General equity funds: A home for retirement savings

The original basis for launching unit trusts was to provide regular savers with access to the JSE. Realistically, investors who can afford to save only R50 or R100 a month will never be able to build up a diversified share portfolio.

What we call a general equity fund was simply known as a mutual fund or unit trust. In the UK, the majority of unit trust assets are still invested in equities. But in SA, the industry has increasingly become the domain of multi-asset funds, designed primarily for retirement savings and for drawdown during retirement.

Nonetheless equity funds still make up 19% of assets — it is more than double that if equity assets housed in balanced funds are measured on a see-through basis.

Out of the total in equity funds 16% are in general equity funds and most of the balance of 3% in large-cap index funds. Yet there is only one equity fund in the 10 largest funds in the industry — Allan Gray Equity, with R38.7bn under management — the rest are balanced, stable or income funds. General equity now has 180 funds. It is not a homogeneous category; it is a merger of the original general equity category with the old growth and value equity sectors.

The original growth funds looked for companies with higher growth rates than the market. Many have been absorbed by larger funds. The void from their departure has been filled by far more technical index-based momentum funds, which invest in shares that are doing well. There are still some true value funds such as John Biccard’s Investec Value.

There will always be demand for a fund that invests in shares with a high discount to NAV. Investors who are prepared to stomach higher volatility can do well.

Value funds are often seen as a proxy for the equity income funds in the UK — a confusing term in SA, where income invariably means fixed income. But dividends make up a substantial part of the total return from equities, which is why a fund such as Prudential Dividend Maximiser is a good option. The fact that Prudential is a very good fund manager in any case doesn’t hurt. The fund probably deserves more than its current R4.2bn in assets.

When comparing fund returns it is important to remember that some funds have no offshore allocation, such as the Old Mutual Investors’ Fund discussed below; others have let’s call it a half allocation, such as SIM General Equity with 12.5%, and Prudential Dividend Maximiser, which has a third of its assets offshore, including in Africa. Some of it, if you are to believe its fact sheet, is in Vulcan.

We have included Old Mutual Investors Fund, as it is SA’s oldest surviving unit trust and is also ringing the change with a new, photogenic, all-black fund manager line-up. You might expect a R12.7bn fund to lumber along, but it is no closet index fund; it invests in shares such as Transaction Capital and Italtile.

Many of these shares were initially found by Neil Brown and Richard Hasson in their Old Mutual days before their Electus boutique was spun off as a separate business. They were able to take the Nedgroup Investments Growth Fund with them to their new digs in Rondebosch. This perhaps looks less like a general equity fund and more like the original growth funds, which were a halfway house between the small-cap funds and the general equity behemoths. It has not grown much, with just over R1bn under management, but Nedgroup believes it fits nicely between the much larger Rainmaker fund, run by Abax, and the Value fund run by Foord.

The best performer of the five recently has been the R7.3bn SIM General Equity Fund. The team has settled since its unconstrained team moved to Denker Capital and now that it is entirely focused on third-party assets — Sanlam’s own money is run by an internal team. It has made high conviction bets into platinum producers, for example, and avoided land mines.

Truffle stands out among the second-tier managers. It runs the Managed and Balanced funds for Nedgroup. Its R493m general equity fund carries the Truffle brand, and while Truffle might not be an old brand, it has a close-knit team of RMB Asset Management graduates such as Nicole Agar, Saul Miller and Sophie-Marie (SM) van Garderen to support the portfolio managers. In-depth company research is second nature to them.

Prudential Dividend Maximiser

Prudential has two funds in the general equity sector. Prudential Equity is a mainstream SA-only fund, but Dividend Maximiser focuses more heavily on cash-flow generation and the income to clients.

Fund manager Ross Biggs, who co-manages with Rehana Khan, says the Divi fund has a full 30% offshore allocation, plus a further 3.5% to Africa. The SA component of the fund has a 5.5% dividend yield. Most of the international investment is held through the Prudential Global Equity Fund or the M&G Global Dividend Fund, which follows a similar philosophy. The Divi fund also holds positions in the highly niched Sanlam Global Financial Fund and Mr Spock’s very own Vulcan Value Equity Fund.

"If you look at big corporate disasters in SA," says Biggs, "most have been in companies with poor or erratic cash flows, such as Steinhoff, Aspen and Tongaat."

