Financial Mail - Investors Monthly
FUND REVIEWS
Blue Alpha BCI Global Equity; Nedgroup Investments Global Equity Feeder Fund; Absa Global Value Feeder Fund; Foord Global Equity Feeder Fund; Stanlib Multimanager Global Equity Fund
“If you are planning to stay in SA it should not matter you aren’t investing in dollar funds. Feeder funds, like dollar funds, will give you diversity into other markets
Investors with only modest sums to invest into global markets should look at the high equity global balanced funds at least as the first in their foreign investment journey.
The sector is dominated by familiar names such as Allan Gray, Coronation and Stanlib. By investing in these funds you are not committing to take your money overseas. These funds are denominated in rands (and feed into funds denominated in dollars) and can be included in domestic investment products such as retirement annuities.
If you have aspirations to take your money overseas then you have to give an offshore platform at least R100,000 — and that is considered a special offer. And you can invest into a feeder fund without getting tax clearance, As far as Sars commissioner Edward Kieswetter is concerned it is no different from investing in a domestic balanced fund.
If you are planning to stay in SA it should not matter you aren’t investing in dollar funds. Feeder funds, like dollar funds, will give you diversity into other markets and tilt your portfolio away from the emerging market bias in the SA market. And locally based houses will provide more service — there will probably be a call centre to help you if you are worried about market trends. It will also ensure the buying and selling of units will be smoother than if you buy into a fund based in Caracas or Beirut.
Of course, it can be difficult to determine the skill of the manager, as the fund pricing is in rands and the fund manager looks heroic when the rand depreciates. You will get some exposure to overseas markets in your domestic balanced or equity funds, as most will take advantage of the 30% foreign asset limit, plus their exposure to rand hedges on the JSE such as Naspers, British American Tobacco and Nepi Rockcastle.
But feeder funds have more latitude — they won’t buy BAT if they prefer Philip Morris, for example. Global funds would be more exciting, but there are some useful shock absorbers on balanced funds which are not available to equity funds. When stock markets are overpriced, balanced funds can reduce their equity allocation to 45% or less. They also have the opportunity to invest in different asset classes as they mature, such as infrastructure and convertible bonds.
There is no index fund available which can replicate an active manager’s asset allocation process.
Not that balanced funds can get too ambitious; the beauty of these funds is that they remain fully liquid and can pay out client redemptions overnight.
In the Association for Savings & Investment SA categories there is a similar global flexible category. But that is a mixed bag populated largely by little-known brands. High equity is much more focused on the mainstream lump sum and regular saver. Of the five, Stanlib Global Balanced has only recently emerged as a contender, helped by subadviser Columbia Threadneedle’s bullish new economy stance.
Many people have their own views about Allan Gray-Orbis but it is dangerous to count it out. It has a much larger investment team than in the past and operates from many more financial centres. But it is an acquired taste.
Coronation Global Managed is a steadier fund and perhaps could do with taking more risks if it isn’t going to become one of the bland funds which is cannibalised by index funds.
Prudential Global Balanced has had a disappointing three years but if we are going to see a few years of underperformance by US equities then it will benefit from its secret weapon, the tactical asset allocation unit at parent M&G.
But probably the most likely of these funds to succeed is Ninety One Global Strategic Managed. It has strong teams at all levels, equities, both core and thematic, fixed income, alternatives and asset allocation. It has been going since 1988, which is about the time Orbis started as an equity-only house. ●
This fund was started when there were two main building blocks. The main one was the original Orbis Equity Fund, a conventional (if often idiosyncratic) global equity fund.
There was no fixed income team at Orbis, so the “bond proxy” was the Orbis Optimal Fund. This is a portfolio of hedged equity which provides clients a cash return plus Orbis’s alpha, or outperformance of the index. Allan Gray commercial director Tamryn Lamb says many clients considered Optimal to be too volatile to be a bond proxy. In 2013 it launched a more conventional global balanced fund.
Lamb says unit holders are being balloted to change the fund of funds into a global balanced feeder, which will be more directly comparable to competitors such as Coronation Managed and Prudential Global Balanced. The result of a ballot can’t be called until the last vote is in, but it is likely to go through.
As it is, the product is already dominated by Global Balanced, which makes up 74.9% of the fund of funds. Lamb says the net outcome in asset allocation and risk is quite close to Global Balanced.
The remainder of the fund of funds is 12% invested in Orbis Global Equity, 3% in Orbis Emerging Markets and 10% in Orbis Optimal, split between the dollar and euro class.
On a see-through basis, reflecting Orbis’s contrarian heritage, it has just 14% of its unhedged equity in North America compared with 19% in the bombed-out Europe and UK markets and 16% in emerging Asia.
It has been a longtime holder of what might be called third industrial revolution shares such as Taiwan Semiconductor Manufacturing Co (TSMC), its largest share at 6.4% of the portfolio, Samsung and second-tier Chinese tech share NetEase. The biopharmaceutical researcher AbbVie might be the closest it gets to the fourth revolution other than its proxy investment in Tencent through Naspers. Other holdings would clearly fall into the value/recovery bucket such as British American Tobacco, XPO Logistics, BMW and BP.
Orbis fund manager Alec Cutler says it loves investing in fast-growing, high-quality companies, but does not like paying too much for the privilege. He argues that TSMC has a deep moat and high returns on capital. It looks relatively cheap compared with the Alphabets of the world on 20 times forward earnings, and it is already paying a healthy dividend.
It makes chips for fast-growing businesses such as Nvidia, AMD, Qualcomm, Apple, Google and Amazon.
Coronation previously operated a third party fund of funds model, and its Global Opportunities FoF remains its flagship global product.
