Sta­ble in name and by na­ture

Financial Mail - Investors Monthly - - Analysis: Unit Trusts - Stephen Cranston

It proved to be a trou­bling start to the year for lowe­quity multi-as­set funds, which are of­ten sim­ply known as sta­ble funds. And Morn­ingstar sub­scribers will know them as cau­tious al­lo­ca­tion funds.

There was a shock R3bn out­flow from the cat­e­gory in the March quar­ter. And it is un­der­stand­able. The prom­ise from these funds — though of course none of­fers a guar­an­tee — is that you can get most of the sta­bil­ity of a money mar­ket or in­come fund from them. Well-con­structed sta­ble funds have not ex­pe­ri­enced more than a 3% to 4% short-term loss, and if you hold on for 12 months there is al­most no chance of loss.

But the other im­plicit prom­ise is that in­vestors will par­tic­i­pate in some solid re­turns from the stock mar­ket. These funds can have a 40% ex­po­sure to eq­ui­ties as well as a 25% al­lo­ca­tion to in­ter­na­tional as­sets. When mar­kets are strong and in­ter­est rates are high sta­ble funds seem like an ideal mix of sta­bil­ity and high re­turns. Their low-volatil­ity char­ac­ter adds to their ap­peal. It is no ac­ci­dent that the unit trust mar­keters choose sooth­ing names such as “de­fen­sive”, “cau­tious”, “ab­so­lute re­turn” and even “guarded”.

There are 215 funds in the Morn­ingstar data­base for this cat­e­gory, which has R233bn un­der man­age­ment. This rep­re­sents more than 10% of the in­dus­try. The funds are a use­ful in­vest­ment for peo­ple ap­proach­ing re­tire­ment or dur­ing re­tire­ment, much more likely to pre­serve the real value of cap­i­tal than cash or fixed in­come funds.

Sta­ble funds are liv­ing up to their name but not up to the prom­ise of steady growth. Even the top per­form­ers have strug­gled to pro­duce a 3% to 4% re­turn over the past year. Yet it wasn’t so long ago that these funds fre­quently did bet­ter than high eq­uity funds.

Choos­ing a sta­ble fund can be con­fus­ing. Some of the funds of­fered by fi­nan­cial ad­vis­ers, such as NFB Cau­tious, are strong con­tenders, and oth­ers, from des­ig­nated fund man­agers such An­a­lyt­ics Cau­tious, also have a strong rep­u­ta­tion.

But un­less you have an ad­viser tied in to their dis­tri­bu­tion net­work, you are likely to end up in one of the off-theshelf prod­ucts. The two dom­i­nant funds in the sec­tor are Al­lan Gray Sta­ble Fund and Corona­tion Bal­anced De­fen­sive, which are both fea­tured. No­body knows how they hit on the 40% limit to eq­ui­ties, but it is now the of­fi­cial ceil­ing im­posed by the As­so­ci­a­tion for Sav­ings and In­vest­ments SA on the low eq­uity cat­e­gory.

It took sev­eral years for any se­ri­ous com­pe­ti­tion to the fund, but the most cred­i­ble turned out to be Corona­tion Bal­anced De­fen­sive. At the very least its fund man­ager, Charles de Kock, looks the part of some­one you can trust with your money. Af­ter all, his fa­ther was gover­nor of the Re­serve Bank.

The other pre­tender, which has not got the at­ten­tion many ex­pected, is In­vestec Cau­tious Man­aged, run by In­vestec’s so­called “qual­ity” team of Sumesh Chetty and Clyde Ros­souw.

It is con­fus­ing try­ing to trawl through the fund ranges of life com­pa­nies such as Old Mutual, San­lam and Stan­lib, which have any­thing from six to 18 funds in this cat­e­gory. Rather find qual­ity in niches. The 27four Sta­ble Fund of Funds has a cup­board full of tro­phies — which can’t just be good luck. It has been a pi­o­neer sup­porter of some mid­sized man­agers, such as Bateleur and Vi­sio, which has worked out well for clients.

