Financial Mail - Investors Monthly
FUND REVIEWS
Allan Gray Balanced Fund, SIM Balanced Fund, RECM Balanced Fund, Old Mutual Balanced Fund, Stanlib Balanced Fund
With R480bn under management, the multi-asset highequity sector is the largest sector in the industry, larger even than money market funds, or equity funds.
High-equity funds used to be called balanced funds, and indeed many still have the word “balanced” in their names. These funds are designed to provide the best possible long-term total return for investors building a nest egg for their pensions.
To qualify for the generous tax breaks available for pension funds and retirement annuities, investors cannot invest 100% into an equity fund. But under regulation 28 of the Pension Funds Act, they can invest up to 75% in equities and balanced funds are the ideal vehicle for this. And there is plenty of scope for diversification as 30% of the assets can be invested offshore, and a further 10% in the rest of Africa.
These funds have a long history — Allan Gray Balanced is coming up to 20 years, Sanlam, Old Mutual and Stanlib closer to 25. Even the newcomer RECM Balanced is coming up for 10. Over the longer term, balanced funds have done well but more recently there is a client backlash against the mediocre returns. After all, it is within the mandate of the category to go down to zero in equities when it is warranted.
As a balanced fund client, you shouldn’t be shy to look at the competition to your own fund. Many have changed their portfolio manager and investment style over the past few years. After trying to delegate to colleagues through a multi- ple counsellor system, RECM founder Piet Viljoen has conceded he is not prepared to follow Dave Foord’s new handsoff style and needs to take back control. The results are there to see, though markets and styles often align by chance. Many investors probably hadn’t heard of the two finalists in the highequity category of the Morningstar fund awards, Aylett and Obsidian.
But the large houses should have an advantage in the balanced space as they can afford to run well-resourced teams for each of the component asset classes, such as bonds and property. The vast majority of start-ups are equity-only shops. Many might envy the resources into which Fred White can tap at SIM Balanced with choices such as a US Dividend Fund, Stable Global Equity Fund and Global High Quality Fund. Old Mutual Balanced taps into fellow boutiques such as Old Mutual Equities and Futuregrowth, which is a good vanilla bond manager but also excellent at the more esoteric stuff.
Stanlib is starting to co-ordinate its skills better under the new head of investment Mark Lovett. Unfortunately its well- resourced listed property franchise had a poor year, but the balanced fund wisely sold down almost all its property holdings early. But it is making use of its fixed income team under veteran Henk Viljoen. And unlike Old Mutual, none of the balanced managers is allowed to second guess the equity team’s choice of shares.
Allan Gray will remain the largest balanced fund whatever its performance, it has such a strong brand. And to be fair the long-term track record is exemplary. But the team must be frustrated by the collapse of the foreign asset performance from its sister company Orbis. Perhaps a good time for its clients to diversify.
But the large houses should have an advantage in the balanced space as they can afford to run well-resourced teams for each of the component asset classes
As the largest fund in the industry, with assets under management around R150bn, Allan Gray is the default choice of many
As the largest fund in the industry, with assets under management hovering at around R150bn, it is the default choice for many advisers.
Its long-term record certainly justifies this, and the firm invests quite heavily in the brand to maintain its share. The fund is carved up between four managers, with CIO Andrew Lapping and senior portfolio manager Duncan Artus taking the largest slices. Jacques Plaut and Ruan Stander from the next generation also run part of the fund — each is responsible for their own asset allocation and local equity selection; bond selection is subcontracted to the bond team, led by Mark Dunley-Owen.
Foreign assets are managed by sister company Orbis with the exception of the pan-African shares and, more recently, global frontier shares.
Plaut says there are checks and balances to ensure that a portfolio manager doesn’t put, say, 10% of their assets in Blue Label Telecoms. But each subportfolio can differ substantially, as some managers are more contrarian, others have a growth style or follow technicals more.
Plaut says Standard Bank has been the bank of choice for a decade, and it has rarely if ever been out of the top 10 equity holdings. It wasn’t the right call given the stronger performance of FirstRand over that time, but Standard’s higher exposure to Africa should pay off over the next 10 years.
There are sometimes surprises in the fund, which has recently acquired a chunky position in Glencore, a wheelerdealer trading business which must be the antithesis of the conservative, long-term Allan Gray. But Plaut says it looks a steal with a 15% free cash flow yield, double that of Anglo American.
Allan Gray still likes classic recovery shares such as Woolworths — though in that case the average purchase price was well above the current price, and Investec, which looks cheap, whether a demerger of the asset management business takes place or not.
Plaut admits the recent Orbis performance has been “shocking”, doing no favours to the Balanced Fund’s relative performance. There were just too many duds.
Orbis was unlucky with PG&E, which is bankrupt after losses from the California wildfires, but there were management errors at shares such as Symantec, NetEase and XPO Logistics.
Fund manager Fred White is a believer is specialisation. In effect he acts as an internal multimanager. For domestic equity he relies on the SIM equity team run by Patrice Rassou. The R17bn fund buys into these shares directly and the top holdings include Naspers, FirstRand, Standard Bank and Anglo American. He says the house is pragmatic value but will still acknowledge that quality, in the case of, say, FirstRand, might warrant a premium.
