Understanding the Fund’s historical volatility and advocating for an outcome-based approach to target enhanced volatility-adjusted returns

Updated quarterly (last updated 30/06/2024)

Understanding what causes the Fund’s elevated level of volatility

The Fund is a Rand-denominated, Reg. 28 compliant balanced fund which is benchmarked against the ASISA South African – Multi Asset – High Equity category (“peer average”). Within this category, the Fund’s mandate is highly differentiated by maximising offshore exposure and minimising local risks which results in a global-like fund with a 90%+ Rand-hedge bias. Given the extreme Rand-hedge bias and large fluctuations seen in the R/$ exchange rate over time, it follows that the Fund will also exhibit enhanced volatility around its Rand returns. Internally, the Fund is benchmarked to ASISA’s Global – Multi Asset – High Equity category which is more representative of the underlying geographic allocation. When compared to these Rand-denominated global balanced funds, the High Street Balanced Prescient Fund has a lower volatility and has generated above-average returns since inception.  Without overlooking the Fund’s volatility as it is a Rand-denominated investment, investors must be aware that the excess volatility relative to the peer average is primarily a factor of large movements in the R/$ exchange rate as opposed to underlying business risk of the Fund’s investments.

Risk, especially as a forward-looking measure, is very difficult to quantify. In financial terms, there is no formal definition but it is generally referred to as the probability of an investment’s realised gain achieving a desired return objective. Volatility is the industry standard metric used by investment professionals as a proxy for gauging risk which measures how often and to what extent price changes. We believe its wide-spread application remains largely undisputed as it is a standardised metric that can be easily calculated and unilaterally applied across investments. We agree that volatility is the best determinant of risk over short time frames as a high degree of unpredictable price fluctuations could lead to material losses and a failure to achieve the return objective. However, it is often incorrectly used interchangeably with risk as opposed to being applied as one of several tools to quantify it. Over longer periods, volatility has little predictive power in determining the probability of achieving a desired return objective and other techniques should also be considered.

Outcome 2: Achieving a return objective within a portfolio of funds

Outcome 2

Achieving a return objective within a portfolio of funds

The High Street Balanced Prescient Fund’s highly differentiated mandate makes it an attractive option for investors seeking diversification, even those averse to price fluctuations. Despite the Fund’s elevated level of volatility, it can be used to generate superior volatility-adjusted returns within a portfolio of funds. When included in a typical equally-weighted portfolio of four large funds**, the historical return achieved increases significantly while the portfolio’s overall volatility rises only marginally due to its distinctly low correlation to its peers.

Closing remark

Using volatility as a proxy for risk has its merits, especially over short timeframes, but it can be misleading if used indiscriminately. This is particularly evident when considering longer holding periods, as is typical when investing in balanced funds. Instead, adopting a multi-faceted, outcomes-based approach provides a more accurate assessment of the likelihood of achieving the desired return objective, whether on an absolute or volatility-adjusted basis. Over longer periods, the degree of volatility may be less of a consideration for South Africans, especially when benchmarking your wealth to global standards. However, if you plan to withdraw all or a significant portion of your investment, volatility over shorter time periods becomes a very useful tool in identifying the risk in achieving a return objective. Therefore, as you approach the withdrawal phase, transitioning to life stage models can help mitigate this risk effectively.

* Historical one-year rolling returns greater than the return objective of South African CPI + 5%

** 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.