Absa Global Value Feeder Fund, Al­lan Gray Or­bis Global Equity Feeder Fund, Ned­group Global Equity Feeder Fund, Old Mu­tual Global Equity Fund, San­lam Global Equity Fund

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

Most in­vestors will opt for a multi-as­set, or bal­anced, ap­proach to their do­mes­tic as­sets, but they of­ten pre­fer to in­vest in­ter­na­tion­ally through a ded­i­cated equity fund. And it is more con­ve­nient to in­vest through rand-based funds as they can be bun­dled on the same plat­form as do­mes­tic in­vest­ments. There is also no need for tax clear­ance, un­like an in­vest­ment into a clas­sic off­shore fund.

The As­so­ci­a­tion for Sav­ings & In­vest­ment cat­e­gory Global Equity Gen­eral has al­most 50 op­tions. In­vestors Monthly looks at five, but it should not be taken as a rec­om­mended short list: some other op­tions will be cov­ered in fu­ture is­sues.

The top fund over the past year was the In­vestec Global Op­por­tu­nity Equity fund, which fo­cuses on the cur­rent sweet spot of high qual­ity fran­chise busi­nesses — just the op­po­site of the kind of shares that San­lam Global Equity fo­cuses on and out­side the usual hunt­ing grounds of the long-es­tab­lished Or­bis Global Equity Fund.

As in lo­cal funds, clas­sic value funds have done badly, with RECM Global com­ing last and San­lam’s fund not far be­hind. It was not all bad news for San­lam, how­ever, as its SIM Global Equity In­come Fund was se­cond for the year. The fund, still less than four years old, aims to in­vest in shares with an at­trac­tive and grow­ing cap­i­tal in­come as well as real cap­i­tal growth over three years. It has given a dol­lar yield of 4% over each of the past three years, far bet­ter than the re­turns from govern­ment bonds or cash.

In­vestors who do not want to take man­ager risk can in­vest in pas­sive port­fo­lios: the Db-x Track­ers MSCI World Equity ex­change traded fund is one op­tion. Those who pre­fer the unit trust route can opt for the San­lam MSCI World Equity feeder fund or the Syg­nia Skeleton In­ter­na­tional Equity fund of funds.

At the other ex­treme in­vestors can take their chances with funds set up by bou­tique man­agers, such as Au­tus, An­chor, Bateleur and BlueAl­pha. All th­ese have had top-per­form­ing funds.

With mod­ern IT it should be pos­si­ble to pick in­ter­na­tional shares from Jo­han­nes­burg or Cape Town, but there is still a per­cep­tion that it is an ad­van­tage to op­er­ate in a more cen­tral spot such as Lon­don or New York. Corona­tion in­vests in a range of in­ter­na­tional man­agers con­duct­ing re­search through a satel­lite of­fice in Lon­don. But it has now de­cided to of­fer its own di­rect in­ter­na­tional prod­uct run from Cape Town, and in Jan­uary 2015 it launched its Global Equity Se­lect fund, run by for­mer chief in­vest­ment of­fi­cer Louis Stassen. Its track record is still too short, but it is a fund to watch. An­other fund which needs a longer track record is the Fo­ord Global Equity fund, run by a team in Sin­ga­pore.

But there is still some­thing com­fort­ing about hav­ing money man­aged by a large house. Stan­lib Equity Feeder Fund, for ex­am­ple, is man­aged by Columbia Thread­nee­dle, which has over 500 port­fo­lio man­agers and an­a­lysts. It has been a top quar­tile per­former over the past year. It has a pref­er­ence for strong growth com­pa­nies and has been over­weight IT, con­sumer dis­cre­tionary and health care, and un­der­weight in en­ergy, ma­te­ri­als, fi­nan­cials and util­i­ties.

In­vestec does not have quite such a large team but in its World­wide feeder fund it of­fers ac­cess to its main­stream Global Equity fund. This has adopted its patented Four Fac­tor sys­tem, which gives a more di­ver­si­fied port­fo­lio than the niche Global Op­por­tu­nity Equity Fund.

The five funds give a range of strate­gies and styles. Absa, like Stan­lib, has de­cided to hand over its global equity fund to a large Lon­don-based house, in its case Schroders. Absa In­ter­na­tional has been changed into a feeder to the Schroders Global Re­cov­ery fund, the most ag­gres­sive global equity fund in the Schroders sta­ble, which is a deep value fund.

Al­lan Gray Or­bis Global Equity feeder fund is some­times re­ferred to as a value fund, but founder port­fo­lio man­ager Al­lan Gray prefers the term con­trar­ian. It wasn’t a good mar­ket to be in con­trar­ian stocks like oil re­cently.

