In June 2018 the average prudential balanced portfolio returned 2.45% (May 2018: -1.61%). Top performer is Allan Gray (3.92%); while EMH Prescient (1.13%) takes the bottom spot. For the 3 month period, Allan Gray takes top spot, outperforming the ‘average’ by roughly 1.92%. On the other end of the scale Investment Solutions underperformed the ‘average’ by 1.09%.

A more conservative portfolio for now should let you sleep more peacefully

The relevance of a normalised interest rate environment is that returns of all other asset classes should start normalizing in other words, returning to inflation beating returns of all asset classes but perhaps cash, up to inflation plus 6% to 8% on equities. Until we reach normality we will see lots of volatility particularly in the more volatile asset classes and we will see similar returns on the various asset classes. This is also what we showed in last month’s column where we looked at the period 1 July 2014 to 31 May 2018. In such scenario, a more conservative portfolio structure should offer more peace of mind as it will avoid the painful draw-downs of the more aggressive portfolios.

This is exactly what the trustees of the Benchmark Retirement Fund did with its Default Portfolio when they decided to pair the Prudential Inflation Plus portfolio with the Sanlam Inflation Linked portfolio on a 50: 50 basis to 50% of the portfolio in October last year. This appears to have worked out quite well for the portfolio since October 2017, given that it is a very short period. Over this 9 month period the Default Portfolio returned 6.2% compared to the return of the average manager’s 5.3%. Graphs 1.1 to 1.6 above cover this period and mirror the positive outcome of the reduction of risk affected in the Default Portfolio.

The US Repo rate is currently 2%, while US CPI was 2.9% at the end of June. This relationship should be the inverse of what it is meaning that based on current CPI, a US Repo rate of around 4% would indicate a normalised interest rate environment.