A word with Dave Foord, manager of the Nedgroup Investments Stable Fund
Please tell us about the key aspects of the Foord investment philosophy and highlight some of Foord’s competitive advantages in managing the Nedgroup Investments Stable Fund?
Rule number one: Do not lose money,
Rule number two: Do not forget rule number one.
Our competitive advantage is derived from a dedication to this simple principle.
Key tenets of our investment philosophy are:
- To preserve and grow our clients’ long-term savings in real terms;
- To define risk as permanent loss of capital – not volatility;
- To invest through the cycle – for the long term;
- To put safety first – diversification, portfolios always balanced; and
- To have patience – time is a powerful force.
Most importantly, we treat investors’ capital as we would our own and not as part of a competition that can be used to our advantage.
The Nedgroup Investments Stable Fund has maintained a flexible asset allocation over time and your long term asset allocation track record is very good. How did you achieve this and can you please provide some insights into your asset allocation process?
In one word: consistency. Asset allocation, which inherently incorporates timing, is responsible for most of the difference in returns, as much as 80% according to some studies. We therefore concentrate our efforts on optimising our asset allocation as far as possible.
While some components of our asset allocation process are simple, other parts are more complex. We use forecasts adjusted for probabilities and risk – so inherently it is a quantitative process. Yet judgement is still the most important element in the process. The process is not constant or fixed as we are learning from and improving it all the time.
The short duration of the Nedgroup Investments Stable Fund’s fixed income component offers protection in a rising yield environment, but are you able to earn sufficient returns on the underlying instruments?
The South African money market industry is one of the few in the world providing a return above the inflation rate. This is partly why the rand has been relatively strong. Hence we are able to earn a 2-3% real return for most of the fund’s fixed income component. Interest rates in most cases will come down as inflation comes down. A large portion of the fund is therefore indirectly matched to the benchmark to ensure a higher probability of meeting the benchmark over the appropriate measurement periods.
Foord employ a multi-counsellor approach on the Nedgroup Investments Stable Fund. Would you explain what this is, how it is implemented and why you took the decision to adopt this process at Foord?
We adopted it because both our research and experience show that it works. It allows for diversification and concentration with conviction. It also provides the appropriate structure for succession and portfolio manager transitions when needed, while still maintaining the required levels of continuity from a portfolio management perspective.
Has the success of Foord Asset Management, both from a performance and growth point of view, led to additional pressures on your time? Are you able to be as involved in the investment process as you have always been?
I’ve always managed my time very well. The success of the firm has enabled us to pay suitable levels of compensation for excellent talent. This means that more great people help with the process now than were available to me 10 to15 years ago. Nevertheless, as CIO I am responsible for all actions and results, just as I have always been.
Risk management is one of the cornerstones of the Foord philosophy. Please elaborate further on your approach in the context of a low equity fund such as the Nedgroup Investments Stable Fund?
Risk equates to the possibility of losing money and/or not achieving the desired results.
With the Nedgroup Investments Stable Fund, we believe we should protect capital even more carefully due to investors requiring more predictability of returns over shorter periods of time versus a typical balanced fund for example and we are thus stricter in our risk parameters.
Globally, political uncertainty is elevated and producing some curious reactions within capital markets. What are some of your thoughts around Brexit, the Trump presidency and any other key risks on the horizon in 2017?
Brexit and Trump are not risks, they are facts. Uncertainty is always there. It has the greatest impact when least expected. We deal with what we can see by working with probabilities. We deal with what we can’t see with caution.
The Nedgroup Investments Stable Fund remains one of the best performers in its category since its inception in 2007. What were some of the strategies or decisions that have contributed significantly to the Fund’s performance during this period?
Consistency! Getting the major asset allocation calls right has contributed greatly. Avoiding losses has also helped the Fund remain at the top end of the ranking tables since launch despite the poor relative performance that investors experienced during 2016.
Over the past year, asset class returns in rands have been weak. Is it necessary to change the way you manage money in this kind of environment?
