FUND REVIEWS

Absa Managed Fund, Coronation Market Plus, Foord Balanced, Aylett Balanced Prescient, Centaur Balanced

High-equity funds are now the largest sector in the unit trust sphere, accounting for about a quarter of industry assets. They provide a one-stop shop for building retirement savings. Most consultants and financial advisers recommend equities to be the core of a portfolio if it is going to have any chance of beating inflation over the long term.

Regulation 28 of the Pension Funds Act is one of the saner SA regulations, as it prescribes a maximum exposure of 75% to equities as well as a 5% or 10% limit on each share, and has gradually built up permitted foreign exposure to 30%.

Three funds have a large market share in the sector, and all have already been covered well in IM — Allan Gray Balanced, which has close to R150bn under management, Coronation Balanced Plus and Investec Opportunity.

Instead of the mainstream Coronation Balanced Plus, we look at Coronation Market Plus. This isn’t technically a Regulation 28 fund, but it looks like one most of the time. Coronation believes this is such a good savings vehicle that it is using it in its initiative to bring in more small, regular investors — they can even start at R1.

Fund managers Neville Chester and Pallavi Ambekar also happen to be the most photogenic investors in the Coronation stable.

The only supersized fund of the five is Foord Balanced. Foord Asset Management has lost favour over the past year on the back of disappointing performance, but this business has bounced back before. Foord still operates out of a converted townhouse in Pinelands and its marketing remains primitive.

Perhaps it should hire Kurt Benn, manager of the Absa Managed Fund. At a recent conference he even out-talked gabbers such as Eusebius McKaiser and Rob Rusconi. He could have set up a successful BEE fund manager, but saw the opportunity to rebuild Absa as an investment brand.

Absa Managed is by no means a bad fund; since its launch in 2010 it has been just ahead of the average of a demanding peer group. It is certainly an indictment of the Absa distribution team that the fund is still under R100m.

We have also looked at two funds run by past winners of the Morningstar awards from Aylett and Centaur.

Walter Aylett has had a high profile from his Coronation days and relishes in a maverick reputation. He is one of the leading Warren Buffett fanatics, but does more than scatter Berkshire Hathaway quotes in his presentations. He seems content for the business to stay small, and avoids the corporatisation that affects growing managers, even the equally maverick Foord.

Centaur Balanced is the sister fund of the multiple-awardwinner Centaur Flexible. Founder Roger Williams was part of the top asset manager of its day, Liberty Asset Management, but soon after founding Centaur moved the business from Sandton to live among the yokels of Cape Town.

For a “different” fund to supplement exposure to one of the bland large funds, Centaur would be first choice, closely followed by Aylett.

Foord Asset Management has lost favour over the past year on the back of disappointing performance

Investors need to know what they are buying in the Absa range, which is rather confusingly named. Absa Managed has just R100m, compared with Absa Balanced’s R2bn. Yet Absa Balanced is in the same category as the Foord Conservative Fund, and has a maximum 60% in equities.

Absa Managed is the obvious choice for the long-term investor, even though there is minimal difference in the benchmark of the two Absa funds: inflation plus 5% for Balanced, inflation plus 6% for Managed.

The Absa team always tries to adopt an absolute mindset. Absa Managed is still constrained by Regulation 28, but it pushes the limits to the edges.

At the end of the second quarter its international allocation was over 34%, and the regulator will expect the manager to bring it back under the 30% threshold. The fund was about 68% in equities at the end of June, but now has an effective 53%.

The fund is co-managed by Kurt Benn, a fund manager schooled at BOE, Quaystone and Sanlam, and Greg Kettles, who ran the international silo at Stanlib. Benn says the two funds are run as a pair, with Balanced paying more attention to downside risk.

He says capital could be more explicitly protected, but hedging is expensive and would make inflation-beating harder in the long run.

The funds’ international investment is through partner Schroders, with a blend of its value, core and multi-asset funds. Benn says the Managed fund is at present leveraged to global growth, with a high allocation overseas. The funds’ largest domestic shares are predominantly rand hedges, with British American Tobacco, Sasol, AB InBev and Bidcorp taking the top four slots.

