Financial Mail - Investors Monthly
FUND REVIEWS
It looks for undervalued companies that grow over the appropriate time horizon, and at different times this means choosing growth or value shares
Element Flexible SCI Fund, Centaur BCI Flexible Fund, Blue Alpha All Seasons Fund, Visio Actinio Fund, 360NE BCI Flexible Opportunity Fund
Visio was on its way to becoming a large manager when it had an alliance with Mazi Capital. There was concern neither would be strong after the split. But both flourished
Flexible funds give fund managers the chance to build a portfolio which truly represents their best investment view. Yet they have not taken off — the domestic flexible sector has just R60bn under management compared with R480bn in the high-equity sector.
Flexible funds do not qualify under regulation 28 of the Pension Funds Act, so they cannot be used on a standalone basis in a retirement annuity. But many investors have ignored their strengths: they allow fund managers to express their best asset allocation views, and there is extensive research to show that significantly more value is added through asset allocation than stock selection.
And balanced funds are unashamedly peer group funds competing in a league table; flexible funds usually have a real-return benchmark, typically inflation plus 5% or 6%. They are favoured by hedge fund managers who want to set up a long-only fund as they offer absolute and not relative returns. In fact, most hedge fund managers have found that there is limited demand for SA hedge funds and they’ve had to diversify into the mainstream.
An exception is Peregrine Capital, which remains a pure hedge fund business, and 36One still has more than half its assets in hedge funds.
Cy Jacobs, head of investments at 36One, says its hedge funds are the conservative low-risk products in his suite: its long/short fund typically has 30% net exposure to the market, and since inception has given a 17% annual return compared with 15% from the more equity-heavy Flexible Opportunity (long-only) Fund.
With about R18bn, 36One is
one of the most sought-after mid-sized managers.
Another house with a strong hedge fund heritage is Visio, where fund manager Patrice Moyal hasn’t won many popularity contests with his indiscreet shorts over the years.
Visio was on its way to becoming a large manager when it had an alliance with Mazi Capital. There was concern that neither would be strong after the split. But both flourished — Visio has about R30bn under management and Mazi more than R40bn.
Blue Alpha is another fund steeped in hedge funds. Founder Uys Meyer learnt his lesson when the Mayflower Fund lost 20% in the year to April 2009. He has since strengthened his team with long-only veterans such as Gary Quinn from Prudential and Richard Pitt from just about everywhere. The firm has barely a foothold in hedge funds these days.
Centaur Flexible has won several industry awards and its founder, Roger Williams, is, like Moyal, a veteran of the old Liberty Asset Management. On his website he tries to lure clients by talking about how he made living from card counting, which might, of course, discourage some. He also managed hedge funds from 2004 to 2008 before deciding that it made more sense to focus on the mainstream higher-volume products.
Like Blue Alpha, Centaur is a cottage business with between R4bn and R5bn under management. These firms can definitely add value as their size gives them extra flexibility.
The fifth fund, Element Flexible, also has a hedge fund background as in its days as Fraters it managed a hedge fund, for the Brait fund of hedge funds, long before Brait became better known for buying dismal chains on the British high street. But Element's best known absolute return roots are through its first successful product, originally called the Fraters Real Income Fund. Element suffered a similar fate as other deep-value managers and its funds withered to below R2bn about two years ago. It now prefers the term contrarian. With some good asset allocation and mostly sensible stock picks, performance has bounced back.
This house, originally Fraters, was best known for its Real Income fund and a real-return approach. The co-managers are Terence Craig and Jeleze Hattingh, and Andrew Bishop, who is currently under supervision, becomes the third portfolio manager on May 1.
This fund aims for a real return of 5% and has achieved this with an excess return of 1.5% since inception. But it is not commercially viable with R134m under management, and the intention is to merge it with the Element Balanced Fund.
Balanced funds are the most popular unit trust category as they can be used to build up retirement income in taxdeductible vehicles. Co-fund manager Hattingh says the funds are being aligned. Flexible already holds a direct 21% in the Balanced fund itself and each holds about 20% in Element’s Global Equity fund, run by CIO Craig. This fund has avoided the classic Faang shares such as Apple and Alphabet, but has included tech shares such as PayPal and Visa, which are benefiting from the increase in electronic payments, as well as health-care shares AbbVie and Roche and niche manufacturers Safran and Danaher. It would not be an Element fund if it did not also include funds with direct holdings in silver and gold.
The Flexible fund is more conservatively structured than its peers, with 44% in SA equity, 10% in local cash, 10% in SA property and 14% in SA bonds. Craig says a heavier weighting in SA bonds added value but the chunky position in property shares detracted. It has invested in corporate paper such as the CPV (solar) Power Plant No 1 Bond and Investec preference shares.
The fund’s large holding in AngloGold Ashanti has helped, especially in the fourth quarter, and the fund continued to favour resource shares such as Glencore and Impala Platinum. Craig says platinum shares have recovered from a decade-long underperformance and it also holds Royal
Bafokeng Platinum.
The fund is small enough to include Afrox in its top 10 but it turned out to be a detractor from performance along with Group Five.
The fund is run by the Centaur team from its offices in Great Westerford, Rondebosch, led by Roger Williams. There are three full-time equity analysts and an equity dealer who doubles as a quantitative analyst.
The flexible fund aims to achieve a real return of at least 6% a year with volatility no greater than 60% of the all share index. It looks for undervalued companies that grow over the appropriate time horizon, and at different times this means choosing growth or value shares.
For example, Centaur may see SA equities yielding 12% a year and look to invest in shares which deliver returns at least 6% higher. In fact, it divides the JSE into 11 areas of opportunity, from the obvious, such as rand hedge, to more subtle ones, such as restructuring. The team spends a lot of time establishing the optimal risk/reward ratio.
