FUND RE­VIEWS

Bateleur Flex­i­ble Pre­scient Fund, Rezco Man­aged Plus Fund, Corona­tion Op­ti­mum Growth, Truf­fle SCI Flex­i­ble Fund, Blue Al­pha BCI Alll Sea­sons Fund

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

In­vestors who want to give their fund man­agers the widest pos­si­ble dis­cre­tion should con­sider the flex­i­ble fund cat­e­gory.

They can in­vest any­thing from zero to 100% in cash in th­ese funds. And while there is an un­writ­ten un­der­stand­ing that high-eq­uity funds will never go be­low 50% in eq­ui­ties, flex­i­ble funds can choose their ex­po­sure.

The five funds cho­sen this month def­i­nitely fall among the eq­ui­ty­cen­tric.

In the­ory as­set al­lo­ca­tion is the great­est sin­gle source of dif­fer­en­tial per­for­mance, but in all th­ese funds stock se­lec­tion is king. None of them makes ex­ten­sive use of bonds, which should be a sig­nif­i­cant build­ing block in th­ese funds.

The As­so­ci­a­tion for Savings & In­vest­ment SA has two main flex­i­ble-fund cat­e­gories. The first is do­mes­tic — funds that may in­vest up to 30% abroad (and with a sprin­kling of rand hedges the ef­fec­tive off­shore ex­po­sure can be in­creased to 50% plus). The sec­ond cat­e­gory is world­wide flex­i­ble. Th­ese funds may move from 100% do­mes­tic to 100% global.

This should not be seen as a pick of the best funds in the sec­tor. Old Mu­tual Flex­i­ble was one of the fi­nal­ists at the Morn­ingstar awards in the flex­i­ble cat­e­gory, and was there­fore cov­ered re­cently. Fo­ord Flex­i­ble, for all its re­cent weak­ness, is still a great long-term pick from a strong house.

The only puz­zle is that Pru­den­tial, which brought tac­ti­cal as­set al­lo­ca­tion to SA, does not have a flex­i­ble fund of its own.

The sec­tor was cre­ated by Sage, the orig­i­na­tors of SA unit trusts, and was made pop­u­lar by Corona­tion, which has two con­tes­tants — the do­mes­tic Man­aged Plus, which be­haves more like an in­sti­tu­tional bal­anced fund, and Op­ti­mum Growth, which was de­signed to present the best of the house’s do­mes­tic and global views. It made di­rect pur­chases of in­ter­na­tional shares at a time when Corona­tion had fo­cused pri­mar­ily on in­ter­na­tional hedge funds. As ex­change con­trols have be­come more re­laxed and the house has got more com­fort­able with in­ter­na­tional shares, the do­mes­tic por­tion of the fund has dwin­dled.

Un­der fund man­ager Gavin Jou­bert it is ef­fec­tively a hy­brid de­vel­oped mar­kets/emerg­ing mar­kets fund.

Flex­i­ble funds usu­ally work off ab­so­lute-re­turn bench- marks such as in­fla­tion plus 4%. Even if the as­sets are pre­dom­i­nantly eq­ui­ties, th­ese funds are rarely bench­mark hug­gers. Rezco Man­aged Plus, for ex­am­ple, has no ex­po­sure to banks, while Truf­fle SCI Flex­i­ble has meaty hold­ings in un­usual in­ter­na­tional shares such as UK in­surer Hast­ings Group and China’s New Ori­en­tal Ed­u­ca­tion.

Truf­fle has close to R4bn in­vested in its flex­i­ble fund, which is dou­ble the size of the man­aged fund it runs for Ned­group. Though Truf­fle suf­fered more than most from its hold­ing in Stein­hoff it is one of the few firms to have changed in the re­cent past from bou­tique size (R6bn-R9bn un­der man­age­ment) to mid size, with a port­fo­lio of more than R20bn.

Rezco and Bateleur re­main in the bou­tique cat­e­gory, though at least they are no longer sub­scale. Both ar­tic­u­late a clear in­vest­ment phi­los­o­phy: Rezco was stick­ing up for growth at a rea­son­able price when al­most ev­ery man­ager of­fered a vari­a­tion on value. Kevin Wil­liams at Bateleur thinks with the ab­so­lute-re­turn mind-set of the hedge fund man­ager that he re­mains at heart. Both are likely to pro­vide a dif­fer­ent re­turn pro­file from the typ­i­cal bal­anced fund, but that is no bad thing.

BlueAl­pha’s Gary Quinn, hav­ing been brought up at Nor­wich and Pru­den­tial, is quite an old-school stock­picker.

As a quality in­vestor he aims to give the as­sur­ance that while he has no con­trol of the shares he buys in the short term, in the long term they shouldn’t go wrong.

There is no ac­tive as­set al­lo­ca­tion in the BlueAl­pha All Sea­sons fund; the cash in­creases sim­ply when Quinn runs out of shares to buy. Quinn’s fans from his Pru­den­tial days will get a nice warm feel­ing when they see shares such as Naspers, FirstRand and Old Mu­tual in the fund.

BlueAl­pha’s Gary Quinn is an old-school stock­picker. He aims to give the as­sur­ance that while he has no con­trol of the shares he buys in the short term, in the long term they shouldn’t go wrong

This is the old­est sur­viv­ing world­wide flex­i­ble fund in SA. It aims to pro­vide the best in­vest­ment view at Corona­tion, and it has five names on the door: Neville Ch­ester and Karl Lein­berger (do­mes­tic as­sets); Louis Stassen (de­vel­oped mar­ket as­sets); Mark le Roux (fixed in­ter­est); and Gavin Jou­bert (emerg­ing mar­kets). They are in Corona­tion’s of­fices in Clare­mont, Cape Town and in­ter­act in­for­mally on a daily ba­sis.

Jou­bert is the lead man­ager. The fund has few do­mes­tic as­sets, with about 4% of the port­fo­lio in­vested ei­ther in Naspers shares or some resid­ual rand cash. There is 19% kept in cash, 7% in prop­erty and 67% in in­ter­na­tional eq­ui­ties.

Jou­bert says it’s un­likely the fund will go back to be­ing pre­dom­i­nantly or even 50% do­mes­tic. “SA represents just 1% of global mar­kets.” There will be over­lap with SA’s global funds such as Global Man­aged and Global Eq­uity Se­lect, but it has a heav­ier emerg­ing mar­kets weight­ing.

Two thirds of the eq­ui­ties are in­vested in de­vel­oped mar­kets, in a mix of con­sumer sta­ples such as BAT, Heineken and Unilever and pri­vate eq­uity firms such as Black­stone and KKR. He says th­ese busi­nesses are on a 10 p:e and 8% div­i­dend yield, a dis­count to tra­di­tional as­set man­agers such as Legg Ma­son and Franklin Tem­ple­ton.

“Yet the lat­ter busi­nesses, like Corona­tion, can lose clients at 24 hours’ no­tice, while pri­vate eq­uity clients are locked in.”

Jou­bert also likes con­sumer dis­cre­tionar­ies such as Nike and Adi­das. Adi­das, now about 3% of the fund, was in­tro­duced in the first quar­ter as its share price had lagged Nike sig­nif­i­cantly, though Adi­das has more po­ten­tial up­side as it has lower mar­gins. An­other dis­cre­tionary busi­ness is L Brands, owner of Vic­to­ria’s Se­cret.

Jou­bert says even though the US mar­ket looks ex­pen­sive in ag­gre­gate there are still pock­ets of value. Nonethe­less, he has steadily re­duced the eq­uity ex­po­sure from about 83% to about two thirds.

The emerg­ing mar­kets slug of the fund in­cludes peren­nial Corona­tion favourites such as Brazil­ian ed­u­ca­tion provider Kro­ton, China’s 58.com on­line clas­si­fied busi­ness and In­dia’s Tata Mo­tors. As well as Ping An In­sur­ance, the only pri­vate in­surer in China’s top five.

This is the largest fund from this mid­sized firm, with about R4bn in as­sets. It is billed as “mod­er­ate ag­gres­sive” and is not lim­ited by Reg­u­la­tion 28. It is a do­mes­tic fund, which can in­vest up to 30% in­ter­na­tion­ally. It has 12.5% in non-SA eq­uity and 11% in non-SA cash.

The fund is co-man­aged by Iain Power, Jonathan du Toit and Charles Booth. More than most funds, it was hit by an ex­po­sure to Stein­hoff but its hold­ings to­day are dom­i­nated by what should be more depend­able large caps. It has a 6% ex­po­sure to Old Mu­tual and about 5% each to Naspers and Sa­sol. Its largest in­ter­na­tional po­si­tion is 4.5% in In­di­a­b­ulls, an In­dian mort­gage lender. It also holds ac­tive po­si­tions in Bar­clays Africa, In­vestec and Stan­dard Bank.

Power says In­vestec looks com­pellingly cheap and with man­age­ment changes should ad­dress some legacy is­sues.

The bank­ing ex­po­sure helped in the first quar­ter when banks, along with re­tail­ers, ral­lied. Truf­fle does not find much value in re­tail­ers any more, ex­cept for Wool­worths. Truf­fle’s main prop­erty hold­ings, Growth­point and Re­de­fine, were steady. It also holds lo­gis­tics spe­cial­ist Equites and off­shore fo­cused Schroder European Reit and In­vestec Aus­tralia.

