Top Centaur flexible fund seeks quality shares at the right price

Long-term investors in the Centaur BCI Flexible Fund must be smiling from ear to ear. The fund, one of two unit trust funds offered by Cape Town-based boutique manager Centaur Asset Management, produced the best risk-adjusted (as well as straight) returns over five years to the end of 2016 of all 71 funds in the South African multi-asset flexible subcategory, achieving an average 18.87 percent a year, according to ProfileData.

This figure is well above the performance of the FTSE/JSE All Share Index (13 percent a year over the five years) and Centaur’s own benchmark (11.1 percent a year). The benchmark is a composite of the Financial and Diversified Industrials Index, the Resources Index and the repo rate.

The fund has been managed by Roger Williams since its inception in 2004, after he founded Centaur Asset Management in 2000. He has an honours degree in economic science and is a Chartered Financial Analyst, with experience as a foreign exchange dealer, equity analyst and stockbroker.

Multi-asset flexible funds are allowed to invest across all the asset classes of equity, bonds, listed property and cash instruments in any proportions, the only limits being a maximum exposure of 30 percent to offshore securities (including five percent to Africa) and 10 percent to any single share.

Equity forms the backbone of the Flexible Fund’s portfolio. Williams says: “At Centaur, we identify three equity market states: positive, neutral and negative, and in each market state, where our target equity content is 90 percent, 80 percent and 60 percent respectively. These market states are identified based on proprietary indicators and savvy judgment.” He says the fund’s asset allocation is designed to bolster returns in major bear markets by protecting capital, while buying into the deepvalue opportunities that such a market spawns. “We have a high degree of flexibility to move out of equities into other asset classes, but practically don’t find changes in market states happening often.” Williams says that once the overall allocation has been decided, Centaur’s basic philosophy is finding quality shares at the right price. “Good quality is defined by reasonably stable profits, great management, a high return on equity and good growth prospects. Opportunities arise when there is a wide disparity between our estimate of the value of a share and the market price.”

As part of their investment strategy, Centaur focuses on 11 “areas of opportunity”, including turnarounds, corporate actions, domestic cyclicals, and stalwarts. “For example, our corporate action category consists of companies that are restructuring, often presenting valuable opportunities for astute stock pickers,” Williams says.

On the past five years, Williams says it is no secret that the period has produced challenges. “Fortunately, Centaur has geared itself through its investment processes to successfully navigate volatile times.”

He gives the following examples of how the Flexible Fund has successfully negotiated the market:

• Centaur moved about 10 percent of the fund into euros and United States dollars in 2011 at excellent levels and capitalised on the subsequent rand weakness.

• Centaur bought a 10-percent holding in Rand Merchant Insurance in 2011, which more than tripled in value by 2015.

• In 2015, with over 20 percent held directly offshore, the fund benefited from a falling rand and excellent international stock picks. In early 2016 the fund locked in a portion of gains on rand weakness using futures.

• In late 2015 and early 2016, Centaur invested in selected deep value and resource stocks, which have performed exceptionally.

Looking ahead, Williams and his team are optimistic about the Flexible Fund’s prospects, expecting an economic recovery off a low base, leading to improved confidence and better economic momentum.

“We have identified selected shares with high prospective return potential and are targeting an equity content of over 80 percent, with a focus on South African equities,” he says. “From a sectoral perspective, we have increased exposure to domestic cyclical shares, which have excellent recovery potential, and select resource counters at the expense of offshoreoriented shares.

“Our mission at Centaur Asset Management is to keep doing what we do by implementing calculated moves to offer our clients optimal returns,” Williams says. – Martin Hesse

Afocus on generating returns above inflation and protecting investors’ capital from losses has earned the Prescient Income Provider Fund its second Raging Bull Award in two years.

The fund’s peers in the South African multi-asset income and interest-bearing sub-categories might out-perform it over the short term, but beating peergroup performance is not the fund’s aim. Instead, it carefully selects low-risk, interest-bearing instruments to provide investors with inflation-beating returns over the long term.

The Income Provider Fund returned an average of 9.5 percent a year over three years to December 31, 2016, according to ProfileData. The 50 funds in the South African multi-asset income sub-category with a performance history of at least three years produced an average return of 6.84 percent a year. The fund has been the top-performer in is sub-category over the fiveyear (9.16 percent) and 10-year (9.31 percent) periods to the end of December.

The interest-bearing shortterm sub-category returned an average of 6.8 percent a year over three years, while the interestbearing variable-term (bond fund) sub-category returned on average 6.67 percent a year.

As a multi-asset income fund, the Income Provider Fund can, in addition to cash and bonds, invest in equities (up to 10 percent of the portfolio) and listed property shares (up to 25 percent). The fund can invest 25 percent offshore and a further five percent in Africa. Funds in the interest-bearing sub-categories can invest only in interest-generating assets, such as cash and bonds. This ability to diversify gives multi-asset income funds a good chance of out-performing inflation when interest rates are low and inflation is high.

The Income Provider Fund aims to deliver a return of inflation, as measured by the Consumer Price Index (CPI), plus three percentage points a year through a full interest rate cycle, while aiming never to lose capital over a rolling three-month period.

According to the fund’s fact sheet, it invests in local and offshore money market instruments, bonds, listed property, preference shares, inflation-linked bonds and derivatives.

Meyer Coetzee, a director of Prescient Investment Management and the head of retail, says that, since the fund was launched 11 years ago, it has delivered, on average, a return of nearly four percent above inflation a year, before fees.

When selecting assets, Meyer says the departure point is to ensure that they will not result in the fund under-performing inflation over any one-year period. The managers then select instruments that will generate the fund’s return objective.

He says the fund’s exposure to high-yield, short-duration, fixed-interest instruments has been the main driver of the fund’s out-performance over the past three years. The fund has had significant exposure to cash and good-quality, short-dated floatingrate bonds.

Although the fund can invest in equities and listed property, it will not diversify into these asset classes simply to generate shortterm out-performance at the risk of incurring capital losses.

(The fund currently has less than three percent in local listed property and 2.5 percent in preference shares.)

Meyer says one of the drivers of the fund’s returns over the past three years has been exposure to offshore assets.

“The challenge with offshore assets is to manage the currency risk within acceptable levels for clients with a risk profile consistent with the Income Provider Fund, because the exchange rate is notoriously volatile. The fund’s current offshore exposure is 15.5 percent, but, for a number of reasons, all the dollar exposure is hedged to rands,” he says.

“With yields on dollar assets of about three percent and a currency forward premium (the differential between local and United States interest rates) of about seven percent, the fund currently earns an average yield of 10 percent or more from this asset class. This is well on par for the overall return target of CPI plus three a year.”

The main factors that underpin the fund’s investment approach are:

• Credit quality. The fund uses comprehensive, strict processes to check credit risk before it invests in bonds not guaranteed by the government, such as those offered by banks and listed companies. The aim of these processes is to ensure that the potential rewards outweigh the risk of credit defaults.

• Duration. Broadly speaking, the longer the term, the higher the risk, but also the better the prospect of higher returns.

• Hedging offshore exposure. “When the dollar strengthens relative to the rand, holding foreign assets results in higher returns,” Meyer says.

“However, the opposite is also true; hence holding offshore assets can result in significant risk for the fund. For that reason, the fund has locked in the great returns it has enjoyed over the past number of years by hedging the currency risk.”

The Prescient Income Provider Fund is managed by Cape Town-based Prescient Investment Management Company, where the interestbearing division is led by veteran investor Guy Toms. The minimum investment amounts are a lump sum of R10 000 or R1 000 a month. – Mark Bechard