Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

An­chor BCI Equity, Dis­cov­ery Equity, Ele­ment Earth Equity, Lau­rium Equity Pre­scient, Mazi Prime Equity

Gen­eral equity re­mains an im­por­tant cat­e­gory, even though the ma­jor­ity of new money has gone into the one-stop multi-as­set funds, mainly in the high equity and low equity cat­e­gories.

It is an easy de­fault to buy one of the pop­u­lar equity funds such as Al­lan Gray, In­vestec and Corona­tion. They have been highly suc­cess­ful in spite of their size. The mar­ket has been nar­row, with a few large caps, such as Naspers, car­ry­ing the rest. But the next few years might be quite dif­fer­ent.

Re­search by No­bel lau­re­ates such as Ken­neth French and Eu­gene Fama show that small caps out­per­form over time. It is hard for the lum­ber­ing di­nosaur funds to add value by in­vest­ing any­where out­side the top 40 or to switch nim­bly be­tween styles such as value and mo­men­tum.

This month we look at five dis­tinct high-qual­ity funds. They should all be on the radar of mul­ti­man­agers and top fi­nan­cial ad­vis­ers.

The out­lier is Dis­cov­ery Equity, which is man­aged by In­vestec As­set Man­age­ment. But it has less than R2bn un­der man­age­ment and of­fers a clas­sic Fama-and-French fac­tor ap­proach.

There are some dif­fer­ences in method­ol­ogy, but it makes sense to look at this fund as a more di­ver­si­fied al­ter­na­tive to the Rafi in­dex, which also uses four fac­tors to as­sess shares.

There prob­a­bly wouldn’t be too much risk rec­om­mend­ing this fund as a mid­dle-of-theroad equity prod­uct.

Other funds in this se­lec­tion prob­a­bly shouldn’t be pur­chased on a stand­alone ba­sis,

Other funds in this se­lec­tion prob­a­bly shouldn’t be pur­chased on a stand­alone ba­sis

as they are just too feast-or­famine in na­ture.

Ele­ment Earth Equity has wisely been keep­ing a low pro­file. At the end of 2015 no­body would have been boast­ing about its track record. But now it is a stan­dard bearer for or­tho­dox deep value. This was once the stomp­ing ground of Al­lan Gray, but now has a few other fol­low­ers — John Bic­card at In­vestec Value and pos­si­bly (though much more nu­anced) Piet Viljoen at RECM.

Ele­ment would make an ex­cel­lent coun­ter­foil to An­chor Cap­i­tal. The core of An­chor’s phi­los­o­phy is that it is “not value”. Its share port­fo­lio will have lit­tle in com­mon with Ele­ment, and its re­turn se­ries will be quite dif­fer­ent. An­chor also has a show­biz ap­proach (why on earth did it list on the JSE?) some­what dif­fer­ent from Ele­ment, which is stuck in an at­tic in the far end of Cape Town.

Lau­rium is a wel­come re­lief as it does not get caught up in these “value or not value” de­bates. It is just a strong, in­tel­li­gent fund man­ager that is per­haps a lit­tle con­ser­va­tive when it comes to tak­ing po­si­tions away from the in­dex. This is due to its hedge fund her­itage and the re­al­i­sa­tion that ac­tive fund man­agers shouldn’t feel the need to take bets they aren’t con­fi­dent they can win.

But any mul­ti­man­ager should se­ri­ously con­sider Lau- rium for its line-up.

Many have al­ready in­vested with Mazi Cap­i­tal, which at R49bn is more than dou­ble the size of Lau­rium and more than 20 times larger than Ele­ment. Founder Malun­gelo Zil­im­bola has the sliv­er­ware to prove his abil­ity as a fund man­ager — it could be luck, of course, but he has helped make his luck.

Zil­im­bola had an un­pleas­ant di­vorce from Pa­trice Moyal at Vi­sio a few years ago, but if any­thing, Mazi is now the stronger brand. It is cer­tainly time to look more broadly at the gen­eral equity uni­verse. These five funds are a good place to start.

