Some simply too big to ignore

The industrial fund sector, with R8bn, is one of the smaller in the SA unit trust industry, with R350m of net inflows over the past year.

There has been only one new fund in the sector in recent years — the Satrix industrial index tracker. But the sector is larger than the resources and financial sectors combined.

Most of these started life in the theme fund craze of the late 1990s as consumer funds. But a lack of choice, disputes about definitions and the lack of a credible consumer industry index led them to migrate to industrial funds.

To confuse everyone, there is a subset of the industrial sector called industrials, but the industrial funds tend to be underweight. These include the out-of-favour construction shares, none of which has a market cap above R10.5bn. In fact, the only heavyweight shares in the industrial subsector are Bidvest (R51bn), Barloworld and KAP (both about R18bn).

But the real action is in the consumer discretionary and consumer staples sectors. The attraction of a product focused on industrials is the ability to construct a far less cyclical product than anything available in a dedicated resources fund or even a dedicated financials fund. Over time these funds have offered higher growth than general equity funds. Coronation Industrial has given annualised returns of 20% since 1998.

One decision would have affected returns above others — the weighting in Naspers. The share has a R1 trillion market cap. Rather quaintly, it is classified under “media: cable & satellite”, and it is true that the DStv pay-television business is still a useful cash generator. But it has become a player on the Chinese consumer market through its Tencent Internet platform. This is best known in the West for its WeChat service, rival to WhatsApp. No fund can afford not to hold Naspers, as it is more than 20% of the industrial index, and its market cap is now more than the big four banks combined, plus Old Mutual and Sanlam. In that sense this sector is different from general equity: investors are looking for a reasonable proxy to the industrial index, so it doesn’t make sense to leave out the really large shares.

Another share loved by all five funds is Steinhoff. It, too, is too big to ignore, with a market cap equal to Standard Bank and Nedbank combined. Another way to look at it is that it is larger than the entire retail apparel sector, plus Woolworths.

But it is also a tribute to the ability of CE Markus Jooste, the man in black, to persuade investors to back his strategy.

Steinhoff is much more popular in the industrial funds than significantly larger businesses such as British American Tobacco, SABMiller, Anheuser-Busch InBev and even that erstwhile darling of the consumer discretionary sector, Richemont. And it has none of the royal aura of the Rupert family businesses, such as Richemont and Remgro, nor the decades of business plaudits held by breweries.

There is limited demand for industrial funds because the way in which financial advisers pick funds has changed. At one time the focus was on picking the most fashionable fund for clients, which may have been an Internet or intellectual capital fund. Many considered sector allocation as part of their value add.

Now most financial advisers prefer one-stop funds so they can offer clients high-equity balanced or low-equity balanced solutions, for example. Just a few astute investors have continued to invest in these funds, as they have been lower risk and higher return than most general equity funds.

The five funds are from large houses with large research capabilities. Behind Sarah-Jane Alexander and Adrian Zetler at Coronation stands Karl Leinberger, the chief investment officer who used to run the fund, and who undoubtedly gives them the third degree before they buy or sell a share.

Theo Botha at Stanlib feeds off his colleagues at the equity franchise headed by Herman van Velze. Behind Andrew Kingston and Marlo Scholtz at Sanlam Investments is an extensive team, driven to work long hours by head of equities Patrice Rassou.

Brian Pyle at Old Mutual Industrial leverages off the Old Mutual Equities research team, and the fund is similar to an industrial carve-out of the house’s flagship Investors’ Fund.

The one question mark is Momentum, which is phasing out its direct equity business in favour of a multimanager-focused, goals-based approach. But for now, in the experienced hands of Norman Mackechnie, there isn’t much to worry about.

Now most financial advisers prefer one-stop funds so they can offer clients high-equity balanced or low-equity balanced solutions