Speaker 0:
with advisors and investors facing a bewildering choice from over 1200 investment funds, we ask South Africa's top fund allocators to share their top tips and ideas to find the winners. Welcome to investment.

Speaker 1:
Hello and welcome to the investment den. I'm joined today by Darren Burns, executive at Cogen. Welcome, Darren.

Speaker 1:
Thank you, Claire. So, Darren, you've put forward two, investment cases, namely the inflexion points in the interest rate cycle. But you can take us through this.

Speaker 1:
Yeah, So, I mean, we do believe that we have reached an inflexion point in the in the local interest rate cycles. Um, you know, the risk premium with regards to inflation is is very high. Um, you know, the global risks are still prevalent. Um, economic, Local economic growth is low. We still have load shedding. Those things

Speaker 1:
do exist. So we really feel we have reached the sort of top, um, of the of the risk premium. Um, you know, reputation. The They've done really well at keeping inflation within the target band. So while inflation, uh, is is really at a at a high point, as I mentioned, right. Um,

Speaker 1:
we do believe that in the future, we're going to actually see that start to decrease. We've seen the interest rate cycle, Um, being very active recently, um, we have we did start hiking rates rates long before, um, we saw our counterparts in the in the more developed countries do it. So we do believe we are gonna be ahead of them in the decrease of interest rates. And, you know, there are still some positives out there that could reduce that risk premium. We

Speaker 1:
we could see higher commodity prices, uh, stronger terms of trade, less load shedding, which we have seen recently, which will drive that risk premium down and result in a lower interest rate and a and a lower inflation rate. Um, in South Africa. So you've put forward, um, a a strategic income fund to express this view quite well, namely the Lori Strategic Income Fund. Perhaps you can take us through why you've selected this fund as a topic.

Speaker 1:
Yeah, so I think you know, we include, um, the Lorient Strategic in Income Fund within our local building block right within the cogen um, fixed interest funder fund, which is used in our models now, uh, the reason we've included our thinking

Speaker 1:
with Loris is very aligned. So we also feel like them. There are asymmetric return opportunities available right now. Now, what that means is because I spoke about that risk premium being very high and the likelihood of inflation reducing in the short term. Um, what that means is

Speaker 1:
the the potential for a higher total return and higher inflation adjusted returns with regards to the interest rate on inflation rate, moving down is far higher than the risk of, um, low returns. Uh, should that interest rate or in, uh, interest rate or inflation rate increase, um, significantly in the near future. OK, so you've mentioned that you employ the use of this fund in your core local, um, fixed income allocation.

Speaker 1:
Perhaps. Is it then, sometimes employed tactically, do you increase allocations? Um, through certain market cycles.

Speaker 1:
So you know, we have currently included as a tactical allocation, but it is also a long term tactical allocation. So, as I mentioned, you know, while our views are aligned, we do believe that there is significant opportunity and value in the longer end of the yield curve, which is currently, uh, the thinking within this fund and the way the fund is being managed, You know, I mean, uh, Melanie stock at the portfolio manager of this fund has an excellent, um, track robot has a

Speaker 1:
wealth of knowledge. Uh, it's also a very a very vanilla fund in the sense that it doesn't make use of complex derivatives. Um, it doesn't hold a lot of property. It doesn't hold a lot of global insurance. It really suits our fixed interest profile and the need that we have for a a local fixed interest fund within our local component of our solution. So, uh, again,

Speaker 1:
interest and inflation rates don't expect them to decrease overnight. Uh, it usually only happens the other way around. Um, so it is a long term tactical approach, but I don't really see us moving out of this fund unless our views, um, strongly disagree with each other, which we haven't seen at all yet.

Speaker 1:
OK, so secondly, your case for offshore, let's discuss this case and perhaps why are you constructive on offshore allocations? So, I mean, we've always been very vocal about offshore and trying to get as much, uh, assets offshore as possible. We've seen that you know, in recent times, regulation 28 limits have significantly increased. Uh, your regulation 28 limit for a pre retirement product is now sitting at 45%. That's almost half of your, uh, your retirement,

Speaker 1:
your retirement portfolio or your retirement investment that you can take, um offshore, which we feel is an excellent opportunity for increased returns. Right, So it's a you can get increased diversification. There's a lot more opportunities offshore. We know the number of funds R to South Africa is absolutely massive. You know, the South African economy makes up a very small, uh, portion of global GDP. Um and what we've

Speaker 1:
what we've seen if you look at the actual return profiles of So as an example, we we tested, um, the top 10 local balanced funds over five years looked at their risk return profile and compared it with the top 10 global balanced funds. Um, over the same period. And you could see that the increased return, uh, there was sort of significantly increased return in the global balanced funds.

