It is easy to keep life simple by investing in a wide range of international index trackers in the market. A giant firm such as BlackRock offers these portfolios for just a few basis points. It can be a good solution for investors who do not have a qualified financial adviser and are fee sensitive.
But there is a place for active funds to play a "satellite" role, and the five funds reviewed do that, in the sense that they are all the opposite of index trackers.
In the past we looked at value funds such as Absa Global Value, run by Schroders. It is certainly true to its label, but has battled, as the share prices of its holdings have not — in spite of what the textbooks say — reverted to the mean.
Orbis, the most popular offshore fund in SA (no less than R18bn is invested in its SA retail feeder fund) has never been a classic value fund, and owns shares the Schroders Value team wouldn’t even research, such as Facebook and the biotech firm AbbVie.
Orbis also has far less exposure to financials than a more traditional value house such as Dodge & Cox. And with an impressive overall performance in its nearly 30 years on the market, all SA investors should at least consider Orbis.
An interesting trend over the past decade has been the rise of "quality", which is now the preferred term for "the inverse of value." The quality of the fund managers, sadly, is no better or worse than it is for other styles. But the term "growth" is undoubtedly out of fashion. The best-marketed quality fund in the SA market is Investec Global Franchise, which has benefited from the flight to safe, steady dividend payers. These companies have an economic "moat" and are not hostages to the economic cycle. People are unlikely to halt a Visa transaction or stop buying Purina cat food in an economic downturn, but they will put off buying a car or other durable goods.
Investec doesn’t have a house style, but it offers quality under Clyde Rossouw, value under John Biccard and low-quality, low-value portfolios run by Chris Freund and Hannes van den Berg.
Sanlam’s High Quality Equity under Pieter Fourie is a clear rip-off of Rossouw’s fund, but it is also doing substantially better than the index trackers. It has a dedicated investment team of five and is proving to be a more coherent proposition than the legacy Sanlam Global Equity Fund.
Anyone searching for the old-school growth funds of the 1990s would do well to look at Stanlib Global Equity. It has a significant bias towards the technology behemoths. But fund manager Neil Robson of Columbia Threadneedle does not invest in today’s faddish neo-dot-bombs such as Uber or even Netflix and he has some large financial holdings for diversification.
In the past we have looked at Coronation Global Equity Select, which is run by veteran Louis Stassen. It is a competently run global equity fund, but it doesn’t have the track record of an Orbis yet.
Investors who want to follow the Coronation brand should take a look at its multimanager fund, Coronation Global Opportunities Equity. The fund manager has been conducting global manager research for over 20 years, led by Tony Gibson, and the fund has a blend of managers you have probably never heard of — with the exception of Contrarius, as it is run by the former chief investment officer of Allan Gray Stephen Mildenhall — quite a celebrity is his day.
All five funds are worth examining in more detail with your financial adviser.
SPW high quality equity feed fund
There have been numerous changes at Sanlam in its international investment strategy but it is now establishing a credible presence under Pieter Fourie, head of global equities since 2012.
Though it is branded Sanlam Private Wealth, this is not an invitation-only fund for ultra high net worths. It is positioned as the flagship global equity fund in preference to the more pedestrian Sanlam Global Equity Fund, which is more value orientated. It invests in high-quality businesses with long-term horizons and it invests with no reference to the index. Low sensitivity to stock market moves is key and quality shares are less dependent on the economic cycle. A recent winner for the fund has been Bayer, the German pharma group, which is rumoured to have settled lawsuits concerning its Roundup weedkiller. It also sold its animal health business for about $7bn. It did well from PepsiCo, the soft drinks and snacks group as well as Medtronic, which is showing strong organic growth as a medical device business.
Fourie was hit by Philip Morris, which is talking of remerging with its former parent Altria. Chinese internet stock Tencent was hit by competition in video advertising. He says he prefers to invest directly into Tencent instead of buying Naspers in the hope that the discount will unwind over the next 30 years. As a global fund it is more relevant to look at Tencent against a direct competitor such as NetEase.
There is limited overlap between the top 10 holdings of the Sanlam and Investec funds: just Booking Holdings and Johnson & Johnson. But there are similarities in the holdings: Investec holds Nestlé, Sanlam holds Reckitt Benckiser, Investec holds Microsoft. Sanlam holds Alphabet (Google) and Facebook. In pharma, Investec holds Roche, Sanlam holds Bayer and Allergan.
