Category Investments

A strange place

01 September 2004 Angelo Coppola

Scott Campbell of PSG Fund Managers says that the Financial Adviser community is well advised to follow the well rehearsed financial planning model, whereby current assets plus savings grow at a target return to achieve the required cash at retirement.

However, the actual reality of the fund manager achieving these target returns is not quite so well rehearsed.

Research from Ibbotson and the London Business School shows returns for equities over the 102 years from 1900 to 2002 were 4.6% above cash.

Of interest is that the rate of return above bonds is less and it is therefore fair to assume that achieving cash (Libor) +4% is very difficult. It will undoubtedly require active asset allocation management between and within asset classes.

According to John Mauldin's latest research, the Dow Jones Industrial had 63% positive years and 37% negative over the same 103 odd years. Avoiding the bear markets in equities, utilising property and hedge funds for diversification/risk management in bearish times and timing markets is the only way to achieve these targets in our mind.

Static model tested actuarial driven portfolios with fees will never achieve LIBOR +4% over the long term.

However the latest trend is for hedge funds to dominate target return portfolios.

Now whilst we believe alternative strategies are an important component to any portfolio, it is risky to allocate entire portfolios to one asset class. We do not have 103 year data for hedge funds through all conceivable economic and political environments, but one thing will be for sure, the past 10 years data/numbers will not be repeated over the next 10 years.

For the simple fact that the wall of money now being allocated to this investment style is so fundamentally different to the recent past.

In fact, hedge fund indices have produced four down months in a row as the wall of money becomes a problem. For example, GAIM Advisers recently wrote an article about European Convertible Arbitrage that illustrates our point.

There is a dwindling universe of bonds to choose from and unless M&A activity picks up, it is unlikely to grow in the short term, BUT new money into the hedge fund sector grows at a rate of knots.

Being long only convertible bonds has been a successful strategy for us over the past 18 months, but convertible arbitrage is not delivering its promised target returns of the past.

Even the most experienced players are being squeezed within their strategies? Financial Advisers who allocate 100% to hedge funds are BIG making asset allocation decisions!

The investable index is only up 0.8% YTD and most strategies are having a tough time.

Target returns of Libor + can be achieved by utilising start hedge fund managers at the right time, but the moral of the story is, never ever believe the story that evolves from investment marketing departments is gospel. Any fund manager worth their fees is active.

Quick Polls


The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?


Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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