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SIM Managed Fund of Funds: Building Stellar Unit Trust Returns With Your Own Building Blocks

Local investors who stuck with Regulation 28-compliant unit trusts are being rewarded for their loyalty with rolling three- and five-year returns ‘lifted’ by strong performances from most asset classes in the latter half of 2020, through 2021 and into the early part of 2022.

The extent of the recovery is evident in the latest return statistics from the collection of SIM* Managed Fund of Funds unit trusts that cater to a range of investor risk profiles, from conservative to cautious, moderate and moderate aggressive, on to aggressive. Natasha Narsingh, Head of Absolute Returns and Senior Portfolio Manager at Sanlam Investment Management, says the performance of these funds is commendable given the financial market uncertainty created by two years of lockdown and the pandemic.

The SIM* Managed Aggressive Fund of Funds ranked fourth in its category for the period 01 May 2012 to 30 April 2022, with an average annualised return of 10.83% compared to its benchmark** of 10.41% over a 10-year period. Similarly, the SIM Managed Moderate Aggressive Fund of Funds ranked eighth in its category over the same period with an average annualised return of 10.31% compared to its benchmark** of 9.78% over a 10-year period. The lowest and highest actual annualised returns over the period, 01 May 2012 to 30 April 2022, ranged between -11.15% to 40.82% for the SIM Managed Aggressive Fund, and -8.94% and 35.94% for the SIM Managed Moderate Fund.

An investor studying the longer-term track record of these unit trusts could be forgiven for forgetting about the tumultuous two years during the pandemic and the almost decade-long slump in the JSE All Share Index prior to that. “Our Fund of Funds range has successfully navigated treacherous financial waters that were blighted by icebergs such as COVID-19, extensive countrywide lockdowns and the unbelievable pressure brought to bear on business earnings and margins during these times,” says Narsingh, who offers four reasons for the performance.

First, each of the Fund of Funds in question is restricted to investing only in other internal active and passive funds; second, the bottom-up fundamental analysis skills of the SIM fund management teams; third, the asset manager’s pragmatic value philosophy; and fourth, getting the portfolio construction right. “Given the support from the brand and fund management teams, all that remains is to determine the optimal asset allocation for each of the funds, choose from the building blocks available to me and add to and subtract from these as appropriate for the prevailing financial market environment,” Narsingh says. Getting the balance right requires insights and rigorous analysis into the return prospects across the broad investment universe of local and offshore equities, listed property, bonds and cash.

One opportunity in the local space that played into Narsingh’s hands during 2020 and 2021 is the SIM Top Choice Equity Fund, which is an actively managed high-conviction portfolio holding a maximum of 20 of the best equity investment ideas. The fund has delivered a strong performance return, providing an above-benchmark growth in capital over this period. Another notable offering is the Sanlam Real Assets Fund, an offshore equity fund, which invests in listed securities that derive their value from underlying physical real assets such as renewable energy and infrastructure assets. By including this defensive and liquid fund in the SIM Managed Fund of Funds unit trusts, she achieved impact and sustainability outcomes with good returns achieved at minimal levels of risk.

The question top of mind among unit trust investors is whether 2022 will deliver similar returns as fund managers begin positioning their portfolios for endemic or post-pandemic market conditions. According to Narsingh, 2022 results will hinge on the tactical balance between the various asset classes. She is in the enviable position of seeing through the individual components of each of her unit trust portfolios to get a close to real-time, financial instrument-level view of the mix of asset classes and return expectations.

As we head into the second quarter of 2022, local equities are back in favour, despite excess volatility in financial markets. “The expected return on offer from local asset classes, particularly local equities, are reasonably good – we see many opportunities linked to elevated market volatility,” says Narsingh. But each asset class’s return expectations will ebb and flow as inflation, the pandemic, geopolitical instability, and other macroeconomic factors feed into both local and offshore markets.

Unlocking value will prove a key differentiator in the domestic equity part of a multi-asset portfolio, with stock selection by underlying SIM managers expected to add significant alpha. However, Narsingh is cautious about the outlook for developed market equities, particularly US equities, given the strong performances from this category through 2021 and company valuations that look to be on the expensive side on most traditional valuation metrics. That said, the Moderate Aggressive and Aggressive Fund of Funds will still retain a fair amount of exposure to offshore equity; given the well-diversified mix of capital growth-seeking and defensive funds within our offshore equity construct.

The outlook for property, usually a big driver of portfolio returns, is subdued. Investments in this asset class recovered through 2021, but fund managers are now becoming more cautious about their property exposure in portfolios. Given the structural changes in this sector, due to the COVID-19 pandemic, to still fully play itself out, it is difficult to appropriately determine the fair value for properties. Bonds and cash remain core building blocks for investors with conservative, cautious, and moderate risk appetites. “The yield on offer from cash notes with floating interest rates and money market instruments should start to pick up as the South African Reserve Bank enters a rate hiking cycle this year; appropriate exposures to cash and bonds will ensure portfolio protection during volatile times,” says Narsingh.

Local bonds still look cheap. “We have some of the cheapest bonds in the world. You can pick up a 10-year government bond at a yield of over 10%, which, depending on what your long-run inflation expectation is, could see you earn anywhere between a 4.5-5% real annualised yield. There is value in select areas of our yield curve; you do not need to add significant duration to be able to lock in really good returns from SA government bonds over the medium term,” concludes Narsingh.

*SIM stands for Sanlam Investment Management.
**The benchmark for the funds can be viewed on the respective MDDs.

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