High equity multi-asset funds: The benefits of balance

At R514bn, the High Equity Multi-asset category is by far the largest in the unit trust sector. Even money market funds have fallen substantially in their market share as bank deposit rates have become more competitive, and now account for R340bn in assets.

Morningstar calls the High Equity category Aggressive Allocation, and excludes a few funds which it considers to be too conservative or undynamic.

Balanced funds should probably grow even more as we move towards robo advice. They are the obvious vehicle for an investor with 20-25 years before retirement and they consider switching out only five years before.

These funds are ideal for a nonadvice framework.

All of them are subject to Regulation 28 of the Pension Fund Act, which has limits on equity overall (75%), on offshore investment (30%, though it could be increased soon) and on exposure to any one share (10%). People won’t retire with just one asset or worthless company stock.

Balanced funds have not been a good investment over the past three years, giving an annual return of about 3%, but they are equity-centric products. If there is a recovery in the market it could be sudden, and it is difficult to time a return to the market.

Perhaps the biggest disappointment is that few funds have taken advantage of the Regulation 28 allowances to invest in alternative products such as hedge funds and private equity. The problem is limited liquidity — units can’t be bought and sold on demand — and poor price discovery — there is rarely an accurate daily price. It will be much easier for large institutional investors such as pension funds and life offices to take advantage of this dispensation. For now the old 60:40 formula applies to balanced funds — 60% equities, 40% interest-bearing assets.

This month we look at five quite different funds. Allan Gray Balanced is still by far the largest fund in the sector (and, in fact, the whole industry) at close to R150bn under management. It faces many of the problems of size, and a lack of flexibility offshore because it is forced to work with just one manager, Orbis, which has its own culture and client base. The fund is restricted to buying megacaps. And, as always at Allan Gray, there is pressure to live up to previous fund managers with their legendary reputations.

Foord Balanced is another fund run by a large manager, which is recovering from a bout of bad performance. Predictably, it is banging the "long-term performance" drum, which in Foord’s case is fair comment. Unlike Allan Gray, Foord does not have the benefit of a slick marketing machine to gloss over poor returns.

Laurium is one of the mid-tier managers that is starting to stand out. As well as its hedge funds, where it has a solid client base, it has been building out a suite of long-only funds, of which the Stable and Income funds are the most recent. Much like at Truffle, the company’s main decision makers worked together for many years before starting the business. In Laurium’s case the core team was at Deutsche.

In the next tier down, with about R3.8bn, is CounterPoint, which is not the Pick n Pay housebrand dishwasher. It was started by Steve Mills and Alex Pestana (ex Sanlam) and Sam Houlie has now taken Mills’s role as head of equities. Houlie has a lot to prove after his disastrous tenure at the Momentum Value fund. The multimanagers should be the first to jump in as he is sure to give an uncorrelated performance.

The smallest shop in this report, ClucasGray, in fact has a balanced fund, Equilibrium, which is twice the size of the CounterPoint Fund. And fund manager Andrew Vintcent is a safer pair of hands. But it will hard to predict who provides the best return. Dave Foord is by far the most experienced manager in this line-up, but on his yachts and jaunts to Singapore, is he going to give his undivided attention?

Allan Gray Balanced Fund

Allan Gray’s chief investment officer Andrew Lapping admits that the fund has gone through a poor period. The single biggest factor was that Orbis, which runs its international assets, has been underperforming for at least three years.

Even if he wanted to, Lapping could not part company with Orbis, as they have a common shareholder in the Gray family. And over the long term Orbis has proved to be a good source of returns, very often performing when other active and index funds are in the doldrums.

Domestically, Lapping says that the holding in Sasol and, at times, British American Tobacco (BAT), detracted, [as did] not owning some strong performers such as Anglo American BHP (or at least not enough of it) and Richemont. The fund has avoided a few landmines such as Aspen and Shoprite.

Its bet on diversified miners was through Glencore, which looked cheap, as its basket, with copper, nickel, zinc and thermal coal, is well below normal prices. In contrast, iron ore costs $115/t while Allan Gray considers iron ore’s normalised price to be $55/t.

