Fairtree Balanced Prescient Fund, Kagiso Balanced Fund, Obsidian SCI Balanced Fund, Ashburton Balanced Fund, Nedgroup Investments Managed Fund
The high-equity unit trust sector is now the bedrock of the unit trust industry. It has assets of R454bn, about a quarter of the industry total, including money market funds, and net inflows of R37bn over the past 12 months.
It is no surprise that this sector is so popular. Investors saving up for retirement who do not want to construct their own pantomime horse of a fund can treat these as a onestop fund. It is far easier than trying to invest in separate equity, balanced, bond, property and global funds.
And at all times investors need to keep their portfolios within the confines of Regulation 28 of the Pension Funds Act, with prescribed limits on asset exposure.
There are more than 200 funds in this sector, yet these flows are far from evenly distributed. Most financial advisers confine their support to old favourites such as the Allan Gray, Coronation, Foord, Investec and Prudential funds.
But there is a much wider universe to explore. This month we look at some of the lesserknown funds. These are not all small managers. Ashburton, for example, has more than R100bn, as well as its status as the portfolio management arm of FirstRand. There is plenty of internal competition in the greater group. Momentum alone has SP Reid and Momentum Asset Management, plus there are about a dozen managers in which RMI Investments has a strategic holding. Some, such as Perpetua and Truffle, are already competitive in the balanced space.
But Ashburton is in the mould of the traditional asset manager and even occupies premises once held by its predecessor, RMB Asset Management. Ashburton had quite a coup when it acquired fixedincome specialist Atlantic at the end of 2015 with the first couple of fixed interest, Arno Lawrenz and Heather Jackson.
In contrast, Obsidian Capital is a boutique with just a few billion under management. It was originally a hedge fund business and it has deliberately stayed small. Founders Richard Simpson and Royce Long did not want to create the bureaucratic culture that was so stifling in their days at RMB Asset Management. There is a lot to be said for a small, focused team, and their balanced fund is worth considering.
Somewhere in between is Kagiso Asset Management, with R40bn under management. It has certainly made a transition from its early incarnation as a BEE joint venture with Coronation, specialised in index funds. It no longer likes to be seen as a black or even a BEE manager. This can mean it needs to jump through even more hoops, especially in the retail market. Rather buy the fund on its track record, which was somewhat blighted in 2015. As more managers move out of the explicit value space into the cosier “quality” comfort zone, Kagiso will be one of the last managers standing — it still invests in platinum shares, for example.
Fairtree is developing from its original base as a hedge into sizeable long-only managers; only R4bn of its R35bn is in hedge. It has a genuine boutique model; each of its businesses, such as SA Equity, is self-contained. It operates from both Tygervalley and Stellenbosch, and each new boutique can operate where it wants.
Fairtree Balanced is a combined effort in which four Fairtree managers take part, in a type of “fund of funds” model. Stephen Brown used to run the RMB Value fund in its better years, alongside Mashuda Cassim of Cachalia Capital. Paul Crawford ran an innovative fixed-income portfolio with Jonathan Stewart, first at the now defunct NIB Asset Management and then at RMB. They were best known, though, for their distinctive muttonchop sideburns, like something from Victorian melodrama.
Nedgroup Investments Managed fund now has about a year under the management of Truffle. Its track record before November 1 2016, though has been expunged. That was the day it started its new life as a domestic-only balanced fund. It has about R2bn under management, but this should grow, if only because of the strength of Nedgroup’s excellent distribution, headed by the high-octane Shaun Anderson.
That’s not to discount the highly competent and cohesive Truffle team.
Kagiso still battles for recognition in the retail space: unit trusts account for just R3bn of its R40bn under management.
Its black empowerment ownership, so useful in the government and parastatal markets, is considered irrelevant among retail financial advisers. But it is their loss, as Kagiso has a first-rate investment team. Nonetheless, it had a poor 2015, which hurt its three- and five-year numbers.
Fund manager Gavin Wood says the high holding in platinum hurt. This has been maintained, with about 6% of the portfolio in Northam Platinum and Zambezi Platinum preference shares and 2% in Anglo American Platinum. These businesses are at the lowest end of the cost curve, he says.
Kagiso has one foreign share in its portfolio, Prudential Plc, the UK-based life insurer. It recently announced the merger of its M&G and Prudential asset management units to create a £330bn manager. Another financial holding is local property and casualty insurer Santam.