The main mining holdings are Gold Fields and BHP Billiton. And just outside the top 10 is Sanlam. Picks that do not look so clever in the short term include MTN, as well as Greenbay and Nepi Rockcastle.

The fund is almost 10% invested in property (even more, counting the Schroders allocations) on a see-through basis. As a small fund it can also hold big positions in small caps.

The fund is underweight long bonds, as a 30-year bond yielding 10.2% has a poorer risk-return tradeoff than 8.2% offered from a bond one year to maturity. The benchmark of CPI plus 6% has proved too tough over the past three years as all asset classes have performed dismally, but sometimes it seems to be an easy target.

This is not a Regulation 28-compliant fund but it is also in the Morningstar Aggressive Allocation category, as it behaves more like an aggressive than a flexible fund. It is quite different from the Coronation Optimum Fund, which goes up to 90% in foreign assets.

Market Plus is run by Neville Chester and Pallavi Ambekar, who also run the Top 20 Fund. Think of them as the dynamic team. Market Plus is distinctly bolder than the flagship Balanced Plus Fund. Unlike many other funds in the category it does not have an inflation-plus benchmark; it has a composite benchmark of 52.5% equity, 22.5% bonds, 20% international and 5% cash.

It currently has about 44% in domestic equity and 20% in foreign equity.

At a pinch you might convince yourself that this is a Reg 28 fund in all but name. Chester says that will be true most of the time, but there could be a special opportunity to enhance returns by going 100% equity one day.

He says the fund caps its foreign holding at 35%, not far off the Reg 28 limit, especially if Africa is included. The fund invests 2% into the Coronation African Frontiers Fund, looking at the long-term potential of what are still illiquid African markets.

The two largest holdings in the fund are Coronation Global Opportunities, at 14%, the established multimanager fund run by Tony Gibson. Underlying managers are specialist boutique managers such as Contrarius and Egerton in the UK and Maverick in the US. It has 6% in the Coronation Global Emerging Markets Fund run by Gavin Joubert and Suhail Suleman.

Domestically, the dynamic team has a few predictable picks such as Naspers, though the holding of 5% is quite conservative, and British American Tobacco. But it has made a bold pick in Intu, the former Capital Shopping Centres in the UK, a geared business in a vulnerable economy.

It also holds MTN. Chester says it is at least delivering on the ground in SA and can recover. There are a few crowdpleasers, including Anglo American, Standard Bank and Old Mutual. Anglo American was acquired when it was practically being given away about five years ago, and it now has good operational numbers.

Chester has added to the allocation of UK Quilter shares received in the Old Mutual unbundling. The fund has taken profit in Mondi but increased the holding in Investec — even before the announced split in the business — and MMI, trading on a massive discount.

Even after more than R5bn of new outflows over the past year, Foord Balanced remains one of the four largest balanced funds, along with Allan Gray, Coronation and Investec.

Foord has been a difficult firm to categorise, and largely sold itself on the proven talents and intuition of founder Dave Foord.

It has a philosophy which CEO Paul Cluer argues underperforms in the late stages of a bull market. It did so in 1997/1998 and it is doing so now.

The heart of the Foord philosophy is to get the big calls right, buy at the right price, take a long-term view, ignore the benchmark and diversify and manage risk.

The firm has also diversified its intellectual property, and Foord himself is just one of four managers of the Balanced fund. The others are Nick Balkin, William Fraser and Daryll Owen.

Fraser says there is a multiple-counsellor approach, which gives each of the portfolio managers complete freedom — not just of stock picks, but of asset allocation. As there is a common investment philosophy, though, these positions do not vary

dramatically. For example, they have pooled their R6bn-plus government bond position into the R186 government bonds, the predominant fixed-income position.

It has a 3% exposure to corporate bonds and 8% to money market, both split between local and foreign. The fund has low exposure to domestic equity of 38%, offset by 25% in foreign equity. The foreign holding is held through two funds, 17% in the Foord Global Equity Fund and 13% in the Foord International Fund, a flexible but conservative asset allocation fund.

