Prescient Balanced Fund’s alternative bet under the spotlight

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A recent Moneyweb article examined the performance of passive balanced funds.

Read: Could passive balanced funds rescue local investors?

Over the last three years, the average balanced fund – the typical unit trust investors use to save for retirement – did not outperform inflation.

Passive players tend to emphasise the importance of low fees, but the analysis also showed the impact asset allocation has on performance over time.

While active pension funds have generally been slow to embrace alternatives, interestingly, one of the funds mentioned had a small allocation to “alternative assets”.

“[The] Prescient [Balanced Fund] has a 3% exposure to alternatives although there is no such exposure included in the fund’s composite benchmark,” the article noted. “That appears to be something of an active call although not much information is available in the fund’s MDD [minimum disclosure document].”

Bastian Teichgreeber, head of asset allocation at Prescient Investment Management, says the strategic asset allocation of the fund is in line with the benchmark asset allocation. The goal of the fund is to operate with a very low tracking error and therefore it does not want to deviate significantly from the benchmark.

However, the fund is not a pure passive fund. While the starting point is to use passive building blocks (and incorporate low fees, low transaction costs and a low tracking error), the fund also wants to harvest attractive and reliable components from active processes by reallocating capital between asset classes when there is significant market dislocation, Teichgreeber says.

For example: If equities are becoming extremely cheap, the global economy is doing well and monetary policy becomes easy (various indicators point in the same direction), it would deviate from the strategic asset allocation and adjust its allocation to equities to an overweight position.

“We only take alpha bets when we have a very high hit ratio and when we are pretty certain that this trade actually helps to outperform the benchmark.”

The fund’s asset allocation (%) as at December 31, 2018:

South Africa

Foreign

Total

Money market

8.01

0.00

8.01

Bonds

12.40

6.77

19.17

Equity

45.69

19.17

64.86

Property

5.01

0.00

5.01

Alternative Assets

2.95

0.00

2.95

Total

74.06

25.94

100

The fund’s benchmark has a 45% allocation to the capped SWIX 40 Index, a 12% allocation to the All Bond Index, a 13% allocation to the STeFI (‘fixed income’ or short term fixed interest index), a 5% allocation to the SA Listed Property Index, a 20% allocation to the MSCI World Index and a 5% allocation to US 1-month Treasury Bills.

Asked about the fund’s exposure to alternatives, Teichgreeber says the classification as alternatives is “not ideal” as it refers to an allocation to Prescient’s inhouse renewable energy fund, a pure private debt fund. It is effectively an alternative fixed income asset class that aims to structurally outperform the benchmark.

‘Within the building blocks – be it fixed income or equities – we select investments where we know there is a structural reason for them to outperform even over the medium to short term.’

Teichgreeber says the renewable energy fund is structured very conservatively and invests in projects that are mostly fully operational and backed by government.

“We are harvesting an illiquidity premium. So per definition this fund outperforms the fixed income building block of our benchmark.”

He says that while the All Bond Index is used as a reference point for the fixed income building block of the fund, investors expect the fund to deviate from the benchmark exposure, which is what it is doing by introducing private debt. The allocation to alternatives is an active and deliberate decision to enhance the fixed income building block.

It is their strong belief that a pure passive solution that merely replicates the benchmark is prone to underperformance, as it offers the benchmark return after management fees and transaction costs have been deducted, Teichgreeber says.

Essentially, it hopes to add small enhancements that are very unlikely to underperform the benchmark, but which give it a certain small amount of alpha, he says.

“We currently would only take like a 5% exposure [to alternatives], so it is very limited.”

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