The Cannon Flexible Fund – now following an equi-weighted approach
10 March 2014 | Investments | General | Cannon Asset Managers
• Equi-weighted approach allocates equal amounts to all the major asset classes. • This approach has yielded superb long term returns with very low volatility. • Appropriate for conservative investors seeking yield and long term capital growth. • A top quartile performer over the past 5 years to end of January 2014 had it been classified in the Low Equity unit trust category.
Cannon Asset Managers recently unveiled the new-look Cannon Flexible Fund that follows the highly successful equi-weighted approach. This approach was first proposed by free market investment analyst Harry Browne in the 1980s and refined in the mid-1990s. The fund aims to provide the highest return with the lowest risk by diversifying in equal weights between the four major asset classes being equities, bonds, listed property and cash. The investment process allows for tactical asset allocation changes to take advantage of market conditions and will provide a high and growing yield with robust capital growth. Identifying securities that are of high quality and trading at attractive prices, along with applying tactical asset allocation tilts to the asset classes mentioned above, will aid in achieving the above objectives.
The Cannon Flexible Fund has always aimed to provide investors with capital growth over time but with reduced volatility. The fund was managed using asset allocation rules that guided our allocation between cash and equities in the portfolio. This approach, while historically being equity-centric, was also designed to offer smoother returns than equities. Reassessing how to achieve the fund’s objectives, it was decided that the dual objective of lower volatility and capital growth could be better met by introducing listed property and bond investments into the fund, allowing for the use of asset allocation tools across all four of the major asset classes, and giving investors diversification beyond just cash and equities. Apart from better volatility management, the new strategy also allows for a raised yield in the fund which benefits those investors who draw income.
The Success of the equi-weighted approach
Cannon Asset Managers has managed the equi-weighted strategy for clients for almost eight years and the results achieved, from the perspectives of capital appreciation, lower volatility and income generation, are extremely compelling. This is demonstrated in Chart 1 which shows that this portfolio (after fees) has delivered considerable capital growth, avoided expensive and risky equity market rallies, and enjoyed a smooth return.
Chart 1: Cannon Equi-weighted Portfolio performance from April 2006 (inception) to end January 2014
Note: Please note that the Cannon Flexible Fund adopted the investment strategy of the Cannon Equi-weighted Portfolio from June 2013. As a result, the longer-term performance of the Cannon Flexible Fund is not representative of the above. The Index line in the chart represents the static equi-weighting of the asset classes which was the benchmark of the Equi-weighted Portfolio.
Since inception, the Equi-weighted Portfolio has achieved a cumulative return of 118.95% versus the benchmark of 109.82%.
This return has also been achieved with low volatility. Chart 2 below shows the historical drawdowns relative to the individual asset classes held from inception of the portfolio:
Chart 2 – Cannon Equi-weighted Portfolio historical drawdowns from April 2006 (inception) to end January 2014
This is also interesting to see in table format in Table 1 below:
Table 1 – Cannon Equi-weighted Portfolio historical drawdowns from April 2006 (inception) to end January 2014
The largest monthly gain and loss in percentages in the fund, relative to the individual asset classes is shown in Table 2 below:
Table 2 – Cannon Equi-weighted Portfolio largest monthly gain and loss from April 2006 (inception) to end January 2014
Expanding that performance examination back to the portfolio’s inception, the equi-weighted portfolio stands its ground relative to CPI, as can be seen in Chart 3.
Chart 3 – Cannon Equi-weighted Portfolio performance history relative to CPI to end January 2014
Looking at this performance relative to unit trust peers, the equi-weighted strategy would have ranked in the top quartile in the South African Low Equity category over five years to end January 2014.
The investment approach in the Cannon Flexible Fund complies with Regulation 28 of the Pension Funds Act, which will allow investors to use the fund in their financial planning both leading up to and during retirement via retirement annuities, preservation funds, living annuity portfolios as well as in non-retirement savings. There has been no change in the cost to investors to access this fund. Cannon Asset Managers’ stock selection expertise will continue to inform specific opportunities that will contribute to the long-term returns of the fund. These positions will carry clear value attributes, with attention also given to the financial stability of the underlying companies.
The success of this strategy is clear and investors who require a consistent return over a long period of time will be well served by the Cannon Flexible Fund.
