Absa Global Value Feeder Fund, Dodge & Cox Worldwide Global Stock Fund, Ashburton Global Leaders Equity Fund, Dimensional Global Core Equity Fund, Contrarius Global Equity
It is never a bad time to top up your allocation to global equities. Even when we are at the edge of a cliff, as we were in 2000 and 2008, markets soon recover.
And it is always a better time to invest when the rand is relatively strong and, let’s face it, the alternatives of bonds and cash globally have little to offer — and global property seems increasingly unpredictable.
There was a time when the Financial Services Board (now called the Financial Sector Conduct Authority) made it extremely tough for international players to bring their product into the market. This was good news for incumbents such as Investec, Stanlib, Sanlam and Allan Gray Orbis, but not for the public.
But more recently a wide range of funds, with entirely different strategies, has become available to retail investors. In some cases investors don’t even need to source their own foreign exchange as they can buy these funds through rand-denominated feeder funds.
Schroders has two of these available through the Absa management company — its Global Value and Global Core fund, each with a different investment philosophy.
Some funds have been created with the SA investor in mind — Ashburton Global Leaders is modelled on domestic funds such as Coronation Top 20 and Aluwani Top 25. It is the most concentrated fund of the five that are featured. Clients might get comfort from its being managed by a unit of the FirstRand Group, though it operates from the somewhat unlikely financial hub of the island of Jersey (not New Jer- sey, where many Franklin Templeton funds are managed).
The other extreme is the Dimensional Global Core Fund. Because it is a believer in the size premium — meaning that small caps outperform over time — it has 7,500 shares (this is not a typo) when the MSCI World Index has 2,500.
Dimensional is a live experiment of the theories of just about all the recent winners of the Nobel prize for economics, particularly Eugene Fama, Kenneth French and Robert Mer- ton. It is represented locally by Colourfield, a group of actuaries with intellectual cravings.
Satrix used to claim that it would let you buy the market, but Dimensional almost literally gives you the chance to buy the world. And it is not just the firm and its promoters who like Dimensional; many betterqualified intermediaries also do.
One of the low-profile managers (from an SA point of view) is Dodge & Cox, which became well known only when it started to feature on Glacier’s road shows. Yet it is undoubtedly a gem that has proved that a fundamental active portfolio can beat an index fund: over five years it is 2.2%/year ahead of the MSCI World Index.
It even adopts the increasingly unfashionable team-based approach — a committee of eight runs the fund. And it operates from just one office in San Francisco. It might not be the most convenient spot from which to manage a global fund, but if Coronation and PSG can run one successfully from Cape Town, they can do it from Northern California.
You might get a ringside seat at the wedding of Harry and Meghan Markle if you buy some units in Contrarius Global Equity. Its offices are in Windsor, opposite the castle. It is run by Stephen Mildenhall, one of the most brilliant fund managers to come out of SA over the past 20 years.
Many might see this as some kind of bootlegged version of Orbis Global Equity, as Mildenhall was tutored by Orbis founder Allan Gray, but the portfolio composition is quite different. It isn’t a fund for the fainthearted, and makes Orbis look a little bland.
“In some cases investors don’t even need to source their own foreign exchange as they can buy these funds through rand-denominated feeder funds
“Dodge & Cox even adopts the unfashionable team-based approach — a committee of eight runs the fund. And it operates from just one office in San Francisco
This fund feeds into the Schroder Global Recovery fund. It complements the Global Core Equity fund, which goes into a more diversified fund.
The Recovery team are quite proud to be orthodox value managers. They even put a questionnaire on their website to show they are much purer value managers than most of their competitors.
Lead fund manager Kevin Murphy says it is not just a question of buying low p:e shares. In any case, the key metric is the cyclically adjusted p:e developed by Robert Shiller, which looks at the average p:e over 10 years.
“We did well after the crises in 2000 and 2008 when the market did not go in the direction the consensus expected,” Murphy says.
The “Recovery” part of the name, he says, does not refer to economic recovery; it primarily means investing in businesses that can engineer their own recoveries through improved management teams.
