Denker Capital multi-asset funds: Five years of good returns and low volatility

Madalet Sessions

After five years of moderate returns from markets, the Denker Sanlam Collective Investments (SCI) Balanced Fund and the Denker Sanlam Collective Investments (SCI) Stable Fund have generated good investor outcomes with low levels of volatility. In this article, we dig a little deeper into the history of these funds, understand why they have delivered on their objectives and why advisors and investors can continue to invest in them with confidence. 

The funds’ portfolio managers, Madalet Sessions and Jan Meintjes apply a consistent investment approach with a strong focus on risk management.

“Both funds are successful because they were created and are managed with the investors in mind.

The Denker SCI Balanced Fund is different because we put a lot of effort into exposing our investors to different potential outcomes. We diversify away from strong macro views while providing investors with the value of our equity team’s stock picking abilities, not only in South Africa but globally. Investing in this fund means buying into the stock-picking skills of our very experienced equity team, with a risk management overlay – this fund truly offers the best of Denker.

The Denker SCI Stable Fund aims to provide investors with a real return that is competitive. We achieve this by being very cognisant of costs to investors and by owning a widely diversified pool of assets to protect investors’ capital — which we believe is core to any stable fund.“

Jan Meintjes

Figure 1 shows how the funds have performed since inception in May 2017, relative to other funds in their categories.

Low volatility is a measure of how much certainty an investor should have about their potential returns. The best and worst performers (the funds on the top and bottom right) have high levels of volatility. This means investors cannot be certain about their potential fund returns. A fund that delivers a return with relatively low volatility means that there is more certainty about the funds’ return prospects. We are not swinging for the fences and therefore we do not expect things to go either spectacularly well or spectacularly wrong. We are trying to earn attractive returns from a wide variety of ideas.

Figure 1: Multi-asset funds – annualised risk and return comparison since inception

Source: Morningstar, Denker Capital, 30 June 2022. Inception date: 2 May 2017. The A class of each fund has an annual management fee of 0.75% (excl. VAT). Returns are net of fees. Returns for periods longer than one year are annualised. The Denker SCI Balanced Fund’s highest annual calendar year return since inception was 25.6% and the lowest was 1.6%. The Denker SCI Stable Fund’s highest annual calendar year return since inception was 12.0% and the lowest was 3.7%.
*SCI stands for Sanlam Collective Investments.

The success of the funds over the last five years can be attributed to the consistent application of our investment approach.

1. We understand that the future is unpredictable and that there are a wide range of potential outcomes that affect returns. So, we try to assess all possible future scenarios to ensure investors have exposure to a large number of potential outcomes.

2. With a strong focus on risk management, we aim to achieve lower drawdowns and more stable returns over the long term for the funds’ investors.

3. Both funds aim to steadily add to performance, are cost effective and are ideal to be used as investment building blocks.

The future is made up of many possible scenarios, so we try to avoid adverse outcomes for investors.

We don’t rely on one specific macro result for success.

In a global economy, there are a wide range of factors at play over which we have no control, which means we cannot predict or expect things to go a certain way. When we identify opportunities for attractive returns, we therefore ask: are these attractive return outcomes dependent on certain macro outcomes? If the answer is yes, we ask: are there other assets we can own that would mitigate this macro risk to the portfolio? In other words, we look for ways in which we can reduce the portfolio’s reliance for returns on specific outcomes.

For example, having identified global growth and inflation as two of the principal variables affecting asset values, we constructed the risk matrix shown in Figure 2 below. Each one of the four squares represent a potential future that corresponds to an inflation/growth outcome.

The black circle in the middle represents market expectations that correspond with current asset values. Growth can either be surprisingly strong or surprisingly weak while inflation can also surprise us and markets, either positively or negatively. The purpose of this exercise is not to predict whether growth/inflation is likely to be higher/lower than expected, but to understand the risks to asset values should this world – one with inflation/growth better/worse than expected – turn out to be the actual future. Understanding the risks in the different scenarios and how these will affect our holdings helps us to construct a portfolio of assets that will help investors achieve their financial objectives regardless of the growth/inflation outcome.

Figure 2: Risk matrix

Source: Denker Capital

Our approach has paid off for investors.

In this section we reflect on the last five years – looking back at why the funds were launched, how they have performed, and how we manage these funds in line with our investment approach.

