FUND RE­VIEWS

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

Absa Man­aged Fund, Coro­na­tion Mar­ket Plus, Fo­ord Bal­anced, Aylett Bal­anced Pre­scient, Cen­taur Bal­anced

High-eq­uity funds are now the largest sec­tor in the unit trust sphere, ac­count­ing for about a quar­ter of in­dus­try as­sets. They pro­vide a one-stop shop for build­ing re­tire­ment sav­ings. Most con­sul­tants and fi­nan­cial ad­vis­ers rec­om­mend eq­ui­ties to be the core of a port­fo­lio if it is go­ing to have any chance of beat­ing in­fla­tion over the long term.

Reg­u­la­tion 28 of the Pen­sion Funds Act is one of the saner SA reg­u­la­tions, as it pre­scribes a max­i­mum ex­po­sure of 75% to eq­ui­ties as well as a 5% or 10% limit on each share, and has grad­u­ally built up per­mit­ted for­eign ex­po­sure to 30%.

Three funds have a large mar­ket share in the sec­tor, and all have al­ready been cov­ered well in IM — Al­lan Gray Bal­anced, which has close to R150bn un­der man­age­ment, Coro­na­tion Bal­anced Plus and In­vestec Op­por­tu­nity.

In­stead of the main­stream Coro­na­tion Bal­anced Plus, we look at Coro­na­tion Mar­ket Plus. This isn’t tech­ni­cally a Reg­u­la­tion 28 fund, but it looks like one most of the time. Coro­na­tion be­lieves this is such a good sav­ings ve­hi­cle that it is us­ing it in its ini­tia­tive to bring in more small, reg­u­lar in­vestors — they can even start at R1.

Fund man­agers Neville Ch­ester and Pallavi Am­bekar also hap­pen to be the most pho­to­genic in­vestors in the Coro­na­tion sta­ble.

The only su­per­sized fund of the five is Fo­ord Bal­anced. Fo­ord As­set Man­age­ment has lost favour over the past year on the back of dis­ap­point­ing per­for­mance, but this busi­ness has bounced back be­fore. Fo­ord still op­er­ates out of a con­verted town­house in Pinelands and its mar­ket­ing re­mains prim­i­tive.

Per­haps it should hire Kurt Benn, man­ager of the Absa Man­aged Fund. At a re­cent con­fer­ence he even out-talked gab­bers such as Euse­bius McK­aiser and Rob Rus­coni. He could have set up a suc­cess­ful BEE fund man­ager, but saw the op­por­tu­nity to re­build Absa as an in­vest­ment brand.

Absa Man­aged is by no means a bad fund; since its launch in 2010 it has been just ahead of the av­er­age of a de­mand­ing peer group. It is cer­tainly an in­dict­ment of the Absa dis­tri­bu­tion team that the fund is still un­der R100m.

We have also looked at two funds run by past win­ners of the Morn­ingstar awards from Aylett and Cen­taur.

Wal­ter Aylett has had a high pro­file from his Coro­na­tion days and rel­ishes in a mav­er­ick rep­u­ta­tion. He is one of the lead­ing War­ren Buf­fett fa­nat­ics, but does more than scat­ter Berk­shire Hath­away quotes in his pre­sen­ta­tions. He seems con­tent for the busi­ness to stay small, and avoids the cor­po­rati­sa­tion that af­fects grow­ing man­agers, even the equally mav­er­ick Fo­ord.

Cen­taur Bal­anced is the sis­ter fund of the mul­ti­ple-award­win­ner Cen­taur Flex­i­ble. Founder Roger Wil­liams was part of the top as­set man­ager of its day, Lib­erty As­set Man­age­ment, but soon af­ter found­ing Cen­taur moved the busi­ness from Sand­ton to live among the yokels of Cape Town.

For a “dif­fer­ent” fund to sup­ple­ment ex­po­sure to one of the bland large funds, Cen­taur would be first choice, closely fol­lowed by Aylett.

Fo­ord As­set Man­age­ment has lost favour over the past year on the back of dis­ap­point­ing per­for­mance

In­vestors need to know what they are buy­ing in the Absa range, which is rather con­fus­ingly named. Absa Man­aged has just R100m, com­pared with Absa Bal­anced’s R2bn. Yet Absa Bal­anced is in the same cat­e­gory as the Fo­ord Con­ser­va­tive Fund, and has a max­i­mum 60% in eq­ui­ties.