Wood says one of the advantages of not running a mega-fund is that it can take chunky positions in smaller shares. In fact, Naspers, Old Mutual and Sasol are the only monster shares in the top 10. Smaller shares include AECI, Altron, Adcorp, Equites Property Fund and Tongaat Hulett. Not that the strategy always works — in the June quarter Northam, African Rainbow Minerals and Metair detracted from performance.
There is a small hedge against the local equity exposure, with 4.3% of the portfolio made up of hedged equities.
Kagiso has an eclectic mix of yield assets, with 4.1% in preference shares, 3.1% in inflation-linked bonds, just 4.3% in bonds and 4.2% in cash. There is 8% in local property, and 1.4% in foreign property.
Wood likes hotel specialist Hospitality and Delta, a high-yield stock that specialises in government offices. There is a full 24.4% allocation to foreign equity. The fund has also been a big supporter of selected global property shares, notably German residential trusts Deutsche Wohnen and Grand City.
Ashburton, in its present form, is a combination of Ashburton (Jersey) and the asset management unit of RMB Private Clients. It still has a modest share of traditional domestic balanced and equity mandates, but it has a giant parent in the FirstRand Group.
Ashburton Balanced, its flagship product in the Regulation 28-compliant market, is suited to pension, provident and retirement annuity funds. So the fund is the main retail shop window for the group.
Tony Cadle, one of the most experienced managers in the group, is retiring shortly and the fund will be managed by his colleagues Jason Forssman and Lesiba Ledwaba. Wayne McCurrie, who now manages the Ashburton Equity fund, plays a lead role in the resources research.
Forssman says the fund adopts a topdown process drawing on economic research from its sister companies RMB, Wesbank and FNB. It has invested strongly in health care, for example, because of the top-down fundamentals for the sector.
He says that though the fund is only three years old, it works off a 20-year old track record, and the R500m in the fund is invested alongside R40bn of segregated mandates. The fund is a little light on foreign allocation, which accounts for 20.5% , and it also has a modest 5.5% in property, SA equity makes up 47% of the fund, while the fixed income is evenly divided between bonds and cash, at around 13.5% each.
Within equities almost a quarter is invested in financials. The main focus is on RMB Holdings and Standard Bank. Basic materials is a quite heavy 18%, led by BHP Billiton and Anglo American. though it has sold out of Glencore.
Ashburton prefers quality shares, which is why it picks diversified miners over single-commodity plays and a more reliably profitable industrial, such as Bidvest, over Nampak. Naspers is included, but Forssman says there is an internal rule to limit individual holdings to 10%, so the media company has about a half weighting. British American Tobacco is the third-largest share, Richemont the ninth.
Ashburton is not optimistic about the local economy, but it believes that there is some upside in retailers such as Woolworths and Mr Price.
The bond exposure is kept simple, as Ashburton invests in just four government bonds. Its international equities are mainly through the Ashburton Global Growth Fund and 40% are now invested in the US, 30% in Europe and 12% in Japan.
Forssman says the fund avoids global sovereign bonds.
The fund was handed over from RECM to Truffle about a year ago. After discussions with the regulator it was decided to make this the management company’s domestic-only high-equity Regulation 28-compliant fund from November 2016, while Truffle has also retained a fully discretionary balanced fund under its own name. Each of them has about R2bn under management.
Truffle might have a quirky name, but it has a strong equity team, primarily from RMB Asset Management — Charles Booth, Iain Power and Saul Miller, as well as Allan Gray/Orbis-trained Jonathan du Toit. The fund cannot be described as a high-equity portfolio right now but in this category fund managers can opt for full flexibility with anything from zero to 75% equities.
It is unusual, though, for it to fall below 40% equity. It is at present at a conservative 53% equity, 11% in property and 23% bonds. There are small allocations to pref shares and corporate bonds, rather than government bonds, with big holdings in Barclays and Santam bonds both maturing in 2022. It also holds Barclays Africa shares, along with Old Mutual.
Power says Truffle has been a long-suffering investor in Old Mutual, as it had hoped that managed separation would be a catalyst for re-rating.
The fund owns the big four banks, plus Investec and Capitec. It is light on resources other than Sasol and Sappi. It has about a 5% exposure to Naspers.
