Category Investments

Fairtree Balanced Fund true to name, delivers in difficult market

04 August 2020 Fairtree
Jacobus Lacock, Fund Manager at Fairtree

Jacobus Lacock, Fund Manager at Fairtree

Stephen Brown, Fund Manager at Fairtree

Stephen Brown, Fund Manager at Fairtree

Fairtree Balanced Fund is ranked 2nd out of 170 funds in this popular fund category over the last three years and delivers on its mandate in a difficult market.

According to Fund Managers Jacobus Lacock and Stephen Brown, the fund is up 7.2% for the 7-months ending July and continues to challenge the larger multi-asset class funds in the quest to deliver superior, inflation-beating returns for clients from an actively managed, diversified portfolio.

With a collective 35+ years in managing money on behalf of clients between them, the duo came into 2020 with an outstanding 2019 result on the board and a calendar year return for the fund of 17% (after fees) despite global economic uncertainty.

Strategic asset allocation is core to the philosophy and management of the fund and a diversified blend of assets is the cornerstone of its successful investment strategy where tactical asset allocation is deployed.

The diversified strategic asset allocation of the fund is 50% SA equity, 17.5% global equity, 17.5% fixed income, 7.5% property and 7.5% cash. The relatively high strategic allocation to growth assets allows the fund to deliver growth to clients throughout the business cycle while strategic asset allocation is used to protect the portfolio from economic and earnings recessions.

As a unique advantage of the flagship, multi-asset fund, the Portfolio Managers are able to invest in stand-alone underlying asset class building blocks to extract alpha generation from security selection. A recent return attribution indicates that 10% of the 13.6% year-to-date outperformance of the benchmark is attributable to stock selection and the remaining 3.6% is due to asset allocation.

Since inception, each of the underlying investment specialists have delivered alpha generation at crucial times for the fund, which validates the strategy to allocate to experienced specialist teams including SA Equity, Global Property, Fixed Income and Global Equity.

Lacock and Brown said the combination of aggressive policy action by authorities, increased liquidity, rising economic activity and rising probability of a Covid-19 vaccine have spurred asset markets higher.

“Global equity markets were up +4.7% over the month of July and -2.3% year-to-date. Emerging markets were up +8.4% and -3.2% year to date, closing the gap with developed markets. South Africa has also recovered well and is only down -1% year to date, despite many local sectors still being down more than -30%,” said Lacock.

Brown added: “Signs of global recovery saw commodity prices rise with oil up almost +20% and base metals +10%. US jobs rose sharply for a second consecutive month, while retail sales in the US and Europe also surprised. The market rotation into value and cyclicals has lost steam more recently as US and global political tension rose and a second wave of infections in the US emerged and investors turned to safe havens. US Bond yields remain close to all-time low month while the gold price rose to almost $2000.”

The pair attributed the Rand appreciation as the US dollar weakened; South African bonds came under pressure as the emergency budget delivered by National Treasury pointed to increased funding pressures and bond issuance; Government bonds (10yr) sold off post the emergency budget and the yield curve steepened; the market and ratings agencies reacted with skepticism on Finance Minister Mboweni's plan to stabilize national debt at 87.4% of GDP in 2023/2024; to the Fund’s performance.

GDP growth for Q1 (pre-lockdown) surprised to the upside with -2%. The economy remains in recession with mining and manufacturing the key supply side-drivers, while investment and inventories drove the demand side collapse. Lacock and Brown expect Q2 to be very weak due to the lockdown measures taken. Growth for 2020 is expected to be around -7 to -8% down as per latest SA Reserve Bank, National Treasury & IMF estimates. Although inflation continued to fall, now below 3% they believe the scope for further rate cuts by the SARB has diminished. They expect at best, only 25bps of further easing over the next few meetings. Local activity has rebounded as lockdown measure were eased, yet consumer confidence is close to all-time lows.

Equities: The outlook for global earnings growth has recovered although earnings certainty remains low. Aggressive central bank and fiscal policies have provided support to global equity prices. Current global valuations contain little safety margin. Valuations of domestic equities are attractive but Fairtree remains cautious given the poor growth outlook. The domestic economy will only start to benefit from policy intervention, interest rate cuts and lower fuel prices when activity normalizes and confidence improves.

“We like selected local and global exposed cyclical assets with strong balance sheets and global earnings growth potential, plus resources, given tight supply and relative attractiveness of China vs other markets,” said Brown.

Fixed Income: South Africa's inflation remains low while inflation expectation decreases further. Given current weak economic activity and low inflation the SARB may reduce rates again. Liquidity and funding pressure in the bond market remain a concern as signaled by the steep yield curve.

Currency: The team believe the US dollar strength has stabilized and that US political, health and growth uncertainty could weigh on the US dollar along with weakening fiscal dynamic and falling real rates.

“Fundamentals for the ZAR are improving and we believe the currency is undervalued at current levels. Improving current account and term of trade along with improving EM back drop should provide support to the currency along with the attractive real yield it offers,” said Lacock.

“Exposure to SA Equities, Property and Commodities are close to benchmark or overweight, and reflect the view to fully invest in growth assets under normal market conditions. Returns from these growth assets are expected to be in the region of 15%. The fund is underweight Global Equities and neutral Fixed Income at present, and forward returns from these assets are expected to be in the region of 10% on a 12-month view,” said Brown.

Quick Polls


The intention with lockdown was to delay or flatten the Covid-19 infection curve and give both the private and public healthcare sectors time to prepare for the inevitable onslaught. Did the strategy work?


No, the true numbers are not reflected. Almost a quarter of South Africans may already have been infected with Covid-19
It’s too soon to tell. We will likely get a second wave with stringent lockdown regulations in place again
Yes, South Africa bought enough time to make a significant difference. We saved lives and have passed our peak. The worst is over
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