Top boutique manager’s multi-asset bets pay off

A boutique manager has beaten more than 100 peers to claim the position as the top-performing multi-asset high-equity fund over the difficult past three years, thanks to shrewd stock-picking and a higher exposure to fixed-interest investments and listed property shares.

The Centaur BCI Balanced Fund was the leading South African multiasset high-equity fund over the three years to the end of March, with a return of 12.5 percent a year over this period, according to ProfileData.

The manager also manages the Centaur BCI Flexible Fund, which was the top-performing South African multi-asset flexible fund over five and seven years and the second-best performer over three years to the end of March. The fund achieved a return of 19 percent a year over seven years and 12.98 percent over three years.

The manager of both funds, Roger Williams, says the Balanced Fund out-performed because it had a high exposure to listed property, bonds and other fixed-interest investments, and because of shrewd stock-picking of South African listed shares.

Williams says the Balanced Fund’s composite benchmark, which is designed to deliver a real (afterinflation) return of four percent a year, comprises: 28 percent FTSE/JSE All Share Index, 28 percent FTSE/ JSE Financial and Industrial Index, 30 percent FTSE/JSE All Bond Index, eight percent MSCI World Index and six percent cash.

At the beginning of 2016, the fund was overweight in bonds and listed property and underweight in equities. This paid off, because the fund’s local equity benchmark delivered zero percent for the year, while the fixed interest portion of the benchmark returned 14 percent.

“Centaur Asset Management, however, managed to deliver doubledigit equity returns through shrewd stock-picking. Individual stock picks, such as mining company Merafe Resources and pulp and paper company Sappi, performed particularly well for the fund.”

Centaur also benefited from increasing its exposure to resource shares at the beginning of 2016, when the resource sector reached a low, Williams says.

DIFFICULT TIME

Although Centaur’s investment decisions have paid off for the fund, Williams says the past three years have been difficult time for fund managers, because there have been numerous risks to investing in South African bonds and equities.

At the beginning of last year, following the firing of former finance minister Nhlanhla Nene, the value of the rand relative to the major currencies was falling, inflation was expected to increase, and the economy was not looking good. Many funds therefore chose to have higher weightings in cash, particularly over the past 15 months, he says.

“The investment outlook is difficult, and fund managers are likely to continue to struggle to deliver anything but low real returns from local asset classes. Talk of radical economic transformation and the nationalisation of banks and agricultural land has businesses questioning their future and is retarding investment within industries,” Williams says.

“We are going into unchartered waters. The economic framework is in flux and no one is certain where we are going. In this environment, only a few local companies, such as listed education companies and disruptors such as Capitec, are growing their earnings in real terms.”

The total expense ratio on the Balanced Fund is 2.2 percent.

Williams says that, because the Balanced Fund is “nimbler” and can invest in a broad range of JSE-listed shares, Centaur believes the fund can out-perform its benchmark after-fees and deliver value to investors despite the relatively high expense ratio.

Gradidge notes that although there are managers who charge 0.6 percent a year to manage a multi-asset fund, the bigger managers tend to have total (including performance fees) investment charges of more than 1.7 percent, and many funds have fees of more than two percent.

He says another area where asset managers have failed investors has been in making the right rand hedge and offshore asset allocation calls.

Gradidge says many multi-asset funds under-performed last year, because they had the maximum exposure to offshore shares and rand-hedge industrials while the rand was stronger.

Some smaller boutique managers, such as Bridge, Obsidian and ClucasGray, are examples of active managers that were positioned for a stronger rand last year, he says.

Despite multi-asset funds’ lessthan-stellar performance over three years, Gradidge says the picture is brighter over the longer term: multi-asset funds’ average returns were higher than cash and bonds, although they still under-performed equity and listed property funds.

Fortunately, many South African investors have invested in one or more of the five largest multiasset high-equity funds managed by Allan Gray, Coronation, Foord, Investec and Prudential, and these funds have sound long-term track records, Gradidge says.

However, he says if the current market volatility persists, it could be harder for expensive multi-asset funds to deliver value to investors.

Although multi-asset funds may not be “broken”, investors should pay more attention to fees and asset allocation, he says.

He encourages investors to diversify their investments across active and passively managed multiasset funds and to use managers who use strategic or a fixed asset allocation to each asset class and those who practice tactical asset allocation (actively changing the allocation in line with the manager’s view).

laura.dupreez@inl.co.za

However, given that the global economic environment is improving, the recent period of low or no returns from equities has allowed the market to regain some value, he says.

Over the short term, you are unlikely to enjoy the high returns earned in 2009, 2010, 2012 and 2013, but equities should start to deliver 10 to 12 percent a year over the medium term, Tucker says. This should enable multi-asset funds to deliver a real return of four percent over the next five years, he says.