At R490bn the high-equity multi-assets unit trust category is the largest unit trust sector in SA, larger even than the money market category, now at about R422bn.
High equity remains the best one-stop investment for the average saver, as it gives a large exposure to equities — up to 75%, much higher than the 40% for stable funds. But high equity is still an approved vehicle for pension fund saving under Regulation 28 of the Pension Funds Act. And over 10 years with a 7.9% return, these funds outperformed general equity funds, which gave 6.9%, something that isn’t supposed to happen according to modern portfolio theory.
There are 258 funds in the category, so it is not easy to pick the right one. But going the one-stop route is still preferable to the much more complex process of appointing different managers for different asset classes.
Coronation Balanced Plus would be a good default fund. It has a conservative valuation-based approach, but it is certainly not a sleepy index hugger. It has been covered several times in IM.
This week there is an eclectic selection, including some you may never have heard of. Others give no clue to the underlying house in their name.
Two outstanding performers among the boutiques have been High Street and Long Beach. High Street, mainly consisting of alumni of the UAL Merchant Bank, chose their name to signify a phenomenon, the high street, which still flourishes overseas but is on life support in SA. Its High Equity fund has focused overseas as much as it can.
David Hansford claims he named Long Beach after the Noordhoek beach near where he lives. Still, it does no harm to give a hint of California-style sophistication. Anyway, you will be buying these funds for their returns, not their names.
Element is a shop I have respected through its good and bad times (though it may not see matters that way). It has adapted to changing times while still remaining true to its value management roots. It will not have to join failing value managers such as RECM, Bridge and Counterpoint.
You might be wondering who at Discovery runs its balanced fund. It is outsourced to Ninety One, a shop that already has two large and successful balanced funds, Managed and Opportunity. But in fact neither of these replicates the highly successful strategy the shop offers its institutional clients from the SA Equity and Balanced team under Chris Freund, Hannes van der Berg and Samantha Hartard. This team looks at earnings revision, snapping up shares after analysts have upgraded them.
Equally, Nedgroup Investments Balanced isn’t managed in the bowels of the bank but by Truffle, one of the more promising mid-sized boutiques, with about €30bn under management. With the core having worked together for more than a decade at RMB Asset Management, it is gelling well.
Discovery Balanced Fund
Like all Discovery funds, the Balanced fund is managed by Ninety One. Though Ninety One already has two large unit trusts in the Managed and Opportunity funds, Balanced has its own style, buying after earnings (forecast) revisions.
This might not be as catchy a term as momentum or quality, but it outperforms the overall market in the growth and expansion phases of the economic cycle. It provides more consistent returns throughout the cycle.
Discovery says the fund has a unique alpha signature and performs at different times from other balanced funds. It is no more nor less than the core institutional multi-asset product Ninety One has been offering institutional clients for years.
The fund is run by Chris Freund, Hannes van den Berg and Samantha Hartard. There is nothing unusual about the top holdings, except for an unusually high allocation to local financials, which make up 27% of the 41% allocated to local equities; FirstRand, Sanlam and Standard Bank are all in the top 10 holdings. It also has 22% exposure to basic materials shares such as Impala Platinum, Anglo American, BHP and Sibanye-Stillwater.
Between local and foreign equity the exposure is 69% and there is a hefty 22% exposure to local bonds; no other asset class makes up more than 3% of the fund.
Hartard says there was some rotation back to SA Inc shares from November into retailers such as Truworths, TFG and Pepkor. The fund invests offshore into the funds run by their Four Factor colleagues in London. It can invest in the regional funds run by this team, such as the China Pacific Fund and the Asia ex Japan Fund.
Hartard says they like cyclical shares and have been light in more staple shares such as Richemont and British American Tobacco. The fund is particularly light on hospitals, which could take time to recover, as people are only slowly coming back to elective surgery.
Element SCI Balanced Fund
This fund makes life easier for the fund managers by investing directly into other Element funds. The largest holding is 21% in the Element Global Equity Fund. There is a further 8% in the Specialist Income Fund and a further 5% into the so-called "Earth" Equity Fund.
This was a worthy attempt to create an environmental, social and governance fund, but it is still constrained by the small universe of the JSE.
Specialist income has had almost as many bargains as the equity market, with yields of 9% or more. There is a 4.5% real return on the five-year bond. As SA unit trusts are allowed only to invest 20% of their assets into any one other fund, the offshore exposure has been topped up by an 8% holding in the cheap Vanguard Total World Stock exchange-traded fund.
Element, previously Fraters, was considered to be a premier value manager but it has done better than the deep-value peer group over the past five years. Chief investment officer Terence Craig says the house is learning not to buy too soon or sell too late. Experience has taught Craig not to be too ideological. The fund has made opportunistic purchases, such as Afrox in anticipation that it would be bought out by parent Linde.
Craig says there was an unusual opportunity to buy quality shares at a 60%-79% discount at the height of the crash in March 2020. Even Naspers looked attractive, though even at the trough, investors had not priced in the risk from US and Chinese regulatory action. There is already speculation that the WeChat messaging service is providing information to the Chinese government on dissidents. But the Element fund is skewed away from pricey US equities.