Speaker 1:
With that did come increased volatility. But we really do focus on managing the risk within our portfolios to ensure that we keep that volatility to a minimum while still taking advantage of the global opportunities to increase the return for our clients. OK, so the fund that you've selected to express this view is the Black Rock Continental European Flexible Fund. Why is this fund a topic for you?

Speaker 1:
OK, so first of first of all, um, within our portfolios. I mean, that's a very unique fund, right? So it's European, it's flexible, and, you know, it's continental European, so it's very, very specific. Now, within our offshore, the offshore components of our portfolios, we have a, uh, anywhere between 35 and 50 different investment interests. So in investment instruments, so they are exceptionally diversified. Now,

Speaker 1:
in those instruments, we include, uh, indices. So index trackers, um, active indices, smart beter type funds and active managers. Right? So we we specifically use active managers, um, to reduce the in to try and take advantage of, uh, idiosyncratic alpha within our portfolios. Right. So this is a specific example of an active manager that we have chosen. We also believe that you firmly need to

Speaker 1:
have feet on the ground when investing offshore. So, uh, be able to take into account those unique risks that other countries face that we can't really understand. Um, by sitting in South Africa. So in this specific case, the, uh, the Black Rock, Um, Continental European flexible strategy. We really like it, um, for our European specific allocation in our portfolios. Um, we like this

Speaker 1:
due to due to its flexible nature. So the core of the strategy is actually composed of high conviction, longer term sort of holdings. All right, so there's anywhere between 35 and 40 underlying instruments, and those are all very long term holdings. Um and that actually you can get access to via the BlackRock Continental strategy, the normal conventional one. But this flexible one has a small portion that is dedicated to

Speaker 1:
more short term tactical view. So that's where they really can take advantage of managing the risk if they feel there's a bit too much volatility, uh, in the future, or take advantage of maybe some shorter term opportunities that the portfolio manager does see out there. And we've seen that perform very well historically, um, last year specifically, which wasn't a great year for, uh for for for generally or wasn't a great year generally for companies out there. Um,

Speaker 1:
we actually saw that tactical allocation protect on the downside. And, I mean, we've seen the portfolio manager in this case has a very successful history of doing that. This one specifically is generally in the top quintile. So in the top, uh, 20% versus peers and has outperformed its benchmark significantly since inception. OK, so perhaps we can speak to the management's house. I think black rock is a name that can speak for itself. Why, BlackRock?

Speaker 1:
Well, it's actually quite funny that we have included the BlackRock specific fund. Um, BlackRock is, uh or does advise us on our our total global asset allocation within our portfolio. So we, um, are advised by the multi assets, uh, strategies and solutions team, um, from BlackRock

Speaker 1:
and within our portfolios, we don't only have, um, allocation to BlackRock active managers, but also third party active managers. And, you know, we really just feel that with their global exposure and their global footprint having, uh, you know, feet on the ground in over 34 countries globally, they really can

Speaker 1:
they really understand the risks and opportunities that are available globally. Um you know, we use an example often. We we had a chat with, um, a global peer of ours. The other day. We were trying to explain load shedding to him, and after two hours, not just discussing load shedding but primarily around load shedding, he still couldn't really fathom what load shedding was and how it worked. Because he's never been exposed to it in his life. So

Speaker 1:
if you can't understand that, how can we be expected sitting in South Africa to understand all the unique nuances that occur in other countries around the world? And that's why I really believe you need to have someone sitting in those countries understanding exactly how those markets work at a very, very detailed level, Um, to make those investment decisions. Karen, thank you very much for sharing your two top fun picks. We appreciate your time.

Speaker 1:
Thanks very much, Clay. Appreciate it.