Financial Mail - Investors Monthly - - Analysis: High Equity Funds -

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.

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