Page 179 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Fund Manager Interviews

In terms of risk management, what methods or strategies are you able to use to protect your
clients' investments?
The philosophy and process of PSG Multi-management relies on a split funding approach,
which spreads the risk amongst the underlying fund managers. Given that the fund relies on
spreading risk among the underlying managers, a detailed understanding of the role of each
underlying manager in our overall portfolio is very important to our process. A major part of our
risk management strategy is the use of various layers of diversification. The portfolio construction
process focuses on combining complementary styles which reduces fund-specific risk, while our
underlying managers focus on security selection and asset allocation and the implementation of
various risk-mitigating strategies.
From a mandate perspective, the fund has the ability to move 100% into cash should markets
experience extreme uncertainty. However, we generally avoid making such binary calls as the
target objective on the fund over a longer-term (7-year plus) period is to achieve an equity-like
return with lower volatility.
Please comment on the year ahead, and if possible estimate the performance of your fund
over 2 or 3 years. What are your targets and objectives for the year ahead?
One of the key strengths of our approach is that we do not need to regularly make changes to
our underlying managers. By engaging constantly with them and understanding their positioning,
we maintain our conviction in their ability.
As we are now halfway through 2021, we find ourselves in somewhat calmer waters than
experienced in 2020 but with uncertainty still as prevalent as ever. The Delta Covid-19 variant
continues to spread causing a somewhat bumpier recovery than expected; however, the vaccine
rollout programme remains strong globally, with the US, UK and Europe leading the way.
Economic activity saw a strong bounce-back and, as production begins to normalise, we can expect
activity to start exceeding pre-pandemic levels. China and the US are leading the way and have, in
fact, already recovered to their pre-pandemic levels, while other developed and emerging markets
are likely to follow in the latter half of 2021. The extent of change occurring globally provides
countless opportunities for our underlying managers and therefore we remain confident in their
stock picking and asset allocation ability.
There are three key downside risks which we see to the global recovery. Firstly, and probably
the one which is most unpredictable, is vaccine-resistant strains impacting market sentiment. We
have seen the coronavirus mutate into different variants (Alpha, Beta, Gamma, Delta) and there is
no certainty that this won’t continue. Second is vaccine complacency, and third is the Federal
Reserve’s tapering leading to the early withdrawal of stimulus support. The FOMC have been
transparent thus far as they communicate their plan to scale back their asset purchases by the end
of the year. Transparent policy guidance will be key to limit potential negative market reactions.
Are equity markets in general overpriced? Do you anticipate a significant correction or will
the bull run continue?
There are areas of the global equity market that seem to have stretched valuations, but there
are also a number of regions and sectors which are offering attractive valuations. The current
equity bull market is very concentrated from a regional and sector perspective, with US tech being
the major source of returns. However, even within the US, although it has experienced significant
growth over the past few years, there are still attractive opportunities. Emerging markets have also
underperformed developed markets over the past few years – we have started seeing a recovery in
some of these areas already. With a renewed risk-on sentiment, select emerging market equities
are positioned to potentially outperform their developed market counterparts, albeit with
significantly more volatility.
Which asset classes do you expect will give the best total rates of return over the next few years?
In the current market environment, we still believe equities are offering a better risk-adjusted
return. The large fiscal stimulus and comments from Fed Chair Jerome Powell create an
environment which favours equities and a more risk-on appetite for investors. With interest rates
expected to rise only in 2023, the potential upside for fixed income remains limited. We have seen
inflation rise recently and should this continue over the next few years (in the US), this too will be

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts