FUND RE­VIEWS

Financial Mail - Investors Monthly - - Contents -

Fairtree Bal­anced Pre­scient Fund, Kag­iso Bal­anced Fund, Ob­sid­ian SCI Bal­anced Fund, Ash­bur­ton Bal­anced Fund, Ned­group In­vest­ments Man­aged Fund

The high-eq­uity unit trust sec­tor is now the bedrock of the unit trust in­dus­try. It has as­sets of R454bn, about a quar­ter of the in­dus­try to­tal, in­clud­ing money market funds, and net in­flows of R37bn over the past 12 months.

It is no sur­prise that this sec­tor is so pop­u­lar. In­vestors sav­ing up for re­tire­ment who do not want to con­struct their own pan­tomime horse of a fund can treat these as a on­estop fund. It is far eas­ier than try­ing to in­vest in sep­a­rate eq­uity, bal­anced, bond, prop­erty and global funds.

And at all times in­vestors need to keep their port­fo­lios within the con­fines of Reg­u­la­tion 28 of the Pen­sion Funds Act, with pre­scribed lim­its on as­set ex­po­sure.

There are more than 200 funds in this sec­tor, yet these flows are far from evenly dis­trib­uted. Most fi­nan­cial ad­vis­ers con­fine their sup­port to old favourites such as the Al­lan Gray, Coro­na­tion, Fo­ord, In­vestec and Pru­den­tial funds.

But there is a much wider uni­verse to ex­plore. This month we look at some of the lesser­known funds. These are not all small man­agers. Ash­bur­ton, for ex­am­ple, has more than R100bn, as well as its sta­tus as the port­fo­lio man­age­ment arm of FirstRand. There is plenty of in­ter­nal com­pe­ti­tion in the greater group. Mo­men­tum alone has SP Reid and Mo­men­tum As­set Man­age­ment, plus there are about a dozen man­agers in which RMI In­vest­ments has a strate­gic hold­ing. Some, such as Per­petua and Truf­fle, are al­ready com­pet­i­tive in the bal­anced space.

But Ash­bur­ton is in the mould of the tra­di­tional as­set manager and even oc­cu­pies premises once held by its pre­de­ces­sor, RMB As­set Man­age­ment. Ash­bur­ton had quite a coup when it ac­quired fixed­in­come spe­cial­ist At­lantic at the end of 2015 with the first cou­ple of fixed in­ter­est, Arno Lawrenz and Heather Jack­son.

In con­trast, Ob­sid­ian Cap­i­tal is a bou­tique with just a few bil­lion un­der man­age­ment. It was orig­i­nally a hedge fund busi­ness and it has de­lib­er­ately stayed small. Founders Richard Simp­son and Royce Long did not want to cre­ate the bu­reau­cratic cul­ture that was so sti­fling in their days at RMB As­set Man­age­ment. There is a lot to be said for a small, fo­cused team, and their bal­anced fund is worth con­sid­er­ing.

Some­where in be­tween is Kag­iso As­set Man­age­ment, with R40bn un­der man­age­ment. It has cer­tainly made a tran­si­tion from its early in­car­na­tion as a BEE joint ven­ture with Coro­na­tion, spe­cialised in in­dex funds. It no longer likes to be seen as a black or even a BEE manager. This can mean it needs to jump through even more hoops, es­pe­cially in the re­tail market. Rather buy the fund on its track record, which was some­what blighted in 2015. As more man­agers move out of the ex­plicit value space into the cosier “qual­ity” com­fort zone, Kag­iso will be one of the last man­agers stand­ing — it still in­vests in plat­inum shares, for ex­am­ple.

Fairtree is de­vel­op­ing from its orig­i­nal base as a hedge into size­able long-only man­agers; only R4bn of its R35bn is in hedge. It has a gen­uine bou­tique model; each of its busi­nesses, such as SA Eq­uity, is self-con­tained. It op­er­ates from both Tyger­val­ley and Stel­len­bosch, and each new bou­tique can op­er­ate where it wants.

Fairtree Bal­anced is a com­bined ef­fort in which four Fairtree man­agers take part, in a type of “fund of funds” model. Stephen Brown used to run the RMB Value fund in its bet­ter years, along­side Mashuda Cas­sim of Cachalia Cap­i­tal. Paul Craw­ford ran an in­no­va­tive fixed-in­come port­fo­lio with Jonathan Ste­wart, first at the now de­funct NIB As­set Man­age­ment and then at RMB. They were best known, though, for their dis­tinc­tive mut­ton­chop side­burns, like some­thing from Vic­to­rian melo­drama.

