FUND RE­VIEWS

Financial Mail - Investors Monthly - - News - STEPHEN CRANSTON

Old Mu­tual Global Eq­uity Fund, Absa Global Value Feeder Fund, PSG Global Eq­uity Fund, Stan­lib Global Eq­uity Feeder Fund, Coro­na­tion Global Eq­uity Se­lect Fund

There is R138bn in­vested in rand-de­nom­i­nated global eq­uity funds. Most of the rest of the R216bn in global funds is in­vested into global bal­anced funds. Yet more than twice as much (R477bn) is in­vested in fully ex­ter­nalised funds, usu­ally de­nom­i­nated in US dol­lars.

There is a com­fort for many peo­ple in know­ing their money is out of SA, though it doesn’t make it out of the reach of the Pre­to­ria tax­man. There is cer­tainly far more choice in the for­eign domi­ciled fund mar­ket and many more in­vest­ment houses are ac­ces­si­ble.

But there are also sev­eral ad­van­tages to lo­cally domi­ciled funds. There is no need for tax clear­ance be­fore in­vest­ing in rand-based funds and they do not form part of an in­di­vid­ual’s in­ter­na­tional in­vest­ment limit. That is no longer a con­sid­er­a­tion for most peo­ple, as it is quite ac­cept­able to take as much as R10m out of the coun­try ev­ery year.

Per­haps the main ad­van­tage of rand-based funds is that they can be in­te­grated onto the same in­vest­ment plat­form as other as­sets. You are also far more likely to get good ser­vice as you live in the core mar­ket for th­ese funds. You won’t get much joy if your fund is domi­ciled in Sin­ga­pore or San Fran­cisco. Peo­ple look­ing for di­ver­si­fi­ca­tion, but not plan­ning to em­i­grate, should se­ri­ously con­sider rand-based funds.

We have se­lected five very dif­fer­ent funds that can be con­sid­ered. By far the most pop­u­lar op­tion over the years, Or­bis Global Eq­uity, has had a rough time and in­vestors should look at the five in­stead of, or at least as well as, Or­bis.

Old Mu­tual Global Eq­uity has a strong record and takes nu­mer­ous small bets. Iron­i­cally, it has been a sub­stan­tially bet­ter per­former than the US man­agers Old Mu­tual bought for a king’s ran­som. It op­er­ates on a lean struc­ture and has left the heavy lift­ing to ma­chines for two decades — long be­fore any­one con­sid­ered ar­ti­fi­cial in­tel­li­gence to be any­thing but sci­ence fic­tion.

It con­trasts with the much more con­cen­trated funds, which pride them­selves on get­ting to know man­age­ment. The Absa Global Value Feeder Fund

Per­haps the main ad­van­tage of rand-based funds is that they can be in­te­grated onto the same in­vest­ment plat­form as other as­sets

has a hold­ing in An­glo Amer­i­can, which ac­counts for nearly 6% of as­sets.

It feeds into the Schroder Global Re­cov­ery Fund, which is go­ing through a tough time, but which would be an ideal satel­lite fund if, say, Old Mu­tual Global Eq­uity were the core. Its poor re­turns con­trast with Stan­lib Global Eq­uity, a qual­ity growth fund run by Columbia Thread­nee­dle. It has a strong bias to the pop­u­lar FAANG stocks.

There is no de­fin­i­tive an­swer to whether it makes sense to run a global eq­uity fund from Cape Town, given its re­mote­ness from the ma­jor mar­kets. PSG Global Eq­uity, run by Greg Hop­kins and Philipp Worz in Con­stan­tia, has had poor re­turns. Its stock picks just aren’t gain­ing any pop­u­lar­ity in the North Amer­i­can and Euro­pean mar­kets.

Coro­na­tion Global Eq­uity Se­lect also hasn’t made par over the past five years, though there has been some im­prove­ment over the past six months. Fund man­agers Louis Stassen and Neil Padoa at least don’t have any do­mes­tic fund man­age­ment re­spon­si­bil­i­ties and will travel when needed.

This fund was for many years run by the Lon­don-based as­set man­ager in the Old Mu­tual group, un­der a num­ber of dif­fer­ent names.

