FUND RE­VIEWS

Absa Global Value Feeder Fund, Dodge & Cox World­wide Global Stock Fund, Ash­bur­ton Global Lead­ers Eq­uity Fund, Di­men­sional Global Core Eq­uity Fund, Con­trar­ius Global Eq­uity

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON Graphic: RUBY-GAY MAR­TIN Source: IRESS

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

Source: Pro­fileData Fund An­a­lyt­ics

Source: Pro­fileData Fund An­a­lyt­ics

Source: Pro­fileData Fund An­a­lyt­ics

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