Power says that after the rally in do­mes­tic shares the fund has started to switch back into rand hedges, in­clud­ing Sa­sol, as the mar­ket places lit­tle value on Sa­sol’s eth­ane cracker pro­ject.

Naspers has been in­creased now that it trades on a dis­count of up to 40% to its un­der­ly­ing con­stituents.

Truf­fle has been tak­ing profit in An­glo Amer­i­can and switch­ing to BHP Bil­li­ton, which could pay a special div­i­dend from the sale of its on­shore shale as­sets. The house has also held doggedly onto Northam Plat­inum, a rel­a­tively low-cost and high-quality en­try into the sec­tor.

In­ter­na­tion­ally, Royal Dutch Shell was in­creased, as its breakeven has been re­duced to be­low US$50/bar­rel. There is an un­usual mix of global shares; one is San­tander of Spain, a multi­na­tional that trades on a dis­count to the lo­cal banks, an­other Hast­ings in the UK, an Out­surance-style in­surer con­trolled by Rand Mer­chant In­vest­ments — which also hap­pens to be a ma­jor share­holder in Truf­fle. The fund also owns New Ori­en­tal Ed­u­ca­tion, a Chi­nese ed­u­ca­tion sup­plier.

Rezco was one of the hottest small man­agers two years ago. More re­cently it has slipped as its port­fo­lio is skewed to­wards a weak rand.

But chief in­vest­ment of­fi­cer Rob Span­jaard is not chang­ing this sig­nif­i­cantly. He says do­mes­tic shares are over­priced. On a see-through ba­sis the fund de­rives twothirds of its in­come from over­seas.

In its top 10 there are two in­ter­na­tional shares held di­rectly, Face­book and chip de­vel­oper Lam Re­search.

Span­jaard says it will take time to push SA back to 3.5%-4% an­nual growth.

The fund holds no lo­cal banks (though it likes JPMor­gan over­seas). It holds Dis­cov­ery in fi­nan­cials and Shoprite among the re­tail­ers. Both earn sig­nif­i­cant non­rand in­come.

The fund has taken the off­shore al­lo­ca­tion up to the newly per­mit­ted max­i­mum of 30%.

Span­jaard does not see much up­side in ei­ther lo­cal or global bonds. Re­cently there was the big­gest net sell­ing of emerg­ing mar­ket bonds ever. The fund prefers float­ing rate notes to tra­di­tional bonds.

As for prop­erty he says SA has too many shop­ping cen­tres, though he is happy to own well-man­aged lightly geared in­ter­na­tional coun­ters such as In­vestec Aus­tralia and Re­de­fine In­ter­na­tional.

He is cau­tiously op­ti­mistic about com­modi­ties, and holds po­si­tions in Mondi and Sa­sol as well as An­gloGold and gold and pal­la­dium ex­change traded prod­ucts.

Like the older and larger Value Trend Fund, Man­aged Plus is in the Asisa high eq­uity cat­e­gory and the Morn­ingstar Flex­i­ble As­set Al­lo­ca­tion group­ing. Span­jaard says Man­aged Plus will typ­i­cally be about 10 per­cent­age points more ex­posed to eq­ui­ties than Value Trend. Man­aged Plus is 64% in­vested in eq­uity (of which 21 per­cent­age points is in for­eign shares), 7% in prop­erty, 2% in com­modi­ties, 2% in bonds and 25% in the money mar­ket.

The fund is man­aged jointly by Span­jaard, Wally Gray and Si­mon Sylvester. The phi­los­o­phy is growth at a rea­son­able price.

Bateleur, run by Kevin Wil­liams, is best known for its hedge funds, but it re­ceived re­quests from clients to of­fer a long-only unit trust.

Wil­liams says a flex­i­ble strat­egy is clos­est to a hedge fund as it of­fers the great­est free­dom, though it does not al­low for in­di­vid­ual short po­si­tions. It has since set up an eq­uity unit trust.

The Flex­i­ble Fund has a man­date of in­fla­tion plus 4%. In March the fund was 69% in do­mes­tic eq­ui­ties, 14% in for­eign eq­ui­ties and 17% in cash. It has beaten its man­date in the long run, though in a poor eq­uity mar­ket in the first quar­ter it lost 3.5% (al­most all made up in April).

Its big­gest con­trib­u­tors were Ad­cock In­gram, Mpact and its in­ter­na­tional hold­ing in Ama­zon. The main de­trac­tors were Naspers, BAT/Reinet and RMI. Naspers and BAT re­main the largest hold­ings, fol­lowed by Mondi, then a fund which tracks the US S&P 500 and Old Mu­tual. In­ter­na­tion­ally it uses both in­dex prod­ucts, to ac­cess Euro Stoxx as well as the S&P 500 and di­rect hold­ings such as Ama­zon.