Absa Man­aged is the ob­vi­ous choice for the long-term in­vestor, even though there is min­i­mal dif­fer­ence in the bench­mark of the two Absa funds: in­fla­tion plus 5% for Bal­anced, in­fla­tion plus 6% for Man­aged.

The Absa team al­ways tries to adopt an ab­so­lute mind­set. Absa Man­aged is still con­strained by Reg­u­la­tion 28, but it pushes the lim­its to the edges.

At the end of the sec­ond quar­ter its in­ter­na­tional al­lo­ca­tion was over 34%, and the reg­u­la­tor will ex­pect the man­ager to bring it back un­der the 30% thresh­old. The fund was about 68% in eq­ui­ties at the end of June, but now has an ef­fec­tive 53%.

The fund is co-man­aged by Kurt Benn, a fund man­ager schooled at BOE, Quay­stone and San­lam, and Greg Ket­tles, who ran the in­ter­na­tional silo at Stan­lib. Benn says the two funds are run as a pair, with Bal­anced pay­ing more at­ten­tion to down­side risk.

He says cap­i­tal could be more ex­plic­itly pro­tected, but hedg­ing is ex­pen­sive and would make in­fla­tion-beat­ing harder in the long run.

The funds’ in­ter­na­tional in­vest­ment is through part­ner Schroders, with a blend of its value, core and multi-as­set funds. Benn says the Man­aged fund is at present leveraged to global growth, with a high al­lo­ca­tion over­seas. The funds’ largest do­mes­tic shares are pre­dom­i­nantly rand hedges, with Bri­tish Amer­i­can To­bacco, Sa­sol, AB InBev and Bid­corp tak­ing the top four slots.

The main min­ing hold­ings are Gold Fields and BHP Bil­li­ton. And just out­side the top 10 is San­lam. Picks that do not look so clever in the short term in­clude MTN, as well as Green­bay and Nepi Rock­cas­tle.

The fund is al­most 10% in­vested in prop­erty (even more, count­ing the Schroders al­lo­ca­tions) on a see-through ba­sis. As a small fund it can also hold big po­si­tions in small caps.

The fund is un­der­weight long bonds, as a 30-year bond yield­ing 10.2% has a poorer risk-re­turn trade­off than 8.2% of­fered from a bond one year to ma­tu­rity. The bench­mark of CPI plus 6% has proved too tough over the past three years as all as­set classes have per­formed dis­mally, but some­times it seems to be an easy tar­get.

This is not a Reg­u­la­tion 28-com­pli­ant fund but it is also in the Morn­ingstar Ag­gres­sive Al­lo­ca­tion cat­e­gory, as it be­haves more like an ag­gres­sive than a flex­i­ble fund. It is quite dif­fer­ent from the Coro­na­tion Op­ti­mum Fund, which goes up to 90% in for­eign as­sets.

Mar­ket Plus is run by Neville Ch­ester and Pallavi Am­bekar, who also run the Top 20 Fund. Think of them as the dy­namic team. Mar­ket Plus is dis­tinctly bolder than the flag­ship Bal­anced Plus Fund. Un­like many other funds in the cat­e­gory it does not have an in­fla­tion-plus bench­mark; it has a com­pos­ite bench­mark of 52.5% eq­uity, 22.5% bonds, 20% in­ter­na­tional and 5% cash.

It cur­rently has about 44% in do­mes­tic eq­uity and 20% in for­eign eq­uity.

At a pinch you might con­vince your­self that this is a Reg 28 fund in all but name. Ch­ester says that will be true most of the time, but there could be a spe­cial op­por­tu­nity to en­hance re­turns by go­ing 100% eq­uity one day.

He says the fund caps its for­eign hold­ing at 35%, not far off the Reg 28 limit, es­pe­cially if Africa is in­cluded. The fund in­vests 2% into the Coro­na­tion African Fron­tiers Fund, look­ing at the long-term po­ten­tial of what are still illiq­uid African mar­kets.

The two largest hold­ings in the fund are Coro­na­tion Global Op­por­tu­ni­ties, at 14%, the estab­lished mul­ti­man­ager fund run by Tony Gib­son. Un­der­ly­ing man­agers are spe­cial­ist bou­tique man­agers such as Con­trar­ius and Eger­ton in the UK and Mav­er­ick in the US. It has 6% in the Coro­na­tion Global Emerg­ing Mar­kets Fund run by Gavin Jou­bert and Suhail Sule­man.

