Portfolio Construction (Steps 04 and 05)

Once a particular investment idea has been approved by our portfolio management team, it is then considered for inclusion into the relevant funds. This is the start of Portfolio Construction, which is the 4th and 5th steps of our investment process:

 

Rezco-Investment-Process-Step-04-and-05-Portfolio-Construction

Principles

The following outlines some of the details / principles of our portfolio construction process.

  • Rob Spanjaard has final responsibility for the construction of the portfolios. We do not believe investment decisions through an investment committee is an effective method to implement decisions. It is key that a particular individual in the process is held accountable for their decisions, and not a committee as a whole.
  • We are a high conviction manager with relatively few holdings compared to our peers. For example, with our Rezco Value Trend Fund, we will generally hold between 10 and 20 local equities and between 10 and 15 foreign equities, significantly less than many of our peers. Only conviction buys are included in the portfolio.
  • The process is completely benchmark agnostic.
  • Where stock have low allocations, it is generally where we are buying into the position or reducing our exposure in that position.
  • Investments showing the greatest potential reward versus risk taken have the highest weighting.
  • We view shares as portions of a business rather than financial assets.
  • Each idea’s suitability is reviewed versus current holdings to avoid concentration to any particular themes, sectors, countries etc.

Asset Allocation

The following diagram outlines how we use a combination of top-down and bottom-up conviction levels to determine the allocation of a particular security.

R003_01 - Allocation Process

Bottom-Up Conviction Buckets

Based on our level of convition of a particular investment idea, we will allocate according to the following conviction buckets:

Level of Conviction Exposure Range
High 5% – 10%
Medium 2% – 5%

Top-Down Conviction Buckets

As part of our top-down approach to allocations, we use the following elements to determine the final allocation of a particular investment idea:

  • Asset Class Exposure
  • Currency Exposure
  • Sector Exposure
  • Leading & Lagging Indicators

Asset Class exposure

Subject to the relevant mandate restrictions, we follow an active asset allocation philosophy and will for example, use exposure to defensive asset classes to protect on the downside. For example, in mid 2008, we significantly reduced exposure growth assets and subsequently protected capital through active asset allocation.

Asset Class Level of Conviction Rezco Stable Fund Rezco Value Trend Fund Rezco Managed Plus Fund Rezco Equity Fund
Equities High 40% 75% 75% 100%
Medium 30% 50% 60% 90%
Low 5% 10% 15% 80%
Property High 15% 20% 25% 25%
Medium 7.5% 12.5% 15% 15%
Low 0% 0% 0% 0%
Bonds (Duration) High 7 years 7 years 7 years n/a
Medium 3 years 3 years 3 years
Low <1 year <1 year <1 year

Currency Exposure

Currency Level of Conviction Rezco Stable Fund Rezco Value Trend Fund Rezco Managed Plus Fund Rezco Equity Fund
Foreign High 25% 25% 25% 0%
Medium 20% 20% 20%
Low 0% 0% 0%

Sector Exposure

Sector Level of Conviction Rezco Stable Fund Rezco Value Trend Fund Rezco Managed Plus Fund Rezco Equity Fund
Mega High 25% 30% 30% 30%
Medium 15% 15% 15% 20%
Low 0% 0% 0% 0%
Non-Mega High 15% 15% 15% 15%
Medium 10% 10% 10% 10%
Low 0% 0% 0% 0%

Leading and Lagging Indicators

“Leading – These types of indicators signal future events. Think of how the amber traffic light indicates the coming of the red light. In the world of finance, leading indicators work the same way but are less accurate than the street light. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren’t always right).

Lagging – A lagging indicator is one that follows an event. Back to our traffic light example: the amber light is a lagging indicator for the green light because amber trails green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly.” Source: Investopedia

The following table outlines a few examples of the leading and lagging indicators we are taking into account when integrating a particular investment idea:

Leading Lagging
Bond yields Unemployment
Foreign flows Inflation
Country current accounts Currency
Job statistics Price movements
Industry head/tailwinds Interest rates
Quality of management
Earnings exposure

Investment Process

STEP 01 & STEP 02

STEP 01 Sources of Information
STEP 02 Sort, Process & Filter

STEP 03

STEP 03 Refine Idea

STEP 04 & STEP 05

STEP 04 Integrate Idea
STEP 05 Portfolio Construction

STEP 06

STEP 06 Assessment