Abil­ity to adapt to sea­sonal change

The Old Mu­tual Man­aged Al­pha Eq­uity Fund, with its highly di­verse hold­ings com­pris­ing ap­prox­i­mately 80 coun­ters, is a good op­tion for in­vestors who are look­ing for im­pres­sive re­turns.

Finweek English Edition - - FUND FOCUS - *fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

acon­sis­tently top-quar­tile do­mes­tic gen­eral eq­uity fund sig­nif­i­cantly dif­fer­ent to its pre­dom­i­nantly bot­tom-up style peers is the Old Mu­tual Man­aged Al­pha Eq­uity Fund from Old Mu­tual In­vest­ment Group’s Cus­tomised So­lu­tions bou­tique. Its main legs are its highly ac­tive man­age­ment, sta­bil­ity, con­sis­tency of per­for­mance, and ob­jec­tiv­ity in its port­fo­lio con­struc­tion.

Launched in De­cem­ber 1998, the fund’s pri­mary aim is to achieve steady cap­i­tal growth and a higher re­turn than the av­er­age gen­eral eq­uity fund. The fund has gen­er­ated an ad­mirable an­nu­alised 15.5% since in­cep­tion, 10.9% over 10 years, 13.7% over seven, 14% over five, and 7.2% over three.

Port­fo­lio man­agers Saliegh Salaam, Grant Wat­son and War­ren McLeod have op­er­ated as a closely knit team for more than a decade. Their in­vest­ment process is a pro­pri­etary sys­tem­atic one which en­com­passes fi­nan­cial state­ment data, macro-eco­nomic vari­ables and a strong fo­cus on risk di­ver­si­fi­ca­tion.

In ad­di­tion to co-man­ag­ing the Man­aged Al­pha Eq­uity Fund, Wat­son is the joint bou­tique head of the Old Mu­tual In­vest­ment Group Cus­tomised So­lu­tions bou­tique along with John Gilchrist. The Cus­tomised So­lu­tions bou­tique has more than R110bn in as­sets un­der man­age­ment. Salaam is re­spon­si­ble for Cus­tomised So­lu­tions’ Shari’ah-com­pli­ant fund of­fer­ings across the eq­uity and multi-as­set class ranges, both lo­cally and glob­ally, and is the lead man­ager for some of the bou­tique’s spe­cial­ist eq­uity funds.

Wat­son is in­volved in driv­ing the bou­tique in­vest­ment process, de­vel­op­ing and im­ple­ment­ing its in­vest­ment process, and man­ag­ing port­fo­lio strat­egy across the hedge fund, gen­eral eq­uity, spe­cial­ist eq­uity and multi-as­set class range. McLeod is re­spon­si­ble for con­struct­ing and man­ag­ing port­fo­lios.

“The Man­aged Al­pha Eq­uity Fund is eu­phemisti­cally mod­elled on Charles Dar­win’s credo of ‘You will need to adapt, or you will die,’” Salaam ex­plains. “It con­sis­tently adapts to the chang­ing sea­sons in the mar­ket.”

“We are nei­ther crys­tal ball gaz­ers nor fo­cused on any one world view. We watch de­vel­op­ments closely; we con­sis­tently ad­just the port­fo­lio to lever­age the great­est pos­si­ble re­wards; and this typ­i­cally would be to cap­ture up­ward mo­men­tum, re­duce risk, or bring a yield com­po­nent into the port­fo­lio.”

Many ri­val man­agers, Salaam points out, would look in iso­la­tion at a sin­gle share or two, and do an in-depth anal­y­sis into it. The Man­aged Al­pha Eq­uity fund team, in con­trast, fo­cuses pri­mar­ily on themes and how they might af­fect a sec­tor or stock. These would in­clude ex­ter­nal shocks, mar­ket move­ments, cur­rency changes and in­ter­est rate move­ments.

“For ex­am­ple, if the US were to aban­don its his­tor­i­cal po­si­tion on the strong dol­lar that would be ma­te­rial to us. Port­fo­lio man­ager Port­fo­lio man­ager Port­fo­lio man­ager Like­wise, we’d be con­cerned about the im­pact on the rand if the fi­nance min­is­ter were to be fired,” Salaam says.

Typ­i­cal in­stances re­quir­ing ma­jor ad­just­ments in the past year or two were var­i­ous cur­rency shocks, the agree­ment by oil pro­duc­ers to cut pro­duc­tion, the com­modi­ties re­bound, Nenegate, Brexit and Trump.

The fund’s team places con­sid­er­able em­pha­sis on news­flow in iden­ti­fy­ing these themes, Wat­son says. “The essence of what we do is to iden­tify the themes driv­ing the mar­ket, in­clud­ing and over and above val­u­a­tion and prof­itabil­ity. These themes are im­por­tant and are the ma­jor mar­ket driv­ers that in­di­cate what in­vestors are look­ing for. For ex­am­ple, these could be high yield en­vi­ron­ments, low yield en­vi­ron­ments, value en­vi­ron­ments, good and bad. The dy­namic na­ture of our in­vest­ment process al­lows us to adapt to these chang­ing themes through time as their sig­nif­i­cance varies through time.

“Also im­por­tant is to iden­tify dis­con­nects be­tween the econ­omy and shares. The way a share re­acts to a par­tic­u­lar sit­u­a­tion is not nec­es­sar­ily the rep­re­sen­ta­tion of that share’s true value,” he adds.

The dif­fer­ence in out­comes con­se­quently be­tween other funds and the Man­aged Al­pha Eq­uity Fund, says Wat­son, is that they tend to have po­larised out­comes, with huge out­per­for­mance or huge un­der­per­for­mance. “In our case there’d be sig­nif­i­cant sta­bil­ity with con­sis­tency in per­for­mance.”

The Man­aged Al­pha Eq­uity Fund tends to have highly di­verse hold­ings in its port­fo­lio, com­pris­ing around 80 coun­ters, com­pared with the av­er­age gen­eral eq­uity fund’s 30 to 40. In­her­ent in the for­mer is a highly con­cen­trated core port­fo­lio with close in­ter­ac­tion be­tween shares that are held.

A break­down of the port­fo­lio by sec­tor com­po­si­tion at end De­cem­ber showed re­sources at 20.2%, fi­nan­cial at 19.2%, in­dus­tri­als at 58.9%, and liq­uid as­sets at 1.7%.

Top hold­ings were Naspers* (14.6%), Sa­sol (4.1%), Bri­tish Amer­i­can To­bacco (BAT, at 3.4%), MTN (3.2%), Bid­vest (3%), Stein­hoff (2.8%), An­glo Amer­i­can (2.7%) and BHP Bil­li­ton (2.7%).

The fund is ac­tu­ally un­der­weight Naspers*, says Salaam, in spite of it head­ing the list. “Its weight­ing in terms of our bench­mark, the Swix, is 17% to 18%, and we’re be­low it. The fund is also un­der­weight Stein­hoff. “We like BAT be­cause of its con­sis­tent over­all prof­itabil­ity, it has a lot of cash, and in­vestors are be­ing re­warded. And we like An­glo and BHP be­cause the mar­ket is re­ward­ing com­mod­ity com­pa­nies and those geared to the global eco­nomic cy­cle and global eco­nomic re­cov­ery.”

The port­fo­lio is un­der­weight fi­nan­cials, he says, mainly be­cause they’re not set to ben­e­fit sig­nif­i­cantly in the present en­vi­ron­ment.

Grant Wat­son

Saliegh Salaam

War­ren McLeod

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