Sas­fin has been ne­glected for too long by the public in spite of some ex­cel­lent per­for­mance. In­vestors in the Sas­fin Sta­ble Fund will have the chance to get in at the ground floor as Er­rol Shear moves in. He is one of the most ex­pe­ri­enced fund man­agers in SA, with an ap­proach of value tem­pered with scep­ti­cism.

And as a bit of an out­lier, we will be look­ing at the An­chor Di­ver­si­fied Sta­ble Fund. Call it An­chor Life — about half the fund is in An­chor prod­ucts, the rest in a blend of ex­ter­nal ac­tive and in­dex funds.

If An­chor is too racy for you, then get some com­fort that the funds are not picked by any­one in the An­chor hi­er­ar­chy but by David Bacher from Co­rion, a hard-core fund of funds man from his days at In­vest­ment So­lu­tions, Caveo and Brait.

When mar­kets are strong and in­ter­est rates are high sta­ble funds seem like an ideal mix of sta­bil­ity and high re­turns. Their low-volatil­ity char­ac­ter adds to their ap­peal

The fund has won mul­ti­ple awards from Morn­ingstar and from the Rag­ing Bulls pro­mot­ers. Though it is a fund of funds, its to­tal ex­pense ra­tio of 1,2% is be­low those of many sin­gle man­agers.

Fund man­ager Nadir Thokan says the pri­mary aims of the port­fo­lio are cap­i­tal pro­tec­tion and in­come gen­er­a­tion.

The firm has been proac­tive at pro­mot­ing de­vel­op­ing man­agers, black and white. It en­cour­aged Kevin Wil­liams at Bateleur to set up a long-only eq­uity fund. He is one of the key eq­uity man­agers in the fund along­side Kag­iso, Vi­sio (through the BCI Gen­eral Eq­uity Fund) and the San­lam break­away Denker, which runs a ver­sion of the San­lam Value fund in the 27four line-up.

Thokan says larger firms, with greater ac­cess to is­suance and economies of scale , are of­ten more ap­pro­pri­ate as bond man­agers. Corona­tion is the ma­jor bond and cash man­ager, along with the as­set-al­lo­cat­ing Ned­group Flex­i­ble In­come Fund.

To get a good spread of man­agers, global funds are pooled into the 27four Global Eq­uity Fund of Funds. Thokan says this has a value bias, with hold­ings such as Vul­can Value, Bran­des Global Eq­ui­ties and the Aca­dian Global Man­aged Volatil­ity Fund, a quants-based fund. Thokan says Lazard Global In­fra­struc­ture Fund is also a value play, given the low prices of many shares in the sec­tor.

To coun­ter­act the value bias, there are in­vest­ments as well with man­agers who fol­low a qual­ity ap­proach. There is the Mor­gan Stan­ley Global Qual­ity Fund, and out­side the fund of funds there is a di­rect hold­ing in the In­vestec Global Fran­chise Fund. It also in­vests with Arde­vora, a quirky Lon­don-based bou­tique which has a Mo­men­tum bias. Off­shore eq­uity makes up 18% of the fund and 20% are in SA eq­ui­ties. About 9% of the as­sets are in lo­cal and global property as­sets; Ses­fik­ile runs the lo­cal ones, Franklin Templeton the global.

Thokan says global property has been at­trac­tive, as real es­tate in­vest­ment trusts have of­ten traded on 3% yield spread against bonds. The Sta­ble fund is sold to in­sti­tu­tional clients as the in­fla­tion plus 3% fund, the mid­dle of the road.

The Bal­anced fund is in­fla­tion plus 5% while the High Eq­uity strat­egy of in­fla­tion plus 7% is not avail­able as a unit trust. 27four Sta­ble can be bought in a tax-free sav­ings ac­count wrap­per. It qual­i­fies, as it is has no un­der­ly­ing per­for­mance fees.

With R44bn un­der man­age­ment this is still the gi­ant of the sec­tor, though over time the rise of the Ned­group In­vest­ments and Corona­tion funds have given it some com­pe­ti­tion. Yet over the past three years it has grown from R30bn.

