SIM Launches SA’s first institutional 130/30 fund
Sanlam Investment Management (SIM) has announced that it had launched the first domestic active extension fund, one of the world’s fastest growing investment products. A further addition to a list of industry firsts over the last couple of years, SIM’s new 130/30 product offers a solution to the so-called ‘long-only constraint’ by allowing fund managers to more fully implement their investment views by shorting to a limited extent.
SIM MD Armien Tyer said that the company’s world-class research systems, ongoing ability to deliver innovative new offerings and exceptional legal team had allowed it to launch the product first in SA. “Active extension products, or short extension products, are one of the fastest growing areas in fund management globally, having seen fund flows of some $85-billion in the US in 2007.
“They are best suited to institutional investors such as large pension funds and we are delighted to have already secured our first client for the 130/30 product, Advantage Asset Management, even before its official launch,” said Tyer.
Helena Conradie, head of active quants at SIM, explained that long-only fund managers currently have to manage portfolios within the constraint that negative bets against the benchmark are limited to the benchmark weight. “Thus they can only implement a portion of their view. As a result, fund managers are not able to structure a portfolio exactly as they would like if they could implement their view in full. This problem has become known as the long-only constraint. The 130/30 product presents a wonderful solution because it allows long-only fund managers to short a portion of a portfolio thereby providing managers with the opportunity to implement their view more fully.”
The product puts the onus of the performance of a fund more squarely on the investment team’s shoulders. “It is definitely more critical that the team’s view is solid because the margin for error is reduced, but if the view is good, returns are likely to be far greater than in long-only funds without any increase in risk. It therefore becomes more critical that clients find a solid trusted financial house with extremely good research and talented individuals.”
Anne Cabot-Alletzhauser, Chief Investment Officer of Advantage Asset Management, the 130/30 products’ first SA client, says, “The highly concentrated nature of the South African equity market means that long-only managers are severely hampered in terms of finding ways to outperform. Often a portfolio manager’s outperformance is only a function of whether Anglos or Billiton moved down in relation to the rest of the market, simply because the largest active position that managers typically make is to underweight these shares in their portfolio and overweight smaller cap shares in their portfolio. This means that managers can really only take a one directional bet in the market. But 130/30 funds provide managers with an opportunity to express their views, either positively or negatively, on all shares in the market, without introducing high levels of risk or gearing into the portfolio.”
She said that 130/30 funds demand a highly quantitative approach to portfolio construction to be effective. “This is what impressed us with the active quants team at SIM in the first place. For the past two years, Advantage has been assessing the team’s work to see how far the performance requirements of a 130/30 portfolio can be pushed without introducing unwarranted risk levels. We feel comfortable that this team has a deep appreciation of how to effectively execute a strategy that we believe has the potential to change the way investors think about investment potential.”
Conradie concluded that, as was the case in the US, initial take up for the product may be slow. “But it is conceivable that within a few years short extension products will be a serious alternative to long-only investment products.”
