FUND REVIEWS

Denker Cap­i­tal is made up of mav­er­ick fund man­agers from San­lam who have had to go it alone as their style is too hot

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

Denker Global Eq­uity Fund, PSG Global Eq­uity Fund, Old Mu­tual Global Fund, Dis­cov­ery Global Eq­uity Fund, Al­lan Gray-Or­bis Global Eq­uity Fund

In the early days af­ter ex­change con­trols were first re­laxed many in­vestors wanted to fully ex­ter­nalise their in­ter­na­tional ex­po­sure.

There were in­evitably po­lit­i­cal and emo­tional rea­sons be­hind that — the rand up to 2001 seemed to be in free fall, though in fact the JSE sub­stan­tially out­per­formed its global peers over the next decade.

Global funds are no longer the best­sellers they would have been 15 years ago. Many in­vestors have plenty of for­eign ex­po­sure em­bed­ded in other prod­ucts such as high-eq­uity multi-as­set funds and even do­mes­tic gen­eral eq­uity funds.

In the past, the mar­ket­ing pitch would have been to leave for­eign in­vest­ments to teams based in the global fi­nan­cial cen­tres such as New York and Lon­don. But Franklin Tem­ple­ton is the only group to make a se­ri­ous stab at ac­quir­ing a client base in SA; oth­ers such as Fidelity and Mel­lon New­ton tried and gave up. The reg­u­la­tor was ar­guably overof­fi­cious in its ap­proach to reg­u­lat­ing these funds which pro­tected lo­cally con­trolled funds.

The five funds fea­tured this month all grew out of an SA base. Old Mu­tual Global Eq­uity is now man­aged by Me­rian Cap­i­tal, owned by its mainly Bri­tish man­age­ment and pri­vate eq­uity firm TA As­so­ci­ates, but it was orig­i­nally an off­shoot of Old Mu­tual As­set Man­age­ment set up by Garth Grif­fin and Kevin Carter in the mid1980s, al­most a decade be­fore ex­change con­trols were re­laxed. It is the most diver­si­fied of the five with 450 un­der­ly­ing shares but, as we shall see, that does not make it a closet in­dex fund.

Around the time these pi­o­neers moved to Lon­don, Al­lan Gray moved to Hong Kong and then to Ber­muda to put in prac­tice the phi­los­o­phy he took to SA from his time at Fidelity in Bos­ton. In many ways in­vest­ing off­shore is a choice be­tween Or­bis and the rest. It has long been the de­fault choice of SA fi­nan­cial ad­vis­ers

Dis­cov­ery Global Eq­uity is a rel­a­tive new­comer, dat­ing back to 2007, but it feeds into what must be the most com­mer­cially suc­cess­ful SA-con­trolled fund man­age­ment ven­ture, In­vestec’s Global Eq­uity Fund.

Un­like Old Mu­tual, In­vestec has not op­er­ated sep­a­rate do­mes­tic and in­ter­na­tional eq­uity si­los — the fund is op­er­ated by the 4Fac­tor team with an­a­lysts and fund man­agers in sev­eral coun­tries. And it takes a multi­na­tional ap­proach to its value and qual­ity funds too.

Of course, Dis­cov­ery could change man­agers at any time, Per­haps with Dis­cov­ery com­pet­ing with In­vestec in bank­ing, ten­sions will emerge to make the re­la­tion­ship un­sus­tain­able.

Then there are two teams that man­age global eq­ui­ties from Cape Town with no in­ter­na­tional part­ners. Denker Cap­i­tal is made up of mav­er­ick fund man­agers from San­lam who have had to go it alone as their style is too hot for a con­ser­va­tive life of­fice. Denker Global Eq­uity fund man­ager Pierre Marais has cer­tainly re­duced the tem­per­a­ture with a more prag­matic value style.

PSG has proved adept at un­cov­er­ing gems and its global eq­uity fund should be on all ad­vis­ers’ short­lists; PSG As­set Man­age­ment CEO Anet Ah­ern has cer­tainly built a solid sta­ble of race­horses.

There is a lot of con­fu­sion about this fund, orig­i­nally called San­lam Global Best Ideas, run by Kokkie Kooy­man. Kooy­man es­tab­lished a rep­u­ta­tion as the top fi­nan­cial ser­vices spe­cial­ist in SA but when it came to global eq­uity he would some­times shoot the lights out but also plumb the depths.

