Financial Mail - Investors Monthly
FUND REVIEWS
Ashburton Balanced, Northstar Managed, Stanlib Balanced, Coronation Balanced Plus, Perpetua Balanced
“In the past, asset allocation was often a consequence of buying bonds to fill the gaps when opportunities on the JSE were limited
This is still the largest sector of SA unit trusts, at R493bn, though money market funds are catching up fast. The high equity funds lost R18bn last year and at current trends the fast-growing money market funds will overtake them in about a year’s time. These funds hold R422bn at present.
As Karl Leinberger, chief investment officer of Coronation, points out that the trend away from one-stop multi asset funds has been driven by the growth of designated fund managers. They are hired by financial advisers to help construct more sophisticated portfolios, with separate fund managers who run equities and bond and cash managers, and even help them buy alternative assets. Big players in this space include PortfolioMetrix, Fundhouse and Morningstar Investment Management.
But for many advisers and direct clients the one-stop solution makes sense; even splitting between two or three balanced funds does. After all, a large amount of pension money is managed that way. And there is a strong argument that fund managers at the coal face are better at running asset allocation than the discretionary fund managers who are dominated by former pension fund consultants and unit trust marketers.
High equity funds are considered “domestic” — they cannot be invested more than 30% in international assets and may not be more than 75% invested in equities. “Foreign” assets, of course, do not include shares which earn little rand income and happen to be listed on the JSE. It is no surprise that Quilter, a UK-based wealth manager, has been one of the bestperforming financial shares; and there is little SA-based business generated by Naspers, Richemont or British American Tobacco. High equity funds do not have a minimum, and can go down to zero equity, but most have 35%- 45% in local equity and 20%-30% in offshore equity.
In the past, asset allocation was often a consequence of buying bonds to fill the gaps when opportunities on the JSE were limited. More recently there has been a revival of topdown investment. Balanced funds have far more than the traditional 60% equity-40% bonds mix. There is the offshore/onshore decision to be made. Property has become a distinct alternative, though it’s now out of favour, and houses need to decide between fixed, floating and inflation-linked bonds and a whole array of convertibles.
This month we look at five quite different funds that are at various points in their life cycle. The “incumbent” is Coronation Balanced Plus, the secondlargest balanced fund in SA. It doesn’t have much to prove and therefore has a great deal to lose. In spite of its size it has not become a closet index tracker, and its asset allocation is active. Leinberger says the ability to engage in dynamic asset allocation is a key differentiator between active funds and index funds.
Another established fund, though much smaller, is Stanlib Balanced. It has in the past had a patchy track record, as the culture at Stanlib, a unit of Liberty Life, has been more bureaucratic and indecisive than that at Coronation — with the expected results. But it looks much more competitive and energetic under the leadership of Mark Lovett and Giles Heeger, with old hand Herman van Velze playing a decisive role as head of the balanced and equity teams.
Ashburton is the FirstRand Group’s institutional asset manager, and its balanced fund is a work in progress. But it is still worth watching, as it is one of the few funds that explicitly weights top-down macro research higher than bottom up. Much of the Ashburton team, including Wayne McCurrie, have been redeployed to FNB Wealth, a much more profitable operation.
The other two funds reviewed, Northstar and Perpetua, can be called cousins of Ashburton, as their major shareholder is Rand Merchant Investment, which has its origins as part of FirstRand’s old controlling shareholder, RMB Holdings. In fact, for a split funder the two shops would be a great choice.
Northstar follows the “quality” approach (not that it always guarantees a quality outcome) and Perpetua an old school (though intelligent) value approach. NorthStar has strong leadership through Adrian Clayton, who used to head the PSG Asset Management team, and Perpetua has the highly competent Delphine Govender.
But don’t make a choice without seeking professional financial advice. ●
This is the second-largest high equity balanced fund in SA after Allan Gray Balanced. It is run by chief investment officer Karl Leinberger backed up by Sarah-Jane Alexander and Adrian Zetler. They also run the Coronation Equity Fund.
Leinberger says that while the equity fund had an strong year, as it kept a large position in Naspers and was light in SA domestic shares, asset allocation let the balanced fund down, though exercising some put options just before the crash ensured that results were acceptable.
