High Street Balanced Prescient Fund

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

As of 30/06/2024 (updated quarterly)

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 1: Achieving a return objective as an independent investment

Instead of using volatility to assess the level of risk, one can apply an outcomes-based assessment reviewing how often actual gains surpassed a return objective. For retirement savers invested in similar funds within the peer average, a common target return is inflation plus 5% per annum.

Independent Investment

Target Return Objective Success Rate*

Using rolling one-year returns to assess the level of risk produces significantly different results versus using volatility. Historically, High Street Balanced Prescient Fund investors surpassed the target return objective 64% of the time compared to the peer average of 36%. Further, the Fund has produced superior volatility-adjusted returns since inception.
Overview Bar Chart

Volatility-Adjusted Metrics

For those who prefer to use volatility as their primary or sole measure of risk, despite exhibiting a higher volatility, the Fund has produced superior volatility-adjusted returns since inception.
ℹ️ Time Period: Use this slider to adjust the time period of the data 5 Years
Key Metrics High Street Peer Average

Distribution of 1yr Rolling Returns

The Fund return distribution chart has a favourable negative skew with an annualised mean and median return of 14.3% and 18.3% respectively, above the target return of 10.0%. Considering the peer average, the distributions are normally distributed with an annualised mean and median return of 8.8% and 8.0% respectively. The distribution charts will be updated using rolling five-year data points to align with the Fund’s recommended holding period when an adequate amount of historical data becomes available.
Advanced Graph

Source: High Street, Bloomberg, 30/06/2024

Whichever method you use to measure risk, we do not believe volatility should be the sole metric when evaluating risk over longer periods.

 

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.

Volatility Metrics
ℹ️ Time Period: Use this slider to adjust the time period of the data 5 Years
ℹ️ Weight: Use this slider to change the weight of High Street in the portfolio 30%

Total Return (5 Years)

Volatility-Adjusted Metrics (5 Years)

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.

Disclaimer: High Street Asset Management (Pty) Ltd is an authorised financial services provider (FSP45210). The investment performance is for illustrative purposes only. The investment performance is calculated by taking the actual initial fees and all ongoing fees into account for the amount shown and income is reinvested on the reinvestment date. 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. For additional disclosure of performance figures, please go to www.hsam.co.za/local-funds/.

 

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