Some shares have fallen into the fund’s universe as their share prices have plunged, such as Discovery, but Biggs says that while Discovery Health is a strong cash generator, Discovery Life and the bank continue to suck cash. It is more prudent to play Discovery via RMI, which gives access to Outsurance and Momentum Metropolitan too.

One of Biggs’s favourite shares is Tsogo Sun, which is close to finishing its capital expenditure and has a dividend yield near to 10%. Sun International also looks attractive but it is not paying a dividend at present. Biggs says that even if Naspers pays a low dividend, it still has a strong cash-generating engine in Tencent. It is the largest share in the fund, with an 8.8% weighting.

Banks feature prominently in the fund, particularly Standard Bank (4.7% of the fund) and Absa, on a 7% yield, which is 3.2% of the fund. Khan has reduced the holding in FirstRand now that the dividend from Absa will be 40% higher.

It is difficult to find quality resources companies, as they rely on the underlying commodity price, but Anglo American is the third-largest share in the fund after it moved from a highly indebted unfocused business to a much better-streamlined portfolio. The fund started buying platinum shares a year ago, particularly Amplats.

Biggs is wary of retailers, as margins remain elevated, but he holds Woolworths and TFG. He says most investors have got MultiChoice wrong, underestimating its growth in Africa, particularly Nigeria, where it is coming out of losses. He argues that local content and its hold on the best sports properties mean it is unlikely that there will be a wholesale switch of consumers to rivals such as Netflix.

BAT detracted from performance, as it was 5.5% of the fund, but Biggs says it has a 7% sterling dividend yield, which should grow by 10% a year over the next five years. It is seeing off the challenge from illicit cigarettes. The fund has been bitten by its Sappi holding though Biggs is confident about the long-term future of cellulose pulp demand.

Truffle SCI General Equity Fund

Truffle is still little known as a brand, so it likes to focus attention on the experience of its team, dominated by the successful RMB Asset Management team of the early 2000s.

Chief investment officer Iain Power and elder investor statesman Charles Booth are joint portfolio managers.

Power says that while RMB was known for its top-down (macro) approach, Truffle is strongly bottom-up. It looks for solid businesses and spends a considerable amount of time looking at downside risks. In this way it has avoided bombs such as Tongaat, Omnia, Aspen and MTN, though it was caught by Steinhoff in 2017.

Power says fund managers usually underestimate the impact of operating leverage, especially when the problem is compounded by financial leverage.

The fund owns a diversified group of shares and of the five reviewed is the second-most bullish on Naspers, which makes up 12.6% of the fund. But it also has hefty holdings in resource shares such as Anglo American (7.3%), Implats (4.7%), Sasol (4.5%) and AngloGold Ashanti (3.5%). In the second quarter, the four large mining holdings were positive contributors, as were FirstRand, Equites and MultiChoice.

Power says the fund remains overweight on resources, not as a function of a top-down view, but rather the result of a bottom-up assessment. AngloGold continues to trade at a large discount to its global peers. Gold brings "insurance" in troubled times and even after rerating upwards, some platinum shares look cheap. Anglo’s unlisted diamond, iron ore and copper interests are valued at a p:e of just three.

Power has remained invested in Sasol. Though there will be an extra $1bn invested in the Lake Charles Chemical Project, the market has put no value on the spend on this project, which should start generating reasonable returns in 2022. But it was a detractor in the second quarter along with British American Tobacco, KAP and Hulamin.

The fund has been a long-term shareholder in Old Mutual and it has seen an unlock in value with the listing of Quilter and unbundling of the bulk of the Nedbank shares. But it has been reducing its weighting and reinvesting in unloved shares such as Liberty and Momentum.

Nedgroup Investment Growth Fund

The Growth Fund has been managed by Neil Brown of Electus since 2003. Nedgroup head of investments Rob Johnson says Electus meets many of the criteria for best-of-breed managers as it is owner-managed with a strong alignment of interest. It has experienced managers (in Brown and Richard Hasson) with good long-term track records through numerous market cycles, a clear area of expertise (SA equities) and is willing and able to take positions different to the benchmark.

Johnson says in spite of the fund’s name, the Electus investment approach is not confined to seeking out growth stocks. The "growth" refers to capital growth and it is able to invest anywhere in the 120 liquid stocks on the JSE.

Johnson says Electus has the benefit of flexibility due to the modest size of the assets under management. It is able to apply a go-anywhere approach depending on where it sees attractive valuation, be it growth or value; large, mid or small cap; or sector-specific.