The sin­gle as­set man­ager was sold by Old Mu­tual UK (what is now Quil­ter) as it no longer fit­ted into its open ar­chi­tec­ture strat­egy. But the team, now called Me­rian Global In­vestors, still runs the fund. Their re­la­tion­ship with Old Mu­tual Unit Trusts in SA re­mains strong. Me­rian strate­gist Justin Wells says the team sources more than $1bn from the re­gion out of $20bn and vis­its at least quar­terly. The fund is the rand­de­nom­i­nated ver­sion of their global strat­egy and has R16.9bn un­der man­age­ment.

The fund has a de­mand­ing bench­mark in MSCI World (which ex­cludes emerg­ing mar­kets). Over the past few years the gap be­tween the US large caps and the rest has in­creased, but over 10 years the fund’s 19.9% per­for­mance is ahead of the 18.3% from the bench­mark.

Wells calls the strat­egy quan­ta­men­tal. It uses a pro­pri­etary mul­ti­fac­tor screen­ing tool. Wells says the team re­lies on au­to­ma­tion for ef­fi­ciency, and it aims to cap­ture op­por­tu­ni­ties that arise from the mar­ket’s be­havioural bi­ases. He says it does not try to fore­cast, but to work out what shares should per­form well in the cur­rent mar­ket.

Nor is it a black box, as there is hu­man in­ter­ven­tion. The fund man­agers have dis­cre­tion to make ad­just­ments to the model.

Com­pared with its com­peti­tors it takes nu­mer­ous small bets. Its hold­ing in the fund has to be no more than 0.5% above or be­low the share’s in­dex weight­ing. But this doesn’t make it a closet in­dexer. It can go as far as 40% off bench­mark. It has an ac­tive share of 85% to 90%, mean­ing only a small amount of the re­turn can be ex­plained by mar­ket move­ment. Its largest hold­ings are Ap­ple (1.7%), Mi­crosoft (1.4%) and Ama­zon (1.2%), which can’t be ex­cluded, ac­cord­ing the fund rules, but there are

some shares in its top 10 that are not of such mam­moth scope, such as Dis­ney and Swiss drug man­u­fac­turer Roche, which is the only non-US share in the top 10.

The three port­fo­lio man­agers are Ian Hes­lop, who has a doc­tor­ate in medic­i­nal chem­istry; Amadeo Alen­torn, a robotics en­gi­neer; and Mike Ser­vent, a physi­cist. Wells says the fund is style ag­nos­tic and uses a num­ber of fac­tors to value shares and mar­kets.

The mar­ket driv­ers changed so much be­tween fourth quar­ter 2018 and first quar­ter 2019 that this year the team ad­just­ing screen­ing fac­tors, which are changed dy­nam­i­cally ev­ery four to six weeks.

The fund in­vests into the Schroder Global Re­cov­ery Fund, a well-es­tab­lished deep-value fund. In the short term the fund has strug­gled, giv­ing barely half the re­turn of the MSCI World. Co-fund man­ager An­drew Ly­d­don says the term “Re­cov­ery” was used as Schroder had run a suc­cess­ful UK Re­cov­ery fund for 40 years, but not all the shares are re­cov­er­ing, though the in­ten­tion is their prices should re­bound.

The ma­jor­ity of shares are those in which the mar­ket has fallen out of love. There are con­cen­trated po­si­tions and the largest is a 5.7% hold­ing in An­glo Amer­i­can. Ly­d­don says the group’s abil­ity to gen­er­ate free cash flow was un­der­es­ti­mated and the share price still has to re­flect the stronger po­si­tion of the slimmed-down group.

Other un­der­val­ued com­mod­ity shares it owns are South32 (4.9%), and Rus­sian oil pro­ducer Lukoil (3.2%). There is a large weight­ing in banks as Ly­d­don be­lieves the in­tro­duc­tion of more reg­u­la­tory cap­i­tal has made th­ese busi­nesses more ro­bust, but the mar­ket still has un­com­fort­able mem­o­ries of the global fi­nan­cial cri­sis.

The largest hold­ing is Stan­dard Char

tered (4.9%), a play on Asian and African growth; next is Royal Bank of Scot­land (3.5%), which has only re­cently started pay­ing div­i­dends af­ter its col­lapse dur­ing the fi­nan­cial cri­sis; Ital­ian bank In­tesa San­paolo (3.4%); and it also holds a smaller po­si­tion in its ri­val Unicredit and Bar­clays (3.2%).

