Manager Research

Allan Gray have made a significant change to the investment process behind the Allan Gray Optimal Fund.  When we first rated this fund in 2013 we struggled to reconcile the low investment objective with the high fee. This aspect has been dealt with through an increase in the performance target, while the fee structure remains the same.

The fund aims to provide investors with positive returns above money market (even when markets are negative).  Through time the return will largely be the return of cash, plus the out- (or under) performance of the Allan Gray equity portfolio relative to the All Share index, plus a return from holding a net equity position, less fees.  It is the outperformance component which has been made more aggressive, with the portfolio manager now targeting 50-80% of the Allan Gray equity outperformance (previously this was 40-50%).  It will be more closely aligned to their general equity process than before, which we believe is a good result.

We still have some concerns with this fund:  It is a more technical product which sits outside of Allan Gray’s core fund offerings.  We feel the portfolio construction approach is quite simplistic and there may be some unintended consequences through time.  The fund will also exhibit higher volatility and have more cyclicality than before – this means it should not be seen as ‘low risk’, rather as ‘moderate risk’, both in terms of expected volatility and the investment horizon.  Due to the nature of Allan Gray’s investment process for equities, clients can expect substantial periods where the ‘outperformance’ component of the fund is negative, and this will create a drag on returns.  It is a fund which now targets a return of cash plus 3 to 4 % before fees.  Its main benefit remains the fact that it is an uncorrelated, absolute return type fund which can be used to target moderate levels of real return, and as a result is primarily suited as a building block portfolio within a broader balanced fund, specifically as a replacement for money market or bond asset classes.