First un­der Douw Steenekamp and now un­der Pierre Marais it has be­come far more of a con­ven­tional risk-con­trolled fund, though not as con­ser­va­tive as the San­lam Global Eq­uity Fund next door.

It re­mains a stock picker’s fund but Marais looks at mod­ern in­vest­ment fac­tor risks. He be­lieves there are times to adopt a low beta strat­egy, not de­vi­at­ing too far from the in­dex, and times to open up the risk budget. He be­lieves in max­imis­ing ac­tive share by pick­ing ag­gres­sively within a sec­tor but not in tak­ing big bets be­tween sec­tors and in­creas­ing track­ing er­ror.

As a value man­ager, Marais has avoided Netflix and Face­book, pre­fer­ring Mi­crosoft, Cisco, Or­a­cle and Ap­ple. He says one of the great in­vest­ment op­por­tu­ni­ties was to buy Mi­crosoft at a p:e of 10 back in 2012. Now the po­ten­tial of the cloud busi­ness has com­pletely changed its prospects.

In oil it ben­e­fited from hold­ing To­tal and avoid­ing Hal­libur­ton. Its best per­former in 2017, US home­builder NVR, is likely to be the worst per­former of 2018 on softer build­ing data. Marais is a big sup­porter of the health-care sec­tor and his two largest bets are in health-care equip­ment busi­nesses Bec­ton Dick­in­son and Medtronic but he also owns blue chip drug maker GSK, Roche and No­var­tis. To help keep these com­pa­nies in busi­ness he also owns UK to­bacco com­pany Im­pe­rial Brands.

In tele­coms, Marais be­lieves the best value is pro­vided by Ver­i­zon, which bought out its part­ner Voda­fone in the US to be­come the sec­ond-largest tele­coms group there, and is a pioneer in 5G wire­less.

This fund and the Denker fund are the only two of the five which are run en­tirely from SA, though the oth­ers at least have or have had in­sti­tu­tional links with SA fi­nan­cial ser­vices groups.

PSG adopts the same three M method­ol­ogy it adopts for do­mes­tic shares, fo­cus­ing on the moat or bar­ri­ers to en­try, the mar­gin of safety and the qual­ity of man­age­ment. More than any SA fund it sees pick­ing for­eign and do­mes­tic shares as seam­less, and many of its top shares such as Brook­field As­set Man­age­ment can also be found in its gen­eral eq­uity fund. The fund is co-man­aged by Aus­trian Philipp Wörz and chief in­vest­ment of­fi­cer Greg Hop­kins. Wörz says he is com­fort­able to see Brook­field makes up al­most 10% of the global fund as it is the world’s sec­ond­largest man­ager of al­ter­na­tive as­sets (af­ter KKR), which in­clude hedge funds, in­fra­struc­ture and di­rect prop­erty, and it has $185bn un­der man­age­ment.

In­sti­tu­tional in­vestors are mov­ing away from tra­di­tional long-only in­vest­ments and Brook­field has the brand and rep­u­ta­tion to ben­e­fit from this.

This year has been sig­nif­i­cant for PSG as af­ter years of loyal sup­port for War­ren Buf­fett’s Berk­shire Hath­away it has sold its en­tire hold­ing, on the grounds that the cur­rent price does not have suf­fi­cient mar­gin of safety. It bought the share ini­tially when it traded at a 20% dis­count to NAV.

There is an eclec­tic mix of shares in PSG’s top 10. The Mo­saic Group is not a trav­el­ling art troupe but a miner of potash and phos­phates mainly in Canada and Brazil. PSG also holds Col­fax, which con­trols JSE-listed How­den and op­er­ates in the heavy in­dus­trial mar­kets. PSG is a holder of shares in L Brands, which owns Vic­to­ria’s Se­cret.

Some of PSG’s picks are clearly blue chip such as ca­ble group Lib­erty Global, Asian insurer AIA and Si­mon Prop­erty, per­haps the world’s top name in re­tail and com­mer­cial real es­tate. But it also owns Ja­pan Post In­sur­ance and engineering ser­vices group Bab­cock.

Wörz says Mi­crosoft used to be a large hold­ing but this has been sold down as has Cisco. It has also played the sec­tor through Soft­bank and Ali Baba. Its notable fi­nan­cial pick is JSE-listed Dis­cov­ery.

