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13 May 2013

Flexible Fund Turns Five

Since its inception in 1981, Foord Asset Management has achieved considerable investment success for its clients. This success is largely due to the consistent application of an investment philosophy that strives to get the big calls right; to buy securities at the right price; to take a long-term view and to diversify the portfolios appropriately. The primary focus on protecting capital in real terms and avoiding index relative investing leads naturally to attractive absolute returns over the long term. Over 30 years, the firm has proven its abilities in both asset allocation and security selection, the core competencies required in the multi-asset class investing space.

Although Foord has always managed multi-asset class portfolios, these have mostly been managed within the prudential investment guideline limits imposed by the relevant pension fund regulations. As capital markets have evolved it has become increasingly clear that these regulatory limits (albeit well intentioned) actually impose additional risks to the portfolio by explicitly limiting the investment opportunity set.

Therefore, in April 2008, the Foord Flexible Fund of Funds was established to provide investors with a single investment solution that reflected Foord’s best investment view in the multi-asset space, unconstrained by any artificial asset class limits. The fund was established as a fund of funds to allow the portfolio to invest without limitation in the top-rated underlying Foord international unit trust portfolios (non-FoF unit trusts cannot invest more than 20% into another unit trust fund).

The fund’s name aptly refers to the unconstrained nature of the fund’s mandate, giving the manager full discretion to prudently allocate capital to the best investment opportunities given Foord’s forward looking view of markets and securities. The flexibility of this mandate allows for investment across all asset classes including shares, listed property, bonds, cash and offshore opportunities, across all geographies.

An impressive 5 year track record

The Foord Flexible Fund achieved the all-important five-year track record at the end of March 2013. A five-year track record is important because it is sufficiently lengthy to cover much of a normal business cycle (which can span anything from five to 11 years). This five-year cycle ending March 2013 covered the last phase of the bull market, the advent of the financial crisis, the collapse of Lehman’s, the correlated decline of almost all financial markets, the subsequent loose monetary policy and massive government intervention in financial markets, increased regulation and the on-going European debt crisis.

In this environment, the flexibility afforded to the Foord Flexible Fund has allowed it to outperform the prudentially-regulated Foord Balanced Fund by over 3% per annum (after costs and expenses), with lower volatility and risk of loss. On a since-inception basis, the fund has also outperformed the FTSE/JSE All Share Index and the MSCI Word Equities Index (developed markets) when measured in rands, but with much lower volatility and potential for capital loss. Given the significant market disruption over this time period, it has also been an achievement to outperform the benchmark of CPI + 5% per annum over this period, thereby allowing investors to grow their capital at an appreciable real rate over the long-term.

In this regard, the Foord Flexible Fund of Funds has delivered meaningful real returns for investors through the careful risk management that is typical of Foord’s investment philosophy. We believe that this is an impressive track record for investors to reflect on.

Why the Foord Flexible Fund of Funds?

Asset allocation and stock selection are the key drivers of long-term performance. A flexible investment that permits a dynamic asset allocation approach and high conviction stock selection is well positioned to achieve superior long-term returns with the lowest level of risk.

Foord’s highly experienced investment team take the responsibility for making the asset class allocation decisions. It is the fund manager’s role to balance the valuations of the different asset classes with the diversification benefits thus offsetting the risk of being wrong. The fact that there are no imposed restrictions to specific asset classes allows for significantly better management of the risk of capital loss.

The relative weightings will change over time as the fund allocates capital based on our forward looking best investment view. By way of example, currently the fund has an approximately 60% exposure to non-South African assets with a total of 87% of the fund being invested in equities (34% in SA equities and 53% in foreign equities) with the balance being held in cash, commodities (via a gold ETF), listed property and corporate debt.

At the underlying security level, the objective is to buy and hold the most attractively priced South African and global assets. Attractive securities are those where we believe the risk of permanent capital loss is lowest coupled with an ability to generate future earnings streams (be they dividends, interest rates, income distributions) in excess of inflation. Dave Foord as the portfolio manager is responsible for delivering on the investment objective. The asset allocation and underlying building block portfolios reflect the collective best investment views of the investment team in Cape Town (South African assets) and Singapore (global assets).

More about the fund

The Foord Flexible Fund of Funds is managed to an absolute benchmark of the South African CPI plus 5% per annum, measured over a rolling 3 year period. Many may consider this to be an aggressive benchmark to meet and exceed, however, we believe that it is fair and achievable over the long-term. The performance fee will only accrue when the fund has met this benchmark and also recovered the fee charged over the course of the previous year (including all performance fees). The fee has been structured based on the daily variance of the fund return relative to that of the benchmark. Investors who buy into the fund when performance has been good are not required to pay a performance fee for historic performance from which they have not benefitted. The interests between the fund manager and investors in the fund are therefore very closely aligned.

Who should invest?

The Fund is suitable for investors with a moderate risk profile, seeking long-term real returns on a total return basis. The foreign asset exposure of the fund is obtained via an investment in the Foord International Trust and Foord Global Equity Fund. The Foord International Trust is a conservative, flexible fund while the Foord Global Equity Fund comprises a portfolio of quality companies listed in both developed and emerging markets. Both funds are roll-up funds, meaning that they do not distribute their income. As a result, the taxable income distributions of the Foord Flexible Fund can be low to zero, which is an optimum tax result for individual investors.

The fund is ideally suited to investors seeking a balanced exposure to domestic and foreign assets, with more flexibility (and therefore lower risk) than a traditional “balanced” fund which is designed to comply with the limits imposed on pension funds and to investors who prefer to delegate the asset allocation decisions to an investment manager with a proven and trusted long term track record of preserving wealth in real terms.

Heather McCulloch
May 2013

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