Financial Mail - Investors Monthly
FUND REVIEWS
Coronation Global Equity Select, Investec Worldwide Equity Fund, Nedgroup Investments Global Equity, Old Mutual Global Equity, Sim Global Best Ideas
The global equity sector recently celebrated reaching the landmark of R100bn under management. It might seem small compared with the R358bn in domestic equity. But another way of looking at it is that 60% of the assets held in global funds are in the equity sector, compared with 20% of domestic funds’ assets.
There certainly hasn’t been much to recommend investing in foreign fixed income, which has just 1% of the global sector. Nor have multi-asset funds quite had the success they have had domestically, accounting for 35% of global assets and 51% of domestic.
There has been renewed interest in global funds, perversely, since the recent decline in the rand. The currency has a little less buying power than it did in the first quarter, though admittedly still more than 12 months ago. But if there is some panic buying it is likely to be in the fully externalised foreign collective investment schemes.
When you sell a randdenominated fund you end up with a pile of rands, making it hard to buy that dream cottage in Tuscany. But the rand-based funds are much more practical for most investors. There is no need to ask for exchange control permission (which is likely to get harder under finance minister Malusi Gigaba) and the funds can be held on the same investment platform as domestic unit trusts.
The range of choices is much narrower for rand-based funds than for foreign collective investment schemes. But the fund write-ups indicate that there is still plenty of quality out there, run by hardworking, well-informed teams.
Back in 1995, when exchange controls were first relaxed, it was thought that it did not make sense to run a portfolio from either Cape Town or Johannesburg, or even Pretoria. The easiest transition of all was for Allan Gray. It had common shareholders with Orbis in Bermuda, and the Bermudian outfit had already built up a strong track record. Orbis has a strong share of the market and is the premier name in the sector with financial advisers. Old Mutual already had a unit trust business in the UK, and under Ian Heslop, a plain speaking Scot, now has the best long-term track record in the sector.
The other group with a London-based asset manager is Investec, which acquired UK manager Guinness Flight in 1998. Investec Asset Management in the UK has been excellent as a commercial enterprise, but the results of its Worldwide fund is rather middle of the road.
Coronation took a more intriguing path. Under one of the founders, Tony Gibson, it set up a fund-of-fund business, initially focused on hedge funds but later expanded to long-only funds. This started in Dublin, but once it became clear there was too much fun and not enough work it was relocated to London. It has moved from a fund-of-funds model to a direct in-house model. But unlike Old Mutual, Investec and Allan Gray, it opted to house the team in Cape Town, not London or Boston. It was not the first, as PSG Asset Management runs its entire global portfolio from Cape Town.
Since the millennium there has been a change in investor perception: it no longer matters where the team sits.
One top global team sits in Des Moines, Iowa — surely much less of a financial hub than Johannesburg and maybe even Cape Town.
Coronation has rolled out its international funds quite slowly, only marketing them aggressively to the public after five years. Coronation Global Equity Select hasn’t reached the five-year landmark, so IM was privileged to get access early. The fund is definitely in the benchmark-agnostic camp.
Another high-agnostic fund is the Nedgroup Global Equity Fund. Nedgroup scoured the globe for the right fit. It is Veritas, founded by the legendary UK manager Stewart Newton. It isn’t a fund for the fainthearted; 13% of it is invested in the top two shares, both in the US cable business.
But Nedgroup can inundate investors with stats to show that it is actually quite a conservative fund with a realreturn bent. It certainly looks conservative compared with the original SIM Best Ideas fund, which used to take big bets on Turkish banks and Chinese motor manufacturers.
But you can come out from under the table. With the switch from the maverick Kokkie Kooyman to the much more mainstream Douw Steenekamp it is a fund that can be considered.
There has been renewed interest in global funds since the decline in the rand
Coronation has historically focused on global assets through funds of funds. More recently it has been rolling out direct products, starting with the low-risk Global Capital Plus, and the balanced Global Managed fund.
The original dollar-denominated Global Equity Select fund was launched only in January 2015, and the rand-based feeder fund even later. The fund is run by Louis Stassen, assisted by actuary Neil Padoa. The entire global research team operates out of Coronation’s Cape Town office.