1. The Denker SCI Balanced Fund

Why the fund was launched:

In a recent interview, the highly regarded JP Morgan CEO, Jamie Dimon, explained that predicting the future isn’t very helpful. He said he can’t predict the future, but we should be prepared for it. This is the approach we chose to adopt for the Denker SCI Balanced Fund. We concentrate on understanding the long-term fundamentals of the companies we own and then we position the portfolio to be resilient for a range of potential outcomes.

The fund has delivered top-quartile performance over multiple periods since inception.

The Denker SCI Balanced Fund is ideal for investors saving for the long term who wish to earn superior risk-adjusted returns at lower levels of volatility. To achieve this, we deliberately give investors exposure to a broad range of outcomes to avoid a situation where returns are dependent on, or overly influenced by, any unpredictable outcome.

We are very happy that we’ve managed to deliver top-quartile performance within the fund’s Asisa category over all periods since inception.

Figure 3: Annualised performance since inception, as at 30 June 2022

Source: Morningstar, 30 June 2022. Inception date: 2 May 2017. The A class has an annual management fee of 0.75% (excl. VAT). Returns are net of fees. Returns for periods longer than one year are annualised
*SCI stands for Sanlam Collective Investments. **60% FTSE JSE All Share Capped Index / 15% Stefi / 15% MSCI World / 10% US 10 Year Treasury.

This performance is a result of a combination of superior stock picking and risk management. 

To generate returns for investors, we focus on the companies we believe have the ability to create wealth and are appropriately priced. To mitigate risk we reduce the portfolio’s reliance on specific macro outcomes, or unexpected events that we cannot predict.

The fund makes use of all the different asset classes allowed for Regulation 28 funds in the Asisa SA – Multi asset – High equity category. As explained earlier, we build our portfolio from the stock level up. The portfolio includes:

  • Offshore and South African equity, as investing in these stocks is the only way to benefit from their long-term wealth creation potential. All else equal, improving regional growth prospects would result in better returns. Our offshore equity allocation provides diversification to investors.
  • Assets that benefit from better-than-expected growth in SA, including government debt.
  • Domestic money market instruments that are not dependent on economic growth for their returns.
  • Offshore cash instruments, which provide very low returns unless the rand weakens, or markets get spooked about global growth prospects. These assets really shine when perceptions about risks change.

Figure 4 shows the result of our risk management approach, which has contributed to our outperformance since inception. It shows the drawdowns of the 10 largest funds in the category since June 2017. The chart shows our consistent focus on avoiding adverse outcomes for our investors.

Figure 4: Drawdowns of the 10 largest funds in the Asisa SA – Multi asset – High equity, since inception of the Denker SCI Balanced Fund, as at 30 June 2022

Source: Morningstar, Denker Capital, 30 June 2022
*SCI stands for Sanlam Collective Investments.

Given that the performance of the Denker SCI Balanced Fund is driven primarily by stock views and not macro views, what can you expect from our consistent approach going forward?

We will continue to:

1. Start with a bottom-up equity process, leveraging the expertise of our greater investment team.

2. Assess valuation and macro risks (e.g. interest rate risk, growth prospects and inflation risk) and allocate assets with the objective of mitigating against a particular outcome.

3. Monitor the behaviour of assets and adjust allocations.

4. Harness the best stock picking and risk management skills of all our portfolio managers to find a balance between excellent performance and tolerable volatility.

2. The Denker SCI Stable Fund

Why the fund was launched:

When I joined Denker Capital, my parents were in the process of selling a small business they had started in 1995. The proceeds from the sale would constitute the bulk of their life savings. What they needed was an investment product that would provide real capital preservation and steady growth, while enabling regular cash withdrawals… and so, using my parents’ needs as inspiration, the Denker SCI Stable Fund was born.

The fund has delivered consistent returns at low levels of volatility since inception.

For the Denker SCI Stable Fund, our objective is to provide investors a diversified capital base that maintains its real value to enable withdrawal. To achieve this, we focus on the things we can control, and so that we can make the most of those factors, while aiming to mitigate against capital loss. This is especially important for investors who require regular income from their portfolios (retired investors, for example), because they may need to sell assets even when the market is down. These investors must have sufficient capital in the market to participate in any surprisingly good returns, while ensuring sufficient risk management so as to prevent a loss of capital that could endanger the ability to draw income sustainably.

Figure 5: Annualised performance since inception, as at 30 June 2022

Source: Morningstar, 30 June 2022. Inception date: 2 May 2017. The A class has an annual management fee of 0.75% (excl. VAT). Returns are net of fees. Returns for periods longer than one year are annualised
*SCI stands for Sanlam Collective Investments.

For investors who require steady capital values, risk is important to note.

