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How to improve the predictability of equity returns

By Guy Fletcher: Head of Institutional Solutions and Research, Sanlam Investments

Delivering persistent returns above your chosen benchmark doesn’t have to be a function of trying to pick and blend the best active equity managers, says Guy Fletcher, Head of institutional Solutions & Research at Sanlam Investments.

In his attached research paper, Fletcher demonstrates that including systematic strategies such as portable alpha and smart beta can both extract the benefits of diversification while still complementing the process of selecting traditional active managers.

However, selecting consistently outperforming traditional active managers is not only difficult, but individual manager persistence is rare. Indeed, longer term outperforming active managers tend only to be in the top 25% of all managers less than half the time, on a rolling 3-year basis. The desire for excess performance can thus can lead to inappropriate manager rotation, thereby impacting cumulative returns.

Fletcher concludes that to bring greater levels of predictability to equity portfolio returns, you would need to challenge the traditional preference for merely blending active managers. Instead, his research reveals that the solution would be to include a portable alpha element (that brings stability) combined with a smart beta strategy (to yield maximum diversification) in conjunction with traditional manager selection.

Structuring portfolios to take advantage of these independent processes is far more likely to improve the consistency of returns.

Download Guy Fletcher’s full, printable white paper below.

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Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Radius Administrative Services (Pty) Ltd (“Radius”), Blue Ink Investments (Pty) Ltd (“Blue Ink”), Sanlam Capital Markets (Pty) Ltd (“SCM”), Sanlam Private Wealth (Pty) Ltd (“SPW”) and Sanlam Employee Benefits (Pty) Ltd (“SEB”), a division of Sanlam Life Insurance Limited; and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments(RF) (Pty) Ltd(“SCI”) and Satrix Managers (RF) (Pty) Ltd (“Satrix”). This publication is intended for information purposes only and the information in it does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Although all reasonable steps have been taken to ensure the information in this document is accurate, Sanlam Investments does not accept any responsibility for any claim, damages, loss or expense, however it arises, out of or in connection with the information in this document. Please note that past performances are not necessarily an accurate determination of future performances and the performance of the fund depends on the underlying assets and variable market factors. International investments or investments in foreign securities could be accompanied by additional risks, such as potential constraints on liquidity and the repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk and settlement risk, as well as potential limitations on the availability of market information. Independent professional financial advice should always be sought before making an investment decision. The full details and basis of the awards are available from the Manager.

Performance is based on NAV to NAV calculations of the portfolio. Individual performance may differ to that of the portfolio as a result of initial fees, actual investment date, dividend withholding tax and income reinvestment date. The reinvestment of income is calculated based on the actual distributed amount, and factors such as payment date and reinvestment date must be considered.

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