INVESTEC OPPORTUNITY FUND
Of the five funds reviewed here, Investec Opportunity Fund is the odd one out. It is large, with R37,4bn under management, but it is not a proxy for the institutional balanced product, nor is it a peer group fund. It is managed by a different team: while Chris Freund manages the balanced funds in a momentum-ish style, Opportunity is run by the quality team headed by Clyde Rossouw and assisted by Sumesh Chetty. You won’t find Naspers in the portfolio, even though it is such a large constituent of the index, because Chetty argues there is a risk of capital loss. The fund has a dual mandate of capital growth and absolute returns.
There is no explicit protection but it aims for no capital losses over rolling 24-month periods. The fund’s portfolio is nonetheless dominated by shares which a value manager would consider expensive, such as Steinhoff, Richemont, Mediclinic, Santam, Aspen and SABMiller. Chetty says that even so the beta of the portfolio (sensitivity to the index) is a conservative 0,7%.
“We consider British American Tobacco to be a defensive share as it is growing its earnings consistently by 12%-13% a year — in sterling, to boot. It has an upward progression independent of the economic cycle.”
The foreign equity holding is also dominated by shares with highly predictable free cash flows, such as Nestlé, Microsoft and Johnson & Johnson. A handful of shares, such as Berkshire Hathaway and Swedish Match, are held directly, as these were bought when the offshore allowance for unit trusts was very limited, but most of the foreign equities are pooled in the Investec Quality Equity fund.
Chetty says the return signature will be very different from the typical balanced fund as Opportunity aims to achieve similar returns at lower volatility. Its drawdowns in the bear phases of 2002/3 and 2008/9 were about a third of those of its peers. In 2008, the loss was 5,5% while other funds lost up to 15%. “We expect the fund to lag in bull markets.”
Its conservative approach is indicated by the fact that its exposure to local equities is just 32%, not far off the 25% for global equities. He says that in certain circumstances the fund might even go 50%-70% cash. Chetty says the contributions from stockpicking and asset allocation have been about equal in the life of the fund. It has a hefty 18% of the portfolio in domestic bonds. Chetty says even under the most aggressive rate hikes the portfolio can only lose 0,5%-1% once the running yield is taken into account. The fund does not use derivatives as this potentially throws away a premium for holding the asset.
For investors who want even more certainty of income, the quality team manages two other funds: Cautious Managed, with a cap of 40% equity, which competes with Allan Gray and Nedgroup’s Stable funds and Coronation Balanced Defensive; and the Absolute Balanced fund, which does make use of derivative protection and offers enhanced cash returns. Cautious Managed has higher exposure to nongovernment bonds, to make up for its limit on equity holdings.
Chetty says that even though Opportunity leans towards the conservative it has not adopted a deep value philosophy. “Deep value managers tend to invest in businesses with negative operating leverage, such as the commodity shares, which are seeing costs grow more rapidly than revenue. Even their stated NAV may not be realisable, if they try to sell a mine shaft. Our quality style means buying great businesses at fair value.”
Chetty says Opportunity has lagged in the short term as it has been a narrow market. Naspers accounted for half of the 10,2% equity return in the past year.