There were real returns for the JSE in 2019 after 2018’s losses, yet no less than R13.5bn was withdrawn from the general equity unit trust sector last year.
For most financial advisers it is far easier to put clients into one-stop multi-asset funds. They can pass the responsibility for asset allocation to a fund manager or multimanager. And individual investors who want to make regular savings would be foolish not to make use of the tax deduction from a retirement annuity, which has a 75% equity ceiling.
Yet many of the unit trust industry’s most admired funds are in the general equity sector. Nedgroup Rainmaker, for example, comes from the era of the instinctive inspirational fund manager. Tim Allsop was in the mould of such gut instinct managers as Chris Logan at BOE.
Allsop had his best ideas in the morning and played golf in the afternoon. Life is a little more sophisticated, and perhaps duller, at today’s Abax, but fund manager Anthony Sedgwick is in the Allsop "more art than science" tradition. Yet Rainmaker has had steady outflows and dwindling support.
Investec Equity is an even older fund. It has several fund managers; even CEO Hendrik du Toit had a spell running the fund. It was even given to hedge fund manager Adrian de Fay for a spell, though some say he spent more time on his surfboard than Allsop did on the golf course. It now has an astute, if overly sensible, group of managers led by Chris Freund, though the reserve bench of Rehana Khan, Samantha Hartard and Unathi Loos should add a few octanes to the process.
360ne Equity seems like a newcomer but it will be 15 this year. Cy Jacobs has built an impressive record from his improbable apprenticeship at Investec Private Clients — but there must be quite a lot of key-man risk around Jacobs himself. The cross-pollination between the group’s hedge funds and its long-only funds is a strength of the business. Another is the refreshing lack of bureaucracy, which sadly has crept into Investec Asset Management, though perhaps not yet into Abax.
Marriott Dividend Growth and Bridge Equity Income are a pair, and not just because they are the only mainstream managers in the Durban area. They were both schooled in an income focused approach, which is suited to the over-55s.
The ideal is a perpetual annuity in which investors never draw on their capital. The main instrument for this would be one of their multi-asset funds but in the current market the Marriott and Bridge equity funds have plenty of equities to choose from with dividend yields just below or at cash rates, particularly as dividends are taxed at a lower rate than cash.
The total return from the Bridge fund in particular has not looked impressive recently but the dividend flow has remained solid. And there is plenty of scope for its underwater shares to recover.
Bridge Equity Income Growth Fund
The fund has declined in terms of unit price but CEO Paul Stewart says that clients, who are mostly in retirement, have enjoyed a 6%-7% income yield from a blend of Bridge funds.
It is run by Ian Anderson, Andrew Dowse and Richard Henwood. The equity fund itself has a running yield of 4.6%. Stewart says Bridge believes in offering clearly defined local-only and offshore-only funds. The mix between local and offshore is up to the client — a blanket 30% offshore allocation is not always suitable.
Without offshore assets, Bridge Equity struggled to keep up with other funds in the general equity sector, particularly its closest rival, Marriott Dividend Growth. Bridge does not believe in following one of the standard equity indices. Some would consider the fact that it holds no Naspers or Prosus to be high risk. But the fund holds a number of the large rand hedges plus blue chips such as British American Tobacco (which gained 10% in January), Richemont and Mondi. Thirty percent of the revenue of the fund’s holdings is sourced overseas. Close to 10% of the fund is in two large hospital groups — Netcare and Life Healthcare — though these were acquired before the expected increase in their business through the coronavirus.
Bridge has taken pain from its real estate holdings, which make up about 6% of the fund. Stewart says at current prices they are trading at massive discounts, in anticipation of a doubling of vacancies. Even blue chips Growthpoint and Redefine started the year falling 5% in January. Bridge has suffered relative to its peers as it rarely invests in resources shares, which have a history of inconsistent dividends. The fund needs to be quite sure that the forward dividend yield of any share in which it invests will be at least 2%.
Stewart says that the outlook for a pure equity fund is not exciting in a risk-off environment, in which safe-haven investments such as US treasuries and German bunds have enjoyed capital gains. There is a significant rotation out of emerging markets. The JSE fell almost 2% in January with commodity shares reversing some of their 2019 gains.
36One BCI Equity Fund
360ne is arguably the most successful manager to bridge the divide between hedge funds and long-only funds.
Fund manager Cy Jacobs says each fund is managed to different benchmarks, the hedge funds against cash and some of the institutional equity funds a 95% exposure to equities with a capped Swix benchmark. The equity unit trust isn’t quite so constrained — it can hold up to 20% in cash and 30% in offshore equities.
Jacobs says the house has not been in favour of domestic shares, so it has a 24% holding in its global equity fund and a further 3% in an S&P 500 tracker. In its top 10 holdings, the only share making most of its income in rands is Standard Bank, and 80% of the holdings are rand hedges. Almost 13% of its fund is in three precious metal shares — Implats, Sibanye and Northam. It is not as keen on diversified mining shares and is building short positions in the hedge fund in Anglo American and BHP.
The biggest single share is Naspers, at 8.5%. Jacobs is a long-term Naspers bull. And he has also been a Sasol bear, except for short periods when it has been held tactically, and it has more often been a short position in the hedge funds. He says there is limited exposure to the less liquid small and mid caps, which are hard to sell when they hit the skids. Exceptions are Adcock Ingram, MultiChoice and Brimstone.
The fund has a strong risk management framework, which has allowed it to avoid landmines such as Ascendis and Tongaat Hulett. It was an early prophet of doom about shares such as Resilient. Jacobs says the fund is only now buying property shares, including Arrowhead, which can pay a high dividend out of its operational cash flow.
