FUND RE­VIEWS

Coro­na­tion Global Eq­uity Se­lect, In­vestec World­wide Eq­uity Fund, Ned­group In­vest­ments Global Eq­uity, Old Mu­tual Global Eq­uity, Sim Global Best Ideas

Financial Mail - Investors Monthly - - Contents - Stephen Cranston

The global eq­uity sec­tor recently cel­e­brated reach­ing the land­mark of R100bn un­der man­age­ment. It might seem small com­pared with the R358bn in do­mes­tic eq­uity. But an­other way of look­ing at it is that 60% of the as­sets held in global funds are in the eq­uity sec­tor, com­pared with 20% of do­mes­tic funds’ as­sets.

There cer­tainly hasn’t been much to rec­om­mend in­vest­ing in for­eign fixed in­come, which has just 1% of the global sec­tor. Nor have multi-as­set funds quite had the suc­cess they have had do­mes­ti­cally, ac­count­ing for 35% of global as­sets and 51% of do­mes­tic.

There has been re­newed in­ter­est in global funds, per­versely, since the re­cent de­cline in the rand. The cur­rency has a lit­tle less buy­ing power than it did in the first quar­ter, though ad­mit­tedly still more than 12 months ago. But if there is some panic buy­ing it is likely to be in the fully ex­ter­nalised for­eign col­lec­tive in­vest­ment schemes.

When you sell a rand­de­nom­i­nated fund you end up with a pile of rands, mak­ing it hard to buy that dream cot­tage in Tus­cany. But the rand-based funds are much more prac­ti­cal for most in­vestors. There is no need to ask for ex­change con­trol per­mis­sion (which is likely to get harder un­der fi­nance min­is­ter Malusi Gi­gaba) and the funds can be held on the same in­vest­ment plat­form as do­mes­tic unit trusts.

The range of choices is much nar­rower for rand-based funds than for for­eign col­lec­tive in­vest­ment schemes. But the fund write-ups in­di­cate that there is still plenty of qual­ity out there, run by hard­work­ing, well-in­formed teams.

Back in 1995, when ex­change con­trols were first re­laxed, it was thought that it did not make sense to run a port­fo­lio from ei­ther Cape Town or Jo­han­nes­burg, or even Pretoria. The eas­i­est tran­si­tion of all was for Al­lan Gray. It had com­mon share­hold­ers with Or­bis in Ber­muda, and the Ber­mu­dian out­fit had al­ready built up a strong track record. Or­bis has a strong share of the mar­ket and is the premier name in the sec­tor with fi­nan­cial ad­vis­ers. Old Mu­tual al­ready had a unit trust busi­ness in the UK, and un­der Ian Hes­lop, a plain speak­ing Scot, now has the best long-term track record in the sec­tor.

The other group with a Lon­don-based as­set man­ager is In­vestec, which ac­quired UK man­ager Guin­ness Flight in 1998. In­vestec As­set Man­age­ment in the UK has been ex­cel­lent as a com­mer­cial en­ter­prise, but the re­sults of its World­wide fund is rather mid­dle of the road.

Coro­na­tion took a more in­trigu­ing path. Un­der one of the founders, Tony Gib­son, it set up a fund-of-fund busi­ness, ini­tially fo­cused on hedge funds but later ex­panded to long-only funds. This started in Dublin, but once it be­came clear there was too much fun and not enough work it was re­lo­cated to Lon­don. It has moved from a fund-of-funds model to a di­rect in-house model. But un­like Old Mu­tual, In­vestec and Al­lan Gray, it opted to house the team in Cape Town, not Lon­don or Bos­ton. It was not the first, as PSG As­set Man­age­ment runs its en­tire global port­fo­lio from Cape Town.

Since the millennium there has been a change in in­vestor per­cep­tion: it no longer mat­ters where the team sits.

One top global team sits in Des Moines, Iowa — surely much less of a fi­nan­cial hub than Jo­han­nes­burg and maybe even Cape Town.

Coro­na­tion has rolled out its in­ter­na­tional funds quite slowly, only mar­ket­ing them ag­gres­sively to the pub­lic af­ter five years. Coro­na­tion Global Eq­uity Se­lect hasn’t reached the five-year land­mark, so IM was priv­i­leged to get ac­cess early. The fund is def­i­nitely in the bench­mark-ag­nos­tic camp.

An­other high-ag­nos­tic fund is the Ned­group Global Eq­uity Fund. Ned­group scoured the globe for the right fit. It is Ver­i­tas, founded by the leg­endary UK man­ager Stewart New­ton. It isn’t a fund for the faint­hearted; 13% of it is in­vested in the top two shares, both in the US ca­ble busi­ness.

