Sam Houlie, Counterpoint’s Chief Investment Officer and Portfolio Manager of the Counterpoint SCI Cautious Fund – one of the top-performing multi-asset low equity funds over the past five years – shared his insights on the subject.

Over the last few years, has it been more important to get the asset allocation right, or to be in the right stocks?

In broad terms, I have observed the following over the past 18 years. Between 2003 and 2005 the virtuous combination of very high embedded real yields in the fixed income space and very depressed equity markets  suited a ‘formulaic’ and ‘strategic asset  allocation’  approach.  The  since-inception  track records  of low equity funds launched  before  the  great financial crisis in 2008, will generally show real returns in excess of 4% and even as high as 6%. The initial yields and valuation tailwinds ensured these high real returns.

Asset allocation mattered most (and added the most value) in these early years. Since 2009, however, both asset allocation and security selection have been equally important.  Notably, security non-selection (stocks or sectors which you can intentionally avoid) has mattered more in equity markets that have become distorted  by central bank intervention.

I have always believed that  the low risk-budget (40% maximum equity exposure) allowed in low equity funds offers the greatest  opportunity  for  aggressive  and  high-conviction positioning.  In  addition,  the  range  of risk-opportunities  has expanded  significantly over the last 18 years. The offshore potential  has increased  from 10% to 30%; direct commodity exposure has expanded in breadth, and trading liquidity has increased; and the use of hedged equity strategies is now more common.

The secular decline in interest  rates has also reduced  the real-return  prospects  of the strategy on a formulaic basis. A 1% to 2% real return is now attainable  at much higher volatility. That is a far cry from the embedded returns available 18 years ago.

How do you think that will change over the next few years in the wake of the Covid-19 crisis?

The heightened uncertainty  from Covid-19 will suit a portfolio management style that is more nimble, with the ability to change your mind as new information becomes  available. The speed  of the recent  decline, response  and recovery is an indication of how quickly markets move nowadays.

We believe that asset allocation and stock selection are equally important,  in managing a low equity balanced fund. The aftermath of Covid-19 and lower interest rates will increase the importance of using the full equity risk budget in the most optimal way.

The best  way to do this is to be nimble and ready to exercise judgement  aggressively when the  risk-reward profile is favourable. The risks you choose to accept and the ones you choose to avoid, will become more important. For example, if bonds become a lower yielding, higher volatility asset class – why not hold cash and allocate to bonds at extremes (as was the case in February to April of this year)? Prioritising exposures will become even more important.

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We hosted a webinar on Thursday 20 August where portfolio managers Sam Houlie, Piet Viljoen and Raymond Shapiro discussed the best local and global opportunities they are finding in today’s tumultuous yet fascinating market backdrop.


Portfolio Manager Piet Viljoen reflects on how most investing concepts expressed in terms of acronyms have historically had poor track records. 19 August 2020

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