Since inception in December 2004, the fund has given a 16.6% return, compared with a 12.1% return from a typical balanced
benchmark, but it has been below average over the past year. It is 58% in domestic equity, 15% in domestic cash, 11% in domestic bonds and 15% in foreign equity, with the balance in other offshore assets.
The fixed income is held predominantly through other unit trusts such as the Allan Gray and Coronation Money Market funds and Coronation Strategic Income. After Naspers the biggest share in the portfolio is Exor, a European conglomerate with investments as diverse as Ferrari cars and The Economist magazine.
Williams says the biggest asset allocation decision to add value has been to move over 10% of the fund offshore in 2011. And until recently it has been underweight in SA equities in favour of fixed income, but this position is being reversed.
Williams certainly doesn’t believe in investing in last year’s winners, as he holds dismal performers such as Woolworths and British American Tobacco. It also holds large holdings in mining stocks Sibanye Gold and African Rainbow Minerals.
Blue Alpha certainly looks teambased: founder Uys Meyer is helped by former Prudential equity manager Gary Quinn, and Richard Pitt, who has worked for a baker’s dozen of fund managers.
Nicola Broekhuysen, a senior analyst on the fund, says it has a different philosophy than other equity-only unit trusts, also drawing on the firm’s experience as a hedge fund manager (Meyer was an industry pioneer with his Mayflower Fund).
All Seasons has a benchmark of inflation plus 5%. Nonetheless the fund usually has a more than 75% exposure to equities, making it unsuitable as an investment in a pension or retirement annuity.
The fund is fully invested offshore, right up to the 30% limit. It has a high cash weighting. Thanks to a strong 9.8% return in the first quarter of the year, the 12month returns look respectable at 11.7%.
Its first-quarter performance was boosted by some closing of the discount at African Rainbow Capital as well as holding on to MultiChoice. But the strong performance of the Blue Alpha Global Equity fund, returning 28%, was the biggest driver.
The global fund takes an aggressively bottom-up approach, with no energy, financials or materials, but individual
shares such as Apple and FedEx fell by almost a third in the fourth quarter.
On a see-through basis the biggest contributors in the 12 months to March were the chunky holdings in Anglo American, up 46%, and Microsoft, up 27%. Other large mining holdings are Glencore, introduced late in 2018, and Anglo American Platinum.
There is a low 10% exposure to domestic financials, primarily to FirstRand. In terms of some of the big shareholder weighted index shares, the fund had too much Richemont for most of the period and too little Naspers. Broekhuysen says the fund is defensively positioned, and has bounced back from the 4.4% loss for 2018. There is a hefty buffer in the shape of a 31% cash holding.
Like 36One, Visio is a hedge fund manager at heart and Visio Actinio displays many of the absolute-return characteristics of a hedge fund.
It aims to achieve positive returns over rolling one-year periods, which it hasn’t achieved recently with a loss of 3% in the year to February. It was, with hindsight, too heavy in equity — a hefty 73% in domestic equity and 13% in offshore.
Fund manager Patrice Moyal’s core
competence is stock selection. He likes shares which will benefit from corporate action and often engages “constructively” with management, most publicly at PPC. He held a hefty holding of up to 7% of the fund in Old Mutual throughout its managed separation.
He is now a strong holder of Quilter, the UK wealth manager spun out of Mutual, which is at a significant discount to peers such as St James’s Place and Hargreaves Lansdown. He holds US chemical giant DowDuPont, which is being split into three.
Moyal does not hold the telecom businesses as he regards them as running a race to the bottom. He likes businesses which could benefit from government intervention such as the hospital groups and taxi financier Transaction Capital.
Education supplier AdvTech has been a disappointment, falling from R20 to R12.50, but Moyal first bought the shares at 35c.
The fund only invests in equities and cash: the cash holding is below 10%. But it has the mandate to use financial instruments including foreign currency, interest rate and exchange rate swap transactions. It has recently held top 40 index futures.
There is just one bank share in the fund — RMB Holdings — but unusually Moyal has Liberty in his top 10. It happens that he learnt his craft at the old Liberty Asset Management.
The fund has a seemingly kind benchmark of the repo rate plus 2%. But over the past two years this has proved an insuperable hurdle: it is cold comfort to clients that the performance was still comfortably ahead of the sector average in spite of a 7% loss in 2018.
Fund manager Cy Jacobs admits that there was too much in rand hedges and the international shares held through the 36One global equity fund. Naspers and British American Tobacco hurt. It also didn’t help that the fund was not invested in the best-performing relevant asset class, SA bonds.
Jacobs says most of the firm’s assets are in hedge funds — over the past 16 years clients would have received a 17% annualised net return. 36One is now the largest hedge fund provider in SA and in the fund it aims to use as many hedge funds as it is allowed to: the main exclusion is that the fund cannot short individual shares, but it can use index futures.
36One was a spin-off from Investec’s private client management but is now an established shop with an investment team of 11. Along the way it recruited Evan Walker, award-winning manager of the RMB Small/Mid-Cap Fund, now co-manager with Jacobs of all the long-only funds.
Jacobs says the firm’s internal report criticising Resilient was leaked but it is a good example of the process the firm goes through to avoid landmines. It likes many other property shares, including foreignbased shares such as Stenprop, Hammerson, Workspace and Green Reit. Its only local property shares are Arrowhead and Fairvest. It has not invested in Brait, EOH, Tongaat Hulett and MTN, though some of these names might appear in its hedge fund shorts.
As an alternative to bonds Jacobs likes high-income instruments such as ZPLP, a preference shares issued by Northam Platinum which pays prime plus 3%.