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.
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.