Protecting clients’ capital in multi-asset funds
To achieve resilience in the multi-asset fund space, portfolio managers must build portfolios that protect the value of investors’ capital. This sounds easy enough, but as the financial advisers in this forum will know, it is quite another thing to manage your clients’ return expectations. “Clients like high returns, but they do not like volatility,” says Neville Chester, a portfolio manager at Coronation Asset Management.
An adviser, client mismatch
His presentation to the 2025 Investment Forum, held at Sun City recently, kicked off with a stark reminder of how differently asset managers, financial advisers, and investors interpret terms like risk and return. It turns out that industry professionals spout divergent views on risk too.
Just a few moments earlier, a panel discussion on reimagining multi-asset portfolios in a new investment world had offered up four variants of what client-centric risk is. These ranged from “losing clients’ money” to “lack of diversification” to “failing to generate a real return for clients” to “not getting clients to the intended destination.”
One of the biggest hurdles your clients face is to grow their portfolios faster than inflation. Inflation is corrosive, and the official Stats SA measure is generally lower than what your clients experience. Chester argues that investors need to produce pre-tax, nominal returns in the 9-10% range just to keep up with real price increases. “You cannot, over time, defend against inflation by only owning an income portfolio; you need to be able to get your clients into funds which take on higher risk in order to be able to generate the needed return,” he says, criticising the recent appetite for income and interest-bearing funds.
Coronation’s research shows that clients are incredibly price sensitive, responding to day-to-day changes in their portfolio balances rather than focusing on the fund’s performance against its benchmarks. Portfolio managers can help by structuring multi-asset funds to minimise volatility and thereby prevent clients from bailing out of these funds when risk nears its highest point. From a financial advising perspective, you can help by educating clients to stay true to their financial plan during extreme market movements.
On macroeconomics and market madness
Macroeconomic forecasting is risky and financial markets volatile, making it incredibly difficult to select and combine assets in a stable, high return multi-asset fund. “Even if you get all your macro calls right, you can still get your stock and investment calls wrong,” Chester says. Your writer enjoyed his explainer for this reality.
Imagine your fund manager approached you as the world was emerging from the COVID pandemic and said: within two years the US is going to have 40-year high inflation and interest rates, there will be war in Europe and the Middle East, the Chinese property market is going to collapse, and you will see a widespread swing towards protectionism. Would you realistically have expected the US equity markets to deliver 20%-plus returns in each of the following two years? The only foil for this madness is to focus on those ‘boring’ valuations. The good news for value investors is that significant market corrections, or pull backs, begin to reveal the undervalued companies that will generate future portfolio returns.
For some fun, the presenter shared a slide of recent market corrections, ad-libbing that one sees a one-in-100-year crisis every five to 10 years. Most recently, investors have endured the Asian financial crisis, the dotcom collapse, the 9/11 correction, the Global Financial Crisis (GFC), and COVID. According to Chester, each of these major crises coincided with the fund’s best performances in terms of adding alpha. “You want to be in a position where your portfolio is constructed such that you can take risk at the points in time when it makes the most sense; it is not just about asset allocation, it is also about alpha,” he said.
Aggressive exposure to asset classes
Enter one of the key motivations for the multi-asset structure in that allows portfolio managers to be more aggressive in getting exposure to asset classes outside of the traditional building blocks. Using bonds as an example, the portfolio manager noted that his fund could switch between high exposure to government bonds to zero exposure to any point in between and make up the difference with credit. A traditional balanced fund might have been limited to bond index products, missing out on this opportunity.
The multi-asset structure also helps with alpha diversification. Commenting on the swings and roundabouts between offshore and domestic equities, the portfolio manager said it had generated excellent alpha from the JSE over the past four years, with its global portfolio finally weighing in over the last half year. “We have managed to keep the clients invested in the product through the cycle, through our own alpha cycle, and make sure they benefit over the long-term,” Chester said. “If your alpha or your return series is so volatile that clients give up, you are not achieving the best outcome for them.”
Diversification gives your clients downside protection and helps smooth out market volatility. “You can take strong positions in the building blocks and know that your overall portfolio, the way it is constructed it, will not suffer or have as big a drawdown as what the market is experiencing,” Chester said. This achieves two things: it keeps clients in their funds and generates better returns over time.
Understanding the subtle nuances
The portfolio manager used the South African listed property fund space, where investors experienced significantly different rights-linked outcomes in so-called A or B units, to illustrate the benefit of thinking carefully about the assets you include in a portfolio.
The same argument holds in the bond market. “Global sovereign bonds have been a disastrous asset class over the last 20 years,” Chester said. The only plus point is that investors get exactly what it says on the coupon. SA Bonds were also unattractive, until around the COVID pandemic, when the market saw a big swing in pricing.
Chester argued that bond and credit yields correlate with crises. It was one of the best South African asset classes to invest in following the GFC. Unfortunately, the credit class has lost some of its lustre of late. “There is too much money chasing too few opportunities, companies are not borrowing, and spreads have narrowed to the point where you are virtually not getting rewarded for the risk that you are taking on,” he said. This explains the ever-changing mix of SA government bonds, SA credit, and global credit in the Coronation Balanced Fund.
For something different, the discussion turned to convertible bonds. Although rare, Chester said his fund had done very well out of this asset class. Convertible bonds are a type of debt instrument that allow the holder to convert the bond into a predetermined number of shares of the issuing company’s common stock. The hybrid security offers regular interest payments and the potential to participate in the issuer’s share price appreciation. Recent issuers include Sappi and Shoprite, which returned multiples of the initial outlay on strong post-issue share price appreciate. If the share price falls, the fund benefits from a yield and strong capital guarantee.
Avoiding duplication
Finally, it is important to avoid duplication through the building blocks you include in your fund. Chester explained that if you have a South Africa equity allocation in your fund, you are likely taking a substantial position on Chinese technology through Naspers | Prosus, which weighs heavily on the JSE Top 40 index. “You want to make sure you are not doubling down on your bet on Chinese tech in the global section … you need to be able to see through what is happening with your equity exposures on the global and domestic side,” he said. There are countless other considerations.
For example, balancing interest rate sensitive exposures in equities locally and offshore, or aligning bond positions in global and SA, identifying areas for risk mitigation, and getting safer exposure to an idea or trend. Case in point, you might include a Philip Morris instead of BAT or a Heineken instead of Anheuser-Busch InBev or a JD.com instead of Naspers. Financial advisers and fund managers must remember that many of the JSE listed firms are externally focused. So, the mix becomes JSE SA focused, JSE Offshore focused, and global.
Banking on diversification to deliver
As for the future. Chester concluded: “We expect to still be able to deliver around 15% per annum over a five-year period, using a diversified portfolio [that distributes risks across] a lot of buckets with very different return drivers and very different alpha cycles.”
Writer’s thoughts:
Your clients love high returns but hate volatility, making it difficult to convince them to stay invested through market corrections. How do you educate clients to focus on long-term returns instead of short-term market fluctuations? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
