Morningstar shines on managers
Prudential, Allan Gray win awards for funds’ consistent returns
● Prudential Investment Managers and Allan Gray were honoured this week for their ability to deliver consistently good performances across their ranges of unit trust funds at the Morningstar Awards dinner held in Cape Town.
While they may not be the fund houses with funds in the top positions in all the major unit trust categories, the awards recognise that they are managers of funds that are most consistently among the top performers.
Prudential won the award for being the best manager with a larger fund range, for the third year in a row, beating runners-up PSG and Nedgroup Investments on performance over periods up to five years ending in December last year.
Allan Gray won for best manager with a smaller range of funds — its second win since 2010. Allan Gray beat Pinebridge and Dodge and Cox, which were placed second and third in the rankings. Both runners-up are large global managers of offshore funds but offer a small set of funds, approved by the Financial Services Board, to South African investors.
Morningstar ranks managers of local and approved offshore funds on their house scores — an average score derived from riskadjusted five-year performance of each of their qualifying funds under management that have a return history of five years or more.
Managers with 10 funds or more are regarded as managers of larger fund ranges; those with fewer than 10 funds are regarded as managers of smaller fund ranges, and it is generally more difficult to achieve a good performance across a large range of funds than across a smaller range.
Prudential was ranked on its performance across 11 qualifying funds.
Matthew Vass, a research analyst at Morningstar, says Prudential’s two equity funds, its multiasset high equity fund and its global high-yield bond fund, contributed to its top overall performance.
Prudential’s investment strategy is to buy shares and bonds that it believes are undervalued relative to the market and which will return to fair value. When shares or bonds reach their fair value, Prudential sells them to realise profits for investors.
It picks shares and other securities based on a valuation of each company rather than taking bets on sectors or industries, says Michael Moyle, the manager of Prudential’s Balanced Fund.
To avoid big losses, it does not take specific bets on companies or securities, preferring smaller active positions in a more diversified range of companies, he says. The manager tends to deliver smaller gains that build up into strong returns over time rather than “shoot the lights out”.
Moyle says Prudential’s Balanced Fund benefited over the past year from an over-
To avoid big losses, [Prudential] does not take specific bets on companies
Michael Moyle Manager of Prudential’s Balanced Fund
weight exposure to South African bonds and listed property.
In December 2016, the manager used some cash in the portfolio to add to its local equity portfolio as it believed many local shares had moved below long-term fair value. The house had a high exposure heading into last year and benefited from July last year, when equity performance started to accelerate because of several factors. It also had little exposure to Steinhoff.
Prudential was also modestly overweight in local bonds last year in the aftermath of the country’s credit rating downgrades, and benefited when these rallied after Cyril Ramaphosa’s election as ANC president.
Allan Gray was ranked by Morningstar on its performance across seven qualifying funds.
Vass says the manager’s Orbis Global Equity Fund of Funds, Orbis Global Fund of Funds, Balanced, Stable and Equity funds all contributed to its good performance.
Like Prudential, Allan Gray is a manager that seeks out shares and bonds that are trading below what the manager regards as their intrinsic value — the discounted value of expected future cash flows or what a prudent businessperson would pay for the company. The manager expects that these securities will increase in value over time, making good returns for investors.
This valuation-driven style can lead the manager to underperform its peers at times, when investors are driving prices higher based on sentiment rather than the factors driving the underlying businesses.
Grant Pitt, joint head of institutional client services at Allan Gray, says it spends little time on analysing less predictable facets of shares such as short-term price fluctuations, which are heavily influenced by investor psychology and speculation.