Five general equity stars - Laurium Capital...2018/08/30  · Piet Viljoen at RECM. Element would mak e an excellent counter foil to Anchor Capital. The core of Anchor's philosophy

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Publication

FINANCIAL MAIL INVESTORSMONTHLY

Page

28-30

Date

Thurs 30 Aug2018

AVE (ZAR)

131196.81

Five general equity starsSTEPHEN CRANSTON

eneral equityremains an impor-tant category, eventhough the majority

of new money has gone intothe one-stop multi-asset funds,mainly in the high equity andlow equity categories.

It is an easy default to buyone of the popular equity fundssuch as Allan Gray, Investecand Coronation. They havebeen highly successful in spiteof their size. The market hasbeen narrow, with a few largecaps, such as Naspers, carryingthe rest. But the next few yearsmight be quite different.

Research by Nobel laureatessuch as Kenneth French andEugene Fama showthat smallcaps outperform over time. It ishard for the lumberingdinosaur funds to add value byinvesting anywhere outside thetop 40 orto switch nimblybetween styles such as valueand momentum.

This month we look at fivedistinct high-quality funds.They should all be on the radarof multimanagers and topfinancial advisers.

The outlier is DiscoveryEquity, which is managed byInvestec Asset Management.But it has less than R2bn undermanagement and offers a clas-sic Fama-and-French factorapproach.

There are some differencesin methodology, but it makessense to look at this fund as amore diversified alternative tothe Rafi index, which also usesfourfactors to assess shares.

There probably wouldn't betoo much risk recommendingthis fund as a middle-of-the-road equity product.

Other funds in this selectionprobably shouldn't be pur-chased on a standalone basis,

28 | aUcust 2018

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2014 2015 2016 2017 2018I Anchor BCI Equity . DiscoveryEquity . Element Earth Equity

. Laurium Equity Prescient . MaziPrime Equity

Graphic:RUBY-GAYMARTINSource:IRESS

a showbiz approach (why onearth did it list on the JSE?)somewhat different from Ele-ment, which is stuck in an atticin the far end of Cape Town.

Laurium is a welcome reliefas it does not get caught up inthese "value or not value"debates. It is just a strong, intel-ligent fund manager that is per-haps a little conservative whenit comes to taking positionsaway from the index. This isdue to its hedge fund heritageand the realisation that activefund managers shouldn't feelthe need to take bets theyaren't confident they can win.

But any multimanagershould seriously consider Lau-

rium for its line-up.Many have already invested

with Mazi Capital, which atR49bn is more than double thesize of Laurium and more than20 times larger than Element.Founder Malungelo Zilimbolahas the sliverware to prove hisability as a fund manager - itcould be luck, of course, but hehas helped make his luck.

Zilimbola had an unpleasantdivorce from Patrice Moyal atVisio a few years ago, but ifanything, Mazi is nowthestronger brand. It is certainlytime to look more broadly atthe general equity universe.These five funds are a goodplace to start. &

Other funds inthis selectionprobablyshouldn't bepurchased on astandalone basis

as they are just too feast-or-famine in nature.

Element Earth Equity haswisely been keeping a low pro-file. At the end of 2015 nobodywould have been boastingaboutits track record. But nowit is a standard bearer fororthodox deep value. This wasonce the stomping ground ofAllan Gray, but now has a fewotherfollowers - John Biccardat Investec Value and possibly(thoughmuch more nuanced)Piet Viljoen at RECM.

Element would make anexcellent counterfoil to AnchorCapital. The core of Anchor'sphilosophy is thatit is "not val-ue". Its share portfolio will havelittle in common with Element,andits return series will bequite different. Anchor also has

ANCHOR BCIEQUITYReturn % Rank

6 months -0.62 30 of 223

1year -0.3 178of215

3 years* 1.03 137of 170

5 years* 131 1o0f129

7years* - -*annualised return

Fund size (Rm): 995Total expense ratio (TER): 118%

Source: ProfileDataFundAnalytics

nchoris an eclectic financial ser-A vices group started by former hedge

fund manager and PR executivePeter Armitage. It is in stockbroking andasset management and also owns a largestake in Capricorn, which runs a leadingemerging markets hedge fund.

