Some sim­ply too big to ig­nore

Financial Mail - Investors Monthly - - Analysis: Industrial Funds - STEPHEN CRANSTON

The in­dus­trial fund sec­tor, with R8bn, is one of the smaller in the SA unit trust in­dus­try, with R350m of net in­flows over the past year.

There has been only one new fund in the sec­tor in re­cent years — the Sa­trix in­dus­trial in­dex tracker. But the sec­tor is larger than the re­sources and fi­nan­cial sec­tors com­bined.

Most of these started life in the theme fund craze of the late 1990s as con­sumer funds. But a lack of choice, dis­putes about definitions and the lack of a cred­i­ble con­sumer in­dus­try in­dex led them to mi­grate to in­dus­trial funds.

To con­fuse ev­ery­one, there is a sub­set of the in­dus­trial sec­tor called in­dus­tri­als, but the in­dus­trial funds tend to be un­der­weight. These in­clude the out-of-favour con­struc­tion shares, none of which has a mar­ket cap above R10.5bn. In fact, the only heavy­weight shares in the in­dus­trial sub­sec­tor are Bid­vest (R51bn), Bar­loworld and KAP (both about R18bn).

But the real ac­tion is in the con­sumer dis­cre­tionary and con­sumer sta­ples sec­tors. The at­trac­tion of a prod­uct fo­cused on in­dus­tri­als is the abil­ity to con­struct a far less cycli­cal prod­uct than any­thing avail­able in a ded­i­cated re­sources fund or even a ded­i­cated fi­nan­cials fund. Over time these funds have of­fered higher growth than gen­eral eq­uity funds. Corona­tion In­dus­trial has given an­nu­alised re­turns of 20% since 1998.

One de­ci­sion would have af­fected re­turns above oth­ers — the weight­ing in Naspers. The share has a R1 tril­lion mar­ket cap. Rather quaintly, it is clas­si­fied un­der “me­dia: cable & satel­lite”, and it is true that the DStv pay-tele­vi­sion busi­ness is still a use­ful cash gen­er­a­tor. But it has be­come a player on the Chinese con­sumer mar­ket through its Ten­cent In­ter­net plat­form. This is best known in the West for its WeChat ser­vice, ri­val to What­sApp. No fund can af­ford not to hold Naspers, as it is more than 20% of the in­dus­trial in­dex, and its mar­ket cap is now more than the big four banks com­bined, plus Old Mu­tual and San­lam. In that sense this sec­tor is dif­fer­ent from gen­eral eq­uity: in­vestors are look­ing for a rea­son­able proxy to the in­dus­trial in­dex, so it doesn’t make sense to leave out the re­ally large shares.

An­other share loved by all five funds is Stein­hoff. It, too, is too big to ig­nore, with a mar­ket cap equal to Stan­dard Bank and Ned­bank com­bined. An­other way to look at it is that it is larger than the en­tire re­tail ap­parel sec­tor, plus Wool­worths.

But it is also a trib­ute to the abil­ity of CE Markus Jooste, the man in black, to per­suade in­vestors to back his strat­egy.

Stein­hoff is much more pop­u­lar in the in­dus­trial funds than sig­nif­i­cantly larger busi­nesses such as Bri­tish Amer­i­can To­bacco, SABMiller, An­heuser-Busch InBev and even that erst­while dar­ling of the con­sumer dis­cre­tionary sec­tor, Richemont. And it has none of the royal aura of the Ru­pert fam­ily busi­nesses, such as Richemont and Rem­gro, nor the decades of busi­ness plau­dits held by brew­eries.

There is lim­ited de­mand for in­dus­trial funds be­cause the way in which fi­nan­cial ad­vis­ers pick funds has changed. At one time the fo­cus was on pick­ing the most fash­ion­able fund for clients, which may have been an In­ter­net or in­tel­lec­tual cap­i­tal fund. Many con­sid­ered sec­tor al­lo­ca­tion as part of their value add.

Now most fi­nan­cial ad­vis­ers pre­fer one-stop funds so they can of­fer clients high-eq­uity bal­anced or low-eq­uity bal­anced so­lu­tions, for ex­am­ple. Just a few as­tute in­vestors have con­tin­ued to in­vest in these funds, as they have been lower risk and higher re­turn than most gen­eral eq­uity funds.

The five funds are from large houses with large re­search ca­pa­bil­i­ties. Be­hind Sarah-Jane Alexan­der and Adrian Zetler at Corona­tion stands Karl Lein­berger, the chief in­vest­ment of­fi­cer who used to run the fund, and who un­doubt­edly gives them the third de­gree be­fore they buy or sell a share.

Theo Botha at Stan­lib feeds off his col­leagues at the eq­uity fran­chise headed by Her­man van Velze. Be­hind An­drew Kingston and Marlo Scholtz at San­lam In­vest­ments is an ex­ten­sive team, driven to work long hours by head of equities Pa­trice Ras­sou.

Brian Pyle at Old Mu­tual In­dus­trial lever­ages off the Old Mu­tual Equities re­search team, and the fund is sim­i­lar to an in­dus­trial carve-out of the house’s flag­ship In­vestors’ Fund.

The one ques­tion mark is Mo­men­tum, which is phas­ing out its di­rect eq­uity busi­ness in favour of a mul­ti­man­ager-fo­cused, goals-based ap­proach. But for now, in the ex­pe­ri­enced hands of Nor­man Mackech­nie, there isn’t much to worry about.

Now most fi­nan­cial ad­vis­ers pre­fer one-stop funds so they can of­fer clients high-eq­uity bal­anced or low-eq­uity bal­anced so­lu­tions

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