Fund Focus: PPS Global Balanced Fund of Funds

PPS Global Balanced Fund of Funds is a compelling proposition aimed at South African investors seeking diversified offshore exposure.

Listed in the ASISA Global Multi-Asset High Equity category, the Fund is skewed toward growth assets. The PPS Global Balanced Fund is comfortable being slightly more aggressive than a traditional global balanced fund that typically invests according to a 60/40 equity and bond composite. This should appeal to South African investors, who tend to view high equity balanced funds as operating in the 60% to 75% equity allocation range.

Gain offshore exposure through a rand denominated fund
While the PPS Global Balanced Fund has 100% offshore exposure, it is denominated in rands, making it a convenient vehicle for local investors seeking to gain offshore exposure without the administrative constraints that are usually encountered when utilising one’s own offshore allowance to invest directly offshore. One is therefore able to quickly and easily gain access to a selection of hand-picked foreign managers, which our manager research process has uncovered, within a portfolio that reflects our best investment view.

Steady performance despite volatile market conditions
The Fund has a five-year investment horizon, which is typical of a fund that is geared toward capital growth. Over five years, PPS Global Balanced has delivered second-quartile performance, outperforming the ASISA Global Multi-Asset High Equity category average slightly. The fund however underperformed its 60/40 global equity/bond composite benchmark, due to near-term underperformance from its underlying equity managers. The recent violent market dislocation proved difficult for the managers to outperform, but encouragingly, conditions have now started to improve. The fund was also underweight global bonds, which until recently has been an extremely unattractive asset class but did well during the market turmoil.

Portfolio Construction and asset allocation
From a portfolio construction perspective, diversification is achieved on an asset class and manager level, where we make use of specialist equity, property, and fixed interest managers. The specialist underlying managers are all well-placed to compete against their respective benchmark indices over the long term, each demonstrating formidable long-term track records. At an FoF level, we also seek to add incremental outperformance through careful tactical asset allocation around the 60/40 strategic asset allocation, driven by our house-view framework. Tactical asset allocation tilts occur relatively infrequently, and we expect the bulk of the strategy’s outperformance to come from its long-term asset allocation mix, and manager selection over time.

A diversified selection of global equity managers
The foreign equity managers in the fund include a selection of some of the best active foreign equity managers in the world, namely Capital Group, Egerton, Baillie Gifford, Dodge, and Cox. The global listed real estate allocation of the FoF is managed by Catalyst Fund Managers, a South African-based property specialist. The fixed interest portion of the portfolio is managed by Blackrock and Dodge and Cox. Each element of the portfolio serves a specific purpose, with the goal of collectively achieving the fund’s long-term objective while providing suitable diversification by providing access to different sources of return. While some of the names in the portfolio are well-known locally, others may be unfamiliar, despite their well-established presence globally.

• Capital Group
Capital Group, one of the largest active managers in the world, manages roughly half of the equity exposure in the PPS Global Balanced Fund. The high conviction weighting in the portfolio is a function of the strategy’s diversified approach, combining multiple internal portfolio managers with different investment styles. The outcome is a strategy that is well diversified across investment styles, and with a consistent return profile over the long term. This approach has been very successful, having been tried and tested over multiple market cycles over the strategy’s 50-year history. This global equity fund is a highly diversified portfolio aimed at investing in established and early-stage multinational companies that are well positioned to benefit from changing global trade patterns.

• Egerton
The second equity manager in PPS Global Balanced is Egerton, which is a focused investment-led asset manager based in London. Egerton is a bottom-up, research-intensive, stock picking manager with no regard for the benchmark. They look to invest in liquid, large cap companies with strong cash flows, a solid balance sheet, and considerable growth potential. The fund has a relatively short investment holding period, given Egerton’s preference for shares that are expected to re-rate quickly, and their tendency to exit these swiftly if the investment thesis is not playing out as expected early on. The portfolio is relatively concentrated by global standards, with most of the portfolio often invested in roughly 20 core holdings.

• Baillie Gifford
In addition to Capital and Egerton, PPS Global Balanced Fund holds smaller weightings in two more style-specific managers. The first is Baillie Gifford, which is a growth-focused manager based in Edinburgh, Scotland. This manager operates a substantial business, managing over $250bn in assets and has been in business for over a century. The strategy invested in focuses on capturing growth opportunities by investing in immature (early stage of development or with significantly changing business models), entrepreneurial companies with significant growth potential from across the globe. The focus is on identifying transformational growth opportunities, that usually tend to present themselves as local companies trying to solve global problems. The strategy is expected to be more volatile than the global equity index given its explicit focus on the smaller capitalisation and growth shares however, we expect this strategy to add significant value relative to the index over time.

• Dodge and Cox
The second style-biased equity manager is Dodge and Cox, a large (over $300bn) and established (founded in 1930) owner-managed firm headquartered in San Francisco. The equity strategy we invest in has a distinct bias to undervalued companies and looks to invest in solid business franchises where the current market valuation does not adequately reflect the company’s long-term profit opportunity. The strategy is not explicitly managed relative to the benchmark, but a conscious effort is made to maintain representation in major economic sectors and to avoid concentrating the portfolio in any one sector or industry. One of the key differentiators between this fund and other value-based strategies is that it has been able to at least keep pace with the market during periods when its style is out of favour, while delivering strong returns once the cycle turns back in its favour.

• Catalyst
In addition to the equity managers, PPS Global Balanced Fund currently has an allocation to global listed property, through Catalyst Fund Managers. Catalyst is a privately-owned specialist listed property manager based in Cape Town, with a proven listed property skillset. Catalyst is a benchmark-focused manager who favour companies with strong management teams and quality assets, employing sensible risk management processes to limit extreme positions in particular stocks, sectors or regions. In general, we tend to view listed property as a hybrid asset class, with both equity and bond characteristics. Being a risky asset, listed property behaves like equity when markets sell off, but the different source of return is beneficial, while the yield underpin enables it to have a differentiated return signature.

Finally, PPS Global Balanced has an allocation to global bonds, also through Dodge and Cox. The strategy we have exposure to invests across the full spectrum of global fixed-income markets with the goal of generating high total real returns. The strategy uses bottom-up fundamental research to find opportunities across corporates, governments, and higher-yielding segments of global debt markets as well as currencies. One of the differentiators of this fund compared to other global bond funds is that it seeks to hold substantial non-US exposure, which includes emerging market debt. This holding is the newest addition to PPS Global Balanced, with the opportunity set for global bonds has become more interesting over the past year or so.

We expect to further increase exposure to government bonds in the portfolio, but for now, we are comfortable holding the bulk of the fund’s fixed interest exposure in (cash-like) low-risk, ultra-short-term government bonds via Blackrock.