Ned­group In­vest­ments Man­aged fund now has about a year un­der the man­age­ment of Truf­fle. Its track record be­fore Novem­ber 1 2016, though has been ex­punged. That was the day it started its new life as a do­mes­tic-only bal­anced fund. It has about R2bn un­der man­age­ment, but this should grow, if only be­cause of the strength of Ned­group’s ex­cel­lent dis­tri­bu­tion, headed by the high-oc­tane Shaun An­der­son.

That’s not to dis­count the highly com­pe­tent and co­he­sive Truf­fle team.

Kag­iso still bat­tles for recog­ni­tion in the re­tail space: unit trusts ac­count for just R3bn of its R40bn un­der man­age­ment.

Its black em­pow­er­ment own­er­ship, so use­ful in the gov­ern­ment and paras­tatal mar­kets, is con­sid­ered ir­rel­e­vant among re­tail fi­nan­cial ad­vis­ers. But it is their loss, as Kag­iso has a first-rate in­vest­ment team. None­the­less, it had a poor 2015, which hurt its three- and five-year num­bers.

Fund manager Gavin Wood says the high hold­ing in plat­inum hurt. This has been main­tained, with about 6% of the port­fo­lio in Northam Plat­inum and Zam­bezi Plat­inum pref­er­ence shares and 2% in An­glo Amer­i­can Plat­inum. These busi­nesses are at the low­est end of the cost curve, he says.

Kag­iso has one for­eign share in its port­fo­lio, Pru­den­tial Plc, the UK-based life in­surer. It re­cently an­nounced the merger of its M&G and Pru­den­tial as­set man­age­ment units to cre­ate a £330bn manager. An­other fi­nan­cial hold­ing is lo­cal prop­erty and ca­su­alty in­surer San­tam.

Wood says one of the ad­van­tages of not run­ning a mega-fund is that it can take chunky po­si­tions in smaller shares. In fact, Naspers, Old Mu­tual and Sa­sol are the only mon­ster shares in the top 10. Smaller shares in­clude AECI, Al­tron, Ad­corp, Equites Prop­erty Fund and Ton­gaat Hulett. Not that the strat­egy al­ways works — in the June quar­ter Northam, African Rain­bow Min­er­als and Me­tair de­tracted from per­for­mance.

There is a small hedge against the lo­cal eq­uity ex­po­sure, with 4.3% of the port­fo­lio made up of hedged eq­ui­ties.

Kag­iso has an eclec­tic mix of yield as­sets, with 4.1% in pref­er­ence shares, 3.1% in in­fla­tion-linked bonds, just 4.3% in bonds and 4.2% in cash. There is 8% in lo­cal prop­erty, and 1.4% in for­eign prop­erty.

Wood likes ho­tel spe­cial­ist Hos­pi­tal­ity and Delta, a high-yield stock that spe­cialises in gov­ern­ment of­fices. There is a full 24.4% al­lo­ca­tion to for­eign eq­uity. The fund has also been a big sup­porter of se­lected global prop­erty shares, no­tably Ger­man res­i­den­tial trusts Deutsche Wohnen and Grand City.

Ash­bur­ton, in its present form, is a com­bi­na­tion of Ash­bur­ton (Jersey) and the as­set man­age­ment unit of RMB Pri­vate Clients. It still has a mod­est share of tra­di­tional do­mes­tic bal­anced and eq­uity man­dates, but it has a giant par­ent in the FirstRand Group.

Ash­bur­ton Bal­anced, its flag­ship prod­uct in the Reg­u­la­tion 28-com­pli­ant market, is suited to pen­sion, prov­i­dent and re­tire­ment an­nu­ity funds. So the fund is the main re­tail shop win­dow for the group.

Tony Ca­dle, one of the most ex­pe­ri­enced man­agers in the group, is re­tir­ing shortly and the fund will be man­aged by his col­leagues Ja­son Forss­man and Le­siba Led­waba. Wayne McCur­rie, who now man­ages the Ash­bur­ton Eq­uity fund, plays a lead role in the re­sources re­search.

Forss­man says the fund adopts a top­down process draw­ing on eco­nomic re­search from its sis­ter com­pa­nies RMB, Wes­bank and FNB. It has in­vested strongly in health care, for ex­am­ple, be­cause of the top-down fun­da­men­tals for the sec­tor.

He says that though the fund is only three years old, it works off a 20-year old track record, and the R500m in the fund is in­vested along­side R40bn of seg­re­gated man­dates. The fund is a lit­tle light on for­eign al­lo­ca­tion, which ac­counts for 20.5% , and it also has a mod­est 5.5% in prop­erty, SA eq­uity makes up 47% of the fund, while the fixed in­come is evenly di­vided be­tween bonds and cash, at around 13.5% each.

