Go­ing liq­uid helped Rezco to ride the down­turn

Weekend Argus (Saturday Edition) - - GOODHANGOUTS - Rag­ing Bull Award for the Best Do­mes­tic As­set Al­lo­ca­tion Flex­i­ble Fund – the top-per­form­ing fund on a risk-ad­justed ba­sis over five years to De­cem­ber 31, 2009

Care­ful stock pick­ing and a man­date that al­lows the fund to move al­most en­tirely out of the eq­uity mar­ket helped the Rezco Value Trend Fund earn re­turns of 19.6 per­cent a year (ac­cord­ing to Pro­fileData) over the five years to the end of De­cem­ber last year, push­ing it to the top of the do­mes­tic as­set al­lo­ca­tion flex­i­ble sub-cat­e­gory ahead of 23 other funds.

Do­mes­tic flex­i­ble as­set al­lo­ca­tion funds in­vest in a com­bi­na­tion of as­sets in the eq­uity, bond, money mar­ket and prop­erty mar­kets, and their off­shore ex­po­sure is re­stricted to a max­i­mum of 25 per­cent.

Fund man­ager Wally Gray says the in­ter­na­tional en­vi­ron­ment has changed fun­da­men­tally in re­cent years, ne­ces­si­tat­ing a much more flex­i­ble ap­proach to manag­ing in­vest­ment risk while tak­ing hold of in­vest­ment op­por­tu­ni­ties.

“Sim­ply stay­ing rel­a­tively fully in­vested in ei­ther eq­uity funds or in­dex funds is now a higher-risk strat­egy,” he says.

Gray says the need for a flex­i­ble ap­proach is starkly il­lus­trated by the sharply con­trast­ing per­for­mance of var­i­ous global mar­kets.

“De­spite the sig­nif­i­cant re­bound from the March 2009 lows, the United States mar­ket, as mea­sured by the Dow Jones in­dex, showed an in­signif­i­cant re­turn for the first 10 years of this cen­tury. The Dow was only marginally above 10 000 at the end of the decade. In stark con­trast, the JSE All Share in­dex has shown a three-fold ap­pre­ci­a­tion over the past decade,” he says.

Gray says other ar­eas pro­duced out­stand­ing re­sults over the past decade, notably Brazil, China and In­dia, as well as gold bul­lion and oil, which have risen by more than 250 per­cent and 150 per­cent re­spec­tively.

“The buy-and-hold phi­los­o­phy spawned by a 25-year bull mar­ket is no longer a se­cure strat­egy. While the long-term cor­re­la­tion be­tween gross do­mes­tic prod­uct and as­set prices re­mains in­tact, the high rates of eco­nomic growth re­flected in boom­ing cor­po­rate earn­ings has been re­placed by a lower growth sce­nario and this, in turn, is re­flected in widely rang­ing mar­kets and sub­stan­tially in­creased volatil­ity. In such con­di­tions, the need for flex­i­bil­ity to in­vest where growth is best, is vi­tal,” he says.

Gray says that since its es­tab­lish­ment five years ago, the fund has shown con­sis­tent pos­i­tive per­for­mance well ahead of the over­all mar­ket, and it con­tin­ued to de­liver good per­for­mance dur­ing the melt­down in the year to March 2009.

He says that when mar­kets are go­ing up, it is im­por­tant to fo­cus on stock se­lec­tion.

“To­wards the end of 2007, we started get­ting un­easy when looking at the global eco­nomic en­vi­ron­ment and felt there was a pos­si­bil­ity of some­thing caus­ing the mar­ket to crash, so we went fairly liq­uid and moved into cash and then in­creased our cash po­si­tion to more than 80 per­cent in 2008,” he says.

Gray says this move helped the fund pre­serve cap­i­tal when the mar­ket crashed in 2008.

How­ever, he adds that he did not fore­see that the crash would be as bad as it was. “When one sees an ex­treme sce­nario across all mar­kets, there is a de­bate about whether there will be a cor­rec­tion and, if so, by how much. When mar­kets move to ex­cesses – ei­ther up or down – one has to ques­tion that,” he says.

“When mak­ing stock picks, we look for com­pa­nies where in­her­ent busi­ness de­vel­op­ment leads to busi­ness growth. For ex­am­ple, if one looks at life and health in­surer, Dis­cov­ery, its man­age­ment makes in­no­va­tive busi­ness de­ci­sions that are likely to re­sult in earn­ings growth,” he says.

How­ever, Gray warns that in­no­va­tion alone is not enough. The in­no­va­tion must lead to rev­enue growth, in­crease in mar­ket share and mar­gin growth.

“We also went very strong on Oceana in 2007 be­cause we thought their mar­gins would do well, and the com­pany held sta­ble when mar­kets went down,” he says.

Looking ahead, Gray says he ex­pects the mar­ket to move in ex­tremes, both up and down. “We have got eq­uity ex­po­sure of about 64 per­cent. Of that 64 per­cent, 20 per­cent is off­shore eq­uity ex­po­sure, which is the max­i­mum al­lowed in terms of leg­is­la­tion, and we be­lieve there are good op­por­tu­ni­ties com­ing up in­ter­na­tion­ally,” he says.

Gray says he is also of the view that de­vel­oped coun­tries such as the US need un­em­ploy­ment num­bers to de­crease be­fore their economies will kick into gear.

“You need peo­ple earn­ing and spending money to boost the econ­omy,” he ex­plains.

Gray says with the rand as strong as it is, he feels it is pru­dent to have money in other cur­ren­cies so that the fund’s eggs are not all in one bas­ket.

“In emerg­ing economies one can find com­pa­nies with faster earn­ings growth, and for this rea­son we have in­vested rather cau­tiously in off­shore eq­ui­ties in Bric (Brazil, Rus­sia, In­dia and China),” he says. – Neesa Mood­ley-Isaacs

Wally Gray, the fund man­ager of the Rezco Value Trend Fund, with his Rag­ing Bull award.

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