NEWS ARCHIVE 
A value is required.
Back to News A good reason for investing in Hedge FoF's and actively managed FoF's
August 2015
Print

A good reason for investing in Hedge FoF's
and actively managed FoF's


August 2015

The universally accepted investment strategy of "buy and hold" is not always the best for everybody, especially not for a person who needs his money during the so called hold period of the crash. A majority of people in South Africa live according to or above their income and are not in a position to buy and hold 50% of their savings under circumstances of retrenchment or retirement. It is also not true that most crashes last only for a short period. The 2008 credit crunch crash in South Africa took almost 3 years to reach its previous height. Specific popular bottom up (buy and hold) funds like Allan Grey Orbis Fund took 4 years to reach their previous high after the 2008 crash, the Global Opportunity Equity Feeder Fund took 8 years. Today all of these funds are winners with far above average CARS (cumulative average rate of returns since inception), but I have never seen a graph done for pensioners who were invested in one of these funds, who had to take their monthly income during the draw down period. They don't come back like these popular buy and hold funds.

Today Japan's Nikkei is trading 42% lower than its previous high during 1990. What used to be the second largest economy in the world is now, after 25 years, trading at a loss of 47.42%. If we consider that the South African market is an emerging market, which typically holds far more risks than a developed market like Japan, we must conclude that it is possible that most of the large South African buy and hold funds that typically follow the index, can experience down turns similar to the example of the Nikkei. For this reason we believe that it is irresponsible to advise clients to invest the bulk of their investments in buy and hold funds. Buy and hold funds work for high net worth individuals who do not need to withdraw from their investments and can diversify their investments on a global scale.

The answer is Macro Top-Down

There are a few unit trust managers who, by switching out before the major crashes or shortly after these crashes, have been getting the timing of the major share market crashes right over the past 20 years. There have also been a few hedge funds that have been able to hedge against the trend. How did they manage to do it? Is it because they are cleverer, more experienced or better qualified than all the others? No not at all. We believe that the primary reason is simply that they embarked on a Macro Top-Down strategy when they were still small and have managed to stay small by capping their funds for new business before they become too big and clumsy. We do not know of managers that have been able to time short term corrections accurately over the long term, but we do know of quite a few who have been timing the major crashes reasonably accurately over the past 20 years.

Look at the long term

Winston Churchill said, "The farther back you can look, the farther forward you are likely to see." If you want to know who is following a successful Macro Top-Down strategy you will have to look at the long term. You should probably look at a term of 10 years or more to see which Fund Managers timed, at least the previous major crash, correctly. There are not many of them. Kanaan Balanced Wrap, the predecessor of our Kanaan Bci Balanced FoF has followed a Macro Top-Down strategy successfully over the past 20 years, today the fund is outperforming the JSE hands down with a CAR of 14.27% per annum. Kanaan Flexi Wrap have been outperforming the JSE over a 20 year period with a CAR of 13.7% per annum and our Kanaan Hedge FoF have been outperforming the JSE over the past 10 years with a CAR of 15.84% (See the graphic analysis attached hereto). For more information visit our website and click on funds. (See the graphs of Kanaan Balanced Wrap, Kanaan Flexi Wrap and Kanaan Hedge FoF).

Back to News   Print