Within eq­ui­ties al­most a quar­ter is in­vested in fi­nan­cials. The main fo­cus is on RMB Hold­ings and Stan­dard Bank. Ba­sic ma­te­ri­als is a quite heavy 18%, led by BHP Bil­li­ton and An­glo Amer­i­can. though it has sold out of Glen­core.

Ash­bur­ton prefers qual­ity shares, which is why it picks di­ver­si­fied min­ers over sin­gle-com­mod­ity plays and a more re­li­ably prof­itable in­dus­trial, such as Bid­vest, over Nam­pak. Naspers is in­cluded, but Forss­man says there is an in­ter­nal rule to limit in­di­vid­ual hold­ings to 10%, so the me­dia com­pany has about a half weight­ing. Bri­tish Amer­i­can To­bacco is the third-largest share, Richemont the ninth.

Ash­bur­ton is not op­ti­mistic about the lo­cal econ­omy, but it be­lieves that there is some up­side in re­tail­ers such as Wool­worths and Mr Price.

The bond ex­po­sure is kept sim­ple, as Ash­bur­ton in­vests in just four gov­ern­ment bonds. Its in­ter­na­tional eq­ui­ties are mainly through the Ash­bur­ton Global Growth Fund and 40% are now in­vested in the US, 30% in Europe and 12% in Ja­pan.

Forss­man says the fund avoids global sovereign bonds.

The fund was handed over from RECM to Truf­fle about a year ago. Af­ter dis­cus­sions with the reg­u­la­tor it was de­cided to make this the man­age­ment com­pany’s do­mes­tic-only high-eq­uity Reg­u­la­tion 28-com­pli­ant fund from Novem­ber 2016, while Truf­fle has also re­tained a fully dis­cre­tionary bal­anced fund un­der its own name. Each of them has about R2bn un­der man­age­ment.

Truf­fle might have a quirky name, but it has a strong eq­uity team, pri­mar­ily from RMB As­set Man­age­ment — Charles Booth, Iain Power and Saul Miller, as well as Al­lan Gray/Or­bis-trained Jonathan du Toit. The fund can­not be de­scribed as a high-eq­uity port­fo­lio right now but in this cat­e­gory fund man­agers can opt for full flex­i­bil­ity with any­thing from zero to 75% eq­ui­ties.

It is un­usual, though, for it to fall be­low 40% eq­uity. It is at present at a con­ser­va­tive 53% eq­uity, 11% in prop­erty and 23% bonds. There are small al­lo­ca­tions to pref shares and cor­po­rate bonds, rather than gov­ern­ment bonds, with big hold­ings in Bar­clays and San­tam bonds both ma­tur­ing in 2022. It also holds Bar­clays Africa shares, along with Old Mu­tual.

Power says Truf­fle has been a long-suf­fer­ing in­vestor in Old Mu­tual, as it had hoped that man­aged sep­a­ra­tion would be a cat­a­lyst for re-rat­ing.

The fund owns the big four banks, plus In­vestec and Capitec. It is light on re­sources other than Sa­sol and Sappi. It has about a 5% ex­po­sure to Naspers.

The fund has a dou­ble dose of Bri­tish Amer­i­can To­bacco through BAT and Reinet, which to­gether make up al­most 8%.

Other than Stein­hoff and Sho­prite, the re­tail hold­ings are niche busi­nesses such as Italtile and Hold­sport. A share kept from the RECM days is RECM Cal­i­bre, a strong pri­vate eq­uity-style port­fo­lio.

Power says the in­tro­duc­tion of the poorly re­ceived new min­ing char­ter added sig­nif­i­cant un­cer­tainty. And the prospect of fur­ther down­grades has not gone away.

He says Truf­fle has taken over the fund dur­ing one of its weaker 18 months. It was tran­si­tion­ing the fund from RECM’s port­fo­lio start­ing on March 2016. Just a few small legacy po­si­tions re­main, such as Ste­fanutti Stocks. Truf­fle has been pick­ing up sub­or­di­nated bank debt, which has been of­fered at 380 to 600 ba­sis points ahead of Jibar, with Stan­dard Bank re­cently of­fer­ing 565 points ahead of Jibar. The prop­erty picks in­clude rand hedges such as Sir­ius, Schroder Euro­pean Real Es­tate In­vest­ment Trust and In­vestec Aus­tralia.

For a niche busi­ness best known for hedge funds, this bal­anced fund is sur­pris­ingly big, with R1bn un­der man­age­ment. The trig­ger pullers at Ob­sid­ian are Richard Simp­son and Royce Long, who made head­lines when they ran the RMB Strate­gic Op­por­tu­ni­ties fund.