The house likes shares in recovery such as MTN, and some neglected midcaps such as Adcock Ingram, Massmart and Netcare. It also owns the recently listed dairy and ready-meal producer Libstar.
Craig says Massmart has never been cheaper in dollars, though in the current financial year it has suffered from the booze ban. AB InBev, which the fund holds, also suffered on the JSE but could be poised for a rebound.
High Street Prescient High Equity Fund
Anyone who buys into High Street funds also needs to buy into its hefty bias towards offshore assets.
"We aim to be different," says fund manager Ross Beckley, "but we are not negative about SA. It is our home."
In December, when the rand appreciated by 5% against the dollar, the fund had a return of just under 0.8%, well below the 3.3% of the benchmark. But over periods of a year or longer it has proved to be a good bet; only in September and November last year did it underperform.
Beckley says this does not make the High Equity fund a go-go momentum fund. It also invests in high-quality value names such as British American Tobacco and the pharmaceutical business AbbVie. It is ready to benefit from a rotation from growth to value shares if this proves to be sustained.
The biggest holding in the fund is 20% in its sister fund, Wealth Warriors, a pure offshore equity fund. This focuses on disrupters, and invests in shares such as Google, Amazon and Apple, which might be expensive on the face of it but which grew revenue last year by up to 40% when the revenue of the US market as a whole was down 3%.
High Street’s direct JSE-listed holdings are strongly focused on businesses that operate predominantly outside SA — Naspers, Prosus, BAT, Mondi, Mix Telematics, Trencor, Master Drilling and Bidcorp. It has no SA government bonds, just a tactical (or should that be speculative) position in African Bank bonds. To reach the Regulation 28 target of no more than 75% in equity it has quite a hefty holding in property, but none of its four counters holds assets in SA. They include Sirius Real Estate, MAS, Stenprop and RDI (previously Redefine International). Stenprop, for example, is focusing on the popular multilet industrial market in the UK.
The current asset allocation of the fund is 64% equity, 20% property, 9% in commodity holdings, 7% in cash and less than 0.1% in bonds.
Long Beach Prescient Managed Fund
The fund is effectively a one-man band run by David Hansford. It started life running the Prescient Private Client funds.
Hansford says he takes the approach of a surfer who cannot control the ocean but looks to harness its forces and ride the wave. He has a reassuringly sensible investment philosophy: a company is attractively priced when trading below the present value of the company’s cash flows.
His big success has been the Long Beach Flexible Fund, which he has managed for 12 years and which has won three major industry awards. Because of the growth of many of his international shares, offshore equities had grown to 44% of the fund. This will need to be trimmed back as it is a regulation 28 fund with a maximum 30% exposure.
Hits have included payment platforms Adyen and PayPal, exercise bike king Peloton Interactive and music platform Spotify.
He admits his largest holding Capital & Counties (12% of the fund) has disappointed, but he argues it has the best quality real estate portfolio on the JSE in Covent Garden in London. Growthpoint Properties (3%) of the fund has a similar tourist mecca, the V&A Waterfront in Cape Town.
Hansford says though some shares have benefited from Covid-19, about half the offshore shares have suffered, notably Amadeus online travel booking. He admits it would have been nice to hold more resources, which made up just 2% of the fund, but he argues such cyclical shares don’t fit in with the character of the fund.
Nedgroup Investments Balanced
Truffle Asset Management runs two funds in this category for the bank, the Managed, which excludes the (up to) 30% offshore allocation, and the Balanced fund, which can invest the full 30% allocation overseas.
There was some scepticism when the fund was taken away from RECM in 2015 and given to Truffle, which has a more middle-of-the-road style, but the fund has remained well ahead of the Asisa category average, particularly in 2020 when there was an active return of almost 8%. It is a team-based approach, with the majority of portfolio managers and analysts trained at RMB Asset Management.
Chief investment officer Iain Power, who takes ultimate responsibility, says the long-held holdings in mineral groups such as African Rainbow Minerals, Sibanye-Stillwater and Impala Platinum added value, though the biggest single contributor was Naspers. Among the foreign holdings, Netease.com in China was the main contributor. The biggest detractor was AngloGold Ashanti, followed by Absa and Sberbank of Russia. Netcare and the RECM & Calibre investment trust also hurt.
Co-fund manager Saul Miller says Netcare has so much potential to recover after Covid-19 — and with elective surgery coming back — that he has bought more. The fund has some unusual positions, with about 4% of its assets in the iShares emerging-markets value ETF — it has also bought Japan ETF in the recent past — and 3.5% in Vivendi, owner of the French equivalent of MultiChoice, Canal+.
Miller says 63% of the fund is made of rand hedge or foreign assets, but there are derivative overlays of foreign equities equivalent to 4% of the portfolio, and on domestic shares which make up 7% of the fund. SA Inc is a small portion of the fund, just 5% made up of financials and 10% of industrials. But it is betting on a Telkom recovery.
And in retail it favours Pepkor and Woolies, as well as niche operators Cashbuild and Italtile. There is limited exposure to fixed income in this equity-centric house: just 6% to bonds, 8% to cash and 6% to selected property counters such as Vukile, Hyprop and Stenprop.
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.