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    Seed Weekly - How active is our active share?

    In one of my previous articles, I looked at how benchmarks influence both active and passive investment management. In this week’s article we take a look at active management, specifically the active share of the property portfolios within the Seed Balanced and Seed Stable Funds.

    Firstly, we need to define active share. Active share is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. An active manager can add value only by deviating from his benchmark index in one of two ways: stock selection or tactical asset allocation. Stock selection involves active bets on individual stocks e.g. selecting only one stock from a particular sector or a small number of stocks from an index like the FTSE/JSE Listed Property Index (SAPY). Tactical asset allocation involves an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing differences or strong market sectors. Examples include, overweighting certain sectors of the economy, having a brief preference for certain stocks or even choosing to keep assets in cash.

    When looking to include property mandates in Seed’s multi asset funds (Seed Balanced and Seed Stable Funds) we had 2 options: 1) track the market as cheaply as possible, or 2) pay a bit more, but get an active manager. We chose the latter and further looked to get the manager’s ‘best ideas’ in a concentrated building block, as property only makes up a portion of the Funds’ total assets.

    Once we selected Grindrod as our preferred active property manager, it is important to monitor the active share of the portfolios to ensure they are managing the portfolios in line with our expectations (i.e. high active share). Below is a chart illustrating the active share of the two portfolios over the past year – in both instances the active share is high (in excess of 80%). It is therefore obvious that the mandates have the greatest probability of generating a return that is different from the benchmark.

    We also compared the returns of the Grindrod portfolios, an index tracker fund (Satrix) and an enhanced tracker fund (Prudential) with the returns of the SAPY index. The purpose of this exercise is to determine the active return (in absolute terms) of the above portfolios in relation to the SAPY index. The chart below illustrates that the high active share of the Grindrod portfolios translates into very different return series to the benchmark, while the Satrix tracker virtually matches the monthly returns and the Prudential Enhanced Tracker has a small monthly variation in return. These are all in line with our expectations. Note – this chart doesn’t show which portfolios delivered better or worse returns, only how different the returns are from the benchmark.

    By selecting an active manager to manage our property mandates, we believe it provides our Funds with the best opportunity to outperform our peers over the longer term – particularly on a risk adjusted basis. The high active share of the Grindrod portfolios also validates the active management fee of these portfolios. Active share is only one aspect that we monitor to ensure that all the underlying portfolios in our Funds are managed as expected.

    Kind regards,

    Stephan van der Merwe

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2016-09-07, 10:47:14, by Mike Email , Leave a comment
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