Ly­d­don be­lieves Euro­pean banks are more at­trac­tive from a risk/re­ward point of view than their US coun­ter­parts.

Cisco Sys­tems is the only tech share in the top 10. Ly­d­don says many of the “legacy” tech shares such as Hewlett Packard and In­tel were cheap five years ago, and even Mi­crosoft fell into this cat­e­gory for a while be­fore new man­age­ment and the rise of cloud com­put­ing made it com­pet­i­tive and rel­e­vant again, the fund re­cently took prof­its in the gi­ant Bill Gates built.

But it still holds a mod­est hold­ing in In­tel, as well as in HP Inc, the hard­ware busi­ness left over when the soft­ware and ser­vices were hived off into Hewlett Packard En­ter­prise.

This is a highly con­cen­trated and highly off-bench­mark fund. It has just 36 shares and the top 10 make up 56% of the fund value.

It has a 10% hold­ing in just one share — Brookfield As­set Man­age­ment. At least this Cana­dian in­vest­ment house is ex­posed to a wide range of sec­tors, from di­rect prop­erty to pri­vate eq­uity, re­new­able en­ergy and in­fra­struc­ture funds.

PSG’s strat­egy has not worked well re­cently as the re­turn over one and two years has been barely a third of what the bench­mark MSCI World has achieved.

Co-fund man­ager Philipp Wörz still be­lieves that the shares con­form to the 3M strat­egy the shop uses to pick shares: moat, man­age­ment and mar­gin of safety. He says there isn’t often much value in the mega-shares and it is best to look at more ne­glected shares, and in opaque mar­kets such as Ja­pan.

The fund is run from Cape Town and can buy lo­cal shares if they stack up against global peers. The fund owns Dis­cov­ery, a highly in­no­va­tive in­surer, and Ned­bank, which is more of a value play.

Wörz is baf­fled that the mar­ket can­not see the strengths of Ja­pan Post In­sur­ance (7.2% of the fund), which has an un­beat­able dis­tri­bu­tion net­work and in­creased de­mand for its prod­uct, yet it trades on a 70% dis­count to em­bed­ded value.

Wörz be­lieves Lib­erty Global’s strong

po­si­tion in the Euro­pean ca­ble mar­ket (it op­er­ates the Vir­gin Me­dia busi­ness) is still un­recog­nised. The fund has a 5% hold­ing in The Mo­saic Group, which mines phos­phate and potash. Bab­cock In­ter­na­tional (4.1%) has main­te­nance con­tracts with the UK min­istry of de­fence. It is old-school brand power that gives L Brands its edge — its main as­set is the Vic­to­ria’s Se­cret lin­gerie chain.

The fund holds a 4.3% po­si­tion in Ja­panese brewer Asahi. On top of its strong brand in its home mar­ket, Asahi ac­quired the Euro­pean brand port­fo­lio of SABMiller two years ago.

The PSG fund also in­vests in prop­erty, its largest hold­ing be­ing Wash­ing­ton Prime which has shop­ping malls pri­mar­ily in less com­pet­i­tive sec­ondary locations in the US. Its main fi­nan­cial ser­vices hold­ing is Pru­den­tial Plc.

This fund feeds into the Stan­lib High Al­pha Global Eq­uity Fund, man­aged by its in­ter­na­tional part­ner, Columbia Thread­nee­dle in Lon­don.

It is very sim­i­lar to Thread­nee­dle’s flag­ship fund the Global Se­lect UK unit trust. The fund could not be more dif­fer­ent from the value-ori­en­tated com­peti­tors from PSG, Absa and even Coro­na­tion.

It fol­lows a qual­ity growth strat­egy. No

The fund is about six months away from its five-year track record, at which time it will start to be sold more ag­gres­sively in the in­sti­tu­tional and re­tail mar­ket.

It made some poor picks early on, so its re­turn since in­cep­tion is 16% be­hind the bench­mark, but over one year it is now ahead. It shares the some­what con­trar­ian DNA of the rest of the Coro­na­tion team, per­haps more so as lead fund man­ager Louis Stassen is a value man­ager at heart.

