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The Benefits of Knowing Your True Asset Allocation

Richard Simpson

The Traditional View

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Equities

Property

Bonds

Offshore

Cash

The problem

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Asset Class A

Asset Class B

Correlated

Equity A

Equity B

Uncorrelated

The consequences

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• True positioning and risk of portfolio not clear

• Returns may not be what you expected

• Difficult to hold investment manager accountable

• Blind spot of Passive Asset Allocation

How should you look at Asset Allocation?

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Deep Cyclicals

I-Sensitive Rand Hedge Defensive

Growth

How should you look at Asset Allocation?

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Deep Cyclicals

Bonds(EM)

I-SensitiveRand Hedge

Defensive Domestic bonds

I-Sensitive(EM)

Property

Cash (DM)

Bonds (DM)

Equity (DM)

Domestic Cash Growth

DM = developed marketEM = emerging market

Weaker rand

Stronger rand

Interest Rate Sensitive equity correlated to Bonds

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I-Sensitive correlated to Bonds (EM)

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Property correlated to bonds

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Rand Hedges and Deep Cyclicals are usually mutually exclusive

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Guidelines

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• Total equity exposure is a blunt measure: Which equity is owned?

• Interest rate sensitive equity, property, and bonds are correlated

• SA domestic equity and emerging market equity are correlated

• Deep cyclical and EM assets are correlated

• Rand hedge shares and offshore assets are correlated

Note: Extreme valuations can cause correlations to break down

A disciplined stock-selection process is essential

Our traditional asset allocation

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12,5

01,41,2

4,1

11,9

8,3

14,1

Interest rate sensitive equity

Property

Domestic Bonds

Emerging market equity & bonds

Growth Equity

Deep cyclical equity

Rand hedge equity

Developed market equity & bonds

How we view asset allocation

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Investment type %

Interest rate sensitive equity 12,5

Property 0,0

Domestic Bonds 21,3

Emerging market equity & bonds 12,1

Growth equity 4,1

Deep cyclical equity 11,9

Rand hedge equity 8,3

Developed market equity & bonds 14,1

Supported by weak

rand

Supported by strong

rand

Cash, commodities, and other equity make up residual %

The blind spot of Passive Asset Allocation

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4% p.a. outperformance

13% p.a. outperformance

Benefits of knowing Your True Asset Allocation

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• Better understand how a portfolio is positioned

• Less risk of fund not doing what you expected

• Ability to ask managers more insightful questions

• Help you to more effectively manage client solutions as a whole

Integrate Asset Allocation with Sector Selection

• A multi asset framework optimal• Asset allocation and stock selection together drive real returns• You buy Equities for real growth in earnings• Earnings override everything in the long run, ratings critical I

short term• The power of yield• Mean-reversion critical• Asset rotation a “multi-year event”• “Cannot invest in a vacuum” – relative valuation• Asset allocation and Sector selection are “joined at the hip”

“Marry Valuation with the Cycle”

Our Asset allocation beliefs

Benefits of a multi asset approach

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Disclaimer• Investors should take cognisance of the fact that there are risks involved in buying or selling any financial product.

• Past performance of a financial product is not necessarily indicative of future performance.

• The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions.

• Illustrations, forecasts or hypothetical data are not guaranteed and are provided for illustrative purposes only.

• Investment performance is calculated by taking the actual initial fees and all ongoing fees into account for the amount shown and income is reinvested on the reinvestment date.

• A schedule of fees and charges and maximum commissions is available on request from the manager.

• This document does not constitute a solicitation, invitation or investment recommendation.

• Prior to selecting a financial product or fund it is recommended that investors seek specialised financial, legal and tax advice.

• The laws of the Republic of South Africa shall govern any claim relating to or arising from the contents of this document.

• The manager does not provide any guarantee either with respect to the capital or the return of a portfolio.

• Collective investment schemes are generally medium to long-term investments.