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

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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

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