Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

Lau­rium Sta­ble Pre­scient Fund, Kag­iso Sta­ble Fund, Dis­cov­ery Cau­tious Bal­anced Fund, Al­lan Gray Sta­ble Fund, Absa Ab­so­lute Fund

With R226bn un­der man­age­ment, low eq­uity (or cau­tious al­lo­ca­tion) funds are the fourth-most pop­u­lar sec­tor af­ter high eq­uity (bal­anced) funds, gen­eral eq­uity funds and money mar­ket funds.

They are con­ser­va­tive funds, but more risky than flex­i­ble fixed income. They can have a bias to­wards growth as­sets, as up to 40% can be in­vested in eq­uity and a fur­ther 15% in prop­erty. And they have the same in­ter­na­tional as­set limit as bal­anced funds — 30%.

The­o­ret­i­cally, in­vestors should be re­warded for the in­vest­ment in real as­sets by re­turns com­fort­ably ahead of in­fla­tion and cer­tainly ahead of low-heart­beat income funds. But in re­cent years sta­ble funds have strug­gled to keep up with fixed income only funds.

The lead­ing fund in the sec­tor, Al­lan Gray Sta­ble, had a pedes­trian 6.7% an­nual re­turn over three years.

This year there were out­flows of R7.8bn from the sec­tor, more than any other.

In­vestors would have done bet­ter in­vest­ing in a sin­gle govern­ment bond and leav­ing the money there.

The core au­di­ence for sta­ble funds is those peo­ple within five years of re­tire­ment and in re­tire­ment. They can­not afford a cap­i­tal loss over a rolling one-or two-year pe­riod but need pro­tec­tion from in­fla­tion.

Most fund man­agers con­sider in­vest­ing off­shore as a crit­i­cal way to com­pen­sate for a weak rand, which in­evitably fu­els in­fla­tion. But they con­stantly need to look at the risk/re­turn trade-off of their investment­s. Sta­ble funds are

not peer group funds — los­ing less than your com­peti­tor isn’t an ex­cuse for de­stroy­ing value.

The five funds in­clude Al­lan Gray Sta­ble, which, with about R52bn un­der man­age­ment, cre­ated the cat­e­gory. There were some highly com­plex ab­so­lute re­turn funds in SA, but Al­lan Gray set the tem­plate for a more eas­ily un­der­stood beast. It has a max­i­mum of 40% eq­uity and aims to beat what you get in the bank by 2%. No talk of low vo­latil­ity or hedg­ing.

It is im­por­tant to know what you’re buy­ing. Absa Ab­so­lute is the least eq­uity-cen­tric of the five, but it is man­aged by the same team which made In­fla­tion Beater win­ner of the re­cent Morn­ingstar award for a cau­tious al­lo­ca­tion fund. Fund man­ager Eben Mare ran a sim­i­lar fund at Stan­lib, and has a more sub­tle and so­phis­ti­cated view of risk than the rest.

Dis­cov­ery Cau­tious Bal­anced is run by the 4Fac­tor team at In­vestec, which was a Morn­ingstar fi­nal­ist through its Mod­er­ate Bal­anced fund. As fund man­ager Chris Fre­und gets closer to earn­ing his free bus pass, he is hand­ing over some du­ties to ris­ing star Sa­man­tha Har­tard. The fund is a good choice for those fa­mil­iar with Fre­und’s pre­oc­cu­pa­tion with earn­ings re­vi­sions.

It also shows the ad­van­tages of be­long­ing to a large house: Fre­und and Har­tard concentrat­e mainly on do­mes­tic eq­uity se­lec­tion and draw in ex­per­tise for fixed income and as­set al­lo­ca­tion from other teams.

It is worth not­ing the ar­rival of the Lau­rium Sta­ble fund. It is hard to imag­ine that founders Gavin Vor­w­erg and Murray Winck­ler ex­pected to make the lat­eral move from glam­orous hedge funds to stodgy sta­ble funds. But with R24bn un­der man­age­ment, Lau­rium is a medium-sized player with am­bi­tions to of­fer prod­ucts at the ap­pro­pri­ate risk level for its broad­en­ing client base.

Kag­iso Sta­ble has had bet­ter per­for­mance re­cently than the others: over three years its 9.1% re­turn is 2.4 percentage points ahead of Al­lan Gray. It achieved this with min­i­mal over­seas ex­po­sure, with strong per­for­mance of some of its mid-caps and reading the plat­inum shares right. It’s still a small fund with about R250m un­der man­age­ment and should start to ap­pear on more buy lists.