An­chor is an eclec­tic fi­nan­cial ser­vices group started by for­mer hedge fund man­ager and PR ex­ec­u­tive Peter Ar­mitage. It is in stock­broking and as­set man­age­ment and also owns a large stake in Capricorn, which runs a lead­ing emerg­ing mar­kets hedge fund.

An­chor BCI Equity is still well ahead of its bench­mark (now the capped Swix), as it has been since it started in 2013. But af­ter strong re­turns in 2014 and 2015 it had a poor 2016. In ef­fect it is coun­ter­cycli­cal to the Ele­ment Earth Equity Fund. It de­scribes its in­vest­ment phi­los­o­phy as “not value”. In­vest­ments are made in pre­mium-rated stocks in cases where the growth out­look and qual­ity pro­file war­rant it.

The fund was run by Sean Ash­ton un­til he left in May, and is now run by a team of which An­chor founder Peter Ar­mitage and Lee Cairns are mem­bers. It has the man­date to take the off­shore al­lo­ca­tion to 30% but its di­rect off­shore ex­po­sure is 6% plus the 4% hold­ing in the group’s JSE-listed for­eign in­vest­ment ve­hi­cle As­to­ria.

Cairns says the fund can take an ag­gres­sive, high-con­vic­tion view, but for much of the time it is pre­pared to re­duce its risk against the bench­mark. He says the port­fo­lio is now not too far from the bench­mark, with 12.7% in Naspers.

Its three next-largest hold­ings are also big go­ril­las: Sa­sol, BHP Bil­li­ton and An­glo Amer­i­can. Exxaro is the other sig­nif­i­cant re­sources hold­ing. But it has no di­rect ex­po­sure to plat­inum, only to di­ver­si­fied min­ers and some gold. It is un­der­weight in banks and in­sur­ers, with RMI its largest hold­ing. Old Mu­tual has also been held in ex­pec­ta­tion of a value un­lock.

Its largest ex­po­sure to re­tail is through the prop­erty coun­ters that own the large malls, prin­ci­pally Growth­point and Re­de­fine. The fund had ig­nored the SA Inc in­dus­tri­als but re­cently bought a bas­ket of Bar­loworld, Im­pe­rial and Bid­vest, along with Vo­da­com and MTN, which have now be­come too cheap to ig­nore.

Nolan Wape­naar from the An­chor in­vest­ment team says that un­for­tu­nately Stein­hoff was in the port­fo­lio, as it seemed to fit the char­ac­ter­is­tics of An­chor’s prag­matic growth style. He adds that much of the fund’s suc­cess can be at­trib­uted to what it hasn’t owned — such as MTN un­til re­cently. The fund aims to avoid a long tail of 0.5% to 0.25% po­si­tions, aim­ing for at least 1% per counter.

This is a deep-value fund that dates back to 2001, when these funds were fash­ion­able. Ahead of its time it in­tro­duced a cor­po­rate gov­er­nance over­lay, hence the “Earth” name. “Ele­ment” is a rem­nant of the old Fraters, which about seven years ago man­aged R20bn. It fell to less than R2bn over the dark days of value. Yet in the past three years all nine Ele­ment funds have been back in the top quar­tile of their sec­tors. This fund has R250m.

Fund man­ager Ter­ence Craig says the busi­ness has cut back its cost base to meet its strait­ened cir­cum­stances, al­low­ing it to re­main in­de­pen­dent while other bou­tique man­agers such as Cadiz and Can­non have been taken over.

It has also dis­banded its in-house unit trust com­pany and now white-la­bels through San­lam Col­lec­tive In­vest­ments.

You can see that it has a dif­fer­ent feel from most gen­eral equity funds. Its four largest shares are all in re­sources, An­gl­o­gold Ashanti, Sa­sol, BHP Bil­li­ton and Glen­core. There are also hold­ings in Im­pala Plat­inum and Royal Bafo­keng. The fund in­vests in small- to mid-cap shares such as gas spe­cial­ists Afrox and Sandown Cap­i­tal, an eclec­tic port­fo­lio of as­sets re­cently un­bun­dled from Pere­grine and run by for­mer Pere­grine CEO Sean Mel­nick. The fund also holds Re­unert and Al­tron, and in re­tail­ing Mass­mart and Pick n Pay.

