PPS Moderate Fund of Funds
Luigi Marinus, Portfolio Manager at PPS Investments
The PPS Moderate Fund of Funds is a multi-asset medium equity unit trust that is managed according to Regulation 28 of the Pension Funds Act.
The aim of the PPS Moderate Fund of Funds is to achieve an inflation of +4% over rolling five-year periods. The fund needs to hold a reasonable amount of growth assets to achieve this return and is therefore appropriate for investors with a medium risk tolerance and medium to long-term investment horizon.
The fund has a combined maximum allowance of up to 60% exposure to domestic and global equities, and a maximum allowance of 25% to property. Depending on market conditions, growth assets could be as low as 40% which means that there is considerable scope for fixed interest securities, which helps to reduce the overall volatility of the fund. The maximum offshore exposure is 30% with an additional allowance of 10% for investments in Africa.
Fund construction
The fund construction process aims to address two goals, namely, meeting an inflation target without assuming undue risk and delivering a competitive peer relative performance. This is achieved by constructing the fund with a specialist building block component and a multi-asset component.
The allocation between the specialist building block component and the multi-asset component is based on the likelihood of achieving the inflation benchmark. The more likely the various asset classes, and in particular equities, are to achieve an inflation-beating return, the greater the exposure to the specialist building block component is likely to be.
As the primary benchmark of the fund is inflation-based, the allowance for the specialist building block component is 50% to 75% of the total fund. This allows for more emphasis on targeting inflation. The multi-asset component has a 25% to 50% allowance that is optimally weighted between a certain number of multi-asset managers. The number of managers is mainly dependent on the modelled interaction between these managers. The goal is to pair managers that differ enough to reduce the overall volatility, while still delivering a return greater than the peer group average over time.
The current 50% exposure to the specialist building block component talks to the headwinds facing equities and the low probability assigned to above-average returns from the asset class in the medium term. Within the specialist component, the current view is that domestic equities have a neutral allocation. Local bonds, global equities and global properties are overweight and domestic property is under-weight, while global bonds are assigned a maximum underweight rating. Local cash does have a neutral rating, but generally acts as the balancing allocation.
Some of the differentiating factors in the specialist allocation is that the fund has a higher strategic allocation to inflation linked bonds than peers in general. This is due to the match between the benchmark and the real return nature of inflation linked bonds. In addition, where possible the global component is explicitly invested with managers who are based offshore.
The PPS Moderate Fund of Funds has consistently delivered first or second quartile performance over all measurement periods, and outperformed the peer group after fees of 1% per annum over the last five years.
During difficult market conditions the fund has remained competitive compared to peers due to the process of applying a house view allocation in combination with the multi-asset manager holdings. It is therefore considered to be a suitable option for investors seeking some upside potential with a reasonable equity allocation, but being conscious of downside risks.
