As you know Seed Investments has become a key partner in 1FINPLAN’S investment solutions construction. The 1FINPLAN committee decided it’s important to share Seed Investments thinking processes when it comes to their Tactical Asset Allocation (TAA) decisions.
Seed constructs our Model Portfolios around predetermined Strategic Asset Allocations (SAA), and then add value through their Tactical Asset Allocation (TAA) process. This week, they took this line of discussion to its logical conclusion. Has Seed’s decision making added to, or detracted from, performance? Essentially how has Seed’s TAA process contributed to returns?
This is Seed Investments Feedback;
At the risk of repeating ourselves, our investment process seeks to incrementally add value to our Funds, rather than risking the fortunes of the entire Fund on one or two outsized allocations. We believe that we have a process that, over time, will produce more good decisions than bad, and we therefore seek to make as many independent decisions as possible so that the law of averages works in our favour and we generate consistent outperformance. Unfortunately in the real world we aren’t always going to get it right, but it doesn’t stop us from constantly striving for this goal.
Importantly, we have set up systems to analyse the decisions that we have made that allows us to focus our attention where required. The chart below is one of the outputs that we review on a monthly basis. It looks quite busy, but essentially tracks whether the allocation to each asset class has added to (above the 0% line – overweight an outperforming asset class or underweight an underperforming asset class), or detracted from (below the 0% line – overweight an underperforming asset class or underweight an outperforming asset class), the Seed Balanced Fund’s returns on a monthly basis. The total contribution from our TAA is represented by the black dot. This is the granular level at which we make (and then analyse) our asset allocation decisions. The chart tracks the monthly contributions over the past 4 years.
It is evident that on a monthly basis the return drivers are quite random, with big contributors in one month often being large detractors in the following month. On a monthly basis our TAA process has added value just less than 70% of the time. When extending this analysis to a rolling 12 month view we get a better idea of how our TAA adds to the investment performance. The chart below breaks down our TAA decisions over rolling 12 month periods. Essentially our TAA decisions have added between 1% and 4.4% over any rolling 12 month period over the past 4 years.
An obvious detractor over the last couple years has been from our underweight Global Bond allocation. Since the inception of the Seed Balanced Fund we have maintained an underweight allocation to this asset class as our research indicates that investors should expect poor returns over the long term. In order to mitigate this position to a certain extent we have overweight allocations to Global Property and Global Alternative. When viewing the underweight Global Bond in conjunction with the overweight Global Property and Global Alternative allocation, it is evident that, in general, this has been a good decision over time (only mildly detracting from returns over the past 4 rolling 12 month periods). The chart below isolates this TAA decision.
Without going further into the detail we will stop this analysis here. Suffice to say that an important part of our investment process is a thorough regular review of the decisions we make. Where they have added to performance we ask whether we should be taking profit or retaining the position. Conversely, where returns have been negatively impacted, we critically assess the investment case again. If the investment case has changed we will not hesitate to cut our losses, but where we are convinced that the investment case has strengthened we are happy to make a higher conviction allocation.
Kind regards,
The Seed Investments Team.
DISCLAIMER
All illustrations, forecasts, information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We endeavour to provide accurate and timely information but we make no representation or warranty, expressed or implied, with respect to the correctness, accuracy or completeness of the illustrations, forecasts, information or opinions. No party should act upon such information or opinion without obtaining the appropriate professional and specialised financial, legal and tax advice based upon a thorough examination of a particular situation. Investors should at all times remain aware of the risks involved in the buying or selling of any financial product, and hereby acknowledges the inherent risk associated with the selected investments and that there are no guarantees (Paragraph 6(2)(f) of BN92).
Seed Investment Consultants will not be held liable for any direct or consequential loss or damage suffered by any party as a result of that party acting on or failing to act on the basis of information or opinion provided by or omitted from this document. The Manager retains full legal responsibility for any third-party named portfolio (Paragraph 6(1)(g) of BN92).
Prescient Management Company and the Trustee are registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value of financial products can increase as well as decrease over time depending on the value of the underlying securities and market conditions and past performance is not necessarily a guide to future performance (no guarantee is provided as to the values of any financial product mentioned in this document). The collective investment scheme may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. CIS prices are calculated on a net asset basis, which is the total value of all the assets in the portfolio including any income accruals and less any permissible deductions (brokerage, STT, VAT, auditor’s fees, bank charges, trustee and custodian fees and the annual management fee) from the portfolio divided by the number of participatory interests (units) in issue. Forward pricing is used. In the event that specific collective investment schemes in securities (unit trusts) are mentioned please refer to the relevant Minimum Disclosure Document in order to obtain all the necessary information in regard to that unit trust.
This document may not be amended, reproduced, distributed or published without the prior consent of Seed Investment Consultants. The laws of the Republic of South Africa shall govern any claim relating to or arising from the contents of this document. Seed Investment Consultants is an authorised financial services provider in terms of the Financial Advisory and Intermediary Services Act (Act No. 37 of 2002).
ADDITIONAL INFORMATION (where applicable)
Performance has been calculated using net NAV to NAV numbers with income reinvested. Full performance calculations are available from the manager on request.
DEFINITIONS (where applicable)
Annualised Return Annualised return shows longer term performance rescaled to a 1 year period. Annualised return is the average return per year over the period. Actual annual figures are available to the investor on request.
Highest and Lowest The highest and lowest returns, since launch, for any rolling 1 year period have been shown.
Annual Return