Schroders certainly can’t be called a closet index hugger. It has almost a double weighting in financials, primarily British banks such as Standard Chartered, Royal Bank of Scotland, Barclays and HSBC. Other large financials include Italy’s Intesa Sanpaolo bank and French credit insurer Coface (similar to Credit Guarantee in SA).
It argues that while every other sector has been increasing risk, banks have been derisking over the past decade. And the fund does not have exposure to any of the mega technology shares such as Apple, Microsoft or Amazon. Old-school Cisco Systems is its only large IT position. But sectors change: it had a different view in the early 2000s, when technology shares were rated lower than utilities.
The fund has held Anglo American for some time, and it now also holds South32, the diversified miner unbundled from BHP Billiton. Murphy says at one point Anglo was priced as if it was about to go bust, yet it now has strong cash flows from quality assets that include De Beers, platinum and copper.
Similarly, the death of many retailers has been exaggerated, which is why the fund owns old-school traders such as Marks & Spencer in the UK and Dillard’s in the US. It also owns four US private-education firms, principally Bridgepoint Education.
It has almost no exposure to consumer staples, just a modest side bet on Philip Morris’s subsidiary in the Czech Republic. It owns an eclectic mix of telecom shares, primarily quasi-monopolies in Croatia, Poland, Greece and Egypt.
Murphy says the team does extensive fundamental research but does not go into time-wasting detail such as visiting every mine, for example.
Dodge & Cox is a recent entrant to the SA market, having built up its brand here over the past three years. The firm started in San Francisco in 1930 and the entire investment team is based in one building in that city. It is one of the largest active fund managers in the world, with US$310bn under management, invested in a simple range of half a dozen strategies: in equities it is US, international (non-US) and global (including the US).
Vice-president Diana Strandberg says the firm thinks of itself as part-owner of the companies it invests in and this encourages a long-term approach. This is similar to Warren Buffett’s philosophy so, like the Sage of Omaha, the fund is cautious about the large US hi-tech shares — Alphabet is the only one in its top 10.
The main risk Dodge & Cox worries about is terminal loss. The firm likes to take a 360° view of its investments, getting to know its competitors, clients and suppliers. “We think we understand the distinction between a good company and a good investment. Good investments need to have the likely risks embedded in the share price,” says Strandberg.
It will take advantage when less patient investors want to sell their holding in a share that still has solid prospects in the long term.
The global fund has just 86 shares, and seven positions make up 2% or more of the fund. Strandberg says the firm initially began to research non-US shares to get a better sense of the competitive dynamics (comparing Caterpillar with Komatsu, for instance). But it has decided not to station analysts around the world, as it believes there is a competitive advantage in operating from one place, and travelling when appropriate.
It has an appetite for emerging markets, with shares such as Samsung Electronics, Naspers, Itaú Unibanco in Brazil and ICICI Bank in India.
Strandberg says the firm first invested in Naspers in 2007. “Naspers management acts like an owner operator and they are thoughtful capital allocators.”
And she says at the current discount to the holding in Tencent, one is paid to own the rest of the business.
Emerging markets make up 18% of the portfolio and there are strong biases towards financials such as Bank of America and Goldman Sachs, and health care, where the largest positions are in Sanofi and Novartis. Strandberg says these shares get more attractively priced as their research and development pipeline gets longer.
The fund is run by a team of eight, with an average of 22 years of service at Dodge & Cox.
The fund is approaching its fifth birthday and is run out of the original Ashburton shop in Jersey by Nick Lee and Veronika Pechlaner.
The fund invests in leading companies in their sectors in a portfolio of no more than 25 shares. The sector allocation differs quite considerably from the index. It is considerably heavier in IT, health care and consumer staples, but light in consumer discretionary and financials, though it has a
large position in JPMorgan.
The three largest holdings are in IT: Microsoft, Alphabet (Google) and Visa. Visa has been chosen on the expectation of a considerable uptick in card purchases worldwide. Lee says the quality of Microsoft earnings is increasing as it moves to a subscription-based model. Royal Dutch Shell is a hefty 6.5% allocation.
Lee says the fund is designed particularly to appeal to SA investors who have been avid buyers of 20-25 share portfolios in the domestic market. Over time the mega-caps in which it invests should have more predictable earnings.
