A balanced, but not traditional, solution in the current environment

Investors who want to invest offshore with a longer time horizon are likely to have one of three needs: capital preservation with some growth; growing their wealth in real terms with some protection; or maximum long-term growth.

Most investors may find themselves somewhere in the middle of this needs spectrum but wondering where to find that balance in an environment where the opportunities for growth and protection may seem unclear.

With traditional asset classes looking fully priced and inflation being one of many risks facing global investors, a portfolio that generates alpha through bottom-up stock selection and utilises diversification into non-traditional asset classes can offer investors that harmony between risk and real returns.

Fundamentally diversified across a range of risk factors

Coronation Global Managed is a classic global balanced solution with a moderate risk profile. As is clear from the chart below, it offers a level of diversification that is hard to replicate on an individual basis, and means that the Fund doesn’t look anything like its peers or the underlying indices that comprise its benchmark.

While equities remain the foundation with which the Fund aims to achieve real returns, it is further differentiated from the traditional 60/40 global balanced portfolio by holding many investment opportunities outside the norm, which we discuss in more detail below. We believe this is important in an environment where, in our view, the global bond index offers a negative real return over the next several years.

Equities

At 59% of the portfolio, the equity bucket comprises 40 - 60 shares, which are carefully selected from a universe of 2 500 - 3 500. We believe our selection shows conviction (14 of the ‘themes’ within this bucket account for 90% of the holdings), but fundamental diversification at the same time. At a very high level, we look to invest in companies with strong competitive positions, operating in a growing market, with capable management and good capital allocation track records.  

Real assets

Our real assets bucket (infrastructure and property investments) comprises 9% of the portfolio. Our infrastructure investments, which we access through listed assets that have concessions to operate toll roads, bridges, tunnels, and airports, are extremely attractive on a standalone basis and relative to the valuation of other inflation-linked assets. They typically offer highly durable and predictable investment outcomes (concession life spans of 20 - 60 years) and also generate income streams linked to inflation, providing protection against inflation shocks.

Within the listed real estate sector, we are taking advantage of attractive opportunities in German residential, Indian office and Australian freehold properties. These property categories are all less affected by a shift from physical to online retail and towards increased homeworking.

High-yield fixed income

Our high-yield fixed income bucket, at 7% of the portfolio, demonstrates the depth of our research effort across different asset classes that allows us to assess the relative attraction of holding a company’s ordinary equity versus a bond instrument issued by the same business. Examples include investing in a convertible bond offered by the leading Indian online travel agent, Make My Trip, and a high-yield bond offered by Mexican bank Banorte.

Inflation protection

At 10% of the portfolio, our inflation protection bucket comprises a combination of long-dated (30-year) inflation breakeven instruments and commodities (gold, platinum and copper). The Fund has held gold (the metal) over many years, but recently switched some of our exposure into the gold miners to improve our gearing to the gold price. We continue to own both platinum and copper and remain quite bullish on both metals but have reduced our positions into price appreciation.

Absolute return

Our absolute return bucket, at 6% of the portfolio, is where we look for tactical opportunities such as buyout offers. Every now and then a business that we already own in the portfolio becomes subject to a buyout offer, with 58.com and 51job being recent examples that have worked in our favour.

Investment-grade fixed income

At 9% of the portfolio, we continue to keep duration very low in our investment-grade fixed income bucket, only investing in highly liquid instruments. We are essentially using this bucket as liquidity to deploy into more attractive opportunities as and when they arise. Investment-grade spreads and volatility are at multi-year lows and, as such, we believe that now is not the time to be moving up the credit risk spectrum and out in terms of duration.

Actively balancing risk and returns

Building well-diversified portfolios that take advantage of all investable asset classes (as we have discussed above) and look nothing like the traditional 60/40 global balanced fund takes extensive research and a significant amount of investment experience and expertise.

It is the combination of this expertise and our robust, tried-and-tested investment approach that has enabled a fund such as Coronation Global Managed to deliver a real return of 5.1% (in USD)* over the past five years. Providing investors with exposure to a wealth of opportunities in traditional and non-traditional asset classes, it actively balances both risk and returns.

This article first appeared in the September edition of Finweek Fund Focus.

*Coronation is an authorised financial services provider. For full fund details, please refer to its minimum disclosure document.