The Ned­group Global Equity Feeder Fund has the most con­cen­trated port­fo­lio, which turned out to be the right strat­egy as it was the top main­stream global equity fund over the past year, with five of its 40 shares ac­count­ing for 25% of the port­fo­lio.

The Old Mu­tual Global Equity fund is the most di­ver­si­fied of the five fea­tured. It typ­i­cally has more than 300 shares and re­lies on quan­ti­ta­tive fil­ters to help choose shares. It is also the only one of the five to be style ag­nos­tic and to use fil­ters rel­e­vant to fac­tors such as value, qual­ity and mo­men­tum.

San­lam Global Equity fo­cuses on value fac­tors such as PE ra­tios and price to book. It is run by the San­lam Four team in Lon­don and should bounce back.

At the other ex­treme in­vestors can take their chances with funds set up by bou­tique man­agers

The fund was started in 1994 as Absa In­ter­na­tional and was pre­vi­ously run by Absa’s Greg Ket­tles as a large cap fund. But last Au­gust, as part of Absa’s strate­gic al­liance with Lon­don-based Schroders, it be­came a feeder fund into the Schroders Global Re­cov­ery fund.

It was an in­ter­est­ing choice as the fund has un­der­per­formed the MSCI World by 15.5% over the past year.

The fund has had three-year neg­a­tive earn­ings growth of 5.2% and achieved a re­turn on equity of 11%, com­pared with 17.3% from the bench­mark.

It was started in Oc­to­ber 2013 and is run by Nick Kir­rage and Kevin Mur­phy.

It has 52 shares, in con­trast to the Absa Core Equity fund, which in­vests in the Schroders Core Equity fund, with al­most 800 shares.

The fund in­vests pri­mar­ily in eq­ui­ties that have suf­fered a se­vere set­back in ei­ther share price or prof­itabil­ity, but where the long-term prospects are be­lieved to be good.

There are no re­stric­tions of size or sec­tor. It has an eclec­tic mix of busi­nesses and its se­cond-largest hold­ing is An­glo Amer­i­can, which cer­tainly qual­i­fies as a busi­ness that needs to re­cover.

The fund also holds South32, the col­lec­tion of non­core as­sets spun off by BHP Bil­li­ton.

It holds the “bor­ing”, unglam­orous in­for­ma­tion tech­nol­ogy shares such as In­tel and Cisco, the faded tech­nol­ogy busi­ness Tech­ni­color as well as two US pri­vate education busi­nesses, Strayer and Apollo, the re­cov­er­ing state-res­cued Bri­tish len­der Royal Bank of Scot­land and that no­to­ri­ous, un­fash­ion­able cash cow Philip Mor­ris.

Equally no­tice­able is the lack of fund man­ager favourites such as the Fang shares — Face­book, Ap­ple, Netflix and Google — or even Exxon Mo­bil, Gen­eral Elec­tric or John­son & John­son.

Ul­ti­mately, the judg­ment of the port­fo­lio man­agers per­forms an im­por­tant over­lay func­tion in look­ing for op­por­tu­ni­ties and eval­u­at­ing risks, in a way that no spread­sheets can do.

The fund feeds di­rectly into the Or­bis Global Equity Fund. Or­bis is Al­lan Gray’s sis­ter com­pany, based in Ber­muda and also con­trolled by the Gray fam­ily.

The fund has had very strong per­for­mance since it was launched in 1990, with an 11.1% an­nual re­turn in dol­lars com­pared with 6.3% from the FTSE World In­dex and 4.6% from the av­er­age global equity fund.

Or­bis was one of the world’s first global equity funds to dis­re­gard bench­marks, con­cen­trat­ing in­stead on ar­eas in which it ex­pected the high­est re­turns. The fund al­ways has 100 shares or fewer. Its top three shares hap­pen to be tech­nol­ogy shares, but they are not the big beasts such as Ap­ple, Al­pha­bet and Ama­zon, but Chi­nese share NetEase, Mo­torola So­lu­tions and Qual­comm. NetEase is a fast-grow­ing busi­ness; the lat­ter two have cash re­serves equiv­a­lent to more than 25% of their mar­ket cap and durable earn­ings, yet they are out of favour.

But over the past year there has been a 9.0% fall com­pared with a -5.6% re­turn from the bench­mark. Or­bis’s SA rep­re­sen­ta­tive, Tam­ryn Lamb, says there was a bias to­wards two sec­tors which un­der­per­formed, en­ergy and emerg­ing mar­kets.

