Flexibility adds value
lexible funds give fund managers the chance to build a portfolio which truly represents their best investment view. Yet they have not taken off — the domestic flexible sector has just R60bn under management compared with R480bn in the high-equity sector.
Flexible funds do not qualify under regulation 28 of the Pension Funds Act, so they cannot be used on a standalone basis in a retirement annuity. But many investors have ignored their strengths: they allow fund managers to express their best asset allocation views, and there is extensive research to show that significantly more value is added through asset allocation than stock selection.
And balanced funds are unashamedly peer group funds competing in a league table; flexible funds usually have a real-return benchmark, typically inflation plus 5% or 6%. They are favoured by hedge fund managers who want to set up a long-only fund as they offer absolute and not relative returns. In fact, most hedge fund managers have found that there is limited demand for SA hedge funds and they’ve had to diversify into the mainstream.
An exception is Peregrine Capital, which remains a pure hedge fund business, and 36One still has more than half its assets in hedge funds.
Cy Jacobs, head of investments at 36One, says its hedge funds are the conservative low-risk products in his suite: its long/short fund typically has 30% net exposure to the market, and since inception has given a 17% annual return compared with 15% from the more equity-heavy Flexible Opportunity (long-only) Fund.
With about R18bn, 36One is
FVisio was on its way to becoming a large manager when it had an alliance with Mazi Capital. There was concern neither would be strong after the split. But both flourished
one of the most sought-after mid-sized managers.
Another house with a strong hedge fund heritage is Visio, where fund manager Patrice Moyal hasn’t won many popularity contests with his indiscreet shorts over the years.
Visio was on its way to becoming a large manager when it had an alliance with Mazi Capital. There was concern that neither would be strong after the split. But both flourished — Visio has about R30bn under management and Mazi more than R40bn.
Blue Alpha is another fund steeped in hedge funds. Founder Uys Meyer learnt his lesson when the Mayflower Fund lost 20% in the year to April 2009. He has since strengthened his team with long-only veterans such as Gary Quinn from Prudential and Richard Pitt from just about everywhere. The firm has barely a foothold in hedge funds these days.
Centaur Flexible has won several industry awards and its founder, Roger Williams, is, like Moyal, a veteran of the old Liberty Asset Management. On his website he tries to lure clients by talking about how he made living from card counting, which might, of course, discourage some. He also managed hedge funds from 2004 to 2008 before deciding that it made more sense to focus on the mainstream higher-volume products.
Like Blue Alpha, Centaur is a cottage business with between R4bn and R5bn under management. These firms can definitely add value as their size gives them extra flexibility.
The fifth fund, Element Flexible, also has a hedge fund background as in its days as Fraters it managed a hedge fund, for the Brait fund of hedge funds, long before Brait became better known for buying dismal chains on the British high street. But Element's best known absolute return roots are through its first successful product, originally called the Fraters Real Income Fund. Element suffered a similar fate as other deep-value managers and its funds withered to below R2bn about two years ago. It now prefers the term contrarian. With some good asset allocation and mostly sensible stock picks, performance has bounced back.