Anchor BCI Equity is still well ahead ofits benchmark (now the capped Swix), as ithas been since it started in 2013. But afterstrong returns in 2014 and 2015 it had apoor 2016. In effect it is countercyclical tothe Element Earth Equity Fund. It describesits investment philosophy as "not value".Investments are made in premium-ratedstocks in cases where the growth outlookand quality profile warrant it.

The fund was run by Sean Ashton untilhe left in May, and is now run by a team ofwhich Anchor founder Peter Armitage andLee Cairns are members. It has the man-date to take the offshore allocation to 30%butits direct offshore exposure is 6%plusthe 4% holding in the group's JSE-listedforeign investment vehicle Astoria.

Cairns says the fund can take anaggressive, high-conviction view, but formuch of the time it is prepared to reduceits risk against the benchmark. He says theportfolio is now not too far from thebenchmark, with 12.7%in Naspers.

Its three next-largest holdings are alsobig gorillas: Sasol, BHP Billiton and AngloAmerican. Exxaro is the other significantresources holding. But it has no directexposure to platinum, only to diversifiedminers and some gold. It is underweight inbanks and insurers, with RMI its largestholding. Old Mutual has also been heldinexpectation of a value unlock.

Its largest exposure to retail is throughthe property counters that ownthe largemalls, principally Growthpoint and Rede-fine. The fund had ignored the SA Incindustrials but recently bought a basket ofBarloworld, Imperial and Bidvest, alongwith Vodacom and MTN, which have now

become too cheap to ignore.Nolan Wapenaar from the Anchor

investment team says that unfortunatelySteinhoff was in the portfolio, as it seemedto fit the characteristics of Anchor's prag-matic growth style. He adds that much ofthe fund's success can be attributed towhat it hasn't owned - such as MTN untilrecently. The fund aims to avoida long tailof 0.5%to 0.25%positions, aiming foratleast 1%per counter. @

ELEMENT EARTH EQUITYReturn % Rank

6 months -5.74 191of 223

1year 1.47 156of215

3 years* 6.32 23 of 170

5 years* 2.37 127of 129

7years* 3.03 99 of 101*annualised return

Fund size (Rm): 250Total expense ratio (TER): 1.9%

Source: ProfileDataFundAnalytics

his is a deep-value fundthat datesT back to 2001, when these funds

were fashionable. Aheadof its time itintroduceda corporate governance overlay,hence the "Earth" name. "Element" is aremnant of the old Fraters, which aboutseven years ago managed R2Obn. It fell toless than R2bn over the dark days of value.Yet in the past three years all nine Elementfunds have been back in the top quartile oftheir sectors. This fund has R250m.

Fund manager Terence Craig says thebusiness has cut back its cost base to meetits straitened circumstances, allowing it toremain independent while other boutiquemanagers such as Cadiz and Cannon havebeen taken over.

It has also disbandedits in-house unittrust company and now white-labels

Its largest exposure toretail is through theproperty counters thatown the large malls -Growthpoint and Redefine

through Sanlam Collective Investments.You can see that it has a different feel

from most general equity funds. Its fourlargest shares are all in resources, Anglo-gold Ashanti, Sasol, BHP Billiton and Glen-core. There are also holdings in ImpalaPlatinum and Royal Bafokeng. The fundinvests in small- to mid-cap shares such asgas specialists Afrox and Sandown Capital,an eclectic portfolio of assets recentlyunbundled from Peregrine and run by for-mer Peregrine CEO Sean Melnick. Thefundalso holds Reunert and Altron, andinretailing Massmart and Pick n Pay.

Craig says he has avoided the large-caprand hedges until recently, but now holdsabout 5% each in AB InBev and BritishAmerican Tobacco. Other than SandownCapital, the only chunky financial holding isin Old Mutual, about 3.5%of the fund. ButElement has already soldits Quilter shares,as Craig says it has a remuneration policydoes not favour the shareholders.

The fund owns Absa but is materiallyunderweight in the banking sector.