One of the top 10 hold­ings, for ex­am­ple, is Apache, an oil ex­plo­ration and pro­duc­tion com­pany with re­serves in the US, the North Sea and Egypt. It pur­chases old as­sets cheaply from other com­pa­nies, then fine-tunes the ex­trac­tion to in­crease pro­duc­tion. It has ex­e­cuted this strat­egy well since buy­ing its North Sea fields from BP.

Or­bis be­lieves Apache can sur­vive an ex­ten­sive pe­riod of low prices. The emerg­ing mar­kets ex­po­sure is pri­mar­ily through Rus­sia, which is about 6% of the fund, with the main po­si­tions be­ing the most prom­i­nent bank, Sber­bank, and the oil and gas gi­ant Gazprom, and par­tic­u­larly through China, which is 13% of the fund.

In 2015 it bought JD.com as a se­cond China e-com­merce play along­side NetEase. An­other theme in the port­fo­lio has been into pay-tele­vi­sion-based groups Char­ter Com­mu­ni­ca­tions, Time Warner Ca­ble and Vivendi.

The fund is the most con­cen­trated global equity fund avail­able in rands. It is mod­elled on the Ver­i­tas global equity strat­egy. Ver­i­tas was pre­vi­ously known as the real-re­turn man­ager, and there is an em­pha­sis on cap­i­tal preser­va­tion. A deep fun­da­men­tal re­search process iden­ti­fies qual­ity and cheap­ness.

Lon­don-based Ver­i­tas was started in 2003. Its main team mem­bers worked at New­ton, a well-es­tab­lished fund man­ager known for its real-re­turn ap­proach to as­set man­age­ment.

Ver­i­tas is a bou­tique man­ager with US$16bn un­der man­age­ment. The global equity fund tar­gets an­nu­alised port­fo­lio re­turns of in­fla­tion plus 6%-10%. It looks for a 15%/year re­turn, which ef­fec­tively dou­bles value over five years.

Head of mar­ket­ing Antony Burgess says beat­ing a bench­mark such as MSCI World is just a byprod­uct of the real-re­turn ap­proach, at least when mea­sured over a sen­si­ble time pe­riod. If it needs to, Ver­i­tas will pro­tect port­fo­lio value through de­riv­a­tives, which it did in the buoy­ant 2007 mar­kets.

Burgess says the way to beat in­fla­tion is to fo­cus on highly cash-generative com­pa­nies, which can pro­tect fu­ture cash flows. And it rig­or­ously ap­plies its own rules to de­ter­mine that there is an ad­e­quate mar­gin of safety. Burgess says the fund is un­likely to buy into sec­tors where cash flow is highly volatile, such as au­tos and air­lines.

It has no ex­po­sure to Ja­pan. Nor does it in­vest much in re­sources or en­ergy, as they are hostage to com­mod­ity prices.

Ver­i­tas op­er­ates off a uni­verse list of 250 com­pa­nies. At the mo­ment there are no Euro­pean banks on the list, but a few Asian banks in Thai­land and Sin­ga­pore which are more de­pen­dent on fee in­come than their Western coun­ter­parts ap­pear on it. The house prefers cap­i­tal-light fi­nan­cial busi­nesses such as the Lon­don and Aus­tralian stock ex­changes and Amer­i­can Ex­press.

Like Or­bis, Ver­i­tas has a fo­cus on US ca­ble tele­vi­sion sup­pli­ers, and has Com­cast and Time Warner in its top 10, but un­like Or­bis it is also ex­posed to the pop­u­lar health-care sec­tor through United Health and Roche.

The fund has been a fre­quent win­ner of in­dus­try awards. It is run by Ian Hes­lop, Amadeo Alen­torn and Mike Ser­vent. Hes­lop at­tributes the suc­cess to a level of con­sis­tency. In­stead of stick­ing to one style it takes el­e­ments of value, growth and mo­men­tum. Re­cently its price-driven com­po­nents within mar­ket dy­nam­ics have gen­er­ated pos­i­tive re­turns, but there were weak re­turns from its dy­namic val­u­a­tion fil­ter, which is fo­cused away from risky shares.

“We recog­nise when we are not go­ing to be re­warded, and to­day’s mar­ket favours qual­ity over value,” Hes­lop says.

“We don’t make big macro­calls but rather fo­cus on how the mar­ket is be­hav­ing and how the sen­ti­ment will af­fect themes.

“At the turn of the year the mar­ket was af­fected by many of the same trends as be­fore, such as weak oil prices, a weaker euro, a ris­ing US dol­lar and tum­bling emerg­ing-mar­ket cur­ren­cies. And it was a time of height­ened volatil­ity and pro­nounced style ro­ta­tions. The sen­ti­ment is mea­sured sep­a­rately in each of the large re­gions, such as the US and Ja­pan.”