At times the fund looks like a closet small-and mid-cap fund. Large holdings include Clientèle (6.6%), Texton Property (5.6%), Libstar (5.2%) Italtile (4.6%) and Combined Motor Holdings (4.7%). Libstar has a prominent position manufacturing no-name and house brands, and Brown believes the move to house brands (also called private label) is bound to continue as they are little different from mainstream brands but cheaper.

He says that on a weighted average basis, the fund would not qualify as a small-cap fund given the 10% holding in Naspers, 3.7% in British American Tobacco and the 10% held combined in the three diversified miners — Anglo, BHP and Glencore.

Brown says it is hard to find 40 decent businesses on the JSE, especially given that some excellent businesses, such as Capitec, are simply too expensive.

Some shares occasionally get into bargain territory. The fund has been buying FirstRand at R58 and selling at R70. And the fund prefers Liberty Holdings to industry favourites Old Mutual and Sanlam.

"We have held Italtile in this fund since inception. It can profitably manufacture and sell tiles in Gauteng 15% cheaper than Chinese imports. How many local manufacturers can say the same?"

Old Mutual investors fund

The oldest surviving fund in the industry, dating to October 1966, gets anew look with the retirement of veteran manager Peter Linley. It is now jointly managed by Siboniso Nxumalo, the new head of Old Mutual Equities, and Meryl Pick, its most astute stock analyst

It is fully invested in JSE-listed shares and currently has a nominal 2.5% in cash.Focusing on the top 100 blue-chip shares,its three largest holdings are in Na s p e r s ,British American Tobacco (BAT) and Anglo American. It also has aggressive exposure to banks, with the big four plus Investec accounting for about 22% of the fund.

Financials as a whole account for almost as much of the fund as industrials, including Naspers. With load-shedding over for the time being and a good result for President Cyril Ramaphosa in the May election, banks proved strong, rising 7% in the second quarter. The fund also has a 4.6% exposure to parent company Old Mutual and 2% to Sanlam.

Pick says the fund had been adding to its BAT and Vodacom stakes in view of their attractive dividend yields. But MTN remains the largest telecoms holding at about 4.5% of the fund. She says the risks for BAT from vaping, declining sales in the developed world and a potential ban on menthol cigarettes are all in the price. And the fund has reduced its Naspers exposure,as it believes Tencent’s valuation is overstretched.

Sasol was reduced on the back of lower polyethylene prices (leading to poorer prospects for its Lake Charles cracker) and a more stable rand. Pick says that even before the overruns at Lake Charles were announced, Old Mutual Equities was reducing Sasol as it was concerned that the local chemical industry was overtraded.

It also has token stakes in WBHO and Raubex, which should do well on even the most modest recovery in the SA construction sector. It holds a few small-cap shares such as Transaction Capital (2.5%), Italtile(3%) and Tsogo Sun (1.1%).

SIM top choice equity fund

This is the more diversified choice when it comes to the Sanlam Investment Management (SIM) equity range. The SIM Top Choice Fund focuses on 20 large JSE shares, but the General Equity Fund has a more diversified range. It has an offshore allocation of 12.5%, invested through the Sanlam Private Wealth Global High Quality Fund and Sanlam Four Stable Global Equity Fund.

Fund manager Patrice Rassou says he is not forbidden from investing in third-party funds, but these funds share the house philosophy.

Rassou remains a Naspers bull — it makes up 13.5% of the fund. In the fund’s capped shareholder weighted index benchmark it makes up 10%. Depending on the relative valuation, this position will be divided between Naspers and its new international spin-off, Prosus.

And the fund has benefited from a weighty 27% in basic materials. Anglos and Implats make up just over 11% of the fund between them. BHP and (laggard) Sasol a further 7%. The fund is looking to buy more Sasol at these lower levels. The only direct gold investment is 2% in Sibanye purely on valuation grounds.

Financials, at 18%, are less than half the allocation in the Old Mutual Investors Fund, with about half of this accounted fo rby Standard Bank and FirstRand. Rassou says the whole sector is cheap — Nedbank and Absa are also on the radar. “We hoped that Old Mutual would grow into the top 10 but it has been disappointing.”

Rassou prefers the food retailers to the clothing plays. He holds Woolworths as a “self-help share” — its outlook depends on how it manages its way out of its Australian crisis, rather than the local economy. Shoprite is also starting to look cheap enough for Sanlam.