Ob­sid­ian ap­plies an ab­so­lute re­turn mind-set to its long-only funds, and is style neu­tral, with el­e­ments of value, mo­men­tum and growth at a rea­son­able price.

Long says this mind-set doesn’t seem to add much value ev­ery year, but then ev­ery eight or nine years it pays off. The manager’s Multi As­set hedge fund (now avail­able as a re­tail fund) was up 13% in a de­pressed 2008, when the av­er­age lon­gonly bal­anced fund was down 8.8%, while in the side­ways market in 2016, when the av­er­age fund was up 1.3%, the fund was up 9.3%. The Bal­anced fund has not lost money over any rolling 12 months since it was launched in 2013. The fund is 40% in­vested in do­mes­tic eq­ui­ties, 21% in do­mes­tic bonds and 18% in off­shore eq­ui­ties. Simp­son says the house still likes bonds as it ex­pects fall­ing in­fla­tion to sup­port the do­mes­tic econ­omy though a down­grade would re­verse this. But it has re­duced ex­po­sure to do­mes­tic cycli­cal shares such as AECI, Mer­afe and Bar­loworld.

Two of its top 10 shares are based off­shore, re­flect­ing a tilt to­wards emerg­ing mar­kets. They are Mex­i­can Coke dis­trib­u­tor Femsa and the Mex­i­can sub­sidiary of San­tander bank. Turk­cel, the Turk­ish mo­bile op­er­a­tor, has been an­other large hold­ing, though with the re­vers­ing of the falls in these coun­tries’ cur­ren­cies these are no longer cheap. In­fla­tion is fall­ing in emerg­ing mar­kets, so some ex­po­sure has been added to an EM bond in­dex.

Long says the shop has some ex­po­sure to both the UK and eu­ro­zone in se­lected eq­uity and prop­erty coun­ters.

It is not cheap as the to­tal in­vest­ment charges are 2.23%. But this is an ac­tive satel­lite fund, not a closet in­dex tracker.

This fund is like one of those films in which old-timers get to­gether to rob a casino in Las Ve­gas. The fund brings to­gether two old col­leagues from RMB As­set Man­age­ment: Stephen Brown at eq­ui­ties, and Paul Craw­ford at fixed in­come. Their ju­nior col­leagues are Ja­cobus La­cock, in charge of as­set al­lo­ca­tion, and Rade­meyer Ver­maak at global eq­uity.

Fairtree Bal­anced is a new fund, hav­ing launched on April 18, but it brings to­gether quite sub­stan­tial ex­pe­ri­ence. Brown says it makes use of the ex­ist­ing as­set class build­ing blocks. These are mixed to­gether in a way that re­duces risk and is de­signed to be ro­bust in times of large market de­clines.

As well as the con­ven­tional fun­da­men­tal eq­uity port­fo­lio, the fund will also be in­tro­duc­ing smart beta eq­ui­ties as an as­set al­lo­ca­tion op­tion. It will be a high eq­uity fund, com­pli­ant with reg­u­la­tion 28 of the Pen­sion Fund Act. This puts a limit of 75% on eq­ui­ties and 25% on in­ter­na­tional as­sets.

The fund is cur­rently 65% in eq­uity, 26% in fixed in­come and 9% in cash. The eq­uity com­po­si­tion is a hefty 19.5% in ba­sic ma­te­ri­als. For now this is pre­dom­i­nantly in­vested in Sa­sol and the pa­per shares, with a muted 11% in fi­nan­cials.

Brown says the global re­fla­tion­ary out­look has cre­ated pos­i­tive sen­ti­ment around cycli­cal and value-ori­en­tated shares. The out­look for higher global bond yields will have a damp­en­ing ef­fect on the high-val­u­a­tion de­fen­sive names — the so-called “qual­ity” shares. Brown says he favours global cycli­cal com­pa­nies with global earn­ings growth po­ten­tial and com­pa­nies with the abil­ity to gen­er­ate cash sus­tain­ably.

Craw­ford says he ex­pects SA’s in­fla­tion will im­prove over the next 12 months as food prices fall, the cur­rency re­mains strong and the econ­omy weak. But po­lit­i­cal risks and pos­si­ble fur­ther down­grades will keep the Re­serve Bank cau­tious. On the pos­i­tive side, the search for yield and a more “risk on” ap­proach to as­sets from global in­vestors will help.

Though Craw­ford de­scribes the stance as “cau­tious”, there is a sub­stan­tially higher weight­ing to bonds than cash.

One crit­i­cism is that the fact sheet was the least trans­par­ent of the five IM looked at this month. No­tably, it did not in­clude the top 10 eq­uity hold­ings or a break­down be­tween for­eign and do­mes­tic as­sets.

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