FUND REVIEWS

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

Corona­tion Global Cap­i­tal

Plus, San­lam Global Cau­tious

Fund of Funds, Al­lan

Gray-Or­bis Global Op­ti­mal

Fund of Funds, Stan­lib Global Bal­anced Cau­tious Fund,

Ned­group In­vest­ments Global

Cau­tious Fund

Many in­vestors hes­i­tate about their first in­vest­ment into off­shore mar­kets. If you in­vest in an eq­uity fund, a crash might soon fol­low. In­vest­ing in cash or bonds is con­sid­ered to be safer, but the re­turns are just too low — why opt for 1% on your money when you can get 7% or more in SA?

The low-eq­uity cat­e­gory is a good com­pro­mise. These are quite unashamedly di­luted bal­anced funds — they do not pre­tend to of­fer any kind of ab­so­lute re­turn or guar­an­tee. Very often they have sis­ter bal­anced funds with, say, 60% in eq­ui­ties, while they have 30% with the bal­ance made up of in­come-pro­duc­ing as­sets, in­clud­ing, in many cases, prop­erty, a hy­brid as­set class.

The fol­low­ing five funds take quite dif­fer­ent ap­proaches but have a com­mon ap­proach to as­set al­lo­ca­tion. To some ex­tent they must, to re­main in the cat­e­gory, which has a max­i­mum per­mit­ted eq­uity ex­po­sure of 40%.

At the more ag­gres­sive end is Corona­tion Global Cap­i­tal Plus, which often has a full 50% al­lo­ca­tion to growth as­sets (10% to prop­erty); at the other ex­treme, Ned­group Global Cau­tious fund is just 20% in eq­ui­ties, though it has a fur­ther 11% in hy­brids such as pref­er­ence shares and con­vert­ible bonds.

Corona­tion’s fund is run by Louis Stassen, who also runs the rel­a­tively new Corona­tion global eq­uity fund. It is the only one of the five funds that is run wholly in-house. Corona­tion Global Cap­i­tal Plus is also the largest of the five funds with R2,4bn un­der man­age­ment. It is not hard to spot its South African roots, as its as­sets in­clude JSE-listed UK shop­ping cen­tre owner Intu and the global Old Mu­tual bond. It lev­er­ages off the skills of Corona­tion’s fixed in­come, prop­erty and even do­mes­tic eq­uity teams when it comes to sec­tors such as com­modi­ties. It hints at offering some kind of ab­so­lute re­turn, but as Stassen ex­plains later, that is more dif­fi­cult to prom­ise in cur­rent global con­di­tions than it is on a do­mes­tic port­fo­lio.

The Al­lan Gray-Or­bis Global Op­ti­mal Fund of Funds, apart from be­ing quite a mouth­ful, takes a very dif­fer­ent ap­proach to pro­vid­ing a cau­tious fund. It is run by Al­lan Gray’s Ber­muda-based sis­ter com­pany Or­bis, and is based on one of its old­est strate­gies.

It does not go through the con­ven­tional path of in­vest­ing in eq­ui­ties, bonds, cash and prop­erty ac­cord­ing to a pre­scribed al­lo­ca­tion, but has a full port­fo­lio of about 90% in eq­ui­ties. To pro­vide re­turns more com­pa­ra­ble with bonds plus a lit­tle bit, it hedges the ma­jor­ity of the eq­uity port­fo­lio us­ing in­dex fu­tures. To get that bit ex­tra, the eq­uity port­fo­lio has to pro­vide some ex­cess re­turn, or al­pha. So it is quite un­cor­re­lated with bonds, and over the past 25 years that Or­bis has been run­ning Op­ti­mal funds it would not have ben­e­fited from the global bond bull mar­ket.

Re­cently, Or­bis in­tro­duced a Global Bal­anced Fund, which fol­lows a more con­ven­tional as­set al­lo­ca­tion route, but it isn’t nec­es­sar­ily the best in the world at con­struct­ing these port­fo­lios. Its Op­ti­mal funds, though, re­main unique and would be a use­ful di­ver­si­fier. It is quite pop­u­lar, with R1,3bn un­der man­age­ment.

Ned­group In­vest­ments Global Cau­tious Fund has been in a sweet spot given its strong fo­cus on the US. It is mod­elled on the highly suc­cess­ful Ber­wyn In­come fund, and maybe it would sit bet­ter in an in­come cat­e­gory than in low eq­uity.

