How do advisers use our Stable Fund?
The Allan Gray Australia Stable Fund is unique. This, however, doesn’t mean that the Fund is complicated. In fact, it’s very simple. It aims to outperform the Reserve Bank of Australia cash rate over the long term by investing predominantly in cash, but can boost returns by investing no more than 50% of its portfolio in carefully selected Australian-listed shares.
Yet despite its simplicity, the Stable Fund can have a myriad of uses in client portfolios, such as an alternative to cash, to supplement an income, to manage behaviour, or as a defensive solution. Here we talk to a number of advisers who have been using the Stable Fund for some time to see how they are using this Fund within their client portfolios.
1. As a unique, defensive solution
Nick Jackson, Director and Authorised Representative of Flinders Wealth Pty Ltd says:
“With its blend of cash and shares the Fund provides a unique solution for the defensive component of our clients’ portfolios. The key feature that draws us to this type of investment solution is the Manager’s conviction to inch into the market when it falls but still hold up to 50% cash. In that sense we see it having the features of a ballast – increasing exposure to growth assets in periods like March 2020 and equally reducing exposure when markets have run ahead.”
Inch is the right verb; we don’t go ‘all in’. Although up to 50% of the portfolio can be invested in shares, exposure has never been that high in the Fund’s close-to-ten year history. The long-term average of the Fund’s exposure to shares is around 30% of the portfolio.
The other word Nick used that is worth calling out is ‘ballast’. Our contrarian investment strategy, used to manage the equity portion of the portfolio, is naturally countercyclical, as we look to invest more in shares when we believe they are undervalued and reduce that exposure as prices rise again and we see less value. You can see this in the chart below, which shows how the Fund’s exposure to shares rises when we see greater value in shares and falls when we see less value.
Source: Allan Gray, Bloomberg. Graph illustrates period between January 2014 and January 2020. The Fund was first launched on 1 July 2011.
For the end client this is contrarian in two ways. The first being that our overall exposure to shares is reduced in a rising market, and the second is that at the individual security level we are investing in those shares that are undervalued relative to the broader market and therefore offer greater potential to grow. Therefore, by its nature, the Stable Fund can be a great defensive option for investors looking to access the sharemarket with lower risk.
2. As a Fund with both defensive and aggressive characteristics
An adviser from South Australia, who wished to remain anonymous, uses the Fund with different client types:
“Depending on the client objective, I typically use the Allan Gray Australia Stable Fund for up to 10% of a portfolio as part of the defensive/alternative component of a balanced to growth portfolio. Conversely, for more conservative to moderate portfolios I use it for up to 10% of as part of the core/growth component.”
The Stable Fund can provide a good option for clients who are concerned about the high levels of the sharemarket more broadly, but don’t want to be completely out of the market. The Fund’s propensity for cash, coupled with our contrarian equity strategy, means we reduce exposure to expensive shares and reallocate capital to undervalued shares, so the client can get some exposure to the market but without bearing the full brunt of a market fall.
With regard to the fitting into the ‘alternative’ category, with the Stable Fund there are no tricks or gimmicks, and none of the complex trading strategies, hedging, options or derivatives often associated with other ‘alternative’, or ‘cash-plus’, funds. This makes the Stable Fund a simple, easy-to-explain ‘alternative’ asset, so the client can fully understand where they are invested.
With the cash rate in Australia at 0.1% and bond yields at extreme lows, clients may need to be invested in growth assets to meaningfully outperform cash. For clients who are concerned about losing capital, but want potentially higher returns than cash, the Fund provides a more defensive option. By limiting exposure to shares to 50% of the Fund’s assets, investors have exposure to the market without being fully invested.
3. To beat the bank rate without breaking the bank
“The Stable Fund is a unique, low-cost offering which my clients find appealing due to the defensive characteristics coupled with the expected above-cash-rate returns.”
Chris Cornish, Principal Financial Adviser of Cornish Wealth Management.
Chris again highlights the Fund’s defensive nature, as well as its long-term, ‘cash-plus’ objective that the Fund has (as at the date of writing) achieved by outperforming its benchmark RBA cash rate net of fees since inception in 2011. And a base fee of just 0.25% certainly ticks the low-cost box. If the Fund outperforms the benchmark, a performance fee of 20% is charged on the excess return. A high-water mark is in place to ensure that you only pay once for outperformance of the benchmark.
Due to its unique and flexible characteristics, it’s clear that the Stable Fund may be suitable for a range of investors – from those looking to preserve their purchasing power but with a desire to outperform cash, to those looking to supplement an income. The Fund is also suitable for more conservative investors concerned about shares being expensive, or wanting a more stable exposure to the Australian sharemarket. Alternatively, it could be used to park money while waiting for other investment opportunities.