Concentration and conviction Stephen Cranston
The traditional unit trust investor would look for a one-stop broad equity fund, and diligently pay monthly by debit order. But that is a very small portion of the market today.
Equity funds are now primarily used as “building blocks” by multimanagers and the more sophisticated financial advisers. These investors often blend three or four equity funds together, preferring funds which represent the top picks of each fund manager.
This month we look at these concentrated general equity funds, or, as their managers prefer to call them, focused, high-conviction funds.
They hold 20 to 25 shares, which is not as aggressive as it sounds: academics argue that a fund is sufficiently diversified with 16 to 18 shares.
A logical way to build an equity portfolio is what’s known as the core and satellite approach, which uses an index fund as the core.
Retail investors who want to invest in just one fund should be wary of choosing these funds, unless they are prepared to keep their proverbial certificates in a drawer for 25 or 30 years. These funds are more volatile than the traditional general equity funds offered by the likes of Investec, Old Mutual and even Allan Gray.
This month we look at five funds from very different houses, all of which can be described as concentrated. The JSE doesn’t have that many investable shares — to be generous, about 120 — so the names will often be the same. With the exception of Bridge, which has it own specific goals, all the funds hold Naspers. Steinhoff is another frequently occurring share. All these funds call themselves quality rather than value, though that also reflects the current fashion in the industry. But the return patterns of these funds can differ significantly.
The most traditional large house in the sample is Sanlam. Its Sim Top Choice deserves to have accumulated more than its R1.4bn under management, as it has comfortably beaten the Swix, particularly over five years. It has been able to leverage the fundamental research of its team of analysts, one of SA’s largest and best. Of course Sanlam is hardly a racy brand and is quite conservative, but worth a look.
At the other end of the scale is the definitely racy Anchor Capital. Its CEO, Peter Armitage, is one of the new breed of flamboyant financial services bosses, a male counterpart to Sygnia’s Magda Wierzycka.
The Anchor BCI Equity Fund had a poor 2016, since its performance will always be contracyclical to the value managers: Anchor avoids sectors such as platinum.
The fund, run by Sean Ashton, is actually more mainstream than you might expect, knowing Anchor’s reputation, though it still has some original perspectives on the market.
ClucasGray is even more of a boutique than Anchor, with roots in stockbroking, but its Equity fund seems to have a more institutionally appropriate flavour. The long experience of fund manager Andrew Vintcent running portfolios at behemoths RMB and Stanlib might explain this.
Do not confuse this fund with the highly eclectic ClucasGray Future Titans fund. Vintcent’s fund is much more of a sleep-at-night portfolio.
Another RMB alumnus, Patrick Mathidi, runs the Aluwani Top 25, which has a similar mandate to its Coronation and Sanlam counterparts. Aluwani has a reassuringly large investment team; most of the members learnt their craft at RMB Asset Management, and potentially could provide the best of both worlds — large manager maturity and small manager flair.
It is the second-largest BEE fund manager after Taquanta.
Bridge Equity Income Growth Fund is somewhat different from the others. Like them it focuses on 25 equities or fewer, but it has an emphasis on dividends, which give it more of a value flavour. It has a much higher exposure to the somewhat bombed-out life sector, for example. Many in the Bridge team, until recently called Grindrod, earned their stripes at Marriott, so it is no accident that there are similarities between this fund and the award-winning Marriott Dividend Income Fund.
All these funds call themselves quality rather than value, though that also reflects the current fashion in the industry. But the return patterns can differ significantly
This fund has morphed several times in its history. It was originally called the RMB Strategic Opportunities Fund and made the reputation of its original fund managers, Richard Simpson and Royce Long, who now run hedge funds at the Obsidian boutique. It then became the RMB Top 25, and after that, briefly, Momentum Top 25, where it was run by head of equities Patrick Mathidi. When he and the bulk of the Momentum direct asset management team left to form Aluwani last year the name was changed again.
It is a domestic only fund, which selects no more than 25 shares from the Top 50. Aluwani has wider equity mandates, and can diversify into smaller shares.
Mathidi’s fund stands out, as it is underweight in the financial sector, a position it took in the lead-up to the downgrade of SA sovereign debt. About 15% of the fund is exposed to three financial shares — Standard Bank, Old Mutual and FirstRand. But Mathidi says the team remains bearish on banks in view of the poor prospects for GDP growth.