Lapping says the approach to valuing resource companies is to focus on long-term expectations for commodity prices, normalised unit costs and the skills of the management team at deploying funds. As well as Glencore, Allan Gray has opted for paper and pulp producer Sappi, as paper prices are weak and should go up. Its big retail holding is Woolworths, which has started to come off its low base.

Lapping says the property holding, which was zero for many years, is creeping up to about 1.5%, including Hyprop. Orbis does not own international properties: their share prices have been pushed up as investors pay a premium for yield which is not available from foreign cash and bonds.

The balanced fund is run on a multicounsellor basis, with four managers running self-contained slices of the fund. Lapping has the largest slice; Duncan Artus is the next most experienced portfolio manager; and the rising stars are Jacques Plaut and Ruan Stander.

Allan Gray’s largest share is Naspers (7.6%), but this includes stub certificates, a way of investing in the "rump" of Naspers excluding Tencent. This has proved a terrible investment as the discount keeps widening. BAT, the second-largest share, has proved volatile (5.6% of fund), and the fund has taken more than its share of pain from Sasol (3.1%). It has also been a patient shareholder of Investec (2.4%).

ClucasGray Equilibrium Fund

ClucasGray Asset Management is jointly owned by the ClucasGray private wealth business and the lead portfolio manager, Andrew Vintcent.

Vintcent previously ran the Stanlib Growth Fund and the RMB High Tide Fund. He is assisted by Grant Morris, previously a fund manager at Melville Douglas.

The Equilibrium Fund has a respectable R800m under management. The main added value is in the stock selection carried over from the ClucasGray Equity Fund, but it also runs a table of expected asset class returns. It uses exchange traded funds for 50% of its international investments, and there is a tilt towards Europe and Japan.

The remainder of the allocation is invested through two idiosyncratic active managers, Veritas (which manages a global equity fund for Nedgroup) and Sustainable Growth Advisers.

Vintcent does not expect returns to come from the same places as in the past few years, believing that cash will underperform inflation, bonds will just beat it and local equities should beat it substantially, while US shares from these levels will struggle to show real returns.

The fund is below its strategic 5% weighting in property, but at a full 55% weighting in local equity, 30% in a blend of cash, bonds and pref shares, and at the lower end of its global range, at 20%. The fund has an average p:e of 11.5 and a forward dividend yield of 4.7%.

Vintcent has been a longtime investor in Old Mutual but has taken some of it off the table — though if the chaos at the company persists the right time may come to buy some more. The fund has invested in large caps such as Absa as well as smaller shares such as Reunert and Metrofile. It recently sold about half its MTN shares and switched them to Vodacom. The fund’s fees are highly competitive at 0.94%.

Vintcent’s background as a bank analyst is reflected in his two top shares — Standard Bank (4.3%) and Absa (4%) — while Old Mutual now stands at 3%. Vintcent was a shareholder in Clover Industries. This form is being bought out by an international consortium; Vintcent says this indicates foreigners can see bargains on the JSE more easily than locals. The largest resource holdings are Sasol, Exxaro and Anglo American. Naspers and British American Tobacco are the main large-cap industrials.

Foord Balanced Fund

Though Dave Foord’s name is on the door, Foord Asset Management is no one-man band. Foord has built a team of eight portfolio managers and nine analysts. He says that over the past couple of years the house has had a hiccup in equity selection, with too many landmines, including Aspen and Sasol. It is the first time it has happened on this scale at Foord, certainly in the decade or so that it has been a large manager, but it happens to all portfolio managers at some point.

But Foord says the asset allocation has been spot on and has more than compensated for the poor equity selection. The Foord Balanced Fund is in the top decile over 10 years, higher over longer periods. Foord International Trust is top of tables over 10, 15 and 20 years and Foord Global Equity has given positive alpha in three of the past five years. These last two are building blocks for the Foord Balanced Fund.

Foord says the fund is well-positioned for the troubles that lie ahead. More than 20% of equity allocation is in cash awaiting buying opportunities, but Foord says share prices are nowhere near their bottoms yet. More than 80% of property allocation is in cash awaiting buying opportunities. This cash is in medium-dated bonds earning CPI plus 5%. About 60% of the fund is protected against rand depreciation through international investments and rand hedges; 22% of funds are in global equities, but 5% of that is hedged against a decline in the S&P index.

