Con­cen­tra­tion and con­vic­tion Stephen Cranston

Financial Mail - Investors Monthly - - Analysis: general Equity Funds -

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.

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