WHERE TOP FUND MANAGERS ARE SPOTTING VALUE
As the year draws to a close, many investors will be out meeting with their financial advisers to consider how their savings should be invested. finweek spoke to the managers of six of the country’s top-performing balanced funds to gauge their views on So
the sluggish economy, expensive stock market, looming ratings downgrade and possible interest rate increase all combined make for a tough climate for investors seeking returns in SA.
Regardless, many retirees, or those saving up for their golden years, will continue to opt to put a l arge portion of their nest eggs in riskier unit trusts, hoping for higher returns. The riskiest unit trusts allowed by law are balanced funds.
Balanced-fund managers are walking a tightrope to beat inflation and deliver on a dual mandate to investors, namely that of growing the underlying capital while delivering inflation-beating returns. With the Pension Funds Act limiting balanced f unds’ offshore exposure t o 25% of t heir underlying capital, almost all managers have allocated the maximum amount they are allowed to foreign assets.
The weakening rand has proved an unlikely tailwind for many balanced funds this year and acted as a kind of hedge.
The balanced-fund managers featured i n this issue were good performers on Morningstar Research’s list over the past 12 months.
1. Rezco Managed Plus
FUND MANAGER: ROB SPANJAARD
One-year return (Fund/Inflation): 15.7%/4.6%
Three-year annualised return (Fund/Inflation): 18.6%/5.73%
FINDING VALUE SHARES i s proving difficult for Rob Spanjaard, a fund manager at Rezco Asset Management.
“Value is really hard to find,” he says. “Shares are really expensive.”
That is one of the reasons why the Rezco Managed Plus Fund is holding relatively more cash than its peers, according to him. Waiting for the right i nvestment opportunities to come along would be rewarding, he says.
“There is value in patience,” Spanjaard says. “Patience will be rewarded; not overpay.”
The fund favours local financial and listed property stocks, which comprise almost half of i ts equity i nvestments. The largest financial holding is medical insurer Discovery. The company’s Chinese operations still boast value, Spanjaard says.
“There is good potential upside, which you are not really paying much for,” according to him.
Another stock delivering value to the fund is multinational packaging giant Mondi plc. This company continues to produce “great numbers” and is well managed, according to Spanjaard.
In terms of international investment opportunities, the fund is positive on the US market and is starting to see value opportunities coming through from Europe – a market, which is slowly recovering from its sovereign debt crisis, Spanjaard says.
“We find European companies that have an export component benefit from the euro being a fairly weak currency,” he explains.
Spanjaard’s tip to investors who are contemplating rebalancing their portfolios and considering balanced funds is that they should find funds with a “good track record” and that have done well through the bear market, or when the stock market fell.
In addition, investors should think about diversifying their balanced funds so as to have different managers with different management styles, he says.
2. Truffle Balanced Fund
FUND MANAGER: CHARLES BOOTH
One-year return (Fund/Inflation): 18.42%/4.6%
Three-year annualised return (Fund/Inflation): 18.72%/5.73%
TRUFFLE ASSET MANAGEMENT’S
BALANCED FUND has a large exposure to local financial and property stocks, which it views as defensive in the current economic conditions, according to Charles Booth, one of the fund’s managers.
“Value is not as easy to find as a year or two ago,” he says. “We’ve got a lot of exposure to financials, which we think is defensive. That includes property.”
The fund also has a large exposure to British American Tobacco, where there is a “very high degree of certainty” of earnings, Booth says.
His tip for investors choosing a balanced fund is to be comfortable that the manager would ensure “good long-term returns”.
In the case of a balanced fund, the manager’s objectives are more complicated than is the case with a straight equity fund, says Booth. On the one hand the objective is to generate a good return, while on the other, the manager tries to preserve capital, he explains.
3. Discovery Balanced Fund
FUND MANAGER: CHRIS FREUND
One-year return (Fund/Inflation): 12.88%/4.6%
Three-year annualised return (Fund/Inflation): 15.79%/5.73%
INVESTMENT OPPORTUNITIES IN the local equity market are becoming less obvious, according to Chris Freund, a fund manager at Investec Asset Management who oversees the Discovery Balanced Fund.
The fund’s above-inflation returns for the past 12 months can be attributed to the very strong performance of the South African stocks held in its portfolio and by good returns on the foreign assets of the fund, according to Freund.
One of the stocks that boosted the fund was Steinhoff International, in which the fund had an overweight position, according to him. Another stock that boosted the fund’s returns was Mondi, which Freund says the fund has held for some time now.
“We think Mondi has an extremely high- quality management team,” he says.
The fund also had a bigger exposure to Naspers* than many other funds, according to Freund. He dismissed the idea that the stock was trading at too high a valuation and says that, when one analyses the company, it has to be split into its holding in Tencent and its other internet-based businesses as well as its DStv assets.
“If you split it up, in fact it was reasonably priced given how well Tencent was growing,” Freund says, adding that the fund likes the team that is managing Tencent. Naspers holds a 34% stake in Tencent, a Chinese internet company.
Going forward, Freund expects Naspers’s non-Tencent business units, including the electronic classified businesses, to do “very well” over the next couple of years.
He also reckons Vodacom would deliver good returns in due course as mobile phone tariffs in SA halt their slide and Cell C abandons its price pressures on competitors. Aside from easing competitor pressures, mobile data is likely to continue to grow at a very rapid pace over the next couple of years, according to Freund.
Freund’s tip for investors is that they should put their money into balanced funds. Over the next couple of years, the level of returns between different asset classes will probably not be that big, but he says that the big difference will come from the specific securities you own. He expects the average returns on balanced funds to be in the region of between 9% and 10%. He is, however, confident that they will be able to deliver even higher real returns for the Discovery Balanced fund.
