Small and beau­ti­ful

This fund cur­rently only has around R240m un­der man­age­ment, but it de­serves at­ten­tion given its track record of de­liv­er­ing mar­ket- and sec­tor-beat­ing re­turns at low cost. HOW THE CLU­CASGRAY EQUILIB­RIUM FUND MEA­SURES UP

Finweek English Edition - - MARKETPLACE PRO PICK - Edi­to­rial@fin­ Craig Gra­didge is a co-founder of Gra­didge-Mahura In­vest­ments.

one thing that has sur­prised me a lot since be­com­ing a fi­nan­cial plan­ner is just how much en­ergy in­vestors ex­pend try­ing to iden­tify which of the newer fund man­agers will be “the next big thing”. Hardly a month goes by with­out in­vestors or prospec­tive in­vestors want­ing to know who we think will be the next big thing. I sup­pose there are brag­ging rights that come with hav­ing picked a win­ner be­fore ev­ery­one else, in ad­di­tion to the ex­cess re­turns that a man­ager has to de­liver to truly be­come “the next big thing”.

Re­cently we have fielded a few ques­tions on Syg­nia’s 4th In­dus­trial Rev­o­lu­tion Global Eq­uity Fund in par­tic­u­lar, but of­ten we get asked for a gen­eral opin­ion on which fund we think could be a fu­ture ti­tan.

We gen­er­ally do not spend much time and ef­fort specif­i­cally try­ing to iden­tify to­mor­row’s winners, but we do have an obli­ga­tion to our clients to con­sider the mer­its of all funds in the mar­ket. How­ever, given that we act in a fidu­ciary ca­pac­ity for clients, our fo­cus has to be on is­sues such as sus­tain­abil­ity and risk man­age­ment rather than the po­ten­tial to win per­for­mance based awards.

One fund that has caught our at­ten­tion re­cently is the Clu­casGray Equilib­rium Fund (CGEF). It is rea­son­ably un­ex­cit­ing, but suf­fi­ciently dif­fer­ent for us to be in­ter­ested. The CGEF is a bal­anced fund and com­plies with reg­u­la­tion 28 of the Pen­sions Fund Act. The fund was launched in Jan­uary 2015 and is man­aged by Andrew Vint­cent (pre­vi­ously of Stan­lib and RMB), and Grant Mor­ris (pre­vi­ously of Ac­cen­ture and Stan­dard Bank). Bal­anced funds are un­likely to get any­one’s blood racing with ex­cite­ment, which is pos­si­bly rea­son enough to in­vest.

There are a num­ber of fac­tors that have re­sulted in us adding the CGEF to our shop­ping list for client port­fo­lios: their at­ti­tude to risk, pric­ing, and the way they use their size ad­van­tage to ben­e­fit clients. In all our en­gage­ments with fund man­age­ment, we noted a con­sis­tent aware­ness of risks to the port­fo­lio, and a gen­eral con­ser­vatism against tak­ing any big bets. The com­pany did not list this as a strength, but it was clear to us that we were not talk­ing to mav­er­icks.

From a cost per­spec­tive, the fund is cur­rently priced at 0.6% with no per­for­mance fees. This puts it at the cheap end of the ac­tive man­age­ment pric­ing curve for bal­anced man­dates. There is an in­ten­tion to raise this fee to 0.75% from Jan­uary 2017. Per­haps they could be con­vinced to leave it at 0.6% if they get enough sup­port from the mar­ket.

Fi­nally, the fund has ex­po­sure to stocks such as ADBEE (share code: ADE), which is an as­set-backed se­cu­rity listed on the JSE as part of Ad­cock’s BEE deal. ADE has a po­ten­tially at­trac­tive risk/re­turn pro­file over the next three years. Larger funds are not able to take a mean­ing­ful ex­po­sure to such op­por­tu­ni­ties. There were nu­mer­ous ex­am­ples of such small- and mid-cap ex­po­sures in the port­fo­lio.

The graph shows the fund’s per­for­mance since in­cep­tion, ver­sus the sec­tor av­er­age and the JSE. It is clear that the fund came into ex­is­tence in what has been a dif­fi­cult pe­riod for mar­kets.

The fund has man­aged to out­per­form both peers and the mar­ket in dif­fi­cult mar­ket con­di­tions, which is com­fort­ing for in­vestors. I sus­pect that their at­ti­tude to risk and low cost struc­ture have played a big part in this out­come.

The fund has around R240m as­sets un­der man­age­ment, which makes it very small. How­ever, I sus­pect that it will be­come a whole lot big­ger if its man­agers con­tinue to de­liver mar­ket- and sec­tor-beat­ing re­turns at a low cost. Those are two im­por­tant in­gre­di­ents in the en­deav­our to be­come the next big thing!

We gen­er­ally do not spend much time and ef­fort specif­i­cally try­ing to iden­tify to­mor­row’s winners, but we do have an obli­ga­tion to our clients to con­sider the mer­its of all funds in the mar­ket.

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