He also invests in Sanlam unit trusts and specialist portfolios. The SIM Property Fund makes up 6% of the portfolio, the Real Assets Fund (direct property and commodities) another 6%. White says this fund has 30 investments and it makes no sense to invest in each of them directly. For international assets it uses funds run by Sanlam Four in London, Sanlam Private Wealth as well as the emerging markets fund run by associate Denker Capital.
White accepts the description of balanced as a “moderate risk” fund is open to interpretation. It does spend a fair bit of time considering risk management, but it has a high equity exposure — 44% just in local equities. Yet the equity portfolio is moderate as it’s diversified and not too concentrated or aiming for a high tracking error. It has also added a steady 1% a year to fixed income performance through a combination of duration and credit tilts.
This is one of the few balanced funds to make a positive return in 2018, scraping a 0.2% gain. Founder Piet Viljoen has always argued that the only risk that matters is not some fancy Greek letter but the risk of losing money. He can be forgiven for some lacklustre performance in the boom years. And you know you are now getting undiluted Piet Viljoen these days at RECM as he is in charge of all six unit trusts.
The fund no longer takes such concentrated bets on perversely contrarian positions. Even its 6% holding in HCI is an investment into a diversified holding company, of which Tsogo Sun is just one of the investments.
Viljoen admits that the fund took some pain with shares such as MTN and Mediclinic. He likes to bang the value drum though — while at Investec he owned some “growthy” shares including Coke bottler ABI and the gas and medical group Afrox. He owns quite small positions in distressed shares such as Aspen and British American Tobacco, but he assures IM he only started buying them at the bottom.
He has been a more substantial investor into Richemont but remains zero-invested in Naspers. Old Mutual is the largest insurance holding in the fund, Spar Group the largest retailer. The largest overseas holding is British supermarket group Tesco, which remains in recovery. Viljoen believes that fixed income and property are overpriced locally and overseas, even though (or perhaps because) he started his investment career in the bond market.
The only asset apart from equities is cash, with 16% in SA cash and 11% in for-
eign cash. The fund is nudging its Regulation 28 limit of 75%. RECM has become a small shop with about R5bn under management. It is also responsible for RECM & Calibre, which makes up 2.5% of the fund. It now trades at a tempting discount.
The fund is run by Graham Tucker and Warren van der Westhuizen of the MacroSolutions team, and looks more like a medium equity than a high equity fund. But it has found support not just from Old Mutual agents but also independent brokers, which has pushed it up to R17.5bn in assets under management.
It was one of the best performers in the sector last year, driven by an 18.8% exposure to nominal bonds, split mainly between 2032, 2026 and 2035 bonds. It also had a relatively light 40.2% in local equities, with a below-benchmark 3.7% in Naspers. British American Tobacco and MTN detracted (though they were only 1.8% each), with Sasol and a heavier bank contribution through Nedbank, Absa and Standard Bank stabilising returns.
There is lower exposure to rand hedges than in the peer group. Internationally it has switched from equities to cash and bonds, which make up 5% of the fund between them. The international holding in total is about 27%, much of which is still managed by fund managers in what used to be the wider Old Mutual Group such as Acadian and Barrow Hanley.
Tucker says none of the 25 largest balanced funds had a positive return in 2018, with an average loss of 3.8%. In this context the 3% loss from Old Mutual Balanced looks at least respectable.
It avoided Aspen and Resilient, reduced Naspers early last year and bought Capitec once the price had slumped after the report from the Viceroy short sellers.
But the absolute return from the fund and its peers has been poor for the past three years, often even over five years. Tucker believes this represents a good point in which to invest in the fund. Old Mutual probably deserves a higher share of the multiasset market.
The rebuilding of Stanlib under head of investments Mark Lovett is starting to bear fruit. Herman van Velze, the most experienced hand in the team and a good portfolio manager, has been given responsibility for the equity and bond funds. Lovett says it is important for franchises to have full responsibility and accountability. But this should not mean they become silos which do not communicate.
The level of cross-asset class discussions has been increased. Stanlib’s celebrity economist, Kevin Lings, also plays a bigger part in the process. The previous manager of the fund, Robin Eagar, recently left the business.
After several mediocre years there was a bounce back (if that’s the word) in 2018, with a top-quartile 0.9% loss. It held the troubled MTN and British American Tobacco, but most of the picks were more stable shares such as Sanlam, Standard Bank and BHP. The resources exposure is a solid 17%, but the largest tilt is to financials, which account for 32% of the equities. It has been reducing its exposure to foreign shares and adding to both domestic equity and fixed income.
The domestic fixed income accounts for about a third of the fund and two-thirds of this is in bonds with a duration of at least 12 years. The fund is geared up to manage both public and private debt, since the LibFin unlisted debt team moved over from Liberty.
The cash exposure is negligible at less than 2% between foreign and domestic, and foreign fixed income is barely 1%. The 26% exposure to international shares is mainly taken through strategic partner Columbia Threadneedle’s Global Equity Fund, which, according to Lovett, operates with a similar philosophy to Stanlib.
The house’s original global partner, Fidelity, now just runs some cash, and Philadelphia-based Brandywine runs fixed income.