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