Ned­group’s fund is still quite small, with US$80m be­tween its dol­lar master fund and the rand-based feeder fund. But there is no doubt that there is in­creas­ing anx­i­ety from the pub­lic about their in­vest­ment in global eq­uity or bal­anced funds — switch­ing to a cau­tious fund makes a lot more sense than dis­in­vest­ing from global as­sets al­to­gether. Ned­group’s fund is an ex­cel­lent al­ter­na­tive to a global cash or bond fund.

The San­lam Global Cau­tious team has a pedi­gree from the days when Anet Ah­ern and Deon Gouws ran San­lam Mul­ti­man­ager In­ter­na­tional more than a decade ago. Since then San­lam’s in-house in­vest­ment ca­pac­ity has grown, and a key com­po­nent of the fund is a port­fo­lio run by the Lon­don-based San­lam Four. The mul­ti­man­ager has also folded into the San­lam Four um­brella, not to be con­fused with the San­tam um­brella. Gree­ley’s unit is now called San­lam Four Fund So­lu­tions. Other partly San­lam-owned busi­nesses with man­dates in the line-up are Cen­tre, based in New York in the World Eq­uity Fund, and Cameron Hume in the Global Bond fund.

Third-party man­agers in­clude Al­liance Bern­stein, Black­rock and the Ja­pan-based Diam In­ter­na­tional. The fund is a min­now, with R75m un­der man­age­ment.

Stan­lib Global Bal­anced Cau­tious should also be sub­stan­tially larger, as it has just $24m un­der man­age­ment. It is man­aged by Columbia Thread­nee­dle, other than its prop­erty as­sets, which Stan­lib man­ages. Like many man­agers Thread­nee­dle was caught nap­ping by the rally in bonds this year as it was un­der­weight in the as­set class. But it is still a use­ful spot in which to in­vest over­seas at an ac­cept­able risk.

Switch­ing to a cau­tious fund makes a lot more sense than dis­in­vest­ing from global as­sets al­to­gether

This was orig­i­nally called the Global Lat­i­tude fund, but Corona­tion re­alised that it, with an ab­so­lute re­turn ori­en­ta­tion, had a lot in com­mon with the suc­cess­ful Cap­i­tal Plus fund. It is on the higher end of the low-eq­uity spec­trum and can in­vest up to 50% in growth as­sets, in­clud­ing eq­ui­ties, prop­erty and com­modi­ties. At least half has to be in­vested in in­come as­sets such as bonds and cash.

Fund man­ager Louis Stassen says that in the early days of the port­fo­lio (launched in Novem­ber 2008) it in­vested into other funds by third-party fund man­agers, but as the team got more fa­mil­iar with in­ter­na­tional eq­uity, prop­erty and bond mar­kets this was taken in-house. The fund will have a large over­lap in its eq­uity por­tion with the Corona­tion Global Strate­gic Eq­uity fund.

Global Cap­i­tal Plus still in­vests in other Corona­tion funds as a con­ve­nient way of get­ting ex­po­sure to an as­set class. It has a 6% ex­po­sure to the Corona­tion Global Emerg­ing Mar­kets Fund (Stassen says in this con­ser­va­tive fund it is un­likely ever to be more than 7.5%) and 4% in Global Strate­gic In­come. Like Cap­i­tal Plus, Global Cap­i­tal Plus aims to have no loss over any rolling 12-month pe­riod.

But Stassen says this is harder to achieve with global than do­mes­tic as­sets. “In SA the rand hedges pro­tect port­fo­lios when the do­mes­tic mar­ket is weak; this doesn’t ap­ply in a global port­fo­lio. And do­mes­ti­cally you are get­ting a rea­son­able yield on cash, whether it’s 6% or 7%, which helps con­trib­ute to pos­i­tive re­turns — glob­ally, cash re­turns vir­tu­ally noth­ing.”

The fund some­times uses de­riv­a­tives such as put op­tions to pro­tect as­sets but re­cently it has pre­ferred to re­duce its eq­uity ex­po­sure as a cheaper way to pro­tect the port­fo­lio. Over the past 18 months, the eq­uity po­si­tion has fallen from 37% to 32%, and prop­erty has fallen from 13% to 7%. It holds a po­si­tion in gold bul­lion se­cu­ri­ties equiv­a­lent to 4% of the fund.

It holds a few de­fen­sive cash-gen­er­a­tive shares which will not pro­vide the growth ex­pected in the eq­uity fund but should pro­vide sta­bil­ity for the more con­ser­va­tive in­vestors in Global Cap­i­tal Plus. These in­clude ca­ble TV busi­nesses Char­ter Com­mu­ni­ca­tions and Com­cast as well as brew­ers AB InBev and Heineken. All have a sta­ble earn­ings stream (more im­por­tant to con­ser­va­tive in­vestors than the po­ten­tial cap­i­tal gain).