The oil majors are cutting costs, which has made them more interesting. The fund owns BP, in addition to Shell. It also owns some predictable consumer goods shares including Nestlé, AB-InBev, Diageo and Kraft Heinz. Recent US tax reforms favour these large corporates in particular.
The only other financial in the portfolio is Prudential Plc, on the expectation of an unlock that has similarities to the Old Mutual managed separation. Prudential UK and its asset manager, M&G, will form one of the listings, and its fast-growing Asian and US businesses will form the other.
The overweight position in health care consists of Novartis, Bayer, Merck and Johnson & Johnson. The fund had a difficult time in 2017, as it was then underweight in technology and emerging markets, which were the winning sectors.
There probably isn’t another fund quite like the Dimensional Global Core Equity Fund. It is benchmarked against an index with 2,500 shares yet it does so with 7,500 shares. Dimensional looks like a real-life experiment in the thinking of Nobel prize winners Eugene Fama, Kenneth French and Bob Merton.
Senior portfolio manager Nathan Lacaze says the firm believes that the market price of shares is an accurate measure of the publicly available information about the security. It uses its own framework to determine the discount rates to apply to each share. No share is more than 2% of the portfolio, which invests across 23 developed markets.
Dimensional uses factors to help build its portfolio, notably value, size and profitability, but it does not like the term “smart beta” used by many of its competitors.
It believes small caps will outperform over time, which explains why it has such a long tail, right down to micro caps.
Dimensional processes company data for all its holdings, and it has a 50-strong data and analytics team to manage this. It also engages with management on corporate governance issues, when it believes that can increase expected returns.
Lacaze says it prefers the term “systematic” to smart beta or closet index. It sees serious limitations to index funds, as they are obliged to rebalance the portfolio at set times whether it is in the client’s interest or not.
The fund is actively managed, though it looks like a replication of the world index to the naked eye — it has overweight or underweight positions right across the spectrum. Nonetheless, its top 10 holdings make it look like an index hugger — tech giants Apple, Microsoft, Amazon and Alphabet make up the top four, with Facebook at six. All 10 top slots are filled by American shares with predictable choices such as Berkshire Hathaway, JPMorgan and Johnson & Johnson.
The US allocation at 57% is higher than the peer group — Dodge & Cox has a 45% allocation, for example. Lacaze says the fund is unashamedly maximally diversified; it does not bet the farm on a few shares. Founder David Booth says the firm believes that nobody can predict securities’ prices.
Shaun Levitan of Colourfield Liability Solutions, which represents Dimensional in SA, says the firm has been reluctant to offer funds which focus on just one factor such as momentum or dividend growth, and prefers to use a wide range. It is also reluctant to implement a new factor into its process, as factors which did well backtested in the past might not do well in the future. Some just eat up too much return through trading costs, for example.
As well as this core fund, Lacaze says that, according to investor needs, it could be useful for investors to augment this with satellite funds such as small cap or value.
This is the quirkiest fund in this selection, but investors can draw some comfort from the excellent track record of its manager, Stephen Mildenhall.
It had an astonishing debut, almost achieving a 100% return in its first year. But it is a feast or famine fund, and sometimes it has been well below the index.
It has some similarities to the Orbis Global Equity Fund, founded by Mildenhall’s mentor Allan Gray. But while Orbis looks increasingly mainstream with shares such as Naspers, NetEase and Sberbank, Contrarius sticks its neck out with truly contrarian positions such as the Macy’s department store chain, retailer Bed Bath & Beyond and miner Freeport-McMoRan.
Energy and materials make up 41% of the fund, with 36% for consumer discretionary. It holds virtually nothing in financials, health care, telecoms, utilities, real estate or industrials and less than a half weighting in IT, mostly in Twitter.
Mildenhall says Contrarius is valuationbased, searching for shares trading at a discount to intrinsic value. But he prefers the term contrarian to the much-misunderstood term “value”.
Contrarius will still buy quality shares with long-term prospects when they are out of favour, and not just cheap shares. And each share is subject to detailed fundamental research before buying.
“Visa has been chosen on the expectation of a considerable uptick in card purchases worldwide