But Ned­group can in­un­date in­vestors with stats to show that it is ac­tu­ally quite a con­ser­va­tive fund with a re­al­re­turn bent. It cer­tainly looks con­ser­va­tive com­pared with the orig­i­nal SIM Best Ideas fund, which used to take big bets on Turk­ish banks and Chi­nese mo­tor man­u­fac­tur­ers.

But you can come out from un­der the ta­ble. With the switch from the mav­er­ick Kokkie Kooy­man to the much more main­stream Douw Steenekamp it is a fund that can be con­sid­ered.

There has been re­newed in­ter­est in global funds since the de­cline in the rand

Coro­na­tion has his­tor­i­cally fo­cused on global as­sets through funds of funds. More recently it has been rolling out di­rect prod­ucts, start­ing with the low-risk Global Cap­i­tal Plus, and the bal­anced Global Man­aged fund.

The orig­i­nal dol­lar-de­nom­i­nated Global Eq­uity Se­lect fund was launched only in Jan­uary 2015, and the rand-based feeder fund even later. The fund is run by Louis Stassen, as­sisted by ac­tu­ary Neil Padoa. The en­tire global re­search team op­er­ates out of Coro­na­tion’s Cape Town of­fice.

It is bench­marked off MSCI All Coun­tries which in­cludes emerg­ing mar­kets (EM). In fact, un­like most global eq­uity funds it can in­vest up to 30% into EM. With hind­sight it had too large a weight­ing in EM, es­pe­cially in Brazil and Rus­sia, which hit the first year’s per­for­mance. But in calendar 2016 its US dol­lar re­turn of 11.6% was 3.7% ahead of the bench­mark. And the fund hit ra­tio (win­ners di­vided by losers) has in­creased up to 1.57.

Padoa says a num­ber of less ob­vi­ous hold­ings con­trib­uted to the up­lift. They in­cluded pri­vate eq­uity (PE) groups KKR, Apollo and Black­stone. An­other PE hold­ing, Fortress, was bought out by the Ja­panese SoftBank at a 40% pre­mium. Padoa says PE firms have a high-qual­ity busi­ness model as they can ef­fec­tively lock in clients for 10 years. Coro­na­tion, by con­trast, can the­o­ret­i­cally lose all its clients overnight.

Other win­ners have in­cluded Tem­pur Sealy, even though it is fight­ing with Stein­hoff’s Mat­tress Firm in the US. An­other is Amer­i­can Ex­press, along with an­other iconic US busi­ness, Har­ley-David­son.

One re­gret, says Stassen, is that the fund was ma­te­ri­ally un­der­weight in US banks, the best per­form­ers of the post-Trump boom. An­other per­haps less glam­orous US busi­ness in the fund’s top 10 is Char­ter Com­mu­ni­ca­tions, which has a large share of the ca­ble busi­ness, giv­ing it a nat­u­ral mo­nop­oly in many parts of the US.

Coro­na­tion has ben­e­fited from the bounce-back of EM shares, with help from its hold­ing in Kro­ton and Está­cio (the Curro and Ad­vTech of Brazil) and the Chi­nese gaming share NetEase. But the Chi­nese e-com­merce op­er­a­tor JD.com de­tracted.

Padoa says the big­gest change since Oc­to­ber has been into the large con­sumer shares. They were of­ten seen as an al­ter­na­tive to bonds and as bond yields in­crease these shares were sold down. These de­fen­sives now make up 8% of the fund and in­clude Bri­tish Amer­i­can To­bacco, AB InBev, Unilever and Heineken. The fund has put in op­tions to pro­tect the fund against un­fore­seen hic­cups. Stassen has a long track record of us­ing de­riv­a­tives suc­cess­fully to pro­tect cap­i­tal. With his con­ser­va­tive genes he could not re­sist tak­ing a punt on Scha­ef­fler, a solid Ger­man in­dus­trial and au­to­mo­tive com­po­nents busi­ness trad­ing on a p:e of about seven. he fund is now 22 years old. At times it has been run on lit­tle more than the smell of an oil rag by one of In­vestec’s bright­est stars, Gail Daniel, but for at least the past 15 years it has been by the 4Fac­tor team (trade­marked).

This has noth­ing to do with sun­screen but is de­scribed as unique. Most peo­ple who have been ex­posed to global eq­uity prod­ucts would have seen man­agers re­fer to “dis­ci­plined idea gen­er­a­tion”, “qual­i­ta­tive eval­u­a­tion” “rig­or­ous de­ci­sion-mak­ing” and “ac­tive risk/re­ward man­age­ment”. Since in­vest­ment, this fund has given ex­actly the same re­turn as the bench­mark of 7.3%, though it is ma­te­ri­ally ahead of the 6.5% from the peer group.