An outstanding feature of the fund is the huge 27% exposure to Naspers, higher than even the share’s weighting in the Swix benchmark. But Mathidi says the intention is to not drown out ideas with too many mega holdings. Just two holdings, Steinhoff and BAT, are above 7%; another two, Standard Bank and MTN, are above 5%. The second-largest position is a 7.6% holding in Steinhoff. Mathidi says the possible division of Steinhoff into a European and an African share could be interesting.
There are a few fallen angels in the portfolio, such as MTN (5%) and Aspen Pharmacare (4.5%) plus Anglo American (3.4%), which could have another leg of recovery left to it. Mathidi says he has avoided the hospital shares out of concern for the impact of National Health Insurance on their businesses. The only single-commodity resource share is Sasol (4.9%).
The fund would be a good choice to blend with a deep-value fund. It follows a philosophy of growth at a reasonable price, more commonly known as a quality style.
Fund manager Sean Ashton says he will invest in premium-rated shares where the growth outlook and quality profile warrant it. He will not blindly buy expensive shares, nor will he ignore lower-quality shares with promising short-term prospects.
The fund has outperformed the Swix benchmark since inception. Ashton says he doesn’t ignore the benchmark altogether but he takes quite a few positions against it.
The fund has about 18% of its assets in offshore equity: it recently benefited from a 15% gain in mattress manufacturer Tempur Sealy. Ashton says it is often difficult to find the kind of shares he likes to buy on the JSE at reasonable valuations, but there will always be opportunities on global market.
There are rand hedges on top of this: Naspers is the largest and makes up 12.5% of the fund — below its Swix weighting. But Ashton says its fortunes will turn as he expects its leading e-commerce asset, OLX, could turn profitable in Naspers’s current financial year. He says domestically focused shares cannot be ignored: perhaps there will be a more pro-growth stance by the ANC or a risk-on rally.
The main domestic shares are the financials. Ashton has bought into what might now be considered to be quality businesses when they were out of favour, such as Steinhoff, Aspen Pharmacare and Danish costume jeweller Pandora.
Steinhoff was a good buy in early 2013 at R23/share (it’s now at about R70). Since then the margins have been moving in the right direction. But Steinhoff still has work to do before it can be considered a genuine franchise quality operation.
Aspen has suffered a decline in margins and returns, but Ashton says he has every confidence it can improve. Pandora’s share price collapsed after a disastrous foray into gold jewellery. It reverted to its costume jewellery core but Ashton believes it could make the same mistake again.
Anchor also holds Anglo American. Ashton says it is not a quality company by Anchor’s definition but the price looks attractive given the valuation of the business and the point in the business cycle. He says BHP Billiton, his largest resources holding, is as close as its possible to be to a quality business in the resources game.
There is a strong focus on financials, with FirstRand, Barclays Africa, RMI and Standard Bank all in the top 10.
Reinet, technically a financial though it earns most of its income from tobacco, is also a chunky holding.
The Bridge suite is managed by the team previously known as Grindrod Asset Management, who chose the name to signify a bridge across troubled water (it’s not a reference to the card game).
This fund is the most aggressive of the Payers & Growers portfolios, and in common with that philosophy it has a focus on high-dividend shares. To sweeten the yield it has a 10% exposure to high-yielding listed property. These are not the household names or the rand hedges, but high-yield second and third liners such as Accelerate, Arrowhead, Delta, Equites and Fairvest.
The fund aims for an equal weighting in all its holdings of just over 4%. The top 10 holdings have few of the shares seen in most other concentrated equity portfolios. It has a retail flavour, with holdings in Mr Price, Clicks and Truworths. It likes the solid dividend streams from life assurers, with Liberty, MMI and Old Mutual, though fund manager Ian Anderson says Liberty’s longer-term prospects are being debated.
Many of the large industrial caps are different from those of the standard funds, with Vodacom alongside MTN rather than ignored, and Netcare held in preference to Mediclinic. Bidvest is the largest share; other prominent holdings are Reunert and AVI.
In line with the fund’s income focus, the fact sheet says the one-year forward yield is 5.12% and distributions are expected to grow 7.5%/year over the next three years.
The fund does not invest significantly in resources. Anderson says even a quality, more industrial resource share such as Mondi is still a price taker and cannot provide a reliable stream of dividends. He says not every share has a high dividend yield
on the date of purchase. Bidcorp, for example, has a dividend yield below 2% but it is expected to grow rapidly.