The fund has remained invested in Aspen, a longtime favourite, which would have hurt it in the short term. It is close to 4% of the fund and an equal weighting to Naspers. Other large holdings are BHP Billiton, British American Tobacco, Sasol and Richemont. A constant feature of the portfolio has been the 3%-4% holding in the NewGold ETF, which Fraser says provides insurance against a global crisis. It is a pure investment in gold, moving up and down with the gold price. The fund is low on financials: it is one of the few without Old Mutual, preferring RMB Holdings, Standard Bank and some Sanlam.

This is one of the last of the old-school personality funds. Fund manager Walter Aylett is known to take an intuitive approach with limited use of quantitative tools. His colleague, Dimitri Theo, describes the style as benchmark agnostic, bottom up.

It is also not easily boxed as a value or growth investor, but rather can be called rational. It considers risk to be the permanent loss of capital, not volatility, so it is prepared to go as low as 25% in equities to preserve capital even if that means a different performance from the peer group.

Apart from the individual stock picks, the best decision for most of the fund’s lifetime has been staying out of bonds. It now holds 7% in bonds, 25% in cash, 46% in local equities and 20% in foreign equities.

Among the large international shares is Berkshire Hathaway, which Aylett has supported for many years. It dovetails with his philosophy that fund managers should behave like the owners of the businesses in which they invest.

Another investment is L Brands, owner of Victoria’s Secret. Another big global holding is Melco International, the Macaubased casino group.

Theo says the shop is not wedded to its position in Berkshire Hathaway, and it would sell if the price went significantly above its intrinsic value, but it is hard to believe that selling the Warren Buffett conglomerate would ever be an unemotional portfolio decision.

Theo says both Melco and Tsogo Sun, another large holding, have been operating under tough conditions, but the upside can be significant if there is even a small increase in consumer spending power.

The fund will take chunky holdings in small caps. Transaction Capital is one, as there is sufficient margin of safety. Largecap holdings include Anglo American, MTN, Reinet and Sasol.

Centaur, run by Roger Williams, is best known for its Flexible fund. But it made the wise business decision to introduce a balanced fund, which has a wider audience.

While investing in a flexible fund is a high-risk, high-return use of discretionary money, balanced funds can house longterm compulsory pension fund savings.

But the best ideas of this small shop are still seen in the Balanced, within the constraints of a 75% maximum exposure to equities and 30% offshore. Williams says even the Balanced fund has a high degree of discretion on asset allocation: finding the optimum source of risk-adjusted returns through scenario analysis. It is currently 63% invested in equities, 47% local, 16% global and 37% in fixed income, with 2% in cash, 20% in bonds and 4% in global cash. Williams says the team is competent in fixed income, though it does not offer it as a standalone product. It uses a quantitative approach to its bond duration and targets a demanding 1.5% outperformance.

But clearly Williams’s passion lies in the stockpicking which, on top of old favourites including British American Tobacco, Naspers, Old Mutual and Sasol, includes more esoteric picks such as Merafe, Exor and Fiat Chrysler. Williams points out that Merafe owns a 20.5% joint venture stake (with Glencore) in the world’s largest ferrochrome smelting company, the second-lowest cost producer of ferrochrome with more than 50 years of reserve life. He expects prices to increase as highly polluting Chinese smelters are closed.

Fiat Chrysler is a bet on the improved perception of the Fiat, Jeep and Maserati brands. Exor, the holding company of the Agnelli family, the Ruperts of Italy, trades on a 32% discount even though it has controlling stakes in Fiat, Ferrari and The Economist, one of the few seriously profitable global news magazines. Williams is also a fan of African Rainbow Minerals with a strong portfolio of manganese mines as well as iron ore and platinum.

Centaur also looks out for shares with an SA connection. It holds BrightSphere, the former Old Mutual Asset Management US. Williams says it has been disappointing due to unanticipated weakness in emerging markets, but it operates a hybrid partnership/shareholder model which, he says, is the ideal model for an asset manager.

Picture: 123RF — DAVID CARILLET