Over the past decade veteran fund manager Louis Stassen has been tasked with setting up a direct international fund management unit. But Coronation is only gradually moving its clients into these vehicles. They will be more profitable but the clients’ interest must come first.
Coronation Global Managed is run by Stassen, Neil Padoa and Humaira Surve. It is fractionally below its benchmark since inception in March 2010. But Padoa says it was the 40% in ldbonds that has been tough to beat, as few expected bond yields to go negative in so many markets (and therefore bond capital values to strengthen so much).
Padoa isn’t counting on a further bond rally, the fund is just 11% in bonds and 21% in cash. It is slightly below benchmark in equities at 57%. The fund does not invest in JSE shares other than Naspers and BAT. But it has invested in bonds issued in foreign currency by SA corporates such as Remgro, Redefine and MTN. Some foreign houses might consider these too risky but Coronation at least has a large equity desk analysing these businesses all the time.
The equity selection is a mix of the fashionable such as Alphabet (Google), Alibaba and Facebook with the eclectic such as Airbus and Ryanair — intriguing ones to own right now — Canadian Pacific Railway and Prudential.
Padoa says Prudential is a great Asian life assurer with an average American insurer, Jackson National, attached. It would add value if Jackson were spun out.
An SA global fund would not be complete without some direct gold exposure and the fund has 5.3% in physical gold as an old-school hedge against inflation.
The strategy of the fund dates back to 1988, when the fund was started by the then Guinness Flight. Investec bought Guinness Flight 10 years later.
The fund’s major update was in 2000, when the quasi-quantitative Four Factor approach was introduced for the running of most equities. It has continuity through its lead portfolio manager, Philip Saunders, who worked at Guinness Flight.
Saunders says the fund is ideally positioned for the SA market with its familiar 75% ceiling on equities, but it has proved popular all over the world.
Saunders now runs the fund with Michael Spinks and Iain Cunningham.
The fund has 27% invested in the core Four Factor equity process, but it also invests 40% in themes: these range from 23% in high return on invested capital — which can be bought on a standalone basis as the Global Franchise Fund 15% — to China’s transition, as well as some smaller themes that don’t account for more than 3% each, such as Japan’s reflation, emerging market debt and high yield.
Saunders says he cannot justify investing client money in developed market bonds, so he has been forced to look further. His largest bond holdings are sovereign bonds from Russia, Indonesia and, yes, SA. His larger corporate bonds include Dell, Verizon and Anheuser-Busch.
The equity portfolio looks quite conventional, with a few exceptions such as Wuliangye Yibin, which distills baijiu, a kind of Chinese witblits.
The top 10 incudes Microsoft, Alibaba, Apple, NetEase, Amazon and Alphabet, but
Originally, Prudential in Cape Town used funds devised by parent company M&G for its international exposure that were not suitable in the SA market. For example, SA investors want implicit regulation 28 rules in global balanced, with a maximum of 75% in equities. Otherwise there is little to differentiate a balanced from an equity fund.
Three years ago it found a neat solution when its chief investment officer, Marc Beckenstrater, wanted to move to the larger M&G mothership in London. He would run a suite of products more closely aligned to the SA market. Michael Moyle, head of multi-asset funds in SA, says his own role is to determine the neutral position of the fund, which is currently 65% MSCI all country (which includes emerging markets), 5% global property, 25% Barclays global aggregate bonds and 5% US cash.
But it has significant leeway, as it makes use of the renowned M&G tactical asset allocation team under Dave Fishwick. It uses exchange traded funds to execute tactical asset allocation efficiently, as well as M&G funds such as Global Select, Enhanced Equity and funds of its Asian sibling Eastspring. Moyle says the advantage of using M&G funds is they are available at no additional fee. But the fund is no longer a fund of funds and it can invest directly into equities and bonds.
Moyle admits the performance in the initial three years has been disappointing; it was a time when being long US equities was the only game in town. But the fund has not been negative on equities overall, with a 68% position at the end of August.
In a contrarian approach, it was almost fully weighted in property at 4.5%. Bonds at 22% and cash at 5% were not far off a neutral position.
Stanlib is one of the last large fund managers that outsources its international fund range to an overseas house. Initially its partner was Fidelity, then the largest independent active manager in the world. More recently Stanlib has thrown in its lot with Columbia Threadneedle, which has similar roots to it as the investment arm of a life office, in its case Eagle Star. Stanlib manages the global property building block under Keillen Ndlovu but leaves the rest to Threadneedle.
Property makes up an unusually high 11.7% of the fund
The fund is considered to be moderately aggressive, with a minimum three-year investment period. Right now it has a conservative 59% in equity, of which half is in the US. The top equity positions are dominated by the large US technology businesses Alphabet, Amazon and Microsoft, as well as their Chinese clone, Alibaba.
But Threadneedle’s approach is to remain spread across different sectors, and it is invested in financial services through JP Morgan, arguably the world’s most powerful bank, as well as the payments duopoly Visa and Mastercard.
It even invests in the volatile oil and gas exploration market through Diamondback Energy, and in health care, both through the knowledge-intensive gene therapy business Illumina and the more mundane US managed-care administrator Centene.
Fund manager Alex Lyle says the fund is underweight in performance aided by good returns from bonds, though an overweight position in cash does not help. The fund holds about 3.5% in domestic cash, for liquidity, and almost 5% in foreign cash.
Lyle says the house’s base case leaves it comfortable to hold quality risk assets, even if they are no longer cheap. He expects to see activity in the US return to fourth quarter 2019 levels by the end of 2022, but that Europe will take longer.