52,384.08||-1548.85||-2.87%|
|Industrial Metals ||5,625.52||-389.14||-6.47%|
|General Industrials ||170.60||2.13||1.26%|
|Consumer Goods ||81,048.14||-1015.94||-1.24%|
|Automobiles & Parts ||4,694.22||-61.14||-1.29%|
|Health Care ||9,450.14||-85.22||-0.89%|
|Index Name||RP||Move||% Move|
|Food Producers ||9,125.67||122.86||1.36%|
|Personal Goods ||917.96||-9.99||-1.08%|
|Consumer Services ||18,749.68||-96.03||-0.51%|
|General Retailers ||7,719.85||190.35||2.53%|
|Travel & Leisure ||5,782.33||95.07||1.67%|
|Support Services ||2,069.00||29.66||1.45%|
|Non-life Insurance ||59,721.97||1510.92||2.60%|
|Life Insurance ||38,897.67||193.87||0.50%|
|General Financial ||4,593.41||3.74||0.08%|
|SHARIAH TOP40 ||3,051.65||-37||-1.20%|
|FTSE/JSE SHARIAH ALL||3,341.38||-28||-0.82%|
|FTSE JSE Fledgling ||6,991.81||-43||-0.61%|
|FTSE/JSE Alt X ||1,488.52||0||0.03%|
|SA LISTED PROPERTY ||649.63||7.13||1.11%|
|CAPPED PROPERTY ||573.65||0.17%|
|FTSE/JSE RAFI 40||9,372.84||-100||-1.06%|
|Capped Top 40||25,156.19||-227||-0.90%|
|Capped All Share||27,212.70||-183||-0.67%|
|JSE TABACO ||12,023.82||-370||-2.98%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|IPL||IMPERIAL HOLDINGS LTD||HOLD||31/05/2016|
|SBK||STANDARD BANK GROUP LIMIT...||HOLD||31/05/2016|
|TFG||THE FOSCHINI GROUP LTD||BUY||30/05/2016|
|Expected||Company Name||Fin. Date|
|02/06/2016||RBA||December 2015 (Final)|
|02/06/2016||TRNSHEX||March 2016 (Final)|
|02/06/2016||WESCOAL||March 2016 (Final)|
|03/06/2016||ILLOVO||March 2016 (Final)|
|03/06/2016||MONTAUK||March 2016 (Final)|
|DIPULA A||11/05/16||27/05/16||06/06/16||ZAR 0.4824|
|DIPULA B||11/05/16||27/05/16||06/06/16||ZAR 0.3878|
|HWN||Howden Africa Holdings Ltd.||01/06/2016||Confirmed|
|BSR||Basil Read Holdings Ltd.||02/06/2016||Confirmed|
|SCP||Stellar Capital Partners Ltd.||03/06/2016||Confirmed||
Stock Exchange News Service
Click here for more SENS news