Sanlam Four’s Mike Pinggera has increased the Multi-Strategy fund’s allocation to alternatives by 15 per cent since its launch four years ago to tackle inflation risk.
UK annual consumer price growth jumped to a four-year high in April after a prolonged period of dormant inflation while equity market valuations remain elevated and bond yields hover at low levels, Pinggera says, creating a challenging environment.
“Bonds will deliver a low but predictable level of income, yet will struggle to keep pace with inflation over the longer term,” he says,
As such, the Multi-Strategy fund does not hold gilts and has a bond duration of 1.3 years to mitigate the risk of higher rates.
With volatility “likely to be high”, Pinggera says he has built a large allocation to alternative assets that provide a stable income stream with inflation linkage, such as infrastructure, renewable energy and specialist property, including distribution centres and student accommodation.
Alternative assets currently account for 25 per cent of the fund, up from the 10 per cent at launch of the strategy four years ago, which yields over 4 per cent.
“While some market participants have viewed these areas of the market as expensive, they continue to perform extremely well,” Pinggera says “Where else can you get 4 per cent yields with inflation linkage? Real assets should continue to be an attractive home for investors in this environment.”
The Multi-Strategy fund aims to provide equity-like returns, with a long-term target of CPI plus 4 per cent and a focus on downside risk management.
In keeping with the manager’s focus on managing downside risk, Pinggera prefers to gain exposure to equity markets through the use of options.
“It is tempting to express high conviction views, but the reality is that regardless of the level of one’s conviction the outlook is highly uncertain,” the manager adds. “Utilising options does not require me to be a forecasting guru. Volatility is low, so options are a cheap way of gaining low-risk market exposure.”