1 year ago

Blue Chip Issue 81

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Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry. Blue Chip takes this opportunity to wish the FPI a happy 40th anniversary. Congratulations!


FUND OF FUNDS A differentiated approach to investment management A business born out of a recognition that a distinct gap exists between retail clients’ needs and fund managers’ investment philosophies, New Road Capital offers a truly compelling investment option for financial advisors looking to provide the most effective investment solutions to their clients. Garth Nash, Managing Director (left) and Paul Fouché, Chief Investment Officer (right), New Road Capital Founded by partners Paul Fouché, Chief Investment Officer and portfolio manager, and Garth Nash, Managing Director, New Road’s investment philosophy is practical in nature, acknowledging that retail clients’ emotions often cloud their judgement when excessive volatility materialises in their investments. Both Fouché and Nash have a deep understanding of what is important to financial advisors and their clients when it comes to constructing investment portfolios. Fouché initially started his working career as a chemical engineer after obtaining his Honours degree in Chemical Engineering from the University of Pretoria. After a few years of practicing as an engineer, his entrepreneurial flair and passion for investments led to him becoming a financial advisor. He built up a large investment book, and met his business partner Nash who also has an advice background and an MBA from Wits Business School with specialisation in venture capital and business dynamics from Duke University. After obtaining his CFA charter, Fouché subsequently moved into wealth management where he managed personal share portfolios and model portfolios for clients. He has built up extensive experience in the realms of both financial advice and investment management by holding various management roles throughout his career. Their investment philosophy is built on the fact that clients value certainty over outsized returns and always weigh downside volatility more than upside volatility in their decision-making. Hence, clients tend to become risk averse at the precise moment when a higher risk appetite is what’s warranted. The result is that clients down-weight their risk profiles at the wrong times, as evidenced by the recent rush to income and money market funds just before the strong equity rally Their investment philosophy is built on the fact that clients value certainty over outsized returns. over the last year. Consequently, many clients have missed a strong period of returns, and are more than likely behind on their specific investment goals. New Road Capital deeply understands this dynamic and offers a range of cost-effective fund of funds (FoFs) schemes designed to achieve inflation-plus outcomes while minimising volatility. They realise that clients are sensitive towards their investments and aim to make conversations among advisors and their clients easier during times of downward and volatile markets by providing a smoother investment journey. This minimises the negative impact of emotional switching and results in clients achieving their investment goals in the end. New Road Capital currently offers five solutions which cater to the full range of client objectives, from CPI + 1.5% to CPI + 5%, as well as a global flexible offering. With clever portfolio construction techniques, as well as leveraging off the many skilled singlestrategy managers in the industry, their portfolios have significantly lower volatility and drawdowns than most of their peers, while still being able to achieve desired performance during market strength. “We close the gap between what fund managers are trying to achieve within their specific funds and what clients and advisors are expecting from their investments,” says Fouché. Founded in 2019, the business currently manages assets of just over R1.7-billion. A tribute to both their differentiated approach as well as to the strength of the relationships that they have with the financial advisors who believe in their added value. Website: Email: Phone: 012 880 2773 78

TAKING THE NEW ROAD FUNDS OF FUNDS Blue Chip speaks to Paul Fouché, Chief Investment Officer at New Road Capital. Paul Fouché, Chief Investment Officer, New Road Capital Why should investors include Fund of Funds (FoFs) in their portfolio? Most single strategy funds are designed with a specific investment philosophy in mind, for use in a broader portfolio. They tend to focus on a theoretical investment philosophy rather than considering behavioural factors that occur in practice. Hence many of them have significant tracking errors with higher volatility than their benchmarks and take on unnecessary risk to provide a small amount of alpha over time, often unsuccessfully. FoFs are designed as holistic portfolio solutions rather than specific portfolio subcomponents. Financial advisors can use FoFs to ensure that their clients are treated in a uniform and consistent way across their books and within their risk profiles and targeted outcomes. While Model Portfolios can do the same, they generally include an added layer of fees and trigger capital gains tax (CGT) within client portfolios if underlying funds are switched. Additionally, their underlying fund allocations are limited by the specific LISP platform the model portfolio operates on, which results in a smaller investment universe when compared to a FoF that has access to any fund if it is regulated. It is for these reasons that we believe the FoF structure is superior to a Model Portfolio structure. The more sophisticated client might also use a FoF as a core component to their portfolio which provides the basis of the portfolio and then add some satellite funds around this core for some additional exposure to a specific theme or sector for example. And specifically, why include your FoFs? We differentiate ourselves in two ways: Firstly, we use a building block approach to portfolio construction, meaning that we use single asset class funds as underlying components in our FoFs. This allows us to strictly control our asset allocations to achieve our second differentiator, which is focusing on inflation plus outcomes. We structure our asset allocations to achieve these outcomes while minimising volatility. Hence, we focus on maximising portfolio efficiency from a risk-return perspective, and not solely from a return perspective. We believe this type of strategy is desirable in practice because it increases the likelihood that clients will remain invested through volatile market conditions where historically those are the times that they make the emotional and wrong decisions of switching out of their long-term asset allocations. This usually happens if the investor’s volatility is larger than they are willing to endure. By managing the volatility, we believe the investor will have a better chance of staying the course. Many FoFs and discretionary fund managers will use multi-asset funds as underlying components which we believe waters down any underlying asset allocation strategy. We don’t believe that this provides a coherent risk management value add to clients. You offer FoFs across five risk profiles. Why are these a good option for the average investor? Our solutions are designed for advisors to use throughout their client base and cater for conservative to aggressive clients. The underlying holdings across our solutions are similar but the weightings differ depending on risk profile. We have taken both financial advisors’ and clients’ needs into account and have tied our return targets to what we believe are realistically achievable over the medium to long term for a specific risk profile. These are similar targets that advisors use when conducting financial needs analyses on clients. Aren’t FoFs quite expensive? Traditionally FoFs have been expensive; however, with the advent of ETFs and other passive strategies it is possible to reduce costs significantly. We use a combination of passive and active strategies to achieve our targeted outcomes. We will generally only use active strategies where the risk-reward profile is favourable. We are very proud that we have been able to offer FoF solutions with substantially lower fees than most of our peers. Our total investment charges (TICs) are in line with most single strategy funds on offer. So, the investor benefits from an added layer of governance and risk management without paying more than by just holding a selection of single strategy funds. 79

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