Do­mes­ti­cally, the dy­namic team has a few pre­dictable picks such as Naspers, though the hold­ing of 5% is quite con­ser­va­tive, and Bri­tish Amer­i­can To­bacco. But it has made a bold pick in Intu, the for­mer Cap­i­tal Shop­ping Cen­tres in the UK, a geared busi­ness in a vul­ner­a­ble econ­omy.

It also holds MTN. Ch­ester says it is at least de­liv­er­ing on the ground in SA and can re­cover. There are a few crowd­pleasers, in­clud­ing An­glo Amer­i­can, Stan­dard Bank and Old Mu­tual. An­glo Amer­i­can was ac­quired when it was prac­ti­cally be­ing given away about five years ago, and it now has good op­er­a­tional num­bers.

Ch­ester has added to the al­lo­ca­tion of UK Quil­ter shares re­ceived in the Old Mu­tual un­bundling. The fund has taken profit in Mondi but in­creased the hold­ing in In­vestec — even be­fore the an­nounced split in the busi­ness — and MMI, trad­ing on a mas­sive dis­count.

Even af­ter more than R5bn of new out­flows over the past year, Fo­ord Bal­anced re­mains one of the four largest bal­anced funds, along with Al­lan Gray, Coro­na­tion and In­vestec.

Fo­ord has been a dif­fi­cult firm to cat­e­gorise, and largely sold it­self on the proven tal­ents and in­tu­ition of founder Dave Fo­ord.

It has a phi­los­o­phy which CEO Paul Cluer ar­gues un­der­per­forms in the late stages of a bull mar­ket. It did so in 1997/1998 and it is do­ing so now.

The heart of the Fo­ord phi­los­o­phy is to get the big calls right, buy at the right price, take a long-term view, ig­nore the bench­mark and di­ver­sify and man­age risk.

The firm has also di­ver­si­fied its in­tel­lec­tual prop­erty, and Fo­ord him­self is just one of four man­agers of the Bal­anced fund. The oth­ers are Nick Balkin, William Fraser and Daryll Owen.

Fraser says there is a mul­ti­ple-coun­sel­lor ap­proach, which gives each of the port­fo­lio man­agers com­plete free­dom — not just of stock picks, but of as­set al­lo­ca­tion. As there is a com­mon in­vest­ment phi­los­o­phy, though, these po­si­tions do not vary

dra­mat­i­cally. For ex­am­ple, they have pooled their R6bn-plus gov­ern­ment bond po­si­tion into the R186 gov­ern­ment bonds, the pre­dom­i­nant fixed-in­come po­si­tion.

It has a 3% ex­po­sure to cor­po­rate bonds and 8% to money mar­ket, both split between lo­cal and for­eign. The fund has low ex­po­sure to do­mes­tic eq­uity of 38%, off­set by 25% in for­eign eq­uity. The for­eign hold­ing is held through two funds, 17% in the Fo­ord Global Eq­uity Fund and 13% in the Fo­ord In­ter­na­tional Fund, a flex­i­ble but con­ser­va­tive as­set al­lo­ca­tion fund.

The fund has re­mained in­vested in Aspen, a long­time favourite, which would have hurt it in the short term. It is close to 4% of the fund and an equal weight­ing to Naspers. Other large hold­ings are BHP Bil­li­ton, Bri­tish Amer­i­can To­bacco, Sa­sol and Richemont. A con­stant fea­ture of the port­fo­lio has been the 3%-4% hold­ing in the New­Gold ETF, which Fraser says pro­vides in­sur­ance against a global cri­sis. It is a pure in­vest­ment in gold, mov­ing up and down with the gold price. The fund is low on fi­nan­cials: it is one of the few with­out Old Mu­tual, pre­fer­ring RMB Hold­ings, Stan­dard Bank and some San­lam.

This is one of the last of the old-school per­son­al­ity funds. Fund man­ager Wal­ter Aylett is known to take an in­tu­itive ap­proach with lim­ited use of quan­ti­ta­tive tools. His col­league, Dimitri Theo, de­scribes the style as bench­mark ag­nos­tic, bot­tom up.

It is also not eas­ily boxed as a value or growth in­vestor, but rather can be called ra­tio­nal. It con­sid­ers risk to be the per­ma­nent loss of cap­i­tal, not volatil­ity, so it is pre­pared to go as low as 25% in eq­ui­ties to pre­serve cap­i­tal even if that means a dif­fer­ent per­for­mance from the peer group.