Foord says Regulation 28 of the Pension Funds Act is a constraint on asset allocation. While Foord Flexible, which has no such constraint, is 51% invested in foreign equity and 8% in local equity, Balanced is 35% local and 25% foreign. But the funds have almost the same weighting to SA government bonds, of about 19%.

At present Foord’s share selection does not look uniquely terrible. Like most of its peers it owned Sasol, though the allocation was less than 3%, and other key holdings include BHP, Naspers, Richemont and RMB Holdings. The only unusual pick is Capital & Counties, owner of central London’s Covent Garden shopping precinct (3% of fund), which was a strong positive contributor.

Counterpoint SCI Balanced Plus

This niche fund manager has moved from Bellville to Claremont and the fund is now run jointly by Sam Houlie and Alex Pestana.

Houlie joined the firm in November 2016 and by March 2018 had taken over from founder Steve Mills and now runs the local and global equity funds.

Houlie had a few controversial years at Momentum, where his deep value style did not suit the markets of the day (he was trained at Allan Gray) and before that was the founder of the Global Franchise and Cautious Managed funds at Investec.

He says in the 10-month sabbatical before he joined Counterpoint, he took a hard look at his investment philosophy to see what went wrong. He was a large investor in African Bank just as it collapsed.

His deep value thinking made him look at (though not always buy) shares such as Steinhoff, Aveng, Aspen, Brait, Omnia and EOH. Balanced Plus invests in two different international funds Houlie runs, a standard Global Equity Fund and Global Owner-managed, a thematic fund overlapping the Global Franchise Fund.

Houlie says he does not take cover behind the benchmark: at times he has held no Naspers, for example. He says we might reach a point in which the fund will start to buy SA shares more extensively but not yet.

He moves actively between shares, switching from Nedbank to Standard Bank out of concern for risks at Nedbank’s large commercial property book. He holds banks indirectly through Remgro. Remgro has a net cash, high-quality portfolio.

Houlie has been an investor in Telkom, Metair and Hudaco. The fund does not have an aggressive holding in SA bonds as he is concerned about the increase on bond issuance to make up for the budget deficit and a reduction in the carry trade as overseas interest rates increase.

He says the fund is conservatively positioned and probably not the right choice for anyone expecting a rally in the JSE and other growth assets. It has just 25% in SA equity and 15% in global equity with 37% in cash and money market. Its larger equity holdings include BAT, Remgro, Standard Bank, Gold Fields and Naspers.

Foord Balanced Fund

Laurium Balanced Prescient Fund

The fund was launched almost five years ago to give a pension fund friendly version of its successful flexible fund. Its annualised return is more than 3% a year ahead of its peers.

The fund is managed by Laurium founders Murray Winckler and Gavin Vorwerg, who focus primarily on the equity selection, and Brian Thomas, who is responsible for asset allocation. Since the beginning of the year it has upped its game on fixed income with the appointment of JP du Plessis. Thomas says the fund can be more nimble than the big balanced funds, its asset base is just above R900m. The large funds such as Allan Gray Balanced and Foord Balanced have a much higher correlation with each other than they do with Laurium Balanced.

Laurium has a relatively high weighting of 3% in the rest of Africa: the Egyptian government bond, with a coupon of 18.75% is a winner, though its holding in Zimbabwe brewer Delta Corp lost money.

It does not hesitate to bring money back onshore if it considers SA assets to be more attractive — the offshore weighting has been reduced from 28% to just over 22%. Thomas says Laurium prefers to invest in international markets through exchange traded funds. Thomas says it’s easier to hedge an index than to hedge a single stock, and it has hedges to protect the fund from any sudden decline in US equities. The US ETF has been the biggest contributor in the year to date. The biggest detractors were Sasol, Shoprite and UK property share Hammerson. In financials, Transaction Capital has been the best performer while shares such as FirstRand, Old Mutual and Nedbank have detracted.

Thomas says that in spite of Transaction Capital’s success, the mid and small cap positions have been detrimental in aggregate, but it has not hesitated to buy some highly niched shares such as self storage facility business Stor-Age. This is in spite of Laurium’s scepticism about property, until very recently its holding was well below the strategic asset allocation of 10%, which has been one of the main drivers of its strong relative performance. Growthpoint is now one of the top 10 holdings overall.