Craig says he has avoided the large-cap rand hedges un­til re­cently, but now holds about 5% each in AB InBev and Bri­tish Amer­i­can Tobacco. Other than Sandown Cap­i­tal, the only chunky fi­nan­cial hold­ing is in Old Mu­tual, about 3.5% of the fund. But Ele­ment has al­ready sold its Quil­ter shares, as Craig says it has a re­mu­ner­a­tion pol­icy does not favour the share­hold­ers.

The fund owns Absa but is ma­te­ri­ally un­der­weight in the bank­ing sec­tor.

Craig says he is com­fort­able not hold­ing a sin­gle share in Naspers, as he calls the group over­val­ued with ap­palling cor­po­rate gov­er­nance. He would pre­fer to lose money else­where, he says.

The fund is man­aged by In­vestec, and is un­der its third fund man­ager. It started as a deep-value fund run by Sam Houlie with some­thing of a feast-or­famine ap­proach. Houlie was suc­ceeded by Ra­jay Am­bekar, who has now moved to Ex­cel­sia. (This may look like the name of a bou­tique ho­tel but it is in fact a bou­tique fund man­ager.) Af­ter Am­bekar’s move, Dis­cov­ery de­cided, and wisely so, that its flag­ship gen­eral equity fund should not be the pris­oner of a sin­gle style.

It wasn’t an op­tion to use the core In­vestec team run by Chris Fre­und, as it al­ready runs the In­vestec Equity Fund. But Grant Irvine-Smith’s Ac­tive Quants Fund is no longer sold to the re­tail in­vestor, so he was ready to take over.

The fund has a mul­ti­style ap­proach, us­ing four fil­ters — value, mo­men­tum, qual­ity and earn­ings re­vi­sion.

But un­like, say, the four fac­tors in the fun­da­men­tal in­dex, it’s not a pure black­box fund, be­cause the weight­ings change dy­nam­i­cally. Nor is it an in­dex hug­ger, as it has a 5% track­ing er­ror — many ac­tive fun-

Its largest ex­po­sure to re­tail is through the prop­erty coun­ters that own the large malls — Growth­point and Re­de­fine

da­men­tal funds are be­low 3%.

Irvine-Smith does not like the term quant and prefers to see the ap­proach as a sys­tem­atic way to process fun­da­men­tal data. Un­like, say, Old Mu­tual, where the quants team does not in­ter­act at all with the fun­da­men­tal teams, Irvine-Smith is con­sid­ered part of the equity team and at­tends its meet­ings at least weekly.

The fund has a 23% al­lo­ca­tion to for­eign equity. With do­mes­tic equity it has a bias to­wards fi­nan­cials (31%). Stan­dard Bank makes up more than 8% of the fund, Absa a fur­ther 6% and JSE Ltd 4%. Naspers is only in fifth place, with an un­der­weight 5%.

There are chunky po­si­tions in smaller shares such as Re­unert (5%), As­tral Foods (4%) and WBH-Ov­con (4%).

The fund is over­weight in re­sources. South32 (since trimmed back) and Mondi were use­ful con­trib­u­tors for much of the year. With the re­cov­ery in the oil price, the fund would have ben­e­fited from a higher al­lo­ca­tion to BHP Bil­li­ton and Sa­sol. It has been in­creas­ing its Bri­tish Amer­i­can Tobacco and An­glo Amer­i­can hold­ings.

Sand­ton-based Lau­rium is one of the top in­vest­ment bou­tiques in busi­ness to­day. It is a hedge fund man­ager at heart, but given that it is al­ready re­search­ing the equity mar­ket for its long-short hedge funds, it makes sense to use the same re­search in the long-only mar­ket.

It has launched a flex­i­ble fund, an equity fund and, most re­cently, a bal­anced fund.

