FUND REVIEWS

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