The fund has one of the lowest allocations to domestic equity, which make up just 33.4% of the fund combined with an aggressive 19% in local bonds. It invests 3.5% in property, but Leinberger says this is primarily the A shares such as Fortress A which have the first right to dividends. The main traditional exposure is to Investec Property Fund. He says the fund has invested little in domestic shares such as retailers and banks, with a few exceptions such as Shoprite and Spar.
Its largest holdings are Naspers, Anglo American, British American Tobacco (BAT) and UK wealth manager Quilter. It also holds platinum shares Impala and Northam. The fund managers have trimmed the Naspers and BAT holdings to take advantage of the depressed price of Bidcorp and AB InBev. Bidcorp is a food service business that serviced small profitable companies well through Covid-19. AB InBev has high debt and will struggle to regain its pre-Covid sales, but it is cheap for a global staples business. The fund is low in banks and insurers and likes globally minded industrials such as Aspen Pharmacare.
The offshore allocation is taken almost entirely through the Coronation Global Opportunities Fund of Funds. It has a 32.9% allocation to international assets, which will have to be trimmed back.
Internationally Coronation invests with boutique managers such as Egerton, Maverick, Tremblant, Lansdowne and Contrarius. It also allocates to its directly managed international funds. Coronation Global Equity Select makes up about 10% of the fund and a further 8% is in Coronation’s Global Emerging Markets Fund.
The fund manager in the FirstRand Group has had quite a substantial staff turnover, but it should settle down now that it has found a permanent chief investment officer in Patrice Rassou.
As the balanced fund showcases the house view, he is bound to get closely involved. For now it is run by Nico Els, who took over from Mark Appleton as head of the local top-down process. The co-manager is Lesiba Ledwaba, who is also in charge of the Ashburton property fund.
The balanced fund takes property through this fund and offshore through its sister Global Flexible and Global Growth funds. Ashburton has had a good reputation in the fixed income market since it bought Atlantic in 2015, and its fixed income unit is now run by Albert Botha.
The fund has a 20% holding in fixed rate bonds and 2% in inflation linkers. Its largest JSE holdings are in Naspers (including Prosus), BHP and Anglo American. It has also held some of the best quality local shares, such as FirstRand, Standard Bank and Sanlam. It was light in resources, which looks like a mistake, and, unfortunately, alongside winners Mondi and Northam it also held Sasol. Some of the shares that weren’t held universally across the peer group were Vodacom, AB Inbev and AVI.
Els says Ashburton SA took its name from Ashburton Jersey, but there was limited co-operation initially. The business now operates integrally. Els says the fund aims to add value through tactical asset allocation. For example, it has a strategic allocation of 48% to domestic equity. It is now at 40%. The fund has benefited from a high exposure to US shares but it shifting to the eurozone and Asia, ex Japan — a region now dominated by China.
The fund is managed by Adrian Clayton who was previously the chief investment officer of PSG Asset Management, where he also ran the balanced fund. Like PSG, Northstar looks at management, the moat, or barriers to entry, and the margin of safety in the price.
The team does the valuation work itself, though it uses more quant techniques than in the PSG days. Clayton calls the technique “quality at a reasonable price”, which differs from the increasingly value-based approach at PSG.
He says free cash flow and high returns on invested capital are very important to the team, as is converting this into an appropriate weighting in a portfolio, with a balance between risk and return.
The fund has been underweight SA equities relative to peers for several years. Clayton believes SA equities are not offering high expected returns against their long-term hurdle of inflation plus 7%. The fund’s average SA equity exposure has been about 40%. But he says that based on bottom-up work, SA equities are beginning to look very good value — there is a weighted average upside return of 30% on our buy list.
The fund has had little property exposure for many years, expecting distribution growth to slow and vacancies to rise, which will put earnings under pressure
Clayton says the fund has high exposure to fixed income, but with low levels of corporate debt and, of late, a lot of short-dated inflation-linked bonds.
Offshore equity has been a dominant (30%) position in the fund for a long time. It has invested heavily in the US, which has paid off handsomely for the fund. Clayton has been reducing exposure to global shares as he believes the potential upside is no more than 10%.
What has worked of late, Clayton says, has been high exposures to Naspers and Prosus, an overweight position in Reinet and BTI, and buying some stocks in weakness in the epicentre of Covid — the likes of Capitec, which it bought at about R550, and Anglo American Platinum at similar levels.
The fund has maintained an exposure to gold shares. It now aims to achieve better returns from its local shares such as