4. Autus BCI Balanced Fund
FUND MANAGER: NIËL HOUGAARD
One-year return (Fund/Inflation): 16.48%/ 4.6% 18.56%/Three-year annualised return (Fund/Inflation): 5.73%
AUTUS FUND MANAGERS’ BALANCED FUND is seeing more value in stock picks offshore than locally, says Niël Hougaard, manager of the fund.
“It is no secret that our fund is underweight in equities,” he says. “If you aim to add value to a portfolio, it comes down to which companies you pick to include in your fund.”
In this regard, Hougaard still sees opportunities in certain local equities such as the PSG-linked companies, including Curro Holdings, Zeder Investments and Capitec. In addition, he is optimistic about the earnings potential of local companies with a foreign income stream, such as Steinhoff International and Naspers. Other opportunities, however, are limited due to the valuation of local stocks.
“The JSE’s All Share I ndex trading at a price-to-earnings ratio of 26.8 worries me,” Hougaard says. “Utilising your full offshore allocation is definitely a better option.”
With regards to investors having to decide where to move their retirement money to, Hougaard’s tip is to look for those funds that have yielded inflation-beating returns over the long term.
“The balanced fund must beat inflation and yield real growth in addition to protecting the investor’s purchasing power over time,” he says.
In addition, he says investors should keep abreast of the changes in the market and industry. Larger fund managers may lack the nimbleness associated with boutique-like outfits, which can move swiftly in and out of positions to optimise returns growth, he explains.
“It is, however, very important that the investor knows what is happening in the market,” he adds.
5. Investec Managed Fund
FUND MANAGER: GAILE DANIEL
One-year return (Fund/Inflation): 14%/4.6%
Three-year annualised return (Fund/Inflation): 14.8%/5.73%
INVESTEC ASSET MANAGEMENT’S MANAGED
FUND holds more than a quarter of its underlying assets in cash and money-market instruments as Gaile Daniel, manager of the fund, doesn’t see many cheap stocks in the local market.
“It’s a bearish statement to be in cash,” she says, adding that cash has done better than banks. “I struggle to be bullish on bonds.”
With the JSE trading at expensive valuations and the local economy buckling under multi-year low commodity prices, increasing numbers of companies are missing earnings targets.
A f unction of t he weak e c onomy i s t he banking sector, according to her. The fund is “l i ght” i n banks, which she describes as being a contrarian position to the rest of the market. “The banks have done very well until the start of this year,” she says. “The revisions [to earnings] are slightly negative.”
In addition, a lot of the local stocks have exposure to the rest of Africa, Daniel says. With many resourcedependent emerging-market economies suffering the same fate as SA, growth prospects for these countries are uncertain.
“For a long time we’ve been concerned about the risk in Africa. The African markets are exceptionally priced out with a huge liquidity flow behind them,” she says.
Following the unprecedented low interest-rate environment the world experienced following the recession in 2008/09, many investors in developed markets poured money into emerging markets, including the rest of Africa. Boosted by high commodity prices, record-setting economic growth lured offshore asset managers to the continent.
“It created this wall of money that mispriced everything,” Daniel says. “That story is unwinding.”
She advises investors to consider investing in one or two good balanced funds, which is less risky than buying property to rent out, where you run the risk of tenants defaulting on rental payments. In addition, she says that an investor should look for funds where the offshore allocation reduces risk rather than increases it. By this, she says that investors should determine whether the offshore allocation is invested in emerging-market assets or not.
6. Contego MET Wealth Creator Fund of Funds
FUND MANAGER: KOBUS LOUW
One-year return (Fund/Inflation): 16.33%/4.6% 14.95%/5.73%Three-year annualised return (Fund/Inflation):
THE CONTEGO MET WEALTH CREATOR FUND
OF FUNDS invests in underlying funds not limited to Contego Asset Management’s offering. The fund isn’t using its full foreign allocation as it is bullish on the rand.
“Normally we would like as much as possible of the fund in offshore,” says Kobus Louw, manager of the fund. This “is to protect against weakness in the rand and uncertainty in South Africa”.
With the rand “hovering at around R14 for a dollar”, most economists are in consensus that the currency is weak, according to him. “It’s not the opportune time to take money offshore per se,” he says. Looking at the markets, there are “huge global risks” including the US Fed considering raising interest rates and setting the direction for most other countries, the Chinese economic cooldown, the migrant crisis in Europe, war in the Middle East and Russia being intent on world dominance, according to him.
Local risks include the economic slowdown, which could be an igniting factor of student unrests, and poor service delivery, Louw explains.
“I f you l ook to the horizon, everything l ooks uncertain,” he says. “It’s a difficult time to invest. So where do you put your money? You have to put it somewhere as you can’t keep it in cash.”
Over the longer term equities and property would outperform inflation, Louw says, even as the local equity market looks expensive at the moment.
With the global and local economy “very fragile” any sudden shock would probably hit stock markets, he says.
When choosing a balanced fund to invest your retirement money, an investor must consider that the fund should deliver returns of between four and five percentage points above inflation, says Louw, as retirees would have to live off these returns.
Another tip for investors is for them to ensure that a good portion of the balanced fund is invested offshore to mitigate against South African country risk, he says.
Charles Booth Fund manager: Truffle Balanced Fund
Rob Spanjaard Fund manager: Rezco Managed Plus
Chris Freund Fund manager:
Discovery Balanced Fund
Niël Hougaard Fund manager:
Autus BCI Balanced Fund
Kobus Louw Fund manager: Contego MET Wealth Creator
Fund of Funds
Gaile Daniel Fund manager:
Investec Managed Fund