It is not of­ten that a qual­ity in­vest­ment house sets up a new sta­ble fund, but Lau­rium did just that in De­cem­ber 2018. Lau­rium has R24bn un­der man­age­ment and an in­vest­ment team of 12. The shop was known for its eq­uity-focused hedge funds and long-only funds, but re­alised that to serve its clients it needs to of­fer prod­ucts across the risk spec­trum. In March, it launched an even more con­ser­va­tive income fund.

Kim Hub­ner, Lau­rium’s head of busi­ness de­vel­op­ment, says there was de­mand from many high net worth re­tirees for a more con­ser­va­tive prod­uct than the Bal­anced and Flex­i­ble funds, but which still have an eq­uity kicker.

Fund man­ager JP du Plessis was re­cruited from Pre­scient to fill the gap in fixed income ex­per­tise. Founders Murray Winck­ler and Gavin Vor­w­erg, will han­dle eq­uity se­lec­tion. The model as­set al­lo­ca­tion for the fund is 34% eq­uity, 8% prop­erty, 20% cash and 38% bonds. There would typ­i­cally be 28% in in­ter­na­tional as­sets.

It is close to the de­fault in eq­ui­ties, at 33%, un­der in prop­erty at 6%, un­der in cash at 8% and ag­gres­sive in bonds at 41%.

The fund is still in its in­fancy with about R50m un­der man­age­ment but Du Plessis says that is large enough to buy a sen­si­ble spread of as­sets. He says it will be more flex­i­ble than the gi­ants of the sec­tor. When it ex­pects the rand to strengthen it will take money back from off­shore.

The fund in­cludes most of the main stock picks in Lau­rium’s eq­uity focused funds, but takes out a few volatile ones. Un­like the Bal­anced Fund, Growth­point, Sho­prite, Stan­dard Bank and An­glo Amer­i­can are not in the top 10. Du Plessis prefers In­vestec, Stor-age Prop­erty, BHP and Absa. He doesn’t see a high div­i­dend yield as a pos­i­tive, it could be a value trap.

Cash and bonds of­fer a good re­turn for lit­tle risk: bank NCDs of­fer 8% plus, some

bonds up to 10% with in­fla­tion about 4.5%. But he says cor­po­rates do not of­fer good value as the tiny ad­di­tional yield (spread) doesn’t com­pen­sate for the risk.

The fund uses de­riv­a­tives ac­tively but se­lec­tively. It has Put op­tions against the US eq­uity mar­ket, and cov­ers about a third of its in­ter­na­tional as­sets against a strength­en­ing rand.

Of­ten over­looked, Kag­iso Sta­ble has an im­pres­sive record. It is prob­a­bly the only BEE fund man­ager that is strong in both eq­ui­ties and as­set al­lo­ca­tion.

Fund man­ager Gavin Wood says that as a smaller shop it has the scope to look at shares with a mar­ket cap be­low R20bn, where there are a lot of bar­gains. The fund has used very lit­tle of its off­shore al­lowance: barely 2% is in for­eign eq­ui­ties.

Sta­ble in­vests into the Kag­iso global port­fo­lio and did well through shares such as, Bright­Sphere In­vest­ment Group (the for­mer Old Mu­tual As­set Man­age­ment US), Al­tran Technologi­es and Kinder Mor­gan, an en­ergy in­fras­truc­ture group.

Its rand hedge ex­po­sure is focused on the plat­inum sec­tor through Northam and Royal Bafo­keng. Wood doesn’t find much worth buy­ing in the SA gold sec­tor. He has some ex­po­sure in­di­rectly through African Rain­bow Min­er­als.

Oth­er­wise the fund is dom­i­nated by do­mes­tic mid-caps. Wood says these shares have lim­ited cor­re­la­tion with the Alsi 40 (they are known as low beta shares.) One way to con­trol risk has been to keep the shares equally weighted when it makes sense.

Af­ter Northam, Wood’s big­gest share is his for­mer em­ployer, Old Mu­tual. Wood says the new slimmed-down Africa-only group has not yet been cor­rectly val­ued. Among his quirkier picks are Tiso Black­star, owner of this pub­li­ca­tion, as Wood says the his­toric com­peti­tors such as

Me­dia24 and In­de­pen­dent are in trou­ble.

