Low equity funds should be the choice for the conservative investor. They aren’t as exposed to a crash in the equity market as a balanced fund, as they are limited to a 40% equity allocation. And they will provide at least some real growth, which is not available from a money market fund.
But recently investors have lost confidence in equity markets, which have battled to provide real returns. Over the past year R12.4bn has been pulled out of low equity or stable funds and almost R57bn has been invested in multi-asset income funds. These differ from the traditional income funds as they can invest up to 10% in equity and up to 25% in property, and in classes such as preference shares. Unlike income funds they have no maximum duration.
But investors in these funds could kick themselves when equity markets turn. Low equity funds are particularly useful for people who are a few years from retirement but still want to get real returns from their investments.
Almost all unit trust houses have a stable fund. Funds such Allan Gray Stable, Prudential Inflation Plus, Coronation Balanced Defensive and Nedgroup Stable are no longer among the top 10 largest funds as money market funds have come back with a vengeance and clients moved to more innocent-sounding funds such as Coronation Strategic Income.
This month we look at two of the mammoth funds in the sector. Some might be put off by fund manager Dave Foord’s swashbuckling reputation at Nedgroup Value but (perhaps only recently) some of his colleagues at Foord Asset Management, such as William Fraser and Nick Balkin, have achieved maturity.
In any case, it has been a popular fund with Nedgroup’s core of intermediaries.
Allan Gray Stable has lived up to its name most of the time, though it had its worst drawdown yet, of about 17%, in March. But it is a good fund for the R500-a-month regular investor.
Other relatively small funds could come from left field. It is surprising that with the huge distribution of the Old Mutual group behind it, Old Mutual Stable Growth Fund has assets of less than R7bn. Fund managers Alida Jordaan and John Orford merit a larger market share. Just track their recovery over the next few years.
Other left-field choices are PSG Stable and Laurium Stable. Laurium is in the ascendant as one of the leading mid-sized boutiques in SA, though it has only taken tentative steps into the stable space. It has its roots as an equity hedge fund business.
PSG might look like an eccentric choice given its recent poor performance. But think back to how well it was doing up until 18 months ago before writing it off.
Allan Gray Stable Fund
This R42.9bn fund created the low-equity category when it was launched in July 2000.
There had been funds which promised to meet absolute returns, often in highly complex ways. But Allan Gray simplified the issue: equity funds could be up to 100% in equity, balanced 75% and stable 40%. The fund used to be managed solely at the discretion of the chief investment officer but is now run on a multicounsellor approach.
Each of the three managers is responsible for the stock selection and asset allocation in their part of the portfolio, though they increasingly leverage the fixed income divisions off the growing Allan Gray bond team.
With the recent departure of CIO Andrew Lapping, Duncan Artus is the new CIO and lead manager, assisted by Gray veterans Tim Acker and Sean Munsie. Munsie says the foreign portion of the fund is run by sister company Orbis.
The fund invests primarily in the Global Balanced Fund, and to reduce the risk, Stable invests in the fully hedged Orbis Optimal Fund.
Munsie says Orbis’s performance recently has been disappointing (it has invested in out-of-favour sectors such as the oil industry). But at least Allan Gray and Orbis have a common philosophy and look at shares in a very similar way.
Stable was hit by its exposure to Sasol, banks and property shares, and has been cautious, adding to bank shares only after the sell-off. It has also added to British American Tobacco — still the largest share in the fund — as well as deeply discounted Remgro and the Newgold ETF. But it sold Aspen (perhaps a little early), and its competitors Coronation and Momentum Metropolitan.
Munsie describes MultiChoice as an ideal share for this fund as it is likely to continue paying a dividend and it has plenty of room to grow in Africa. The fact that French pay-TV giant Canal Plus has taken a strategic holding tells you something. Allan Gray remains optimistic about Woolworths, the 10th-largest share in the Stable Fund.
The fund has moved out of low-yielding cash (now 8.8% of the fund) into the more promising territory of SA bonds, now 27.6% of the portfolio.
Laurium Capital Stable Prescient Fund
Investment houses believe they need to offer something for clients right across the investment spectrum.
Laurium launched its Stable Fund two years ago, and it has only R66m under management. For most of its life there has been a move down the risk spectrum to multi-asset income funds as even a 40% exposure to equities looked dangerous.
Co-fund manager Brian Thomas says the fund operates under a base case; in smooth, predictable markets it will have 34% in equities, up to 8% in property, 20% in cash and a substantial 38% in bonds. It will always have at least 15% of assets in bonds, while it is prepared to go down to 10% in equity and zero in property.
And it is prepared to use its full allocation to international assets: at least 28% of the 30% allocation to offshore and a further 5% in Africa. It helps that Laurium runs both an Africa Equity and an Africa Bond fund. Thomas says that apart from Africa, it finds it cheaper and more efficient to run foreign equities through exchange traded notes. In exchange for giving its dollar allocation to a merchant bank, the fund receives a 100 basis point yield pick-up on the indices in which it invests.
