Commentary: Investec Cautious Managed Fund
Jaye Spence – HOD Technical & Renee Bold – Technical Analyst                                      
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10 September 2015

The Global & Local Technical team recently had the opportunity to receive an update by Sumesh Chetty, a portfolio manager with the Investec Cautious Managed Fund (CMF). The funds main aim is to provide capital preservation and absolute returns through active asset allocation, driven by bottom-up stock picking. The fund’s strategy is outlined by a targeted return of CPI plus 4% over a rolling three to five year period, with emphasis on providing a targeted capital protection over a rolling 18 months. Included in this is their protection strategy with asymmetric return investment opportunities, with a 40% equity limit which also provides exposure to positive returns. 
With investments in a variety of asset classes, including equities, bonds, cash and listed property in a manner similar to that usually employed by retirement funds, units of other funds and derivatives, the fund has provided a Yield to date of 6.2% as well as a 1 Year return of 8.3% before inflation.
Investec’s investment philosophy - which is based on their absolute strategies, namely Risk-cognisant, Quality-centric and Valuation-bias - also forms part of the broad strategy for the CMF. There is, however, specific focus on outperforming inflation with the lowest possible risk (risk being defined as the loss of money) and with downside volatility being more detrimental than overall volatility. Even with a risk rating of 3, the fund actively provided a return of 9.5% p.a. since Inception.
Staying in line with the Investec Valuation bias strategy, the CMF prefers predictable cash flows over uncertainty, which they would only purchase if paid handsomely for it. To them ‘cheap’ is not value. The CMF specifically looks for balance sheet strength, quality of earnings and cash flow conversion within stable industries and they prize franchise value highly.
Figure 1: Asset Allocation
Figure 1: Asset Allocation
With the highest percentage allocated to local bonds - as a diversifier to equities and a cash enhancement - and a specific focus on higher coupons to dampen volatility, asymmetric risk and inflation-linked bonds (as a hedge against inflation rather than cash), as well as focusing on off-the-run bonds and the term structure of interest rates. One of the reasons they find South African bonds attractive is the provision of active returns relative to cash in a deteriorating economic environment. SA Bonds offer a unique opportunity as the market is fixated on credit risk for the Government as well as downgrade risk, and Inflation risk.
The fund is concerned about the South African property valuations as yields have gone too far. This is the foremost reason they do not hold any listed property investments at present, with listed property including retail property, it could be an expensive reality.
Through the funds’ fundamental research and analysis, they seek to employ the best combination of quality, growth and yield. With recent market events, Index equity (locally and offshore) appears risky - where stock selection remains important - the high quality shares included in the selection are on a discount to the market. They remain cautious overall with higher cash as interest rates could also rise, but overall low double digit returns look achievable for the Investec Cautious Managed Fund.
Should you require further information, please contact Renee Bold –on