It is benchmarked off MSCI All Countries which includes emerging markets (EM). In fact, unlike most global equity funds it can invest up to 30% into EM. With hindsight it had too large a weighting in EM, especially in Brazil and Russia, which hit the first year’s performance. But in calendar 2016 its US dollar return of 11.6% was 3.7% ahead of the benchmark. And the fund hit ratio (winners divided by losers) has increased up to 1.57.
Padoa says a number of less obvious holdings contributed to the uplift. They included private equity (PE) groups KKR, Apollo and Blackstone. Another PE holding, Fortress, was bought out by the Japanese SoftBank at a 40% premium. Padoa says PE firms have a high-quality business model as they can effectively lock in clients for 10 years. Coronation, by contrast, can theoretically lose all its clients overnight.
Other winners have included Tempur Sealy, even though it is fighting with Steinhoff’s Mattress Firm in the US. Another is American Express, along with another iconic US business, Harley-Davidson.
One regret, says Stassen, is that the fund was materially underweight in US banks, the best performers of the post-Trump boom. Another perhaps less glamorous US business in the fund’s top 10 is Charter Communications, which has a large share of the cable business, giving it a natural monopoly in many parts of the US.
Coronation has benefited from the bounce-back of EM shares, with help from its holding in Kroton and Estácio (the Curro and AdvTech of Brazil) and the Chinese gaming share NetEase. But the Chinese e-commerce operator JD.com detracted.
Padoa says the biggest change since October has been into the large consumer shares. They were often seen as an alternative to bonds and as bond yields increase these shares were sold down. These defensives now make up 8% of the fund and include British American Tobacco, AB InBev, Unilever and Heineken. The fund has put in options to protect the fund against unforeseen hiccups. Stassen has a long track record of using derivatives successfully to protect capital. With his conservative genes he could not resist taking a punt on Schaeffler, a solid German industrial and automotive components business trading on a p:e of about seven. he fund is now 22 years old. At times it has been run on little more than the smell of an oil rag by one of Investec’s brightest stars, Gail Daniel, but for at least the past 15 years it has been by the 4Factor team (trademarked).
This has nothing to do with sunscreen but is described as unique. Most people who have been exposed to global equity products would have seen managers refer to “disciplined idea generation”, “qualitative evaluation” “rigorous decision-making” and “active risk/reward management”. Since investment, this fund has given exactly the same return as the benchmark of 7.3%, though it is materially ahead of the 6.5% from the peer group.
Worldwide, it is run by James Hand — when his duties as chief investment officer allow — and John Holmes. Both are based in the Investec offices in London.
Holmes says the fund has a flexible investment style that is not dependent on specific market conditions. The focus is predominantly on individual stock selection. He says the factor mix does not always work to the advantage of the fund and its clients. Recently three of its factors — strategy, earnings and technical —were all weak, with just one — value — rebounding. Right now there are more diversified returns. In total there are high-scoring opportunities in cheaper cyclical sectors such as financials.
The fund is unusual as it does not hold any of the huge IT businesses in its top 10. The closest it comes is Taiwan Semiconductors, and there are unusual shares such as Aflac, a life assurer from Ohio. The nearest it comes to mainstream is shares such as Rio Tinto, Johnson & Johnson and Pfizer. Rio and Dow Chemicals have been solid contributors in recent months.
The rally in US banks helped through the holdings in Citigroup and SunTrust. Recently it has been a buyer of the Singaporean bank DBS Holdings and a seller of French IT consultancy Capgemini. his fund uses a different business model from its competitor. It chooses a range of managers for its best of breed approach, even giving the different mandates for its international funds to different managers.
As Anil Jugmohan from the Nedgroup fund selection team puts it, the philosophy is that certain characteristics help longterm outperformance. They include an owner-managed approach, an alignment of interests, including co-investment as well as specialisation and clarity on where it has an edge.
The manager of global equity fund Veritas looks at quality shares but with a strict value discipline. It describes itself as a real return manager, though in any fully invested equity fund these can only realistically be promised in the medium term.
Veritas tends to lag behind the peer group in strongly upward-trading markets but protects capital better during drawdowns. It has outperformed the peer group by almost 4%/year since 2001.
Rather like a magpie, the fund seems to have drawn items from the other funds discussed here. The two largest shares, which make up more than 13% of the portfolio between them, are US cable businesses Charter Communications and Comcast.