World­wide, it is run by James Hand — when his du­ties as chief in­vest­ment of­fi­cer al­low — and John Holmes. Both are based in the In­vestec of­fices in Lon­don.

Holmes says the fund has a flex­i­ble in­vest­ment style that is not de­pen­dent on spe­cific mar­ket con­di­tions. The fo­cus is pre­dom­i­nantly on in­di­vid­ual stock se­lec­tion. He says the fac­tor mix does not al­ways work to the ad­van­tage of the fund and its clients. Recently three of its fac­tors — strat­egy, earn­ings and tech­ni­cal —were all weak, with just one — value — re­bound­ing. Right now there are more di­ver­si­fied re­turns. In to­tal there are high-scor­ing op­por­tu­ni­ties in cheaper cycli­cal sec­tors such as fi­nan­cials.

The fund is un­usual as it does not hold any of the huge IT busi­nesses in its top 10. The clos­est it comes is Tai­wan Semi­con­duc­tors, and there are un­usual shares such as Aflac, a life as­surer from Ohio. The near­est it comes to main­stream is shares such as Rio Tinto, John­son & John­son and Pfizer. Rio and Dow Chem­i­cals have been solid con­trib­u­tors in re­cent months.

The rally in US banks helped through the hold­ings in Cit­i­group and SunTrust. Recently it has been a buyer of the Sin­ga­porean bank DBS Hold­ings and a seller of French IT con­sul­tancy Capgem­ini. his fund uses a dif­fer­ent busi­ness model from its com­peti­tor. It chooses a range of man­agers for its best of breed ap­proach, even giv­ing the dif­fer­ent man­dates for its in­ter­na­tional funds to dif­fer­ent man­agers.

As Anil Jug­mo­han from the Ned­group fund se­lec­tion team puts it, the phi­los­o­phy is that cer­tain char­ac­ter­is­tics help longterm out­per­for­mance. They in­clude an owner-man­aged ap­proach, an align­ment of in­ter­ests, in­clud­ing co-in­vest­ment as well as spe­cial­i­sa­tion and clar­ity on where it has an edge.

The man­ager of global eq­uity fund Ver­i­tas looks at qual­ity shares but with a strict value dis­ci­pline. It de­scribes it­self as a real re­turn man­ager, though in any fully in­vested eq­uity fund these can only re­al­is­ti­cally be promised in the medium term.

Ver­i­tas tends to lag be­hind the peer group in strongly up­ward-trad­ing mar­kets but pro­tects cap­i­tal bet­ter dur­ing draw­downs. It has out­per­formed the peer group by al­most 4%/year since 2001.

Rather like a mag­pie, the fund seems to have drawn items from the other funds dis­cussed here. The two largest shares, which make up more than 13% of the port­fo­lio be­tween them, are US ca­ble busi­nesses Char­ter Com­mu­ni­ca­tions and Com­cast.

This is fol­lowed by health sec­tor groups, in­surer Unit­edHealth and Al­ler­gan, maker of Bo­tox. It holds a new-age IT busi­ness Al­pha­bet (Google) as well as old-school Or­a­cle Group. It likes the aero­space in­dus­try, own­ing Air­bus and air­craft en­gine man­u­fac­turer Safran.

Lead fund man­ager An­drew Headley says a share that has recently been added to the port­fo­lio has been Check Point soft­ware, which coun­ter­at­tacks cyber-at­tacks against net­works. He says it has a strong prod­uct of­fer­ing ver­i­fied in­de­pen­dently and once it is in place it is hard to change ven­dors as net­work poli­cies are cus­tomised.

Cyber threats have also in­creased in sever­ity and Check Point has the widest suite of cred­i­ble prod­ucts in the mar­ket.

With al­most 500 shares, this fund might look like a closet in­dex tracker. Fund man­ager Ian Hes­lop says that in fact it is a high-con­vic­tion port­fo­lio. The ac­tive share, or per­for­mance de­rived from its ac­tive bets, is about 80% — and 90% of this is from stock se­lec­tion.

