Careful stock picking and a mandate that allows the fund to move almost entirely out of the equity market helped the Rezco Value Trend Fund earn returns of 19.6 percent a year (according to ProfileData) over the five years to the end of December last year, pushing it to the top of the domestic asset allocation flexible subcategory ahead of 23 other funds.
Domestic flexible asset allocation funds invest in a combination of assets in the equity, bond, money market and property markets, and their offshore exposure is restricted to a maximum of 25 percent.
Fund manager Wally Gray says the international environment has changed fundamentally in recent years, necessitating a much more flexible approach to managing investment risk while taking hold of investment opportunities.
“Simply staying relatively fully invested in either equity funds or index funds is now a higher-risk strategy,” he says.
Gray says the need for a flexible approach is starkly illustrated by the sharply contrasting performance of various global markets.
“Despite the significant rebound from the March 2009 lows, the United States market, as measured by the Dow Jones index, showed an insignificant return for the first 10 years of this century. The Dow was only marginally above 10 000 at the end of the decade. In stark contrast, the JSE All Share index has shown a three-fold appreciation over the past decade,” he says.
Gray says other areas produced outstanding results over the past decade, notably Brazil, China and India, as well as gold bullion and oil, which have risen by more than 250 percent and 150 percent respectively.
“The buy-and-hold philosophy spawned by a 25-year bull market is no longer a secure strategy. While the long-term correlation between gross domestic product and asset prices remains intact, the high rates of economic growth reflected in booming corporate earnings has been replaced by a lower growth scenario and this, in turn, is reflected in widely ranging markets and substantially increased volatility. In such conditions, the need for flexibility to invest where growth is best, is vital,” he says.
Gray says that since its establishment five years ago, the fund has shown consistent positive performance well ahead of the overall market, and it continued to deliver good performance during the meltdown in the year to March 2009.
He says that when markets are going up, it is important to focus on stock selection.
“Towards the end of 2007, we started getting uneasy when looking at the global economic environment and felt there was a possibility of something causing the market to crash, so we went fairly liquid and moved into cash and then increased our cash position to more than 80 percent in 2008,” he says.
Gray says this move helped the fund preserve capital when the market crashed in 2008.
However, he adds that he did not foresee that the crash would be as bad as it was. “When one sees an extreme scenario across all markets, there is a debate about whether there will be a correction and, if so, by how much. When markets move to excesses – either up or down – one has to question that,” he says.
“When making stock picks, we look for companies where inherent business development leads to business growth. For example, if one looks at life and health insurer, Discovery, its management makes innovative business decisions that are likely to result in earnings growth,” he says.
However, Gray warns that innovation alone is not enough. The innovation must lead to revenue growth, increase in market share and margin growth.
“We also went very strong on Oceana in 2007 because we thought their margins would do well, and the company held stable when markets went down,” he says.
Looking ahead, Gray says he expects the market to move in extremes, both up and down. “We have got equity exposure of about 64 percent. Of that 64 percent, 20 percent is offshore equity exposure, which is the maximum allowed in terms of legislation, and we believe there are good opportunities coming up internationally,” he says.
Gray says he is also of the view that developed countries such as the US need unemployment numbers to decrease before their economies will kick into gear.
“You need people earning and spending money to boost the economy,” he explains.
Gray says with the rand as strong as it is, he feels it is prudent to have money in other currencies so that the fund’s eggs are not all in one basket.
“In emerging economies one can find companies with faster earnings growth, and for this reason we have invested rather cautiously in offshore equities in Bric (Brazil, Russia, India and China),” he says.