FUND REVIEWS

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.