Hes­lop says there is no macro fore­cast­ing. In­stead, the port­fo­lio is driven by six fac­tors: dy­namic val­u­a­tion — value, dy­namic val­u­a­tion — qual­ity, sus­tain­able growth, an­a­lyst sen­ti­ment, com­pany man­age­ment and mar­ket dy­nam­ics. This pro- vides a di­ver­si­fied source of al­pha (ex­cess re­turn). But Hes­lop in­sists this is not a smart beta fund. The fac­tors are di­alled up and down. In fact, value and growth have both had the low­est rat­ing over­all since the fund was started in 1994, and mar­ket dy­nam­ics and an­a­lyst sen­ti­ment have had the high­est rat­ing.

Hes­lop says the fund of­fers a smoother ride than a con­cen­trated 40-share port­fo­lio and can act as a great di­ver­si­fier. “We reckon to get 55% of our picks right. Things can go badly if we get just a dozen shares badly wrong in a con­cen­trated fund.”

The op­por­tu­nity set is not con­fined to the 1,600 stocks in the MSCI World In­dex (the fund does not in­vest in emerg­ing mar­ket shares now) as it looks at 4,500 shares.

The only lim­i­ta­tion is that no share may have a weight­ing of more than 0.5% above or be­low its in­dex weight­ing. So shares out­side the in­dex have a max­i­mum weight­ing of 0.5%.

Chevron Corp and Banco San­tander Cen­tral are two shares that are not mega­caps in the top 10, but the fund is obliged to hold giants such as Ap­ple, Al­pha­bet (Google) and Mi­crosoft by virtue of their size. Other shares in­clude Nvidia Corp, which pro­vides the “brains” for ro­bots and self-driv­ing cars, the bio­phar­ma­ceu­ti­cal busi­ness Am­gen as well as a cou­ple of ba­sic con­sumer goods busi­nesses, Philip Mor­ris In­ter­na­tional and Wal­mart. The largest over­weight po­si­tion is in Bank of Amer­ica, which, at 1.3%, is dou­ble its in­dex weight­ing.

The fund has a highly sys­tem­atic process. It doesn’t be­lieve there is value in vis­it­ing com­pany man­age­ment, but many of the in­puts into process are fun­da­men­tal, such as earn­ings growth.

Hes­lop says the down­side risk is re­duced by cut­ting out un­wanted shares and man­ag­ing volatil­ity.

This con­trol process in­cludes a 4% share turnover ev­ery week.

SIM Global Best Ideas used to qual­ify as the most bizarre and idio­syn­cratic global eq­uity fund on the mar­ket. It was run by fi­nan­cial fund man­ager Kokkie Kooy­man and of­ten had a clear bias to emerg­ing-mar­ket mid-caps. But over the past three years it has started to look like a more con­ven­tional global eq­uity fund.

Kooy­man’s co-man­ager, Douw Steenekamp, has brought more dis­ci­pline into the port­fo­lio. It has, un­for­tu­nately, made the fund some­what duller.

The largest share — once Great Wall Mo­tors of China — is now Mi­crosoft. Steenekamp likes old-line IT com­pa­nies that are no longer con­sid­ered glam­orous, such as the house that Bill Gates built, Cisco and Or­a­cle. He says ev­ery one of the top 200 US com­pa­nies is an Or­a­cle client. Of the newer-gen­er­a­tion tech busi­nesses, only Ap­ple ap­pears in the top 10.

An­other sub­theme is med­i­cal tech­nol­ogy. The fund is a hefty in­vestor in Medtronic, best known for the pace­maker, and med­i­cal prod­ucts spe­cial­ist CR Bard, which is a leader in the can­cer and re­nal sec­tor.

Though in the early days more than half of the shares in this fund were fi­nan­cials, now just JPMor­gan makes it to the top 10. But the smaller hold­ings in Bank of Amer­ica, Axa and Cit­i­group all con­trib­uted.

The fund now has a fi­nan­cials sub­fund di­rectly man­aged by Kooy­man that has 21 shares with a 5% ex­po­sure to emerg­ing mar­ket fi­nan­cials. One of the more con­tro­ver­sial shares is US in­surer AIG. It’s had trou­bles since the global fi­nan­cial cri­sis, but Steenekamp won­ders how low it can go at its cur­rent level of 0.7 times book value.

There have been some good con­trib­u­tors out­side fi­nan­cials, such as Royal Dutch Shell, John Deere and Time Warner.

Steenekamp in­vests with a long-term view, so he has had to put up with some short-term (poor) earn­ings sur­prises from hold­ings such as Medtronic and Nielsen, as well as from IG Group.

Over­all the fund’s port­fo­lio trades at a dis­count to the over­all mar­ket, with a for­ward p:e of 15.1 against the mar­ket’s 17.4%. The re­turn on eq­uity is con­sid­er­ably bet­ter, at 19% against 15%.

Graphic: RUBY-GAY MARTIN Source: IRESS

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