This is followed by health sector groups, insurer UnitedHealth and Allergan, maker of Botox. It holds a new-age IT business Alphabet (Google) as well as old-school Oracle Group. It likes the aerospace industry, owning Airbus and aircraft engine manufacturer Safran.
Lead fund manager Andrew Headley says a share that has recently been added to the portfolio has been Check Point software, which counterattacks cyber-attacks against networks. He says it has a strong product offering verified independently and once it is in place it is hard to change vendors as network policies are customised.
Cyber threats have also increased in severity and Check Point has the widest suite of credible products in the market.
With almost 500 shares, this fund might look like a closet index tracker. Fund manager Ian Heslop says that in fact it is a high-conviction portfolio. The active share, or performance derived from its active bets, is about 80% — and 90% of this is from stock selection.
Heslop says there is no macro forecasting. Instead, the portfolio is driven by six factors: dynamic valuation — value, dynamic valuation — quality, sustainable growth, analyst sentiment, company management and market dynamics. This pro- vides a diversified source of alpha (excess return). But Heslop insists this is not a smart beta fund. The factors are dialled up and down. In fact, value and growth have both had the lowest rating overall since the fund was started in 1994, and market dynamics and analyst sentiment have had the highest rating.
Heslop says the fund offers a smoother ride than a concentrated 40-share portfolio and can act as a great diversifier. “We reckon to get 55% of our picks right. Things can go badly if we get just a dozen shares badly wrong in a concentrated fund.”
The opportunity set is not confined to the 1,600 stocks in the MSCI World Index (the fund does not invest in emerging market shares now) as it looks at 4,500 shares.
The only limitation is that no share may have a weighting of more than 0.5% above or below its index weighting. So shares outside the index have a maximum weighting of 0.5%.
Chevron Corp and Banco Santander Central are two shares that are not megacaps in the top 10, but the fund is obliged to hold giants such as Apple, Alphabet (Google) and Microsoft by virtue of their size. Other shares include Nvidia Corp, which provides the “brains” for robots and self-driving cars, the biopharmaceutical business Amgen as well as a couple of basic consumer goods businesses, Philip Morris International and Walmart. The largest overweight position is in Bank of America, which, at 1.3%, is double its index weighting.
The fund has a highly systematic process. It doesn’t believe there is value in visiting company management, but many of the inputs into process are fundamental, such as earnings growth.
Heslop says the downside risk is reduced by cutting out unwanted shares and managing volatility.
This control process includes a 4% share turnover every week.
SIM Global Best Ideas used to qualify as the most bizarre and idiosyncratic global equity fund on the market. It was run by financial fund manager Kokkie Kooyman and often had a clear bias to emerging-market mid-caps. But over the past three years it has started to look like a more conventional global equity fund.
Kooyman’s co-manager, Douw Steenekamp, has brought more discipline into the portfolio. It has, unfortunately, made the fund somewhat duller.
The largest share — once Great Wall Motors of China — is now Microsoft. Steenekamp likes old-line IT companies that are no longer considered glamorous, such as the house that Bill Gates built, Cisco and Oracle. He says every one of the top 200 US companies is an Oracle client. Of the newer-generation tech businesses, only Apple appears in the top 10.
Another subtheme is medical technology. The fund is a hefty investor in Medtronic, best known for the pacemaker, and medical products specialist CR Bard, which is a leader in the cancer and renal sector.
Though in the early days more than half of the shares in this fund were financials, now just JPMorgan makes it to the top 10. But the smaller holdings in Bank of America, Axa and Citigroup all contributed.
The fund now has a financials subfund directly managed by Kooyman that has 21 shares with a 5% exposure to emerging market financials. One of the more controversial shares is US insurer AIG. It’s had troubles since the global financial crisis, but Steenekamp wonders how low it can go at its current level of 0.7 times book value.
There have been some good contributors outside financials, such as Royal Dutch Shell, John Deere and Time Warner.
Steenekamp invests with a long-term view, so he has had to put up with some short-term (poor) earnings surprises from holdings such as Medtronic and Nielsen, as well as from IG Group.
Overall the fund’s portfolio trades at a discount to the overall market, with a forward p:e of 15.1 against the market’s 17.4%. The return on equity is considerably better, at 19% against 15%.