Nedgroup dumps balanced fund manager
After standing by RE:CM and its contrarian deep-value investment approach for more than a decade, Nedgroup Investments found the losses in its Managed Fund too much to bear, writes Mark Bechard. TAKE CARE WHEN CHOOSING A FUND
Nedgroup Investments has dropped RE:CM as the manager of its massively under-performing Managed Fund and awarded the contract to Truffle Asset Management.
Nedgroup Investments says it intends to merge – subject to regulatory and unitholder approval – the Managed Fund with the Truffle MET Balanced Fund after the Truffle fund has been transferred to Nedgroup Investments.
Nedgroup has a “best of breed” approach to fund management: it outsources the management of its funds to managers that it believes will produce the best performance over the long term.
The Managed Fund has been the worst performer in the South African multi- asset high- equity sub- category over various periods to September 30. According to ProfileData, the fund returned minus 12.37 percent over three months, minus 21.34 percent over a year, minus 0.53 percent over three years, 2.23 percent over five years, 5.4 percent over seven years and seven percent over 10 years (returns are annualised).
The average returns of the fund’s peers were: minus 0.84 percent over three months, 6.34 percent over a year, 12.6 percent over three years, 11.88 percent over five years, 11.59 percent over seven years and 11.47 percent over 10 years.
The fund’s under- performance is partly the result of the deep-value, contrarian investment style of its manager, Piet Viljoen, the founder and chairman of RE:CM.
A value, or valuation-based, manager selects shares that are priced below the value of the company, as determined by the manager, in the belief that the share price will return to fair value. A deepvalue manager follows the same principles as a value manager, but looks for the cheapest shares and holds them for long periods. A contrarian manager goes against the trends in the market, buying assets that are not liked by the market and selling them when they are popular.
Viljoen’s investment style has seen the fund investing heavily in commodity Wouter Fourie, the chief executive of Ascor Independent Wealth Managers and the 2015 Financial Planner of the Year, says the biggest mistake investors make is to select a fund solely on its latest returns, without understanding the risk the fund manager takes to achieve those returns.
When investing, it is important to have a thorough understanding of a fund’s mandate, its consistency of returns, and the philosophy and investment style adopted by the manager. This is why it is in your interests to consult a qualified financial adviser who has insight into how a manager works.
He says Ascor has never offered the Managed Fund to its clients, because of the fund’s level of volatility. However, he says, if the fund were still managed according to RE:CM’s investment style, it could have been a good buy now – when the shares favoured by RE:CM are very cheap – provided you were prepared to wait for possibly five years before the market cycle turned.
Fourie says he believes Nedgroup’s decision to replace RE:CM was influenced by the need to protect its brand and its position as the leading fund manager. The Managed Fund’s PlexCrown rating of one has been a drag on Nedgroup’s overall rating. shares: its top three holdings at September 30 were Impala Platinum (5.4 percent), Anglo Platinum (4.8 percent) and Anglo American (4.5 percent). Over the past year, Impala’s share price has fallen by 51 percent, Anglo Platinum’s by 31 percent and Anglo American’s by 49 percent, according to ProfileData.
The Managed Fund is the only fund of Nedgroup’s 19 funds that qualify for a PlexCrown rating to receive the lowest rating of one PlexCrown in the ratings to the end of September.
Nedgroup was rated the top manager of both South African-domiciled funds and offshore funds in the third quarter, based on the risk-adjusted performance of its funds as assessed by PlexCrown Fund Ratings, and 12 of its 19 funds received an above-average rating of four or more PlexCrowns.
Nic Andrew, the head of Nedgroup Investments, says the decision to replace RE:CM was a difficult one. He says Nedgroup assesses a manager’s performance over the full investment cycle and in relation to a fund’s long-term objectives. It has made a judgment call based on what it believes are the long-term interests of its clients, Andrew says.
Nedgroup communicated regularly with investors and financial advisers in the run-up to the decision, he says.
Nedgroup Investments recognised that RE: CM’s investment philosophy would result in periods of under-performance, and it has stood by RE:CM for more than 10 years. However, it did not expect the Managed Fund to under-perform, in relative and absolute terms, to the extent that it has, he says.
As a result of under-performance and outflows, the assets under management in the fund have halved over the past two years, Andrew says. According to the fund’s fact sheet, it had a market value of R2.95 million at September 30.
The fund’s under-performance was only partly the result of RE:CM’s investment style; RE:CM had also make investment mistakes, Andrew says.
The resignation of RE:CM’s chief investment officer, Daniel Malan, in March also influenced Nedgroup’s decision, Andrew says.
RE:CM’S STYLE ‘WON’T CHANGE’
Viljoen says he was “disappointed” by Nedgroup’s decision, which he said was a business decision, not an investment one. However, the loss of the Managed Fund will definitely not result in RE:CM changing its investment process or style.
The decision will have a “fairly substantial” impact on the company, but, as a result of its conservative business approach, RE:CM will withstand the loss, and there is no need for investors to be concerned about the future of RE:CM.
In a letter to investors in March, RE:CM said the main reason its funds have under-performed is that “South African markets have been driven higher by expensive assets becoming even more expensive, whereas the attractively priced assets keep getting cheaper. This is typical of the late stages of a bull market, as we’ve had for the past six years.”
It says past market cycles have shown that “a disciplined strategy of consistently avoiding over-priced assets and investing in those trading at far less than they’re worth will ultimately deliver good returns over the full cycle. However, the evidence of this has not yet come through in the current cycle.”
In the equity portfolios it manages, “the resources sector – to which we have significant exposure – has lagged and the financial and industrial sectors have continued to out-perform, despite starting from already high valuations. We believe that this is precisely the time to capitalise on one of the most extreme market dislocations in history and allocate capital to a value manager ... We’re confident under- performance will be recovered and our investment philosophy will prove itself again over time,” the RE:CM newsletter says.
Cape Town-based financial adviser Gregg Sneddon told Personal Finance that he was bitterly disappointed by Nedgroup’s decision to replace RE:CM. It was known that Viljoen was a contrarian manager and he has been buying cheap, under-performing shares, including commodities, for some time. Sneddon said he had advised his clients to stay in the fund until the market cycle turned – as it inevitably will — because their losses were only on paper.
However, the decision by Nedgroup Investments to change managers will result in investors realising their losses, he says, because the new manager will sell out of the cheap, under-performing shares and buy expensive shares that are performing better. Effectively, Nedgroup has done what investors are told never to do: sell out of under-performing shares when they are cheap.
Andrew says the assumption that the fund will automatically sell all its cheap, under-performing assets is incorrect. Truffle’s mandate is to position the fund to reflect where it assesses greatest value going forward, taking into consideration current valuations.
Andrew says Truffle was chosen to manage the fund because it exhibits the qualities that Nedgroup looks for in a manager. In particular, it has a “robust” investment process that focuses on downside risk, portfolio construction and risk management.
❑ For a longer version of this article, visit www.persfin.co.za