Fourie also owns Fresenius which provides dialysis treatments in the US, unfortunately a predictably growing business. Fourie says over the past five years he has significantly reduced the fund’s exposure to consumer shares such as AB InBev, Nestlé and Pernod Ricard. But it has taken the opportunity to buy tobacco shares when they are out of favour — such as BAT, Imperial Brands and Altria.
Stanlib global equity feeder fund
The fund is run by Neil Robson and his colleagues at the Columbia Threadneedle global equity team in London. Stanlib’s head of equities Herman van Velze is happy that the fund complements Stanlib’s own quality growth approach to investment and describes it as a good partnership. The fund is more aggresssively aggressively focused on tech than its peers and recently it has outperformed the other four funds reviewed this month.
Its four largest shares are Alphabet (Google), Amazon, Ali Baba Alibaba and Microsoft. Facebook and Tencent are also in the top 10. Robson does not have large holdings in the consumer sector — though Unilever and Pernod Ricard are lower down the table.
Robson argues that in a world of brand fragmentation and niche advertising on social media, the barriers to entry for consumer goods have fallen: think of the success of craft beers abd and gins and natural cosmetics. Robson He doesn’t mind paying a premium for his shares, on purchase they are on average 30% more expensive than the overall market. But he says because of superior growth the shares at the price he bought them they will trade at a discount to the market within three years.
Apart from tech Robson has also found unique opportunities in finance, such as the Housing Development Fnance Finance Corp in India and Ping An Insurance in China, which partners Discovery in its health insurance. business, He likes the outlook for the global payments duopoly Visa and Mastercard that he and owns both of them. Between them — they make up more than 5% of the fund. Shoe giant Adidas has been a strong performer recently; it is expanding gross margins and powering ahead with e-commerce. Robson owns Nintendo, not exactly a new tech name, in anticipation of its new Super Mario Bros game and further distribution of its console consoles in China, via Tencent.
The fund never has a zero exposure to a super sector. It has been a long-term holder of Rio Tinto, which it considers to be the highest quality highest-quality and most consistent diversified miner. And it has avoided the more speculative tech shares with unpredictable business models such as Netflix and Uber.
Investec Global Franchise Fund
This is a fund that does not even pretend to offer balance and diversity. Fund manager Clyde Rossouw says it is highly unlikely that a mining or oil company, even an oil exploration company, would ever be considered as part of the universe, and it won’t take part in the anticipated rotation into energy shares. Almost all its high-conviction holdings are characterised by strong brands: Nestlé with Gerber, Maggi and Nespresso, among others; Johnson & Johnson with Sudafed, Listerine, Clean & Clear and its J&J baby products; and Beiersdorf with Nivea and Elastoplast. The exceptions would be ASML, a key supplier to the semiconductor chip industry, and Verisign, responsible for much of the plumbing on the internet. But the defining characteristic of the fund is not so much valuing brands as finding companies with the ability to produce superior returns on capital over time. Verisign has an outlandish return on invested capital of 153%. Barriers to entry are also crucial: both Visa (the largest holding at 9.1% of the fund) and Moody’s (5.3%) have cosy duopolies with Mastercard and Standard & Poor’s S&P respectively.
Rossouw is sceptical about many of the technology shares, though in aggregate it makes up 35% of the fund. Microsoft (7.1%) is the only tech behemoth in the top 10. The other tech shares are more shares such a Booking (5.5%), which holds Booking.com, and Intuit (3.7%), which sells QuickBooks, as well as Verisign.
The fund has bolstered its financial holdings in the third quarter with a maiden investment in St James’s Place, the main hub for financial advice in the UK. It is the "big gorilla" that JSE-listed Quilter needs to beat. Rossouw has also sold out of Japan Tobacco in favour of Philip Morris, which is better placed for the move to new forms of smoking such as e-cigarettes.
Rossouw says the fund is a high-conviction portfolio of 25 to 40 shares which have high customer loyalty, strong brands and typically no debt. Though it is a pure equity fund, it takes note of the need for downside protection. Its losses in falling markets have been about a third of those in the MSCI world index.
