A bold, but balanced investment strategy
Its fierce independence, objective views and intimate knowledge of markets keeps Fenestra ahead of its rivals
In today’s investment climate, capital and asset allocation are critical, says Fenestra Asset Management founder and CEO William Meyer.
However, he says, most asset management companies don’t actually do share selections, choosing instead to focus on fund selections.
“If you allocate your available capital into five tranches of 20% each — each tranche into a different fund — the reality is that you are actually invested in thousands of different companies,” says Meyer. “And each fund will come with its own layer of fees.”
Institutional investor portfolios, says Meyer, are typically overdiversified with their one-size-fitsall approach. They tend to focus on in-house unit trusts, bonds, cash, exchange-traded funds and some stocks, to the extent that the worth of their top 10 holdings is diluted to less than 2%, while the portfolio manager’s top picks ultimately represent less than 0.2% each.
“The reality is that even if the top picks perform brilliantly, they’re not going to positively impact the portfolio.”
Over-diversified portfolios, he says, will never outperform the benchmark because, to all intents and purposes, they are the entire market, impersonating managed portfolios, but accompanied by high fees that erode performance and returns.
Fenestra, a fiercely independent boutique investment company founded in 1992, has a different approach. It selects stocks from a limited universe of local and international businesses. Each company is carefully researched. Top equity picks for a portfolio are weighted at 5% at the least.
This strategy allows Fenestra to avoid investing in companies that don’t have a compelling investment case or reliable and trustworthy management teams. In this way, the company avoided stocks such as Steinhoff, Tongaat Hulett, Brait, African Bank and EOH under its previous management.
In the case of Tongaat Hulett, the sugar company was never going to be able to be in control of its own destiny, says Meyer. This, coupled with a volatile sugar price, high levels of competition and poor management, ensured it was a stock Fenestra went to great lengths to avoid.
It also gives a wide berth to perennial underperformers such as Woolworths, Aspen, BAT and Sasol.
Fenestra’s approach pays off, allowing its clients to consistently outperform the market and its competitors.
What sets Fenestra apart, says Meyer, is the ability to have an objective local and global view, and an intimate knowledge of different markets.
Bespoke portfolios are designed for each client’s specific needs. Meyer’s extensive knowledge of the investment universe means he also knows when to cut his losses. “Figure out what went wrong and then move on. There will always be other opportunities.”
To protect themselves against market risks, investors need to be diversified, but not too diversified or they won’t see any significant return, he says.
“Diversification has pros and cons. It is possible to enjoy the benefits of diversification without diluting performance.”
The trick, says Meyer, is to be
What it means:
Institutional investor portfolios can be over-diversified: Fenestra succesfully avoids this pitfall invested in different currencies and countries in a focused way: a wide spread is not advisable. In the same vein, it’s not a good idea to dilute a successful portfolio’s wellperforming assets for safe havens, because this is likely to be a recipe for lower returns.
“More than 90% of a portfolio’s return stems from the capital allocation decision. Here are two extreme examples: if we allocate all the capital to short-term money market cash accounts, after-tax, real (adjusted for inflation) return is guaranteed to be very low. The current return on Swiss francs is —1% . In other words, if you invest in 100 Swiss francs, in a year’s time you would be the proud owner of only 99 Swiss francs.”
On the other hand, had you invested all your available capital in the “next Apple”, your return would be excellent, he says.
“Other building blocks to blend into your capital allocation model include gold, the US dollar, other dollars and different countries and industries.”
Exposure to offshore equities is essential because of the limited opportunities offered by the JSE, and to track global growth themes not available on the local bourse.
“In recent years, the number of listed companies on the JSE has shrunk significantly, providing investors with a limited pool of businesses in which to invest. Making the situation even worse is that few new companies are being listed,” he says.
A balanced portfolio should have an allocation to safe-haven assets such as the Swiss franc and gold, because capital preservation is critically important, says Meyer. But because the returns on safe-haven investments are low, the equity components need to perform well. “From a return point of view, they need to carry the entire portfolio.”
Meyer admits that some clients are horrified by safehaven investments, given their
low returns. But he insists that these investments are the lifeblood of the portfolio because they are able to fund the opportunistic and high-conviction purchase of new equities.
“In a sense, their relatively low return now will provide the greatest return as they are converted into special stocks.”
Meyer believes there is little incentive for SA’s successful small and medium-sized businesses to list on the JSE, given the extensive compliance and regulatory issues they have to contend with once they are listed.
Coupled with this is that many of the country’s successful entrepreneurs have emigrated over the years, causing a significant brain drain.
“Businesses in SA are plagued with a very high tax rate, an unfriendly business environment, policy and regulatory uncertainty, and rampant corruption.”
Business confidence, according to the SA Chamber of Commerce and Industry’s business confidence index, is at historical lows. This is only partly due to the impact of the
Covid-19 pandemic.
In a similar vein, SA is following a clear downward trajectory in the World Economic Forum’s Global Competitiveness Report. Last year it was ranked 59 out of 63 countries. Countries are rated on their economic performance, business efficiency, government efficiency and infrastructure.
The report cites the country’s growing unemployment; rising public debt levels amid a shrinking fiscal space; lack of decisive plans to revive the struggling economy; electricity supply problems and rolling blackouts; and sluggish legal processes to address corruption in state-owned enterprises as some of the reasons for its decline in the global ranking.
When it’s too difficult to do business in one market, money will move to a more investmentfriendly destination, says Meyer.
And without investment, SA will battle to stage an economic recovery and its unemployment figures will continue to soar.
High-growth companies, he says, are typically found in Silicon Valley rather than Sandton.