Se­lec­tive share picks see Absa eq­uity fund through mar­ket slump

Weekend Argus (Saturday Edition) - - GOODHANGOUTS - Rag­ing Bull Award for the Best Broad-based Do­mes­tic Eq­uity Fund – the top-per­form­ing fund on straight per­for­mance in this cat­e­gory over three years to De­cem­ber 31, 2009 Rag­ing Bull Award for the Best Do­mes­tic Eq­uity Gen­eral Fund – the top-per­form­ing fund

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

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