High Street Balanced Prescient Fund:

There is more to risk than volatility

Understanding volatility

Risk, especially as a forward-looking measure, is very difficult to define. In financial terms, it is seen as the chance that an investment’s actual return will differ from an expected or target outcome. Volatility, as measured by standard deviation, is the most widely used metric by investment professionals. It measures the dispersion of returns that an investment exhibits over a period. This metric is especially relevant over shorter time frames as a high degree of volatility could lead to material losses and a failure to achieve a desired goal. However, although it is equally possible that excess returns are realised, there may be an inability or unwillingness to endure the risk associated with such polar outcomes.

The High Street Balanced Prescient Fund has demonstrated considerably higher volatility than the ASISA South African – Multi Asset – High Equity category (“ASISA peer group”), which is a trend that is likely to endure. However, a firm understanding of the Fund’s differentiated mandate explains why such volatility exists, and reveals why it is not necessarily the best measure of whether an individual will realise their target return.

The Fund’s mandate is to maximise offshore exposure and minimise local risks which results in fund with a 90%+ Rand-hedge bias. Due to this extreme offshore focus, the Fund is benchmarked internally against a global benchmark to gauge the relative volatility and performance. While the asset class limits of the ASISA Global – Multi Asset – High Equity category are identical to the ASISA South African – Multi Asset – High Equity category, it is comprised of global balanced funds denominated in Rands. When compared to these global funds, the High Street Balanced Fund is less volatile than the ASISA peer group average and has generated above-average returns since inception. When compared locally, its elevated relative to domestic peers can almost exclusively be explained by its significant Rand-hedge composition. Understanding the excess volatility is a factor of large movements in the Rand/Dollar exchange rate is important when considering the Fund’s relative to its peers.

1) Volatility as a standalone investment

A common return target for retirement savers invested in similar funds within the ASISA peer group category is inflation plus 5% per annum over five-to-seven years.

Instead of using volatility to assess the level of risk, one can assess how often actual gains differed from the target annual return – the true definition of risk. Using historical data is not necessarily a guide to future performance but volatility is calculated using the same data. The graphs below illustrate the distribution of historical one-year rolling returns relative to the target return.

 

 

Source: High Street, Bloomberg, 31/05/2024

Historically, High Street Balanced Fund investors achieved the return objective XX% of the time compared to the ASISA peer group average of XX%.

Using rolling one-year returns to assess the level of risk produces significantly different results versus using volatility alone. Whichever method you use to measure risk, we do not believe volatility should be the sole metric when evaluating risk over longer periods.

Volatility-adjusted return analysis

For those who prefer to use volatility as their primary measure of risk, despite exhibiting a higher volatility, the Fund has produced above average volatility-adjusted return metrics since inception.

For a detailed analysis, click on the Excel icon above to access our interactive spreadsheet to assess the Fund’s volatility-adjusted return metrics versus the ASISA peer group average or how it can be used to enhance a portfolio of funds.

Volatility Metrics
Time Period: 1 year
Weight: 0%

Even for those who use volatility as their primary risk metric, the High Street Balanced Fund is nonetheless suited as an ideal diversifier. Its inclusion in a local portfolio compliments a core-satellite approach constructed using active or passive pillars. When included in a typical equally-weighted portfolio, the Fund’s highly differentiated mandate means total portfolio volatility is only marginally higher. This is because of the Fund’s distinctly low correlation to its peers. When considering volatility-adjusted return metrics, the Fund’s inclusion in the portfolio would have produced significantly enhanced results had it not been included as a diversifier.

Rounding it up

Using volatility as a proxy for risk can have its merits, but it can be misrepresentative if considered in isolation. It is often over-emphasised in formulating an investment strategy to achieve a long-term target return of inflation plus 5%. Instead, a multi-faceted approach should be adopted to better understand the chance that subsequent gains will fail to achieve the target return, on an absolute or volatility-adjusted basis. At High Street, we employ a rigorous stock selection and valuation process to identify mispriced securities within a global universe. Both volatility and fundamental risk metrics, which we believe are more accurate measures of risk, are considered in achieving the target return.

For South Africans seeking to remain invested for longer periods, the degree of volatility may be less of a consideration especially if you are benchmarking your wealth to global standards. However, should you intend to withdraw all or a significant portion of your investment, we believe volatility over shorter time periods is a very useful tool in identifying the risk in achieving a target return. As such, as you near the time to start withdrawing, moving to life stage models could assist in mitigating this risk.

 

 

* The basis of inclusion is determined by selecting the four largest funds in the ASISA South African – Multi Asset – High Equity category. Selection is based according to the fund size as of the prior calendar month-end.

 

Disclaimer: High Street Asset Management (Pty) Ltd is an authorised financial services provider (FSP45210). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. The information provides relates only to facts and should not be seen as a solicitation to invest. There is no guarantee in respect of capital or returns in a portfolio. Performance has been calculated using net NAV to NAV numbers with income reinvested. The performance for each period shown reflects the return for investors who have been fully invested for that period. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestments and dividend withholding tax. Full performance calculations are available from the manager on request. Annualised performance shows longer term performance rescaled to a 1-year period. Annualised performance is the average return per year over the period. Actual annual figures are available to the investor on request. Highest and lowest is returns for any 1 year over the period since inception have been shown. NAV is the net asset value represents the assets of a Fund less its liabilities. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms please go to www.prescient.co.za.

 

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