Al­lan Gray in­vented this cat­e­gory when low risk meant an in­come or a bond fund. Since in­cep­tion in July 2000 there has been a 12.6% re­turn, com­pared with 9.1% for the bench­mark. Cu­mu­la­tively that is al­most dou­ble the re­turn. The Al­lan Gray phi­los­o­phy hasn’t changed, though with so much im­i­ta­tion it doesn’t seem so un­usual any­more. It seeks to buy shares when they can be had at a sig­nif­i­cant dis­count due to their dis­mal short-term prospects.

Fund man­ager Mark Dun­ley-Owen says that, un­like the eq­uity fund, the sta­ble fund does not have to keep to its max­i­mum eq­uity weight­ing at all times. It has just a 34% net ex­po­sure to eq­ui­ties at present. Its in­ter­na­tional ex­po­sure is less than 11% on a net ba­sis with a fur­ther 10% hedged. This is be­cause the al­lo­ca­tion is di­vided be­tween the Or­bis Global Bal­anced Fund, a tra­di­tional multi-as­set port­fo­lio, and Or­bis Op­ti­mal, which hedges out the bulk of the mar­ket risk. Dun­ley-Owen says the for­eign por­tion of the fund was re­duced from 27% to 25%, pri­mar­ily to meet the re­quire­ment of Reg­u­la­tion 28 of the Pen­sion Fund Act.

Do­mes­ti­cally, Dun­ley-Owen says, many of the shares will be the same as those in the eq­uity and bal­anced funds. This is the case with the top six shares, though the or­der varies slightly: Sa­sol, Bri­tish Amer­i­can Tobacco, Stan­dard Bank, Old Mutual, Rem­gro and Naspers. But fur­ther down the ta­ble there is a bias to­wards value shares with the prospect of good div­i­dends.

Bar­clays Africa and Lib­erty are in the Sta­ble fund top 10, In­vestec and Rand Mer­chant In­vest­ment are ab­sent. Dun­leyOwen says he is not adding to the Naspers po­si­tion but he finds the un­der­ly­ing as­sets of Rem­gro at­trac­tive.

The bond and cash ex­po­sure in the fund is al­most en­tirely fo­cused on SA and there is about a 5% ex­po­sure to for­eign bonds and cash, of which al­most 2% is in Africa.

The fund is a hy­brid fund of funds de­signed for in­vestors who want ex­po­sure to the ca­pa­bil­i­ties of An­chor Cap­i­tal, a listed bou­tique fund man­ager, but also want it blended and di­ver­si­fied with other of­fer­ings.

To en­sure a fair out­come An­chor does not do the blend­ing; in­stead, it has hired David Bacher from Co­rion. This is the old Brait fund of hedge funds busi­ness. Bacher pre­vi­ously worked for In­vest­ment So­lu­tions and Caveo, so pick­ing funds is in the blood. He is the son of former cricket tsar Ali Bacher, and he also has a com­pet­i­tive streak. He is even com­pet­ing against him­self, as there is a Co­rion-branded fund in the same cat­e­gory.

There are two main ex­po­sures to An­chor. One, via An­chor Flex­i­ble In­come, makes up al­most a third of the fund, and a fur­ther 8% is in the An­chor BCI Eq­uity Fund. Bacher says to smooth out re­turns, given the high track­ing er­ror of the An­chor funds, there is a sub­stan­tial ex­po­sure to in­dex funds, with 9% in the Gin­sGlobal Global Eq­uity Fund, run by former Bar­clays SA boss An­thony Gins­berg, as well as Stan­lib’s Alsi 40 tracker (5%) and its All Bond Tracker (4%). It also has a to­ken po­si­tion in the iShares Emerg­ing Mar­kets fund.

But there are also ac­tive funds that com­ple­ment the An­chor ap­proach. Al­most 19% of the fund is held in the Ned­group Flex­i­ble In­come Fund, an R11.5bn fund run by Rashaad Tayob at Abax. It is con­ser­va­tive right now, with a sim­i­lar duration to a money mar­ket fund. Bacher also in­vests in the San­lam Se­lect Bond Plus Fund (8%), which is not run by San­lam’s in-house team but by Ma­trix Fund Man­agers.

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