No. We’ve been managing client assets for over three decades now. Although we’ve taken the opportunity to enhance our process over time, we’ve been careful only to do so for the right reasons and at the right times. This has enabled us to develop our investment process to be enduring and robust through various market cycles and conditions.
The Fund’s returns relative to the peer group since the middle of 2016 have encountered some headwinds. Could you elaborate on the biggest drivers for this positioning and any lessons you have learnt?
We do not place much emphasis on peer-relative positioning. We do not attempt, nor have we succeeded in the past, at coming first in every month or quarter. There is usually some other asset manager with an extreme position who comes to the fore with a good performance in the short term. As a result, each time period provides another (different) winner when results are measured over short time horizons. It’s our consistency that earns us favourable long-term returns for our investors.
For the year to 31st March 2017, our offshore positions have actually done very well against their respective benchmark in USD. Nevertheless, we’ve been hurt by the strong rand due to our full offshore weighting and rand-hedge exposure. The outcome of the Brexit vote also negatively impacted the fund’s performance. We believe that these are short-term headwinds.
Recent events such as the Cabinet reshuffle and consequent downgrade by two of the prominent Rating Agencies has already resulted in a markedly weaker rand. Longer term, we believe that the fund is positioned appropriately both from a bottom-up and top-down perspective to maximise returns while carefully managing risk exposures.
Could you explain the impact of the Brexit vote on the Nedgroup Investments Stable Fund, with a comment on Capital & Counties in particular, which was hit quite hard?
We called the result of the Brexit referendum correctly, but we also believe that the negative impact on the British pound (which was overvalued to begin with) has been too severe. Capital & Counties (Capco) is an excellent diversifier for the fund, has real assets and a great management team. The collapse in the share price is a fantastic buying opportunity, of which we availed too early as it subsequently turned out, mainly because of Rand strength.
While there is negative sentiment around the central London residential property market following the Brexit referendum, Capco’s Covent Garden assets (58% of net asset value) remains resilient. This inimitable asset recently received a marginal increase in valuation to GBP2.1 billion, as tourism-related retail spend offsets any weakness in domestic demand. Capco continues to optimise space in the Covent Garden estate through its leasing activity. Helped by the sharply weaker rand in recent weeks, the share price is already up more than 20% from its lows.
A number of investors have selected the Fund to draw a specified income within a living annuity. What would be your advice to these unit holders?
Investors should get better long term returns in a typical balanced fund that has a higher allocation to equities. However, they will also need to be able to tolerate the greater volatility that comes with it.
From the Nedgroup Investments Stable Fund they should be able to draw an income of 4% per annum, which they can then increase each year by the inflation rate. This will provide an income which will have minimal impact on the erosion of their capital values over the long term. Investors who are able to withstand the shorter term fluctuations that do occur every once in a while should benefit more in the long run compared to others who capitulate during periods of lower returns.
A large proportion of the Fund is exposed to foreign currency, either through direct offshore holdings or South African companies with overseas operations. What will be the impact on the Fund if the rand continues to strengthen? What is your view on whether this is likely?
If rand strength continues it will result in no-to-low returns for a short period. A significant portion of the Fund (53.3%) is in rand assets. Of this 16% is in bonds, which will perform well in an environment where the rand does continue to strengthen. Inflation will also be much lower in this scenario, thereby lowering the overall target return (benchmark).
Nevertheless, it is our priority at Foord to build portfolios that remain robust through most types of market environments as opposed to placing all our bets on a single outcome materialising. As mentioned previously, recent political events will also add to the pressure for currency weakness.
Can you please tell us more about the Fund’s offshore positioning?
From an asset allocation perspective, we currently prefer a high allocation to global equities with particular emphasis on sectors where the earnings growth outlook is in excess of global GDP growth. We are invested in good quality companies that are trading at attractive valuations.
What is the outlook for the Fund from this point onward? Can you provide a very rough estimate on return expectations based on the current portfolio structure?
We believe investors will be able to maintain real levels of capital in the short term through a higher allocation to quality, local businesses locally, cash, shorter duration bonds and a full allocation to offshore. We have no doubt that the Fund will achieve its target return of inflation plus 4% over the medium- to long-term.