Though the fund has a domestic focus, Bidcorp, BAT, Richemont, MTN, Netcare and Spar all provide some rand-hedge income. But there are no Naspers shares.
Anderson says most clients get the taxfree benefit of the income generated by the fund as they are invested in tax-protected vehicles such as retirement annuities.
He is not dogmatic about dividend payments. He will not automatically sell a share that cuts or holds back a dividend, provided there are good reasons, such as an acquisition or major capital upgrade.
The fund’s launch was prompted by the success of the Coronation Top 20 fund. It is managed by SIM head of equities Patrice Rassou, but in effect it is a greatest hits collection from SIM’s top analysts. It includes most of the chunky holdings in the industrial, financial and resources funds.
Rassou says each share has a story: it is predominantly a bottom-up fund. He says the fund has proved itself in a volatile environment, including the global financial crisis, and much of the time it has thrashed its more famous Coronation counterpart.
The SIM fund goes quite far down the cap scale. It has a 3% holding in Altron and 1% in Dis-Chem, acquired at last year’s listing. It is still more volatile than the classic SIM General Equity fund, but more styleneutral than its value fund.
Naspers is the largest holding at more than 15% of the fund. Andrew Kingston, who runs the SIM Industrial, may be the biggest Naspers bull in SA — it makes up more than a third of his fund.
Rassou says five of the six biggest companies in the world are technology stocks. By holding Naspers, with its investment in Tencent, the fund offers clients exposure to the global technology theme without taking money offshore to buy Facebook shares. British American Tobacco, ever the stable cash cow, makes up 10% of the fund.
There are no mining shares in the fund’s top 10, with just Sasol and Mondi representing resources in the top 10.
As with many of the other concentrated equity funds, Steinhoff is a substantial holding. Rassou says the share came under pressure as the business was just doing too many deals, but it seems to be getting back to basics.
Like many others, he is giving the new MTN management team the benefit of the doubt: it has a 4.3% holding. He says MTN has hit rock bottom, and recovery is all in the hands of the management team.
Rassou is holding on to 7.5% in Old Mutual, though it has been a disappointing performer over the past year. There is a strong bet on banks, with FirstRand, Investec and Standard Bank making up more than 16% of the fund between them.
In the short term these shares have been disappointing, as a widely anticipated rate cut did not take place. Relative to competitors the fund has 20% in resources, including, unusually, some platinum, though the biggest holdings are Sasol and Mondi.
The fund is run by Andrew Vintcent, previously manager of the Stanlib Growth Fund, and Grant Morris. ClucasGray’s core business is private client stockbroking, but it now has a small but fast-growing retail fund manager.
The fund falls into the high-conviction category but it is not confined to large caps. To remain diversified it has a self-imposed limit of 10% into any share. Its holding in Naspers is 8%, for example.
In its top 10 are two companies on the mid-cap/small-cap divide: Reunert and Zeder. Holdsport is another favourite share.
Vintcent says he is concerned about the valuation of certain segments of the market. But the political disruptions and slowdown in SA have created an opportunity to invest in good companies.
One of these is Barclays Africa, which may be the least-loved bank right now, but is still a well-managed business. Yet it is on a p:e of eight and a dividend yield of 7%. It has a strong balance sheet with high impairment provisions. And much of the same can be said for the marginally more popular Standard Bank, which at 7.2% of the fund is an even larger holding. BHP Billiton is also held, as the best-quality business in a highly depressed sector, the diversified miners. The fund has acquired holdings in depressed miners such as Exxaro and African Rainbow Minerals.
Vintcent says the underperformance by local cyclicals of global defensives has been stark. Reunert is a good example. Zeder gives exposure to food producers, which will benefit from falling food inflation leading to margin expansion. Vintcent also likes Clover and RCL Foods.
An unusual holding in the fund is Adbee, which was set up as the vehicle to let BEE investors take a stake in drug manufacturer Adcock Ingram. It also provides an attractive entry into Adcock for the investor.
The fund has a holding in MTN, which Vintcent argues could revive under new management and has the potential to be exciting, with more than 100m clients.
Some shares are bought and sold actively, such as MMI.
The fund is also distinctive in what it doesn’t own: it has no Steinhoff, Bidcorp or Woolworths.