This has been an out­stand­ingly suc­cess­ful fund, and with Old Mu­tual sell­ing off its UK-based sin­gle man­ager there was some con­cern that there could be a change of man­ager. It would have been tempt­ing to give it to the young global eq­uity team op­er­at­ing in-house at Pinelands, known as the “bar mitz­vah boys” for their im­prob­a­ble youth. How­ever, peo­ple don’t in­vest in this fund for the com­fort of the Old Mu­tual brand, but for the skills of fund man­agers Ian Heslop, Amadeo Alen­torn and Mike Ser­vent.

Over seven years the fund is 2.2 per­cent­age points a year ahead of the bench­mark, which few global man­agers that are far bet­ter re­sourced can claim. The team now works for the new Me­rian Cap­i­tal, but re­tains the man­date to run the fund.

Alen­tron says the fund has about 450 shares, which has helped it man­age spe­cific risk. He says the num­ber of shares is not a good proxy for the fund’s ac­tive share (con­tri­bu­tion from ac­tive man­age­ment). In the fund’s case up to 70% of the dif­fer­ence in per­for­mance can be at­trib­uted to its stock bets, and just the re­main­der to the move­ment in the bench­mark.

No share can he held at more than 1% above or be­low its weight­ing in the MSCI World In­dex. Just look­ing at the top 10, the fund seems unimag­i­na­tive, with Ap­ple, Mi­crosoft and Ama­zon the top three hold­ings, mak­ing up less than 5% of the fund. Su­per­fi­cially, it has sim­i­lar­i­ties with In­vestec’s 4Fac­tor process, but Me­rian con­tin­u­ally reviews the weight­ing to its fac­tors ac­cord­ing to dif­fer­ent mar­ket con­di­tions. In some years it will em­pha­sise qual­ity and mar­ket dy­nam­ics, in oth­ers value and man­age­ment teams, for ex­am­ple.

The port­fo­lio man­ager’s main role is to su­per­vise a sys­tem­atic process and not to sec­ond guess what the data shows. The main hu­man in­ter­ven­tion is in the de­bates about which fac­tors are likely to give the best re­turns in the next one to three years.

Alen­torn says this does not in­volve try­ing to fore­cast macro­fac­tors such as the

growth in US GDP but rather to see whether the in­vest­ment en­vi­ron­ment is high risk or low risk.

The fund is in­vested en­tirely in the In­vestec GSF Global Eq­uity Fund, which has been run­ning for 18 years on a 4Fac­tor ba­sis. It is a mul­ti­style fund, in con­trast to In­vestec Global Value and Global Fran­chise (Qual­ity) funds.

Se­nior fund man­ager Rhyn­hardt Roodt says the term fac­tor was adopted some time be­fore it was adopted in aca­demic cir­cles, and it can also be de­scribed as four “at­tributes”. It looks for high-qual­ity shares which are at­trac­tively val­ued, have im­proved op­er­at­ing per­for­mance and in­creased in­vestor at­ten­tion. About 5,000 are val­ued equally on these met­rics with a max­i­mum pos­si­ble score of 16. Only those which score 12 or more are con­sid­ered for the port­fo­lio.

Roodt does not see it as a quant prod­uct, but rather a fun­da­men­tally based fund which made use of com­put­ers in the days be­fore this was the norm. This is some­times called a quan­ta­men­tal ap­proach. Once shares have passed the screen­ing there are now 30 an­a­lysts to do the heavy lift­ing but the fac­tor mod­els are in­tended to keep them away from be­havioural traps, and to en­sure the ma­jor­ity of risk is taken through stock picks. The in­ten­tion is to neu­tralise, as far as pos­si­ble sec­tor or coun­try risk. The fund does not go over or un­der 5% com­pared with its weight­ing in the MSCI world in­dex.

In­vestors in Chris Fre­und’s do­mes­tic eq­uity prod­ucts will see fa­mil­iar themes, no sur­prise as Roodt used to carry Fre­und’s bags. Less at­ten­tion is paid to screen­ing in SA, given the fa­mil­iar­ity with SA’s top 40 shares but there is a philo­soph­i­cal over­lap.

The Dis­cov­ery fund is be­hind the bench­mark in the short term; Ja­panese brewer Asahi has caused pain this year where de­mand is fall­ing at home, off­set­ting growth over­seas. Chi­nese pork pro­ducer WH has been hit by African swine flu. In­vestec cut its losses in Rio Tinto, and au­to­mo­tive pro­duc­ers Del­phi and Lear also hurt.