The fund has a double dose of British American Tobacco through BAT and Reinet, which together make up almost 8%.
Other than Steinhoff and Shoprite, the retail holdings are niche businesses such as Italtile and Holdsport. A share kept from the RECM days is RECM Calibre, a strong private equity-style portfolio.
Power says the introduction of the poorly received new mining charter added significant uncertainty. And the prospect of further downgrades has not gone away.
He says Truffle has taken over the fund during one of its weaker 18 months. It was transitioning the fund from RECM’s portfolio starting on March 2016. Just a few small legacy positions remain, such as Stefanutti Stocks. Truffle has been picking up subordinated bank debt, which has been offered at 380 to 600 basis points ahead of Jibar, with Standard Bank recently offering 565 points ahead of Jibar. The property picks include rand hedges such as Sirius, Schroder European Real Estate Investment Trust and Investec Australia.
For a niche business best known for hedge funds, this balanced fund is surprisingly big, with R1bn under management. The trigger pullers at Obsidian are Richard Simpson and Royce Long, who made headlines when they ran the RMB Strategic Opportunities fund.
Obsidian applies an absolute return mind-set to its long-only funds, and is style neutral, with elements of value, momentum and growth at a reasonable price.
Long says this mind-set doesn’t seem to add much value every year, but then every eight or nine years it pays off. The manager’s Multi Asset hedge fund (now available as a retail fund) was up 13% in a depressed 2008, when the average longonly balanced fund was down 8.8%, while in the sideways market in 2016, when the average fund was up 1.3%, the fund was up 9.3%. The Balanced fund has not lost money over any rolling 12 months since it was launched in 2013. The fund is 40% invested in domestic equities, 21% in domestic bonds and 18% in offshore equities. Simpson says the house still likes bonds as it expects falling inflation to support the domestic economy though a downgrade would reverse this. But it has reduced exposure to domestic cyclical shares such as AECI, Merafe and Barloworld.
Two of its top 10 shares are based offshore, reflecting a tilt towards emerging markets. They are Mexican Coke distributor Femsa and the Mexican subsidiary of Santander bank. Turkcel, the Turkish mobile operator, has been another large holding, though with the reversing of the falls in these countries’ currencies these are no longer cheap. Inflation is falling in emerging markets, so some exposure has been added to an EM bond index.
Long says the shop has some exposure to both the UK and eurozone in selected equity and property counters.
It is not cheap as the total investment charges are 2.23%. But this is an active satellite fund, not a closet index tracker.
This fund is like one of those films in which old-timers get together to rob a casino in Las Vegas. The fund brings together two old colleagues from RMB Asset Management: Stephen Brown at equities, and Paul Crawford at fixed income. Their junior colleagues are Jacobus Lacock, in charge of asset allocation, and Rademeyer Vermaak at global equity.
Fairtree Balanced is a new fund, having launched on April 18, but it brings together quite substantial experience. Brown says it makes use of the existing asset class building blocks. These are mixed together in a way that reduces risk and is designed to be robust in times of large market declines.
As well as the conventional fundamental equity portfolio, the fund will also be introducing smart beta equities as an asset allocation option. It will be a high equity fund, compliant with regulation 28 of the Pension Fund Act. This puts a limit of 75% on equities and 25% on international assets.
The fund is currently 65% in equity, 26% in fixed income and 9% in cash. The equity composition is a hefty 19.5% in basic materials. For now this is predominantly invested in Sasol and the paper shares, with a muted 11% in financials.
Brown says the global reflationary outlook has created positive sentiment around cyclical and value-orientated shares. The outlook for higher global bond yields will have a dampening effect on the high-valuation defensive names — the so-called “quality” shares. Brown says he favours global cyclical companies with global earnings growth potential and companies with the ability to generate cash sustainably.
Crawford says he expects SA’s inflation will improve over the next 12 months as food prices fall, the currency remains strong and the economy weak. But political risks and possible further downgrades will keep the Reserve Bank cautious. On the positive side, the search for yield and a more “risk on” approach to assets from global investors will help.
Though Crawford describes the stance as “cautious”, there is a substantially higher weighting to bonds than cash.
One criticism is that the fact sheet was the least transparent of the five IM looked at this month. Notably, it did not include the top 10 equity holdings or a breakdown between foreign and domestic assets.