Apart from the in­di­vid­ual stock picks, the best de­ci­sion for most of the fund’s life­time has been stay­ing out of bonds. It now holds 7% in bonds, 25% in cash, 46% in lo­cal eq­ui­ties and 20% in for­eign eq­ui­ties.

Among the large in­ter­na­tional shares is Berk­shire Hath­away, which Aylett has sup­ported for many years. It dove­tails with his phi­los­o­phy that fund man­agers should be­have like the own­ers of the busi­nesses in which they in­vest.

An­other in­vest­ment is L Brands, owner of Vic­to­ria’s Se­cret. An­other big global hold­ing is Melco In­ter­na­tional, the Ma­caubased casino group.

Theo says the shop is not wed­ded to its po­si­tion in Berk­shire Hath­away, and it would sell if the price went sig­nif­i­cantly above its in­trin­sic value, but it is hard to be­lieve that sell­ing the War­ren Buf­fett con­glom­er­ate would ever be an un­emo­tional port­fo­lio de­ci­sion.

Theo says both Melco and Tsogo Sun, an­other large hold­ing, have been op­er­at­ing un­der tough con­di­tions, but the up­side can be sig­nif­i­cant if there is even a small in­crease in con­sumer spend­ing power.

The fund will take chunky hold­ings in small caps. Trans­ac­tion Cap­i­tal is one, as there is suf­fi­cient mar­gin of safety. Large­cap hold­ings in­clude An­glo Amer­i­can, MTN, Reinet and Sa­sol.

Cen­taur, run by Roger Wil­liams, is best known for its Flex­i­ble fund. But it made the wise busi­ness de­ci­sion to in­tro­duce a bal­anced fund, which has a wider au­di­ence.

While in­vest­ing in a flex­i­ble fund is a high-risk, high-re­turn use of dis­cre­tionary money, bal­anced funds can house longterm com­pul­sory pen­sion fund sav­ings.

But the best ideas of this small shop are still seen in the Bal­anced, within the con­straints of a 75% max­i­mum ex­po­sure to eq­ui­ties and 30% off­shore. Wil­liams says even the Bal­anced fund has a high de­gree of dis­cre­tion on as­set al­lo­ca­tion: find­ing the op­ti­mum source of risk-ad­justed re­turns through sce­nario anal­y­sis. It is cur­rently 63% in­vested in eq­ui­ties, 47% lo­cal, 16% global and 37% in fixed in­come, with 2% in cash, 20% in bonds and 4% in global cash. Wil­liams says the team is com­pe­tent in fixed in­come, though it does not of­fer it as a stand­alone prod­uct. It uses a quan­ti­ta­tive ap­proach to its bond du­ra­tion and tar­gets a de­mand­ing 1.5% out­per­for­mance.

But clearly Wil­liams’s pas­sion lies in the stock­pick­ing which, on top of old favourites in­clud­ing Bri­tish Amer­i­can To­bacco, Naspers, Old Mu­tual and Sa­sol, in­cludes more es­o­teric picks such as Mer­afe, Exor and Fiat Chrysler. Wil­liams points out that Mer­afe owns a 20.5% joint ven­ture stake (with Glen­core) in the world’s largest fer­rochrome smelt­ing com­pany, the sec­ond-low­est cost pro­ducer of fer­rochrome with more than 50 years of re­serve life. He ex­pects prices to in­crease as highly pol­lut­ing Chi­nese smelters are closed.

Fiat Chrysler is a bet on the im­proved per­cep­tion of the Fiat, Jeep and Maserati brands. Exor, the hold­ing com­pany of the Agnelli fam­ily, the Ru­perts of Italy, trades on a 32% dis­count even though it has con­trol­ling stakes in Fiat, Fer­rari and The Econ­o­mist, one of the few se­ri­ously prof­itable global news magazines. Wil­liams is also a fan of African Rain­bow Min­er­als with a strong port­fo­lio of man­ganese mines as well as iron ore and plat­inum.

Cen­taur also looks out for shares with an SA con­nec­tion. It holds Bright­Sphere, the for­mer Old Mu­tual As­set Man­age­ment US. Wil­liams says it has been dis­ap­point­ing due to unan­tic­i­pated weak­ness in emerg­ing mar­kets, but it op­er­ates a hy­brid part­ner­ship/share­holder model which, he says, is the ideal model for an as­set man­ager.

Pic­ture: 123RF — DAVID CARILLET

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