Selective share picks see Absa equity fund through market slump
The long-term resilience of good-quality domestic equity shares helped the Absa Select Equity Fund to grab two Raging Bull Awards this year – one for the best risk-adjusted performance over five years in the domestic general equity sub-category and one for having the highest return over three years among all the domestic general equity, value and growth funds. The fund also earned a certificate for top performance in the domestic equity general sub-category over three years.
Although six funds earned the highest PlexCrown rating of five crowns in the domestic equity general sub-category, the Absa Select Equity Fund had the highest overall score, placing it in top position.
The Select Equity Fund produced annualised returns of 22.81 percent over five years to the end of December last year (according to ProfileData), out-performing the fund’s benchmark, the FTSE/JSE All Share index (Alsi), which showed annualised returns of 20.25 percent. Over the three years to the end of December, the fund had the highest return, 11 percent a year, of all the funds in its sub-category. The Alsi returned 6.53 percent a year over the same period. In comparison, the money market produced annualised returns of 8.7 percent over five years and 9.8 percent over three years to the end of December last year.
Errol Shear, the chief investment officer of Absa Asset Management, says these performance figures challenge the widely held theory that cash was a sound bet when the JSE plummeted in 2008 through to the first quarter of last year.
He says the market recovered between March and December last year, but many jittery investors were in no mood to take advantage of this.
“Market flight is traditionally followed by a period on the sidelines, compounding overall losses. The result is a significant erosion of wealth,” he says.
Shear says the fund has a “pragmatic, value-oriented investment style and seeks outperformance through selective stock-picking with a focus on quality companies”. Some “interesting” smallcap shares, such as those of pharmaceutical company CiplaMedpro, software company Datatec and mining company Merafe, frequently liven up the mix, Shear says. “We look for companies with good business models, where the price at which the share is trading is below intrinsic value. To quote Warren Buffett, price is what you pay, value is what you get. Our valuations are based mainly on price-earnings (PE) ratios and discounted cash flows,” he says. A PE ratio tells you how many years, at the current level of earnings, it will take you to recover your investment in a share. It is calculated by dividing the share price by the annual earnings per share.
Shear says despite tough market conditions, the companies in which the fund had large investments and which performed well over the past year included life assurer Old Mutual, retailer Mr Price and food producer Tongaat Hulett.
“We have attempted to keep our equity exposure to companies where we are comfortable with future earnings prospects,” he says.
At the end of December last year, the fund’s top holdings included Absa, Standard Bank, Anglo American, Mr Price and Spar.
Shear says constant research and active management help to contain downside risk.
Although the fund lost money in 2008, the year of the financial crisis, when the Alsi dropped 23.2 percent, he says the fund beat the index by 12.5 percentage points through good stock-picking.
Shear says he prefers to buy goodquality shares and would rather pay a little more for quality than buy a stock just because it is cheap.
“We switched out of cyclical shares, such as Merafe, into more defensive companies, such as retailer Shoprite (up 28 percent in 2008), general industrial company Remgro (up 24 percent in 2008) and Mr Price (up 20 percent in 2008). The market crash gave us excellent opportunities to acquire great companies at reasonable prices,” Shear says.
He says the Absa Select Equity Fund also sold down on resources stocks, including Anglo American, halfway through 2008, after enjoying some excellent returns on these shares in 2007 and early 2008.
“Hopefully, recent performance figures will remind investors of the advantages of taking a core equity position in line with their risk appetite and maintaining a judicious level of market exposure, even in uncertain times,” he says.
Looking ahead, Shear says he thinks the stock market rose too quickly last year and that 2010 may be a year of more modest returns.
“We remain fairly defensively positioned, concentrating on companies that we believe have sound business models, where management is making sensible decisions and where we see good earnings growth this year,” he says.
The minimum investment amount for the fund is a lump sum of R2 000 or a monthly debit order of R200. – Neesa Moodley-Isaacs
The Raging Bull Award for the top-performing fixed-interest fund went to an income fund this year, because the shorter-dated instruments held by the fund delivered higher returns than longterm bonds.
Fixed-interest funds are made up of varying investments in the bond, cash and money markets.
Bonds are debt instruments usually issued by the government or corporate companies to raise capital.
Ansie van Rensburg, the manager of the Stanlib Cash Plus Fund, says performance in the bond market came under pressure due to the large funding requirements of the government and the parastatal sector (for example, Eskom). This caused the bond curve to steepen, resulting in the under-performance of longer-dated bonds.
Van Rensburg says the Stanlib Cash Plus Fund’s exposure to shorter-dated bonds over the past three years contributed to the fund’s excellent performance.
“As the bonds, which were mostly corporate bonds, got closer to their expiry dates, their returns started to move in line with that of money market assets,” she says.
Van Rensburg says the average duration (term to maturity) of all the instruments in the fund is limited to 180 days. A single investment can have a maturity of up to 18 months. This means that unexpected moves in interest rates can affect the capital value of the portfolio, but the risk is limited by the maximum average duration of the portfolio. Other risks include unexpected changes in inflation that cause market volatility (if rates move in a direction opposite to expectations) and general market conditions.
“We try to stick to investments of the highest credit quality. Although revenue is calculated daily, it is distributed to investors on a monthly basis,” she says.
Van Rensburg says the market is pricing in flat interest rates for one year, with the risk of one more rate cut at the next Monetary Policy Committee meeting in March. This has become likely, because Reserve Bank governor Gill Marcus recently mentioned that the committee’s decision this week to keep rates unchanged was not unanimous.
“Inflation is expected to move back towards the target range of three to six percent during the first quarter of 2010. Due to cost push inflation pressures filtering through, we expect inflation will move out of the target range towards late 2010.”
Van Rensburg says because of concerns about inflation and the fact that interest rates have reached the bottom of the cycle, she will keep the average duration of the fund at slightly less than six months. – Neesa Moodley-Isaacs