Flexible versus equity fund

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CIARAN RYAN: Flexible funds are getting a lot of attention from investors because of their ability to invest across all asset classes and, as the name implies, their ability to respond to market conditions and opportunities by allocating funds quickly and flexibly. How have they performed relative to other investment funds, and is this something you should consider for your retirement nest egg?

Well, to help us sort this out and to explore some of the big themes in the financial markets, we are joined by Murray Winckler, co-founder and portfolio manager at Laurium Capital.

Hi Murray, good to talk to you again. Can you kick off by giving us first of all your take on the big themes in the financial markets at the moment? When we spoke several months ago the bonds and equities were both headed in the same direction, and that was south. Have things changed much since then?

MURRAY WINCKLER: Morning Ciaran and everyone. Yes. Last year was a pretty nasty year for everyone.

I think if you look back over calendar ’22, the global bond markets were down some 17% – in fact the worst return in the last 95 years. The equity markets were down; the global equity market was down 18%, which was the seventh worst in the last 95 years. And so it was pretty bad, very unusual to have both of them producing such poor returns.

Where we sit today on the global macro, obviously it’s all been driven by rising inflation and rising rates. Inflation has definitely peaked and is starting to come down, and the question is, where does it come down to? The Fed [US Federal Reserve] was behind the game in raising rates, so the market keeps thinking the Fed is going to pivot and that it’s sort of holding markets up for the year to date.

But our view is that rates are likely to stay higher for longer, and our view is we’ll see rates being cut probably only into next year in the US if there’s a bit of a recession, which is pretty bad for markets.

So while markets have stabilised and we could have seen the bottoms in global markets, we still think there’s a lot of risk in the markets.

The US markets are on a forward 18 times multiple consensus, so it looks [like] slightly 10% above the average over time [for] the last 10 years, say. But the expectation is 2% earnings growth.

Our view, which most top-down analysts do have, strategists have, is that earnings are going to be a lot worse than that.

So we think a 10% to 15% correction in the global market is quite possible some time in the next three to six months.

On the local front, obviously it’s all about load shedding, so I won’t go too much into that. But growth has really been revised downwards for this year and we are probably going to be anywhere between zero and 1%. I mean, the consumer is under huge stress, our prime rate’s gone from 7% to 11.25% in the last year and a bit, and that’s more than 50% up.

Food inflation is probably running at close to 15% for the man in the street, unsecured lenders and probably the bond market as well, [and] the middle-income market, which probably gets hurt in the next sort of 12 months or so with the rates starting to bite.

So that’s a pretty tough environment. And then there is the load shedding as well.

Our markets are cheap. We are at 10 times forward multiples, about 20% cheaper than normal for the domestic component, which is about 40% of the market.

But there are certain sectors that look quite decent. So we do think our call for this year was that the SA market in rands probably gave you a 15% total return. We have done about 4%, 5% so far this year.

And for the US [at the] beginning of the year we are probably not too far [off], and still feel that you’ll get a total return from where we started the year at around a total return of 5%. We’ve done about a 9%, 8% probably total return year to date.

So there is very little to come from the US, but there are risks on the downside, I think, in the next three to six months.

CIARAN RYAN: I guess that’s all the more reason why you need to have a bit of flexibility in your fund allocations. So talk about flexible funds – what are they and why should investors consider them as part of their strategy?

MURRAY WINCKLER: Flexible funds are one of the funds we run. It’s quite a small category, but the big thing is [you have flexibility] to invest across all types of assets. That’s the big thing.

We’ve run our Flexible Fund basically just over 10 years, but we’ve run it about 85% invested in equities. That’s been the base case.

Currently at the moment we are running 70% [equities], so we are a lot lower, but it’s unconstrained. You are able to allocate investments based on market opportunities, and a bit of extra diversification in a pure equity fund as such. So you want equity-type returns with basically lower volatility.

CIARAN RYAN: Okay. So talk about your particular flexible fund. What is the name of it and what is its objective?

MURRAY WINCKLER: Okay. It’s the Laurium Flexible Prescient Fund. Prescient is the manco, and we have run it since inception for 10-and-a-bit years.