MSCI Europe remains a key investment, but it has recently switched from the S&P 500 to the Russell 1000 value index, expecting better prospects from recovery shares than from the market as a whole. The fund has a modest 6.8% in offshore equity, supplemented by some large holdings in international businesses listed on the JSE such as Naspers, British American Tobacco and Anglo American. The 13.1% exposure to foreign bonds looks bizarre, but these are not German bunds offering negative interest rates but SA corporates such as MTN and MultiChoice providing attractive yields on their dollar bonds.
The fund has taken a bet on SA banks, mainly Standard Bank and Nedbank, which are trading well below their average price to book (Nedbank 0.6 v 1.4; Standard Bank 1.1 v 1.5).
Nedgroup Investments Stable Fund
The fund aims to give a return of inflation plus 4% over a rolling three years and targets no negative 12-month periods.
It is run by Foord Asset Management, which is not prepared to launch its own fund in the category. It argues that long-term investors should take on a much higher level of equities to meet their goals.
Nedgroup’s Anil Jugmohan says it has been a good partnership. The fund peaked at R35bn as it proved to be a success with financial advisers, and even now has R19bn under management.
Jugmohan says Foord was chosen as it is independent and owner-managed and has an experienced team with high convictions as well as a culture of believing in capital preservation — in fact, they are highly upset when they lose clients’ money. They try to avoid this by focusing on companies with sustainable free cash flow.
Fixed income isn’t overcomplicated. A quarter of the entire fund’s holdings have been in one bond, the mid-duration R186.
The fund has a modest allocation to domestic equity, just 10.8%, and 23.4% to foreign equity. Bonds at 37.9% certainly outpunch cash at 11%. Foord remains a supporter of the gold ETF in preference to gold shares. NewGold is the largest "equity" at 5.7%.
More unusual positions include Capital & Counties Properties in London, Spar Group and Aspen Pharmacare. Foord is a longtime Aspen cheerleader.
Old Mutual Stable Growth Fund
The fund is the most conservative of the three funds in the MacroSolutions range at Old Mutual. It is run by John Orford, who focuses primarily on asset allocation, and Alida Jordaan, who runs stock selection.
Orford says there will be overlap between the stock selection of all three MacroSolutions funds — Stable Growth, Balanced and Flexible. And there is co-operation with the other boutiques in Old Mutual; it leverages off the equity research at Old Mutual Equities. Once the allocation to cash and bonds has been determined, the execution of the fixed income purchases is outsourced to Futuregrowth.
The fund has a relatively aggressive 24.9% in domestic equities. The larger holdings include Naspers, British American Tobacco, Anglo American and FirstRand. There is a similar split between SA nominal bonds (20%) and inflation-linked bonds (17.9%). It has a relatively chunky holding in SA cash (15.1%) and a modest allocation to foreign equity (9.3%).
Orford says it looks as though the global economy is finally on the mend, but the fund has been lagging its target of inflation plus 3% after fees for some time. Its underweight position in global equities did not help. But local shares, which weighed on the fund’s returns, suddenly came to life such as Super Group, TFG and Omnia. There were also new positions such as Shoprite and AVI which contributed. The fund avoided gold but holdings in Impala Platinum and Northam helped.
There was also a chance to buy bank shares at very low prices. And fixed income offers promising real returns — 5% for 10-year government bonds and about 4% for inflation-linked bonds.
PSG Stable Fund
It was a unexpected move when John Gilchrist, who oversaw Old Mutual’s quantitative and index suite, joined PSG Asset Management as deputy chief investment officer.
Not only is it a much smaller business, but it is staunchly fundamental, adopting old-school company research. He now jointly manages the Stable Fund with Dirk Jooste.
The fund is dominated by SA bonds, which account for 49.5% of the portfolio, but it also includes a 25.9% exposure to domestic equity (some of it hedged) and 13.3% to foreign equity, some of it hedged. It has a relatively small exposure to cash of 8.8%.
Gilchrist says he has aimed to tailor the buy list of each fund to be fit for purpose, rather than making it one size fits all. The fund includes longtime favourites of PSG such as Discovery and AB InBev.
Its largest international shares are Prudential Plc, which operates as a life insurer primarily in Asia, and the giant Simon Property Group.
But Gilchrist believes it is important not to double up bets unconsciously by, say, investing too much in bonds and banks, which often have similar drivers. He says PSG can not be contrarian for its own sake, particularly.
But some shares have fallen within his risk appetite after their recent declines, such as AngloGold, Northam and Exxaro, as well as consumer shares such as Remgro, AVI, Compass and Philip Morris.
Inflation-linked bonds have also started to offer value, and they make up 21% of the fund.
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