Coronation Global Opportunities Equity Fund
This multimanager international fund is a revamp of Coronation’s original fund of hedge funds. Tony Gibson runs the fund, which he’s managed in some form or another since 1997. Recently Karl Leinberger, Coronation’s CEO, was brought in as co-manager.
The fund is split between a range of managers, all in owner-managed boutiques. It does not attempt to be style neutral but none of its managers would be called benchmark huggers. Managers include Contrarius, run by Stephen Mildenhall, the former chief investment officer of Allan Gray. He takes the extreme nonbenchmark-cognisant approach, often deep value, of Allan Gray in the days when it was still a small shop. He is the only external manager who has not run hedge funds. The other big holding is with Egerton Capital run by John Armitage in London. It is a hedge fund manager at heart which takes a more short-term approach to capital preservation and investing than Contrarius.
The fund also invests with Maverick, run by Texan Lee Ainslie, also a hedge fund veteran, who still believes in the value of his relationships with management teams.
Lansdowne Partners in London is another hedge fund manager that gives itself a generous risk budget. The fifth external manager is Tremblant, run by high-profile Brett Barakett in New York. Global Opportunities has built up a 25% position in Coronation funds, split between its Global Emerging Markets and Global Equity Select funds. Leinberger expects Global Opportunities to remain its flagship global equity product for at least five and maybe 10 years, as the in-house are still building up their long-term track records.
But don’t expect a smoothed multimanager fund. Even in aggregate, the fund does not behave like an index tracker. In the third quarter it fell 11%, the main culprit being Contrarius, which had large positions in oil services and deep sea drillers, with Transocean down 30%, Valaris 43% and Diamond Offshore 37%. But Mildenhall’s retail shares have bounced back — Bed Bath & Beyond is up 12%, Abercrombie & Fitch 8% and Macy’s 7%. Egerton slightly underperformed the market with a 19% fall in steel pipe producer Tenaris, in which it has a chunky holding. Landsowne was hurt by exposure to Rio Tinto (down 13%) and the main ArcelorMittal shares, down 21%. Maverick took a wrong turn by backing DXC Technology, which fell 46%.
Of the external managers, only Contrarius is readily available to SA investors. The fund is an intriguing blend of sometimes eccentric managers.
Allan Gray Orbis Equity Fund
Orbis certainly has the best name recognition of any of the offshore funds available in SA, and as Allan Gray in SA has built its linked investment platform into the largest in the country, Orbis continues to be the default international fund for many financial advisers.
Its long-term record is impressive — since inception in January 1990 it has given more than double the annualised return of the peer group.
But investing in it can call for a strong stomach, as the performance is anything but consistent.
Over three years it has had about half the return of the peer group, and even over five years it is materially behind. In most businesses this would lead to introspection and some review of whether the approach should be changed or at least updated.
But Orbis’s executive in Cape Town, Tamryn Lamb, says the team is more excited about the absolute and relative value of its portfolio than ever.
She says there has been a flow to safe and stable names, which are now overpriced. XPO Logistics, which has been plagued by a rash of poor management decisions and assaults for short sellers, is still the second-largest share, and in fact the share price is still higher than Orbis’s average purchase price.
Lamb says the fund is not against consumer staples; Brexit has let to some attractive repricing of UK-listed shares such as BAT, Reckitt Benckiser and Imperial Brands (previously Imperial Tobacco).
Nor is it averse to tech. Its largest share is NetEase, Tencent’s major (but cheaper) rival, as well as Autohome, a Chinese version of Autotrader, and Facebook.
Lamb says Facebook might seem an odd choice for a "value" manager such as Orbis, but at 19 times current earnings investors aren’t paying much for potential growth. Orbis’s only developed market bank holding is Credit Suisse; it also has a large holding in Sberbank of Russia (3.7%) and a couple of Korean banks.
It has recently bought significant holdings in the motor industry, through Honda, BMW and Toyota.
Orbis has always had an unusual interest in Japan, which has been a personal favourite of founder Allan Gray since the launch of the business. The fund owns Mitsubishi, Sumitomo and Mitsui. They all trade considerably below book value.
But any recovery might take time, as they are tied to the health of the Japanese economy and the commodity cycle.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.