He also holds Libstar, which makes pri­vate-la­bel prod­ucts for su­per­mar­kets and owns the Lance­wood dairy brand. It bombed af­ter list­ing, which gave Wood the chance to top up the hold­ing.

There was good stock se­lec­tion in Quilter — the for­mer Old Mu­tual Wealth UK was a win­ner — as well as the mod­est hold­ing in Naspers. Mid-cap stal­warts such as Clover, Datatec, AECI and Me­tair all helped. But Wood also stepped in the bog known as Ton­gaat Hulett and owned shares in the dis­mal Delta Prop­erty Fund.

The net ex­po­sure to eq­ui­ties has in­creased by three percentage points to 26% since De­cem­ber 2018

The fund has un­usu­ally high po­si­tions in pref­er­ence shares and prop­erty, both more than 11%, and al­most half its 46% in eq­ui­ties are hedged. Most of the prop­erty is held through the high-yield Dip­ula and Fortress A shares.

It has few nom­i­nal bonds (2%), though it’s slightly more bullish on in­fla­tion-linked bonds (6%).

The fund is man­aged by the 4Fac­tor eq­uity team at In­vestec As­set Man­age­ment. Chris Fre­und, the head of the unit, is the lead man­ager, with Sa­man­tha Har­tard over­see­ing the eq­uity se­lec­tion.

Cau­tious Bal­anced has a limit of 40% in eq­ui­ties, and it has about 45% in bonds. To man­age the bond part of the port­fo­lio it makes use of the In­vestec fixed income team, headed by Peter Kent and Mal­colm Charles. For as­set al­lo­ca­tion, Fre­und gets help from the Lon­don-based global as­set al­lo­ca­tion team, un­der Philip Saun­ders and John Stop­ford. Global eq­uity as­sets are sourced through the 4Fac­tor team. Rudi Nau­mann in Cape Town op­ti­mises the in­ter­na­tional hold­ings so that they com­ple­ment the lo­cal hold­ings. There is a bias to­wards com­pa­nies op­er­at­ing in Europe and Ja­pan, as well as to Hong Kong listings.

The fund’s bias to­wards re­sources shares has helped it to be one of the top per­form­ers re­cently. Con­trib­u­tors have in­cluded Africa Pal­la­dium Deben­tures, An­glo Amer­i­can, An­glo Amer­i­can Plat­inum, BHP, Im­pala, Sa­sol and South32. Har­tard says the fund held no British Amer­i­can To­bacco when it hit lows last year but started buy­ing as it got to lev­els not seen since it came close to bank­ruptcy in 1988. She also be­lieves there will be an op­por

tu­nity to buy Naspers again (which the fund re­cently trimmed) as she ex­pects the first-quar­ter earn­ings for Ten­cent to be weak. And she ex­pects fair op­er­a­tional re­sults for MTN, which has been over­sold on con­cerns about reg­u­la­tory pres­sure on data prices. The fund ini­ti­ated a po­si­tion in AB Inbev as bro­ker earn­ings re­vi­sions are now look­ing pos­i­tive.

The fund was hit by de­clines in Mass­mart, Mr Price, Pep­kor and Tru­worths over a poor re­tail re­port­ing sea­son, and heavy­weights such as Absa, Aspen, San­lam and Sappi also hurt. Both Stan­dard Bank and Absa are in the fund’s top 10.

It has a large hold­ing in lo­cal bonds (45%) and a more mod­est 11% in lo­cal cash. It has al­most no ex­po­sure to for­eign bonds but 4% in for­eign cash, and 2.5% split equally be­tween for­eign and lo­cal prop­erty.

This has been the most com­mer­cially suc­cess­ful of the sta­ble funds and is R53bn strong. This is in spite of its worst loss to date of 6.9% be­tween Septem­ber and Novem­ber last year, but with lo­cal and for­eign eq­ui­ties both weak there were few hid­ing places.

The fund is not a di­luted ver­sion of the Bal­anced Fund as it has just one of the three fund man­agers in com­mon: CIO An­drew Lap­ping runs a chunk of both funds, but Leonard Kruger and Mark Dun­ley-Owen fo­cus on Sta­ble and other low-eq­uity man­dates.

It has al­most a max­i­mum ex­po­sure to eq­ui­ties, with 36% in net eq­ui­ties and a fur­ther 7% in hedged eq­ui­ties. It has re­duced its lo­cal hold­ings in the first quar­ter, sell­ing shares in Naspers, Rem­gro and the banks.