Good picks have in­cluded in­dus­trial con­glom­er­ate Honey­well and US rail­way op­er­a­tor Nor­folk South­ern. Some more good picks have been US insurer Cigna, Eli Lilly and Thermo Fisher Sci­en­tific. And not hold­ing Face­book has proved to be help­ful.

Many of the hold­ings in the fund could be de­scribed as dy­namic but not cut­ting edge and in­clude Mi­crosoft, Com­cast, Gold­man Sachs and AIA. Roodt says to ac­com­mo­date the ex­pected grow­ing im­por­tance of China, In­vestec is re­cruit­ing Man­darin-speak­ing an­a­lysts, some based in Hong Kong, oth­ers in Lon­don or per­haps New York. The fund has quite a mod­est ex­po­sure to emerg­ing mar­kets of 8% and more than 64% in North Amer­ica, though this isn’t far off the in­dex weight­ing.

Or­bis has to be the premier off­shore in­vest­ment brand in SA, built on the rep­u­ta­tion of Al­lan Gray, who launched the orig­i­nal fund in the 1980s.

Leg­is­la­tion means it is im­prac­ti­cal to sim­ply of­fer a rand class in the main Or­bis fund, along­side the dol­lar, yen and pound funds. In­stead, the Fi­nan­cial Ser­vices Con­duct Author­ity in­sists that an en­tirely sep­a­rate fund is set up as a feeder fund.

But Or­bis’s rep­re­sen­ta­tive in SA, Tam­ryn Lamb, says there are no ex­tra charges for in­vest­ing through the feeder fund. It is not al­ways open to new busi­ness, as it re­lies on the for­eign cur­rency ca­pac­ity of the Al­lan Gray unit trust com­pany, though it has re­cently re­opened.

Or­bis has been through a bout of un­der­per­for­mance and over the past year it has pro­vided only half of the 16.4% re­turn in rands from the MSCI world in­dex.

Or­bis goes out on a limb to be the op­po­site of an in­dex tracker. Its ac­tive share (re­turn that can’t be ex­plained by the in­dex per­for­mance) has hit 96%. It has the rep­u­ta­tion of a dyed- in-the-wool value man­ager which prefers bricks and mor­tar to in­tan­gi­bles, yet in De­cem­ber it made a size­able in­vest­ment in Face­book.

Another tech buy is Naspers: the team likes Ten­cent in its own right, but the dis­count at which Naspers trades to its Ten­cent hold­ing is now com­pelling. The largest tech­nol­ogy share is NetEase, which ac­counts for al­most 7% of the fund. It has proved to be a volatile in­vest­ment in spite of its strong po­si­tion in the Chi­nese gam­ing mar­ket. Its other main emerg­ing-mar­ket hold­ing is at the op­po­site end of the spec­trum: Brazil’s bulk iron ore pro­ducer Vale.

But Lamb says the risk-off mood in global mar­kets has pro­vided some op­por­tu­ni­ties in emerg­ing mar­kets, par­tic­u­larly South Korea. Or­bis owns Korea Elec­tric Power Corp and bank­ing group KB Fi­nan­cial. It has a light ex­po­sure to fi­nan­cials, with mod­est hold­ings in Wells Fargo, Berk­shire Hath­away and Credit Suisse. There was also an op­por­tu­nity to buy bio­phar­ma­ceu­ti­cal com­pa­nies, which might seem spec­u­la­tive by Or­bis stan­dards. But Lamb says the mar­ket was not even pay­ing for a cash stream from Ab­bVie and Cel­gene’s drugs, let alone their pipe­lines.

The fund is un­der­weight in Europe and the UK. Its main Euro­pean hold­ings are blue chips such as BMW and Swatch. The fund still has a soft spot for Ja­pan, hold­ing the Mit­subishi and Su­mit­omo trad­ing com­pa­nies, and oil and gas group In­pex. Pro­fileData Fund An­a­lyt­ics The in­for­ma­tion, data, analy­ses and opin­ions above do not con­sti­tute in­vest­ment ad­vice, and all in­for­ma­tion should be ver­i­fied be­fore us­ing it. Do not make any in­vest­ment de­ci­sion with­out the ad­vice of a pro­fes­sional fi­nan­cial ad­viser.

Pic­tures: FI­NAN­CIAL MAIL

Anet Ah­ern

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.