Investec Equity Fund
Investec (soon to be Ninety One) Equity Fund goes back to the 1980s, when it was called the Metboard Fund, predating even the formation of Investec Asset Management. Over the past decade Investec Equity has been managed as an all-weather pragmatic fund, in contrast with the more ideological Investec Value and Opportunity funds. The cool-as-a-cucumber Chris Freund remains the lead portfolio manager, assisted by Fairtree veteran Hannes van den Berg and, for the offshore portion, by London-based Rhynhardt Roodt.
Investec Equity’s key screening tool is earnings revisions. It focuses on companies with expected further profits that are being revised upwards. But firms also need to be at a reasonable valuation. The fund holds chunky high-conviction positions in these shares and is no benchmark hugger.
It had some high-conviction bets on platinum, with 5% in Implats and 2.6% in Amplats, and more than a quarter of its exposure was to the basic materials sector as a whole. It is one of the few large unit trusts that has a considerable holding of 2.7% in Capitec, which has been the subject of numerous positive earnings revisions, as well as in FirstRand, at 3.3% — in fact in late 2019 it switched a portion of its Standard Bank shares into FirstRand.
The fund’s top 10 include Sanlam, at 3.1%, rather than the hapless Old Mutual.
Its industrial holdings are dominated by Naspers/Prosus, which between them make up 14% of the fund.
Van den Berg says shares such as MTN and Telkom did not do well on the earnings revision filter and the fund had light, if any, holdings in them. In 2019, as the rand strengthened, the international component shrank, but there has been a reversal in the year to date as the rand has weakened.
The fund had limited exposure to global technology, with the exception of semiconductor share Lam Research. The fund tends not to hold unpopular shares about to experience a dead-cat bounce, so it has recently suffered from not holding Aspen Pharmacare and Mediclinic.
It was also hit by its holding in Massmart and, to a lesser extent, in The Foschini Group. No doubt in anticipation of the coronavirus, the fund sold much of its holding in Corona brewer AB InBev.
Marriott Dividend Growth
It is no coincidence that Marriott and Bridge have a lot in common. Bridge, headed by chief investment officer Ian Anderson, started as a breakaway from Marriott. They are the only two mainstream asset managers in the Durban area.
Marriott operates as a single team, under chief investment officer Duggan Matthews from Hillcrest in the western suburbs. Both houses are anchored by shares with reliable, growing dividends allowing investors to draw income without touching their capital. Marriott looks only at shares with a market cap above R2bn, to avoid the more speculative shares and only counters that have paid dividends over the past three years.
Marriott adopts the classic quality approach, which makes its universe quite narrow in the SA context so it avoids technology (with the exception of Honeywell), commodities and the higher risk cyclical industries. The largest exposure, 27%, is to brand-heavy food and beverage businesses such as Coca-Cola, Diageo, Nestlé, AB InBev and Distell, as well as personal and home-care giants such as Unilever, Colgate Palmolive and Reckitt Benckiser.
The fund holds all three major food retailers, Shoprite, Pick n Pay and Spar, as well as Clicks, but not Woolworths or any clothing retailers. Second is health care, at 15%, through a blend of local shares Netcare and Life Healthcare and global blue chips Johnson & Johnson and Medtronic.
It has decided to take its 11% exposure to banks entirely through Standard Bank and FirstRand given that dividend yields of local banks are better and because of the scarcity of quality global banks. Real estate exposure is also local, through Growthpoint, Equites and Stor-Age. Yields vary from 1.7% for Clicks up to 9.8% from Stor-Age. The fund’s distributions have more than doubled since 2009 to 250c per unit (share).
Nedgroup Investments Rainmaker Fund
Rainmaker was once the largest fund in the Nedgroup stable, with R15bn under management. But it has had annual outflows of about R1.2bn and recently fell below R10bn.
Abax has at least been compensated by the success of the Flexible Income Fund it runs for Nedgroup, which has doubled in size to R17bn. The original Rainmaker fund manager, Tim Allsop, and his successor Anthony Sedgwick, both from Abax, have a natural affinity for the small-and mid-cap sector, and shares that probably won’t appear in too many other general equity funds include KAP Industrial Holdings, Oceana, Alexander Forbes and Tiger Wheels.
Sedgwick believes that KAP and Truworths are both good examples of well-managed local companies which are unjustifiably cheap. In its top 10 holdings, only one share, Sasol, can be considered a dud.
With hindsight Abax would have liked to be less invested in the diversified miners — it had 8% in Anglo American and 4.3% in BHP — and more in the platinum miners, in which it had 2.5% spread between Impala Platinum (Implats), Northam and Royal Bafokeng. It has also had a modest gold position of less than a percent in AngloGold Ashanti.
Implats was still one of the top five contributors to the fund in the fourth quarter, along with Anglo American, British American Tobacco (BAT), Remgro and Sasol during its short recovery. Poor performers included Standard Bank, Nedbank, Prosus, MTN and AB InBev. Sedgwick is encouraged that three shares which were a drag on performance in 2018 did well in 2019 — BAT, Mediclinic and Reinet.
Naspers and Prosus make up about 15% of the portfolio and Sedgwick says management is at last doing something about the discount at which it trades to Tencent, though not nearly enough. The fund has a hefty 15% weighing towards all five banks, with FirstRand and Standard Bank the largest positions. In retail the position in Shoprite was sold completely and Mr Price is now the largest holding.
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