The box and whiskers chart below illustrates the range of returns that the 10 largest funds in the Asisa SA – Multi asset – Low equity delivered since June 2017. The bottom end of the bottom ‘whisker’ represents the single worst monthly return generated by a fund while the top of the top whisker is the best monthly return outcome. The box represents the second and third quartile outcomes – this means the most common achieved returns, or half of all the months’ returns generated by a fund. One can see that most of the time fund managers are generating a fairly narrow range of returns. However, the whiskers show that some funds take more risks to generate returns – as seen by very high and very poor outcomes.

Figure 6: The range of returns delivered by the 10 largest funds in the Asisa SA – Multi asset – Low equity category since inception of the Denker SCI Stable Fund, as at 30 June 2022

Source: Morningstar, Denker Capital, 30 June 2022
*SCI stands for Sanlam Collective Investments.

The portfolio is built using equity indices, while making use of all the different asset classes allowed for Regulation 28 funds in the Asisa SA – Multi asset – Low equity category. It includes:

  • Offshore and South African equity, as investing in these stock indices is the only way to benefit from the long-term wealth creation potential of the equity market. Our offshore equity allocation provides diversification to investors. Investing passively reduces costs for investors.
  • Government debt – inflation linked, fixed interest and floating rate notes provide higher returns and different risk profiles.
  • Domestic money market instruments that are not dependent on economic growth for their returns.
  • Offshore cash instruments, which provide very low returns unless the rand weakens, or markets get spooked about global growth prospects. These assets really shine when perceptions about risks change.

Given that the Denker SCI Stable Fund is managed to protect real capital over the medium term, what can you expect from our consistent approach going forward?

We will continue to select assets with the aim of steady growth and mitigation against capital loss. This includes:

1. Investing cost effectively to add to performance.

2. Allocating local and offshore equity to passive securities.

3. Assessing valuation and macro risks and allocate assets with the objective of mitigating against capital loss.

For more information, or to invest, please contact us at investorrelations@denkercapital.com  

Madalet Sessions

Key fund facts

*SCI stands for Sanlam Collective Investments.

Disclosures

The information in this material belongs to Denker Capital (Pty) Ltd and Sanlam Collective Investments (RF) (Pty) Ltd. The information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. Although all reasonable steps have been taken to ensure the information included is accurate, Denker Capital and Sanlam Collective Investments do not accept any responsibility for any claim, damages, loss or expense – however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (FAIS). Use or rely on this information at your own risk. Consult your financial advisor before making an investment decision. Sanlam Collective Investments (RF) (Pty) Ltd is a registered and approved Manager in Collective Investment Schemes in Securities.

Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and that the value of investments/units/unit trusts may go down as well as up. Changes in the exchange rates may have an adverse effect on the value, price or income of a product. A schedule of fees and charges and maximum commissions is available from the manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Additional information on the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Performance is based on NAV-to-NAV calculations with income reinvestments done on the ex-div date. Performance is calculated for the portfolio and the individual investor performance may differ as a result of initial fees, actual investment date, date of reinvestment and dividend withholding tax. Lump sum investment performances are being quoted. The performance of the portfolio depends on the underlying assets and variable market factors. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. The manager has the right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. If the fund holds assets in foreign countries, it could be exposed to the following risks regarding potential constraints on liquidity and the repatriation of funds: macroeconomic, political, foreign exchange, tax, settlement and potential limitations on the availability of market information. The fund may invest in other unit trust funds which levy their own charges and may result in a higher fee structure for our portfolio. All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (CISCA).

Sanlam Collective Investments retains full legal responsibility for the co-branded portfolios. The portfolio management of the fund is outsourced to Denker Capital (FSP no: 47075), an authorised financial services provider in terms of the FAIS Act. Standard Bank of South Africa is the appointed trustee of the Sanlam Collective Investments scheme.

Source of performance figures: Morningstar. Returns are annualised and net of fees unless otherwise stated. An annualised return is the weighted average compound growth rate over the performance period measured.

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About the author

  • Madalet Sessions

    Madalet co-manages the Denker Sanlam Collective Investments Balanced and Stable funds with Jan Meintjes. She started her investment career at Investec Securities as a research assistant to top-rated investment strategist Brian Kantor. In 2008 she joined Element Investment Managers as an analyst responsible for fixed income, money market and property investments. From there she moved on to Nedgroup Investments in 2010, where she was responsible for managing the Nedgroup Private Wealth Bond and Property funds. She joined Denker Capital in 2016 to establish our range of multi asset class funds.