Interview With Wessel Grobler
This article will be diving a bit deeper into the value of Fairtree Invest portfolio solutions and unit trusts in terms of construct and investment philosophy. This is a continuation to the article “Factor Investing Success is on the Rise”.
Inside that article, we explained multiple investment strategies and how they are blended together inside our Fairtree Invest portfolio solutions and unit trusts. In this article, we will be explaining our equity stock-picking strategies using multi-factor modelling, as well as our tactical and strategic asset allocation approaches. This will be covered through a dialog interview between Wessel Grobler, Fairtree Invest’s Portfolio Operations specialist, and Kheara Kroggel, Fairtree Invest’s Business and Operations Development Strategist.
What is Strategic Asset Allocation VS Tactical Asset Allocation?
“Strategic Asset Allocation is the long-term, overall asset class allocation of what the fund manager wants the fund to look like. This looks at specific target weightings of asset classes. These target weightings stay relatively static within the portfolio. The way that those strategic asset allocations are combined, is what determines where your return generation comes from. Tactical Tilting is more along the lines of active management. This is when the portfolio manager will try to tilt the asset allocations to match the market cycle.
So, whether the market is in a bull or bear state, the asset manager will tilt the asset class exposures to try generate returns actively. With tilting, we want to limit the participation in a bear market when markets are detracting, causing downside. However, when markets start running you would want to partake in that. This tilting normally takes place inside equity allocations. Liquid assets are key, in order to make changes timeously. Within our Fairtree Worldwide Flexible Fund for example, the Investec Managed, Coronation Optimum Growth and The Stanlib Absolute handle our tactical tilting within the fund.”
When is Tactical Tilting then applied inside the Fairtree Invest Funds?
“We try to manage the journey of the client’s asset exposure as much as possible. It is more responsible to the end client and adds a lot of value to their portfolio in the long term”
“Fairtree Invest believes largely in strategic long-term views. Despite the long-term views, active management is an important element alongside that. They do this through tilting tactically in certain asset exposures. In that case, can tactical tilting be considered as a form of a ‘timing-the-market’ allowance?”
“Well yes, but timing of the market is a very difficult thing to get right. Some fund managers do well in it. One would need to look at the track record of the fund to really gauge market-timing accuracy of fund managers. If you take the Fairtree Worldwide Flexible Fund for example, we outsource this responsibility to the Investec Managed, , Coronation Optimum Growth and Stanlib Absolute funds. These funds have very specific mandates on them. When we combine their mandates into our fund blend, it acts powerfully as a tactical tilter to protect capital losses on downside risk. Looking at the Stanlib Absolute fund, their aim is to protect capital over a 12-month period. We can see how they tactically tilt their asset class exposure to protect their mandate. For instance, we saw that their equity asset allocation swung from 4% to 17-20% within a few months. They want to play aggressively in changing exposures like that and they are good at it. However, solely exposing a client to those swings would be irresponsible on our part. That is why we use it as a building block, blended with other strategies to manage the best return and risk journey for our clients.”
Factor Tilting VS Tactical Tilting
“So, we know that there is a difference between ‘factor tilting’ and ‘tactical tilting’ within a portfolio. What is ‘factor tilting’ and how does that work within Fairtree Invest?”
“Factor tilting takes place inside the equity portion of our fund and solution allocation. This can be on either our global or local equity positions. Factor tilting is based off of different drivers inside the equity markets. Namely, these factors are; Value, Investment, Quality, Momentum and Volatility. These factors drive returns in different equities through different cycles of the market. In general, we have beta-like strategies as a systematic quantitative base. Analytics are run across the equities, assigning to each of them a score in each factor. The outcome of the best scoring equities are then weighted and included in the portfolio accordingly. Where the tilting in this would take place is on the active manager overlay. This allows room for some biases to pull through according to which phase of the economic cycle we are in. The active manager will use their expertise to under or overweight certain industries or stocks as they see fit”
Can One Actually ‘Time’ The Market in order to Tilt at the Perfect Time??
If you stick to your strategy and fund mandate as a portfolio manager, you can do well in what you set out to do. However, as individual investors, perfect timing has not been proven successful to date. Many investors cannot stomach the cyclical turns in the market and they tend to exit and enter the market at the wrong times. This means that when the market changes and Value investing starts to come through, only after Value investing starts coming through, then people want in. At this point most of the gains would have already passed. For us at Fairtree Invest, it is all about the journey. We ensure that people get exposure to a variety of factors according to the best scoring stocks. Factor scoring qualifies various equities as highest performers across all factors in our view. So, as the market and economy goes through the cycles, we mitigate biases as much as possible, all the while still generating alpha returns.
How does this all work within the ‘Fairtree Flexible Balanced Fund’ and the ‘Fairtree Worldwide Flexible Fund’?
“So, within the Fairtree Flexible Balanced Fund and the Fairtree Worldwide Flexible Fund there is a blend of tactical asset allocation and strategic asset allocation strategies, as well as multi-factor investing overlaid with fundamental active management. There is a lot of complexity going on inside these models. Could you explain what the value of blending all of this into a single fund is, what is the goal here?”
“Upfront those two funds you mentioned have different mandates. The Fairtree Flexible Balanced Fund is a Regulation 28 fund, suitable for Retirement risk appetites and legislation. The Fairtree Worldwide Flexible Fund is an unconstrained balanced view, so it allows for higher equity, property and offshore exposures inside the fund. This is important because it sets the template to the boundaries of specific asset class exposures within each fund. The mandates are set upfront to manage client journey best to their objectives/reason for investing.
In terms of tactical tilting…
In the Fairtree Worldwide Flexible Fund, the split between local and offshore will almost always be 50/50 split. The blend of strategic and tactical asset allocation, manages the exposure to the market. When markets are rallying hard, the investor will gain the upside and when markets are contracting there is limited downside exposure. There may be a little bit of a lag with the upside gains because of the tactical tilting on the asset class level. However, our main responsibility to the client of protection on drawdown, is equally as important to us as generating return. We want to best manage the journey of our clients.
In the Fairtree Flexible Balanced Fund, here there are those boundaries of 30% Offshore allocation and about 60% Equity allocation. Here, tactical tilting is particularly important because this funds mandate is geared for client’s who are investing toward retirement. Its aim is to bring growth, but limit those capital drawdowns, by making volatility a bit more constrained to manage the client journey.
In terms of factor-investing…
The way that we combine the various factor-based equity building blocks will offer some tilting within the combination of those building blocks. However, we will not add extra tilting inside of those models. We allow for the Fairtree Asset Managers to apply their fundamental active overlay tilting on top of the multi-factor investing models. The main reason of the combination is to show that there is place for both active(alpha) and passive(beta) investment management. We use systematic multi-factor quant-based models, this brings the cost of investing down hugely. From there the active managers overlay their industry and market expertise on top of that, allowing limited tilting within each model. This generates alpha for our clients with lower risk and lower cost. We tested this in theory and it has been so rewarding to see it practically play out inside the funds and solutions. The alpha side of the return generation, means finding the managers who can generate more than the market (beta), but still participate in the upside of the market(beta) returns because it is low cost.
You can think of it as a motor-vehicle. The engine pistons are firing up-and-down at different times. The equity market is the same. So, when you use these strategies in conjunction with each other you get the compliment of how they work together differently, but still generate return uniquely.”