Hes­lop says the fund does not buy com­pa­nies as much as it buys into dif­fer­ent types of mar­kets. The man­agers do not do com­pany vis­its or meet man­age­ment, and rely heav­ily on tailored quan­ti­ta­tive re­search. This is very dif­fer­ent from a high-con­vic­tion man­ager such as Ver­i­tas and Or­bis.

The fund holds about 400 shares and it does not down­weight any share by more than 0,5% of its weight­ing in the MSCI, hence its three largest hold­ings are tech gi­ants Ap­ple, Ama­zon and Al­pha­bet (Google).

It has a large ex­po­sure to phar­ma­ceu­ti­cals (Pfizer, Gilead Sci­ences and Novo Nordisk) and just one fi­nan­cial (Cit­i­group) in the top 10.

Hes­lop says that in the­ory there is no di­ver­si­fi­ca­tion af­ter 30 shares, but this is naive and does not take into ac­count how out­per­for­mance of the mar­ket (al­pha) works. Such a low ex­po­sure would leave the port­fo­lio ex­posed to the­matic or style risk.

But at the other ex­treme, Hes­lop says, to hold 1,000 shares would di­ver­sify away any po­ten­tial al­pha.

The fund is firmly in the con­cen­trated port­fo­lio camp, though with about 50 shares it is more di­ver­si­fied than Ned­group’s 40-odd.

Se­nior port­fo­lio man­ager Colin McQueen says the fund has an in­stinc­tive value bias, in­di­cated by its price:earn­ings ra­tio of 9.9, com­pared with 14.9 for the MSCI World In­dex and price to book of 1.1 com­pared with the mar­ket’s two times. He says the fund has un­der­per­formed as there has been an un­usu­ally long run of ex­pen­sive shares be­com­ing more ex­pen­sive and of cycli­cal shares do­ing badly. He says the team finds a lot more op­por­tu­ni­ties in the two thirds of the mar­ket made up of cycli­cal shares than the third made up of more sta­ble non­cycli­cal shares.

It has a num­ber of po­si­tions in en­ergy such as To­tal, Pe­tro­leum Geo-Ser­vices, ENI and Anadarko Pe­tro­leum. It ar­gues that en­ergy com­pa­nies look at­trac­tive for any in­vestor with a time hori­zon longer than five months. The world needs con­tin­u­ous in­vest­ment in capex to meet ris­ing oil de­mand and to off­set nat­u­ral de­clines from ex­ist­ing pro­duc­tion. McQueen ex­pects oil shares to re­vert to the mean, which is par­ity on price to book with the over­all mar­ket, yet they are now trad­ing at a 40% dis­count.

There has not been this level of dis­count since the 1920s. He says en­ergy is more at­trac­tive than min­ing as it is far less de­pen­dent on China’s de­mand. The fund’s largest hold­ing is Ex­press Script, a US phar­macy ben­e­fit man­ager which pro­cesses claims for in­sur­ers and cor­po­rate health schemes in the US: it has had a wob­ble be­cause of a con­tract dis­pute with a large cus­tomer but the un­der­ly­ing busi­ness re­mains sound. Over the past quar­ter the top 10 hold­ings have changed markedly, as Hewlett-Packard was de­merged and hold­ings were trimmed in Unit­edHealth, Ar­row Elec­tron­ics and Im­pe­rial To­bacco.

A big win­ner re­cently has been Sam­sung Elec­tron­ics, as shares rose sharply on news of a share buy­back. It is now the fourth-largest hold­ing in the fund. An­other win­ner was NN Group, the Dutch in­surer, as in­vestors ap­pre­ci­ate how strongly cap­i­talised the busi­ness re­ally is.

The main themes of the fund now are old line tech­nol­ogy busi­nesses — Or­a­cle and Mi­crosoft are in the top 10. An­other is health care. Gilead Sci­ences may be the world’s lead­ing listed biotech busi­ness, yet it trades on a p:e of seven.

An­other un­der­rated health-care stock is Medtronic. It re­cently ac­quired a new man­age­ment team from Gen­eral Elec­tric. It has a free cash flow yield of 6%. A third theme is fi­nan­cials, still a bombed-out sec­tor.

Top 10 shares in­clude HSBC and Bank of Amer­ica with BNP Paribas just out­side, and trad­ing on a p:e of seven.

McQueen says many in­vestors still pre­fer the warm feel­ing of safety from sec­tors such as the over­priced con­sumer sta­ple busi­nesses (the Nestlés and Unilevers) but this strat­egy is un­likely to pro­vide at­trac­tive re­turns on cap­i­tal.

Pic­ture: iStock

Phar­ma­ceu­ti­cals and health care fea­ture strongly in some funds.

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