There is a reason why certain rules and practices in life ensure success. Over time, proven methods result in proven outcomes.

I often get asked the question: what sort of return can one expect from their portfolio? This all depends on the risk and growth mandate of the portfolio. Often, it is best to revert to what you are trying to achieve or outperform. In most cases, this would be inflation. Inflation represents the buying power of your money, and that is what we aim to protect over the long term. This return above inflation is, as most of you know, the real return.

If we are to use inflation as our base, then to set a target or expectation, we can build this off the inflation base. In an equity portfolio, you should expect a return of inflation plus 6-8% over time. In a low- to moderate-risk diversified portfolio, you would expect inflation plus 3-4%. A cash or bond/income fund will give you inflation plus 1-2%.

If we take the average inflation rate for South Africa as 6%, then an equity portfolio should give you a nominal return of around 12-14% over the longer term. Income or bond portfolios would average around the 8% p.a. mark.

This looks different when compared with returns from more developed markets like the US. The average inflation rate in the US over the longer term is closer to 2-3%. An equity return in the US would, therefore, be closer to 8% p.a. A cash or bond return in the US would likely be closer to 2-4% p.a. This may not appear exciting for the South African investor, but you need to consider the real return and the fact that this would be in US Dollars, with Rand depreciation added on top.

The reason for highlighting the above is to emphasise that over time, assets and portfolio returns should revert to the mean (average). As Wealth Managers, it is important for us to understand our clients’ goals, needs, and risk tolerance. Part of this process is setting up a risk and growth mandate that ensures the portfolio meets these needs and goals within the chosen framework.

One of the things we do is ensure that we understand what we receive from the underlying portfolio/fund managers and confirm that they deliver on their stated objectives. Unlike Forrest Gump, you want to know what you are getting from your box of chocolates.

At NFB, the funds we use are narrowed down through a vigorous due diligence process. Constant reviews and engagement with the portfolio managers on our Houseview ensure we understand the underlying mandate and positioning of the funds. This allows the advisor to match the correct fund to the client’s requirements and expectations.

Too often, clients get caught up trying to chase the best returns and investment themes instead of allowing the fund manager to do their job and achieve returns in line with the stated benchmark and mandate. Portfolio managers actively manage their asset allocation positions. These positions may not pay off immediately and can take time to bear fruit, but the fund manager often has a longer-term view and a goal of achieving the mandate set out.

Over the past five years, we have experienced extreme market conditions: COVID-19, low interest rates and Quantitative Easing, the Russia-Ukraine war, high inflation, and political instability and uncertainty. These events have led to volatility and pricing extremes. More recently, certain prices and asset class valuations have moved back towards their mean. As this has happened, we have seen returns re-rate and fall back into line.

Asset Allocation funds with Balanced mandates are making a strong comeback. As various asset classes re-rate and diversification adds value, the trusted process and sticking to the mandate start to pay off.

A lot can be learned by examining the investment objectives and portfolio mandates of these funds. Picking three funds from our Houseview, the following highlights are taken from the fund fact sheets of these Asset Managers:

• NFB Managed – Aims to provide investors with medium- to long-term capital growth while maintaining a medium- to high-risk profile. The fund seeks to achieve total returns exceeding inflation (CPI for all urban areas) plus 5% per annum over rolling three-year periods. It invests in a mix of equity securities, non-equity securities, money market instruments, bonds, listed property, and collective investment schemes, both locally and globally.
• Ninety One Opportunity – Focuses on capital growth and absolute returns through active asset allocation. It seeks to provide lower volatility than traditional balanced funds, with sufficient equity exposure to provide scope for capital growth over the medium to long term.
• Allan Gray Balanced – Aims to create long-term wealth for investors within the constraints governing retirement funds. It seeks to outperform the average return of similar funds without assuming additional risk. The fund buys shares at a discount to their intrinsic value to achieve its objectives.

As illustrated in the graph and table below, these funds have achieved their benchmarks over the past five years, consistently outperforming inflation and meeting their objectives. Despite volatility and uncertainty, these funds have adhered to their strategies and met their mandates.

 
 


In the Low Equity category, portfolio mandates aim to protect capital while providing some income and capital growth. These portfolios are suited to more conservative investors and have a targeted return lower than that of balanced or full equity funds. These funds typically have more bond and cash exposure, with a maximum equity allocation of around 40%.

If we look at our award-winning flagship NFB Stable Fund, its objective and mandate read as follows:

• Objective: The NFB Ci Stable Fund aims to provide investors with income and medium- to long-term capital growth while maintaining a low-risk profile and preserving capital.
• Investment Strategy: The portfolio seeks to achieve total returns exceeding inflation (CPI for all urban areas) plus 3% per annum over rolling three-year periods.

In the low-risk Income sector, the Income Fund Manager aims to beat cash and inflation by a few percentage points. Their role is to manage funds in the fixed-interest space while monitoring inflation, bond rates, currency, and interest rate cycles. They achieve this by using various short- and long-dated bonds as well as corporate debt and inflation-linked bonds to generate returns higher than the average bank rates. While individuals may find bank interest rates attractive during certain periods, these rates can shift, leaving portfolios vulnerable when deposits mature. The Income Fund Manager navigates these cycles to meet their objectives.

The graph below illustrates the returns from low-equity cautious portfolios and income funds, highlighting their outperformance against inflation and money market rates.

So, what does all the above mean? Simply put, trust the process. Portfolio managers actively allocate assets in line with their mandates to meet the investor’s objectives. This may not always play out in the short term, but over the longer term, as managers identify opportunities and pricing anomalies, these portfolios will deliver.

 
 


In the words of Forrest Gump: “Now, Momma said there’s only so much fortune a man really needs, and the rest is just for showing off.”

Well, Forrest, if all I need is to meet my inflation benchmark, then let my portfolio manager show off by adding alpha.