When we started out it was our first long only fund. Laurium Capital’s been going for coming up for 15 years mid this year – very nearly 15. We started out only manging hedge funds and our first foray into the long-only space was through our flexible fund.

We thought that coming from a hedge-fund mindset, this category gave us the most opportunities for running an unconstrained mandate.

The objective was to beat the All Share Index, and then an objective as well was to make sure a client’s got a CPI+5 [%] rolling return over three years.

So that’s what we are trying to do – equity-like returns and hopefully at a lower volatility than you’d get from equity markets. That was the objective when we started.

CIARAN RYAN: So you’re coming up for your 10th birthday of the Laurium Flexible Prescient Fund. How’s the score sheet? What is it looking like?

MURRAY WINCKLER: The score sheet has actually been very good. At the end of January the fund turned 10 years [old]. It was launched on February 1, 2013, and for the first 10 years it did a return of 12.6%. So above the CPI, which was CPI+5 [%], so [it] was 10 [%]. So that’s comfortably above the objective there.

But markets have been quite pedestrian over the 10 years. Your Capped Swix has done only 8% annualised, so we actually were over 4% better per year than the SA equity market net of fees. In fact, if we look against all of the equity funds, the whole equity category in South Africa, we actually were the number two fund overall. So it’s had an exceptional 10 years.

Obviously you are only as good as your next innings, so what happens in the next three years, the next five years, next 10 years really counts.

CIARAN RYAN: Right. Are there other benefits to flexible funds that are not that obvious?

MURRAY WINCKLER: It depends on the mandate for the flexible category. A couple of the guys who’ve done the best in that category over time are those that have a higher proportion of equity in the fund.

So, as I said, we have had 85% in equities over time. That’s where we’ve been. At the low point we’ve never been below 50%. That was very briefly, and in equities, our max has been 95%.

So that’s the range and the flexibility when we think equities or bonds look better.

We’ve been up to 20% sitting in offshore assets – bonds or equities offshore as well. So you do have this flexibility.

On the bond side in particular, we think bonds look very attractive in SA. With your 10-year yield you’re getting 11.5% and against long-term inflation probably about 5%.

And you’re getting a good 6% real return, [which is] very attractive. At the end of January we chopped down our nets in the fund and our bond exposure is now running at the highest bond exposure we’ve ever had; actually in SA bonds we are running above 20%, and then 5% in international bonds as well, so very high. We think risk-adjusted returns from bonds look very attractive.

So really it’s a flexibility to choose where you want to be. You could be in cash; cash yields are also quite decent now if you don’t pay tax. Obviously if you pay tax as an individual it’s pretty expensive.

But with the bonds, in particular, we do think that if you just get your running yield of close to 11%, and yields don’t come down, you get a nice return. And if yields drop by, let’s say – sort of our view – 75 basis points from here, you get another 5% on top of that. So you’re getting sort of high double-digit returns from bonds. We think you’ll get that.

CIARAN RYAN: All right. So for somebody who’s, let’s say, of retirement age, should they be using a flexible fund rather than equity fund for their long-term investments? Is there sort of an age prescription or is there an advantage if you’re younger to go into a flexible fund? Give us the idea of the target market for this.

MURRAY WINCKLER: Yes, I think everyone will have some exposure to equity. So you get high equity, medium equity, low equity – and low equity can go up to 40% in equity, max. So everyone, no matter at which stage of life, is probably going to have some equity in their funds, just because it is a growth asset.

Our fund objective is to give you equity-like returns. We’ve obviously been well ahead of that since inception, and yet our volatility has been a lot lower.

So then it says, for someone a bit older, you can afford to have a little bit more in our Flexible Fund because you have a lower volatility. So hopefully you’re going to get the returns that are equity-like or ahead, which they have been since inception, but your volatility is lower. So by default you should actually be able to have a reasonable amount.

And right across the spectrum I think we have quite a few people of, let’s say mature age, well into the 60s-plus, that are in the flexible fund.

CIARAN RYAN: Okay. Murray Winckler, portfolio manager at Laurium Capital, we are going to leave it there. Thanks very much for joining us, Murray.

MURRAY WINCKLER: Thanks very much, Ciaran.

Brought to you by Laurium Capital.

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