Fund man­ager Mur­ray Winck­ler says it seeks to iden­tify com­pa­nies of which the share prices differ ma­te­ri­ally from their es­ti­mate of in­trin­sic value, par­tic­u­larly if there is a cat­a­lyst to lead to re­ver­sion to the mean. It be­lieves short-term in­ef­fi­cien­cies lead to trad­ing op­por­tu­ni­ties which are not linked to in­trin­sic value.

Lau­rium Equity is a bench­mark-fo­cused fund. Its av­er­age track­ing er­ror of 4% is lower than that of the quants-fo­cused Dis­cov­ery Equity Fund. Lau­rium’s hold­ing of 11.4% in Naspers is sim­i­lar to its weight­ing in the capped Swix in­dex. All its top 10 shares are large caps, with Old Mu­tual, Absa and RMB Hold­ings in the fi­nan­cial sec­tor, Sa­sol and An­glo Amer­i­can in re­sources, and Naspers, Reinet, Vo­da­com, Sho­prite and TFG in the in­dus­trial sec­tor.

Brian Thomas, the re­tail an­a­lyst on the fund, says the fund also holds Tru­worths, as well as a small po­si­tion in Wool­worths now that it is too cheap to ig­nore. Thomas says Reinet is on an even big­ger dis­count to its net as­set value that Naspers, though both nudge 40%. Tobacco com­pa­nies have been hit by the suc­cess of the Juul va­p­ing prod­ucts, even though these ac­count for less than 4% of the US mar­ket.

Its de­vi­a­tion from the bench­mark in terms of the in vogue “ac­tive share” model show that its stock picks over time ac­count for about 55% of out­per­for­mance and its sec­tor picks for about 23%.

The fund, which is now eight years old, has been win­ner of three Morn­ingstar awards as well as two Rag­ing Bull awards. It has grad­u­ated from the ranks of emerg­ing man­agers: it has R49bn un­der man­age­ment and a 15-strong in­vest­ment team. A large part of its suc­cess can be at­trib­uted to its pre­scient de­ci­sion to take the largest hold­ing in its peer group of Naspers, which makes up no less than 22.6% of the fund.

Most of this was bought at R1,000. The share price is now R3,400.

Fund man­ager Malun­gelo Zil­im­bola says that while he is still op­ti­mistic about the prospects for the group he is un­likely to let the hold­ing go above 25% of the fund. He has also not been afraid to take a large bet on fi­nan­cials, though in the June quar­ter he re­duced the weight­ing from 34% to 26%.

FirstRand, Stan­dard Bank and Old Mu­tual are the three big fi­nan­cial hold­ings. Zil­im­bola says he used to work for FirstRand in his days at RMB As­set Man­age­ment, where he built up a re­spect for the man­age­ment team, now in­vig­o­rated with Alan Pullinger in the hot seat. Stan­dard Bank has not had such a glo­ri­ous re­cent past, but Zil­im­bola says the out­look has im­proved now that its new core bank­ing sys­tem has been in­stalled and there is just one CEO. The fund also holds In­vestec.

The fund has some ex­po­sure to SA Inc in­dus­tri­als through Sho­prite and Aspen, but Zil­im­bola says it will take sev­eral more quar­ters be­fore there is a true turn­around in the lo­cal econ­omy, which is why shares such as Im­pe­rial and Bar­loworld re­main off the radar screen.

The fund has taken prof­its on Pick n Pay but still holds TFG and Tru­worths. Its other large in­dus­trial hold­ing is Bri­tish Amer­i­can Tobacco. The fund has been a long­time holder of Old Mu­tual plc and has been happy to see a 15% up­lift in the Quil­ter shares it re­ceived in the un­bundling. Zil­im­bola says it is en­cour­ag­ing that Old Mu­tual has stayed flat, as the rand has weak­ened.

The fund has been a grate­ful holder of An­glo Amer­i­can, which has had good news through a large spe­cial div­i­dend from Kumba, the sale of coal as­sets and the out­look for the re-en­gi­neered An­glo Plat­inum, now largely out of deep-level min­ing. Sa­sol has also proved to add value, with an un­ex­pect­edly steep re­cov­ery in the oil price to about $80 a bar­rel.


Malun­gelo Zil­im­bola, founder of Mazi Cap­i­tal.

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