The fund is a quirky mix of old-school

less than 14% of the fund is in­vested in four tech gi­ants — Al­pha­bet, Ama­zon, Mi­crosoft and Alibaba. Ten­cent is also in the top 10.

An­other theme is fi­nan­cials, par­tic­u­larly emerg­ing mar­ket banks such as the Hous­ing Fi­nance De­vel­op­ment Corp in In­dia and Bank Rakyat In­done­sia. It also holds both pay­ment gi­ants Visa and Master­card, as well as JP Mor­gan.

Fund man­ager Neil Rob­son says there are high de­grees of cer­tainty about the fu­ture profit stream from the tech gi­ants: they have some head­wind from reg­u­la­tory pres­sure, but this is re­flected in the price. Visa and Master­card, with an 85% mar­ket share of card pay­ments, are en­joy­ing high growth from the 12% an­nual in­crease in plas­tic transactio­ns.

As a qual­ity growth fund it does not have the fo­cus on con­sumer sta­ples or even lux­ury goods of com­peti­tors such as Mor­gan Stan­ley Global Brands fund and the In­vestec Global Fran­chise fund. Rob­son says that in a world of brand frag­men­ta­tion and niche ad­ver­tis­ing on so­cial me­dia, there aren’t the same bar­ri­ers to en­try in con­sumer goods and this is par­tic­u­larly true of craft beers and gins as well as nat­u­ral cos­met­ics. Con­sumer sta­ples com­pa­nies which used to be able to rely on 4% to 5% or­ganic sales growth now strug­gle to show 1%. But the fund still owns Unilever and liquor group Pernod Ri­card.

Rob­son says on the date of pur­chase of a new hold­ing the port­fo­lio trades at a pre­mium of up to 30% of the mar­ket, but be­cause of su­pe­rior growth it trades at a dis­count by year three. Its worst un­der­per­for­mance was in 2016, when value shares re­bounded and in­ter­est rates rose.

In the first quar­ter Alibaba and semi­con­duc­tor equip­ment man­u­fac­turer Lam Re­search were top per­form­ers, while the big­gest dis­ap­point­ment was US man­aged care group Cen­tene. value — Bri­tish Amer­i­can To­bacco, or BAT (5.9%), Philip Morris (3%) and AB In­Bev (2.8%), big techs such as Al­pha­bet (5.8%) and Face­book (3%), me­dia shares such as ca­ble gi­ants Char­ter Com­mu­ni­ca­tions (6.7%) and Altice (3.4%) and con­tent provider Vivendi (2.4%).

It also holds global travel web­site Book­ing.com, air­craft builder Air­bus (3.2%) and pri­vate eq­uity group Black­stone.

Co-man­ager Neil Padoa says BAT was the strong­est con­trib­u­tor in the first quar­ter af­ter lag­ging in 2018, and Air­bus, Philip Morris, Char­ter and Per­sh­ing Square have all con­tributed to a strong quar­ter, which was 5.2% ahead of the world in­dex. This was in spite of hold­ing the poor-per­form­ing Aspen Pharmacare; US phar­ma­ceu­ti­cal dis­trib­u­tors CVS and Wal­greens also hurt.

The fund usu­ally con­sid­ers 10 to 15 themes in which to in­vest, Padoa says. To­bacco is still a strong theme, as BAT is likely to show 3%-4% an­nual growth just from its tra­di­tional cig­a­rette busi­ness. Ca­ble will face com­pe­ti­tion from satel­lite and the can­cel­la­tion of ser­vices, but its ri­vals will be hard-pressed to match the speed of the ca­ble ser­vice.

Padoa says Black­stone is the high­estqual­ity pri­vate eq­uity, real es­tate and hedge fund group, but the fund also has shares in its ri­val Car­lyle.

When the fund opened in 2015 US banks were cheap, he says, and Eq­uity Se­lect cast a wide net, buy­ing JPMor­gan, Citi, Mor­gan Stan­ley and Gold­man Sachs. Citi and Gold­man Sachs are the largest re­main­ing hold­ings. The two main in­sur­ance hold­ings, AIA and Ping An, are both lever­aged to Asian growth.

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