Technology is a game-changer
for empowering IFA’s in volatile


Adam Reeves

Absa Index Solutions,
Absa CIB


It is not an easy time to be an Independent Financial Advisor. 2022 was the worst year on record since the Global Financial Crisis as a combination of rising interest rates, surging inflation, COVID-19 lockdowns in China and geopolitical tension in Ukraine negatively impacted investor portfolios.

Independent Financial Advisors (IFA’s) themselves were forced to navigate these markets and help clients find an appropriate balance between risk and performance, but many found themselves struggling to find tools that gave them the right mix.

Typically, an Advisor will have a range of house view portfolios consisting of Collective Investment Scheme (“CIS”) funds that they would look to allocate their investors savings into. These can be broadly classed as “Aggressive”, “Moderate”, “Conservative” and “Cash”.

Should there be a change in market expectations, the Advisor has a choice to make; stick with the current allocation and be subject to all the market turmoil or trade into a lower risk portfolio in order to safeguard some capital at risk.

Discretionary Fund Managers (DFMs) are increasingly being used by Independent Financial Advisors to manage the investments and investment strategies in their clients' portfolios. Advisors can now outsource their investment decisions to third-party experts and take the guess work out of designing suitable client portfolios.

DFM’s engage with manager research, analysing funds and asset management companies, looking at both the quantitative and qualitative aspect of underlying single asset class funds as well as multi-asset funds. They make use of modelling systems that can optimise portfolios within given risk parameters that will provide IFA’s clients with the best prospective probability of achieving their investment objectives within an acceptable risk tolerance.

DFM’s however, all draw from the same list. Whilst there are over 1200 locally listed CIS funds, all DFM’s get to choose from the same funds.

But what if there was a way to choose a certain level of risk appropriate to your group of clients, to introduce certainty of minimum portfolio value at a future date or even having a rolling stop-loss on your portfolio? What if there were strategies that would rebalance the portfolio from market facing funds into cash-like funds when markets were volatile and then automatically reinvested back when market conditions calm down?

This is where innovative technology plays a role.

Absa CIB recently launched a range of solutions, within their Fund Linked Solutions Business (“FLS”), that provide investors with a sophisticated range of investment strategies that introduce the ability to optimally manage risk and return objectives on assets held.

By using bank-issued Notes, investment professionals now have access to a range of tools that have previously only been accessible to the likes of high net-worth investors and hedge fund managers.

Absa Fund-Linked Solutions includes four strategies: Delta 1, Risk Managed (Volatility Control), Protection and Leveraged which can be integrated into IFA strategies including Hedge Fund and a Model portfolio structure.

Let us consider these 4 typical portfolios that may be considered by an IFA

  • Multi Asset High Equity Balanced fund
  • Multi Asset High Equity Balanced Fund of Funds
  • Retail Hedge Fund SA Long/Short Equity – Long Bias
  • Model Portfolio consisting of an 80% allocation to a High Equity Fund of Funds and a 20% allocation to a Retail Hedge Fund.

Based on our research the table below shows the annualised performance, maximum drawdown, and volatility of each type over the last three years:

Annual Return Max Drawdown Volatility
High Equity Balanced Fund 12.70% 24.50% 13.00%
High Equity Fund of Funds 10.25% 26.50% 11.80%
Retail Hedge Fund 15.40% 7.40% 9.00%
Model Portfolio 11.45% 22.00% 10.20%

The Retail Hedge Fund did what it is designed for in volatile markets giving an annualised return of 15.40% with a much lower maximum drawdown of 7.40% while the Model Portfolio achieved a decent return of 11.45% but with a maximum drawdown of 22% and a volatility of 10.20%.

So given the very small set of data above, the advisor would be looking good if they allocated 100% of their client’s investment into Retail Hedge funds. This is unfortunately not always achievable.

Current regulation prohibits Standard CIS funds or CIS Fund of Funds from owning any exposure to Retail Hedge funds, even though they are regulated. So, if an advisor wanted to blend Retail Hedge funds and standard funds or Fund of Funds, they can only do this in a “wrap” fund or, they could use the Absa FLS Note to achieve this using the Delta-One strategy.

Let’s look at these investment types when incorporating some of these strategies via the Absa FLS platform Note:

Retail Hedge Fund

Annual Return Max Drawdown Volatility
Direct Investment 15.40% 7.40% 9.00%
Risk Managed (Volatility target 15%) 14.00% 6.60% 8.60%
Continuous Protection (80% guarantee) 12.50% 6.25% 8.15%
Leveraged (1.5 times) with 15% volatility target 17.70% 9.70% 12.20%

Given that Retail Hedge funds are by their very nature give a higher return with lower drawdown risk, it is not surprising that the best performance FLS strategy is one where more exposure is obtained via the leveraged strategy.

Model Portfolio

Annual Return Max Drawdown Volatility
High Equity Balanced Fund 12.70% 24.50% 13.00%
High Equity Fund of Funds 10.25% 26.50% 11.80%
Retail Hedge Fund 15.40% 7.40% 9.00%
Model Portfolio 11.45% 22.00% 10.20%

As seen above, the introduction of the Absa FLS Strategies into a portfolio can dramatically change the risk and return characteristics to better suit the investor.

By integrating technology into their offering, IFAs can now expand their investable universe and more rapidly respond to changing market conditions. As such, we look forward to engaging with the Advisor universe.

Adam Reeves

Absa Index Solutions, Absa CIB

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