It now has a hefty 27.5% ex­po­sure to for­eign as­sets: this has not been easy as its off­shore part­ner, Or­bis, has un­der­per­formed for sev­eral years. Most of its

for­eign hold­ing is held through the Or­bis Global Bal­anced Fund with a splash of Optimal to di­lute the risk.

Kruger says for­eign ex­po­sure adds di­ver­si­fi­ca­tion to the port­fo­lio and pro­tects in­vestors against po­ten­tial rand weak­ness. Dun­ley-Owen says the fund has had a lower ex­po­sure to eq­ui­ties in the past but right now it has found a suf­fi­cient num­ber of at­trac­tive shares to take a full po­si­tion.

He says SA shares have per­formed no bet­ter than cash over the past five years, well be­low the 6% av­er­age an­nual out­per­for­mance in the past.

Its prop­erty hold­ing is be­low most peers at 4%, and its bonds are a hefty 28%, though with quite a con­ser­va­tive du­ra­tion of 2½ years. Its 4% to ex­po­sure to African bonds looks unusual but in­cludes is­suers such as Stan­dard Bank and MTN. But the 21% por­tion in money mar­ket and bank de­posits is pri­mar­ily held on­shore.

Commoditie­s group Glen­core is the largest share, while Naspers is sec­ond equal in Sta­ble with British Amer­i­can To­bacco on 2.7%. Its top 10 eq­ui­ties over­all in­clude China’s NetEase; Ab­b­Vie, a US hitech phar­ma­ceu­ti­cal busi­ness; Tai­wan Semi­con­duc­tor; and oil gi­ant BP.

Sta­ble con­sid­ers above-in­fla­tion re­turns its pri­mary ob­jec­tive, with cap­i­tal preser­va­tion sec­ondary. It has never had a rolling 12-month neg­a­tive re­turn in its 20-year his­tory.

Absa has two funds in the low-eq­uity cat­e­gory. In­fla­tion Beater won the 2018 Morn­ingstar award in the cau­tious al­lo­ca­tion cat­e­gory mainly be­cause it was the right fund at the right time, an ul­tra-con­ser­va­tive fund when no­body was be­ing paid for tak­ing risks.

The Ab­so­lute Fund is more like the rest of the low-eq­uity group­ing, though not by much. It has a fairly mod­est long-term goal of CPI plus 4%, a bench­mark it beat eas­ily

in 2013 and 2015 and has beaten more narrowly over the past 12 months. It is third out of 47 in the cat­e­gory since in­cep­tion in July 2008.

It is run by Eben Mare, a for­mer head of ab­so­lute re­turn funds at Stan­lib, and Kany­isa Nton­tela, pre­vi­ously with the Per­petua eq­uity team. It is very con­ser­va­tively po­si­tioned, with just 21% in growth as­sets, 12.3% in do­mes­tic and 4.5% in for­eign eq­uity, and 4.3% in do­mes­tic prop­erty.

Barely 11% out of the per­mis­si­ble 30% is in­vested off­shore. The big­gest com­po­nent of the port­fo­lio, at 42.4%, is do­mes­tic bonds (fixed and float­ing), a fur­ther 8% in in­fla­tion-linked bonds and 21% in the lo­cal and in­ter­na­tional money mar­ket. No sin­gle eq­uity makes up as much as 1% of the port­fo­lio, and it is an eclec­tic bunch in­clud­ing Oceana, Sho­prite, African Rain­bow Cap­i­tal, Tsogo Sun, Alexan­der Forbes, Corona­tion, KAP and TFG. There are also ten­ta­tive po­si­tions in shares such as Com­bined Mo­tor Hold­ings.

Mare says he would be happy to in­crease the ex­po­sure to eq­ui­ties once he is con­fi­dent that value can be un­locked. He is tempted by Sa­sol but ex­pects the first years of the Lake Charles cracker in the US to hold it back.

He adds that as an ab­so­lute re­turn fund, it is not in­ter­ested in buy­ing beta, or mar­ket ex­po­sure, and prefers more pre­dictable re­turns, of­ten from shares which do not be­have like the in­dex. The prospects for in­ter­na­tional shares now look much bet­ter. Absa Ab­so­lute’s big­gest over­all hold­ing is lo­gis­tics prop­erty share Equites, and it also holds Fortress B. But Mare is cau­tious about the prospects for the main­stream of­fice and re­tail sec­tor.

Pic­ture: 123RF — LE MOAL OLIVIER

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