Introducing the PPS Balanced Passive Fund: A Strategic Investment for Long-Term Growth

The PPS Balanced Passive Fund stands as an optimal choice for investors seeking a long-term investment horizon and diversified exposure across various asset classes, both locally and globally.

Categorized within the ASISA South Africa Multi Asset High Equity category, this fund adheres to a maximum equity allowance of 75% and a maximum offshore allocation of 45%. Additionally, the inclusion of listed property is permitted, with the caveat that the combined exposure to equity and property does not exceed 90%.

Distinguished by its predominantly passive management approach, this fund sets itself apart by maintaining a steadfast focus on long-term expectations throughout market cycles. Aligned with the PPS Balanced Passive Fund target asset allocation after fees, this strategy strategically combines local and global equity, property, bonds, and money market exposures to achieve cost-efficient performance.

In contrast to peers frequently adjusting asset allocations based on short-term expectations, this fund employs a strategic asset allocation model rooted in long-term expectations. This unwavering commitment to long-term perspectives distinguishes this fund within the industry, where tactical asset allocation adjustments based on shorter-term outlooks are more common. By prioritizing stability and consistency over short-term fluctuations, this fund offers investors a unique and reliable investment option in the ever-evolving financial landscape.

Strategic Asset Allocation: Balancing Risk and Return
The target asset allocation is meticulously crafted by the investment team at PPS Investments, incorporating the risk-return characteristics of each asset class. This process aims to produce an optimal combination of asset classes targeting a specific return level without unnecessary exposure to risks. The fund's targeted return level is South African Inflation (SA CPI) plus five percent, with a focused time horizon of seven years. Both the return target and time horizon play pivotal roles in shaping the fund's asset allocation strategy.

Understanding Time Horizon Impact on Returns
To illustrate the influence of time horizon on expected real returns (adjusted for inflation), the below chart outlines the average real return for each asset class over different time horizons spanning the last 33 years. Notably, local property (Lprop) has shown a remarkable average annualised real return of almost 10% over rolling 12-month periods, surpassing local equities (LEq), and developed market equities (OEqDM) at approximately 9% on average. As the time horizon extends to rolling eighty-four months, returns stabilize, with Lprop, LEq, and OEqDM settling at around 7.5%. In comparison, the PPS Balanced Passive Fund’s target asset allocation concludes at approximately 7%.

Mitigating Risks in Asset Classes
While the aforementioned assets offer promising returns, they also come with additional risks. The subsequent chart portrays potential scenarios for each asset class over different time horizons, emphasizing the impact of unfavourable market conditions. The return for an asset class during unfavourable conditions is defined as the annualised real return that was exceeded 5 percent of the time. For instance, local property, with an average rolling 12-month real return of 10%, presents a risk of a negative real return of -27% over the same period.

Comparatively, local nominal bonds (LNomB) and local inflation-linked bonds (Lilb) exhibit 5th percentile real returns of approximately -7% and -6% respectively, while local cash (LCash) maintains a 0% real return in times of stress. Over an extended 84-month period, 5th percentile returns reveal local nominal and inflation-linked bonds both producing an annualised real return of 0%, whereas local property faces a more substantial decline at -7%. The PPS Balanced Passive Fund target asset allocation demonstrates resilience with an annualized real return of -1.5%, protecting capital better than all asset classes except for local bonds and cash.

Aligning Strategy with Consistent Outperformance
Integrating the impact of time horizon and risk considerations enhances the fund's ability to consistently outperform specific targets. While local property exhibits an impressive average rolling 12-month real return, surpassing other asset classes, it falls short of outperforming a CPI + 5% target when compared to global equities. According to the chart below, global equities display the highest probability of outperforming a CPI + 5% target with a time horizon of 7 years, closely followed by the PPS Balanced Passive Fund target asset allocation and then local equities. The construction of this fund’s target asset allocation is designed not only to surpass this target return level at acceptable risk levels during normal market conditions but also to deliver acceptable risk and return levels during adverse market conditions.

The PPS Balanced Passive Fund’s target asset allocation is made up out of the following composition: 35% local equities, 5% Local property, 10% local nominal bonds, 7.5% local inflation linked bonds, 2.5% local cash, 20% developed market ESG focused equities, 15% emerging market ESG focused equities and 5% global property.

Manager Selection
At PPS Investments, our approach to selecting managers follows a meticulous and consistent process. The evaluation hinges on three core pillars: Organization and Strategy, People and Support, and Investment Approach. Under each pillar, various aspects undergo thorough scrutiny, resulting in a comprehensive rating. PPS has entrusted Prescient Investment Managers with the role of fund manager. Their demonstrated ability to effectively generate returns aligns seamlessly with the targeted asset allocation.

Invest with confidence in the PPS Balanced Passive Fund, backed by a resilient and strategic approach to long-term growth. Our commitment to prioritizing stability and consistency over short-term market fluctuations sets us apart, ensuring a steadfast and reliable investment avenue for your long-term financial goals.