Wil­liams says the only neg­a­tive re­turn was in 2016 — down 3.4%, when Brexit and Don­ald Trump’s vic­tory in the US elections brought ex­tra volatil­ity to the mar­ket.

Wil­liams says he likes in­dus­trial mid­caps which have high bar­ri­ers to en­try, long track records of earn­ings growth and sta­ble man­age­ment. Mpact is one, AECI an­other, and Hu­daco a third. The team has also held Italtile for more than seven years.

The team spends about a third of its time look­ing at macro is­sues such as mon­e­tary pol­icy and the val­u­a­tion of cap­i­tal mar­kets, the rest on analysing com­pa­nies. It looks at four fac­tors — the quan­ti­ta­tive stats; the busi­ness model; the man­age­ment team; and in­tegrity and gov­er­nance. When there are few eq­ui­ties at com­pelling value, the cash com­po­nent is in­creased, to as much as 40%.

Wil­liams is not op­ti­mistic right now: that the Bateleur long/short hedge fund is just 30% net in­vested in­di­cates this. There is more in­vestor con­fi­dence than six months ago he says, but there has been no change on the ground: the bond and do­mes­tic eq­uity ral­lies are dis­count­ing a sub­stan­tial im­prove­ment.

BlueAl­pha is a spe­cial­ist eq­uity man­ager with both lo­cal and global port­fo­lios. All Sea­sons is a flex­i­ble fund but it is un­doubt­edly eq­uity cen­tric, with 83% in lo­cal eq­ui­ties and 17% in cash.

The fund is run by Gary Quinn, for years one of the se­nior eq­uity man­agers at Pru­den­tial Port­fo­lio Man­agers. Ac­cord­ing to se­nior an­a­lyst Ni­cola Broekhuy­sen the house fo­cuses on three things:

Value cre­ation, or a com­pany’s abil­ity to cre­ate free cash flow, as op­posed to ac­count­ing earn­ings, in ex­cess of their cost of cap­i­tal. A steel pro­ducer’s costs would be sub­stan­tially higher than a re­tailer’s, sim­ply due to the cap­i­tal out­lay re­quired to op­er­ate. Of­ten such cap­i­tal-in­ten­sive in­dus­tries can’t gen­er­ate suf­fi­cient re­turns on pro­jects to sus­tain fu­ture growth.

Growth po­ten­tial, or a com­pany’s his­tory of de­ploy­ing its cash to growth op­por­tu­ni­ties to fuel fu­ture ex­pan­sion. The fund looks to in­vest in com­pa­nies that can sus­tain or­ganic vol­ume and rev­enue growth.

Quant sig­nals. The fund uses quan­ti­ta­tive models to both screen for new po­ten­tial in­vest­ments and elim­i­nate mis­takes — this is pre­dom­i­nantly done through fo­cus­ing on what back-tests in­di­cate to be suc­cess­ful, as well as what isn’t work­ing any more.

BlueAl­pha calls it­self a quality in­vestor that pays par­tic­u­lar at­ten­tion to the earn­ings cy­cle. “We are gen­er­ally will­ing to pay up for quality be­cause in our ex­pe­ri­ence, quality com­pa­nies per­sist in be­ing quality com­pa­nies, lead­ing to a com­pound­ing through time of their su­pe­rior re­turns,” says Broekhuy­sen.

Lo­cally, it holds large hold­ings in Naspers, FirstRand and Mr Price, which all de­serve the quality tag, while Old Mu­tual looks more like a special sit­u­a­tion and At­lantic Leaf Prop­er­ties doesn’t yet have the track record to be con­sid­ered quality. In its global shares Ten­cent, Ap­ple, Mastercard and per­haps even the Ser­viceNow cloud busi­ness, count as quality, but the of­ten trou­bled Fi­atChrysler would not. Quality shares should com­pound through time be­cause of su­pe­rior re­turns. The off­shore al­lo­ca­tion in the fund grew over the years as reg­u­la­tory al­low­able lim­its rose.

The bulk of the fund’s off­shore al­lo­ca­tion is man­aged in-house, through ex­po­sure to BlueAl­pha BCI Global Eq­uity Fund, man­aged by Richard Pitt, a vet­eran of Old Mu­tual and Cap­i­tal Al­liance.

BlueAl­pha be­gan as a hedge fund house and Broekhuy­sen says this has con­trib­uted to a fo­cus on ab­so­lute risk mit­i­ga­tion and re­turn. It holds fu­tures on a reg­u­lar ba­sis.

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