Stassen says in most cases he finds the US man­age­ment teams more im­pres­sive than their Euro­pean coun­ter­parts. A re­cent ex­cep­tion is the Ger­man auto parts busi­ness Scha­ef­fler, which builds up a pipeline of parts for model launches, a se­cure in­come source.

He says prop­erty is use­ful as a lower cor­re­lated as­set class to eq­ui­ties. Many of the names have SA con­nec­tions. They in­clude UK shop­ping cen­tre owner Intu Prop­er­ties (dual-listed on the JSE) and Cromwell Prop­erty in Aus­tralia, for­merly an as­so­ci­ate of Re­de­fine In­ter­na­tional. The fund took ad­van­tage of the chance to buy UK prop­erty shares at bar­gain prices af­ter the Brexit poll.

Stassen has also in­vested in the shares of five large pri­vate eq­uity groups — KKR, Apollo, Black­stone, Fortress and Car­lyle.

The fund calls it­self a cau­tiously man­aged rand-de­nom­i­nated off­shore port­fo­lio which aims for a di­ver­sity of as­set classes, coun­tries and cur­ren­cies. It has a bench­mark of 30% MSCI World and 70% Bar­clays Cap­i­tal Global Ag­gre­gate In­dex.

The fund will not hold more than 40% in eq­ui­ties, mak­ing it more sta­ble than the tra­di­tional bal­anced fund. Fund man­ager Justin Gree­ley says that by in­vest­ing in a sin­gle fund that di­ver­si­fies across all ma­jor in­ter­na­tional as­set classes, they out­source the de­ci­sion on how much and when to in­vest in as­set classes.

The main build­ing blocks of the fund are San­lam Global Bond (pre­vi­ously San­lam Uni­ver­sal Bond), which makes up 47% of the fund and San­lam World Eq­uity (pre­vi­ously San­lam Uni­ver­sal Eq­uity) which makes up 29%. Both funds are out­sourced to sev­eral man­agers on a mul­ti­man­ager ba­sis.

The eq­uity fund gives global man­dates as well as sep­a­rate Ja­panese eq­uity man­dates. Gree­ley says the fund is cau­tious on the US as the next leg of earn­ings may not out­per­form the world as it has tended to do since 2008. It has been pos­i­tive on Europe since quan­ti­ta­tive eas­ing started in that re­gion last year.

San­lam World Eq­uity is not to be con­fused with San­lam Global Eq­uity, run as a value fund by San­lam’s Lon­don-based sin­gle man­ager San­lam Four. Though it does not form part of the bench­mark, the fund has a 10% prop­erty al­lo­ca­tion through the San­lam Global Prop­erty Fund, for which Al­liance Bern­stein is the sub-ad­viser. There is a di­rect 3% po­si­tion in the Four Sta­ble Growth Fund, which Gree­ley de­scribes as a de­fen­sive, qual­ity-based port­fo­lio, fo­cused on shares which have re­peat­edly beaten ex­pec­ta­tions and 10% of the port­fo­lio is held in cash.

Gree­ley says the fund does not make changes to as­set al­lo­ca­tion month on month. It has been un­der­weight in bonds as it has high con­vic­tion that at the ab­so­lute level of the mar­ket there is po­ten­tial for cap­i­tal loss. The prop­erty ex­po­sure is part of its at­tempt to find yield at more ac­cept­able lev­els than can be found in the sov­er­eign and much of the cor­po­rate bond mar­ket. Whole sec­tors of the mar­ket, such as Ger­man, Swiss and Ja­panese bonds now have neg­a­tive yields.

The fund in­vests into two of the funds run by Al­lan Gray’s sis­ter com­pany Or­bis — the Op­ti­mal SA dol­lar fund and the Op­ti­mal SA euro fund. The only de­ci­sion taken from Cape Town is the ap­por­tion­ment of as­sets into these funds: cur­rently it is 61% in the dol­lar fund and 39% in the euro fund.

The fund is con­sid­ered to be a low-eq­uity fund, but un­like its peers it does not ac­tively in­vest in other as­set classes such as bonds, prop­erty and cash. Within Or­bis this is the role of the Global Bal­anced fund.

Tam­ryn Lamb, head of Or­bis’s SA busi­ness, says the Op­ti­mal funds were set up to pro­vide bond and cash-like re­turns by hedg­ing eq­ui­ties. It re­duces most of the stock mar­ket risk through ex­change-traded de­riv­a­tive fu­tures con­tracts.

In ef­fect, the fund will get a cash re­turn plus what­ever ex­cess re­turn over the in­dex

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