Financial Mail - Investors Monthly
FUND REVIEWS
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.