With the changes to regulation 28, a “domestic” unit trust can invest up to 45% of its assets globally and still be considered a South African fund. But there is an increasing demand from multimanagers and discretionary fund managers (DFMs) for a “pure” South African fund.
There are several high-profile funds with a JSE-only mandate.
The leading funds in this category are the R42bn M&G SA Equity Fund, the R25bn Coronation Top 20 Fund, the R12bn Old Mutual Investors’ Fund and the R4.5bn Nedgroup SA Equity Fund, which is run by Laurium Capital.
Other South Africa-only funds are the R3.6bn Foord Equity Fund and the R1.5bn Sanlam Investment Management Top Choice Equity Fund. Allan Gray and Ninety One also have South Africa-only equity funds.
There has been a debate at the industry body, the Association for Savings & Investment South Africa, which is responsible for unit trust categorisation, about whether to introduce a separate South Africa-only equity category.
But so far it has stopped short of moving South Africa-only equity funds into a separate category. Instead, these funds are ranked alongside the other funds in the R537bn general equity category.
South Africa-only funds aren’t true to label anyway, as such as a large portion of the JSE market capitalisation is accounted for by the dual-listed multinationals, which in some cases might derive 10% or less of their income from South Africa.
For example, consider the following in the two largest South Africa-only funds.
In the case of the M&G SA Equity Fund, four of the top 10 holdings have limited exposure to the South African economy (Naspers/Prosus, British American Tobacco, or BAT, Richemont and Gold Fields), and the other six holdings have quite substantial non-South Africa exposure as well — Standard Bank, MTN, MultiChoice and Absa through their pan-African operations, and FirstRand and Investec through their UK businesses.
In the case of Coronation Top 20, there is even more of a skew towards the dual-listeds, with Nedbank being about the only pure-play South African share (excluding its small exposures in Africa and the Channel Islands). The top 10 roster is dominated by dual-listeds such as Naspers/Prosus, AB InBev, Anglo American, Richemont, Quilter (the Old Mutual UK operations) and BAT. Standard Bank and MTN round off the top 10.
Co-fund manager Neville Chester says the fund has the Coronation DNA, so it’s unlikely to differ substantially in terms of share selection from the Coronation Equity Fund — except that it holds no more than 25 shares. These aren’t necessarily megacaps, however, as the fund holds shares such as Dis-Chem, Pepkor, Motus and Spar.
At times we even sell shares to each other if one manager prefers it more
— Nick Balkin
Nick Balkin, chief investment officer (South Africa) of Foord Asset Management, says the firm launched its equity fund specifically as a JSE-only fund.
“As the options on the JSE narrow, we might have to consider launching a domestic equity fund with a mandate to invest up to 45% offshore,” he says.
Foord’s powerful and charismatic founder, Dave Foord — now a resident of Singapore — is no longer a portfolio manager on this fund, which is now run by three people based in Foord’s office in Pinelands, Cape Town: Balkin, Nancy Hossack and Wim Murray. They each manage a portion of the fund on a multicounsellor basis, an approach also followed by Allan Gray.
“We work together; it’s not as if we are competing and not disclosing our holdings. At times we even sell shares to each other if one manager prefers it more,” says Balkin. “There is plenty of scope for autonomy as we don’t work off a central buy list.”
But clients, even mega pension funds, can’t buy the Balkin or Hossack fund — they have to buy the combined package.
Following Foord’s idiosyncratic approach, there are some unusual shares in the fund such as Aspen Pharmacare, a longtime house favourite, which makes up 7% of the fund; construction company WBHO, at almost 3.5%; and property share Fortress at 3%. “We don’t own shares to be a proxy for a sector, so we definitely prefer owning Fortress, with its unique features, to owning a broad-based listed property proxy such as Growthpoint and Redefine in the fund.”
Gustav Schulenburg, co-manager of the R500m PSG SA Equity Fund, says that as a smaller fund than the R8bn PSG Equity Fund, the domestic fund can invest more meaningfully into mid- and small-cap funds, which include shares such as Afrimat, Raubex and Southern Sun. “We want to cap this fund at about R1.5bn to make sure we can still enjoy this flexibility,” says Schulenburg.
That is not to say it aims to be a small-cap-focused fund — one of its most successful holdings recently has been brewing giant AB InBev, in which it has taken some profits.
Schulenburg adds that (unlike Foord) PSG Asset Management operates off a single buy list for its equities, with the SA Equity Fund confined by mandate to local shares, the (general) Equity Fund buying both local and global shares, and the Global Equity Fund investing primarily in global shares — though the global fund has invested in local life office Discovery Holdings, for example.
Regular monthly investors are better off investing in general equity funds, which provide far more diversity than South Africa-only funds. These funds are designed primarily as building blocks for quasi-institutional wholesale investors such as DFMs, who believe that they can find a better manager to run the international portion of their equities.
It’s best not to overcomplicate investment by carving up the cake too much. A broad-based equity fund such as Coronation Equity, Ninety One Equity or Allan Gray Equity is often a good solution.
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