Craig says he is comfortable not holdinga single share in Naspers, as he calls thegroup overvalued with appalling corporategovernance. He would prefer to lose mon-ey elsewhere, he says. @

he fundis managed by Investec, andT is underits third fund manager. It

started as a deep-value fund run bySam Houlie with something of a feast-or-famine approach. Houlie was succeeded byRajay Ambekar, who has now movedtoExcelsia. (This maylook like the name of a

boutique hotel but it is in fact a boutiquefund manager .) After Ambekar 's move,

Discovery decided, and wisely so, that itsflagship general equity fund should not bethe prisoner of a single style.

It wasn't an option to use the coreInvestec team run by Chris Freund, as italready runs the Investec Equity Fund. ButGrant Irvine-Smith 's Active Quants Fundisno longer sold to the retail investor, so hewas readyto take over.

The fund has a multistyle approach,using fourfilters - value, momentum,quality and earnings revision.

But unlike, say, the four factors in thefundamental index, it's not a pure black-box fund, because the weightings changedynamically. Noris it an index hugger, as ithas a 5%tracking error - many active fun-

AUGUST2018| 29

DISCOVERY EQUITY FUNDReturn % Rank

6 months 1.16 47 of 223

1year 5.176 59 of215

3 years* 6.91 18of 170

5 years* 6.34 103 of 129

7years* 6.1 92 of 101*annualised return

Fund size (Rm): 1784Total expense ratio (TER): 1.88%

Source: ProfileDataFundAnalytics

damental funds are below 3%.Irvine-Smith does not like the term

quant and prefers to see the approach as asystematic way to process fundamentaldata. Unlike, say, Old Mutual, where thequants team does not interact at all withthe fundamental teams, Irvine-Smith isconsidered part of the equity team andattends its meetings at least weekly.

The fund has a 23%allocation to foreignequity. With domestic equityit has a biastowards financials (31%).Standard Bankmakes up more than 8%of the fund, Absaa further 6% and JSE Ltd 4%. Naspers isonly in fifth place, with an underweight 5%.

There are chunky positions in smallershares such as Reunert (5%),Astral Foods(4%)and WBH-Oveon (4%).

The fund is overweight in resources.South32 (sincetrimmed back) and Mondiwere useful contributors for much of theyear. With the recovery in the oil price, thefund would have benefited from a higherallocation to BHP Billiton and Sasol. It hasbeen increasing its British AmericanTobacco and Anglo American holdings. @

LAURIUM EQUITY PRESCIENTFUND

Return % Rank

6 months -1.85 74 of 223

1 year 764 34 of 215

3 years* 3.06 95 of 1705 years* - -

7 years* - -*annualised return

Fund size (Rm): 1115Total expense ratio (TER): 1.59%

Source:ProfileDataFundAnalytics

andton-based Lauriumis one of thetop investment boutiques in businesstoday. It is a hedge fund managerat

30 | aucust 2018

heart, but given that it is already research-ing the equity market forits long-shorthedge funds, it makes sense to use thesame research in the long-only market.

It has launcheda flexible fund, an equityfund and, most recently, a balanced fund.

Fund manager Murray Winckler says itseeks to identify companies of which theshare prices differ materially from theirestimate of intrinsic value, particularly ifthere is a catalyst to lead to reversion tothe mean. It believes short-term inefficien-cies lead to trading opportunities which arenot linkedto intrinsic value.

Laurium Equity is a benchmark-focusedfund. Its average tracking error of 4%islower than that of the quants-focused Dis-covery Equity Fund. Laurium's holding of114%in Naspers is similar to its weightingin the capped Swix index. All its top 10shares are large caps, with Old Mutual,Absa and RMB Holdings in the financialsector, Sasol and Anglo American inresources, and Naspers, Reinet, Vodacom,Shoprite and TFG in the industrial sector.

Brian Thomas, the retail analyst on thefund, says the fund also holds Truworths,as well as a small position in Woolworthsnow that it is too cheap to ignore. Thomassays Reinet is on an even bigger discountto its net asset value that Naspers, thoughboth nudge 40%. Tobacco companies havebeen hit by the success of the Juul vapingproducts, even though these account forless than 4%of the US market.

Its deviation from the benchmark interms of the in vogue "active share" modelshow that its stock picks over timeaccount for about 55%of outperformanceandits sectorpicks for about 23%. @

he fund, which is now eight yearsold, has been winner of three Morn-ingstar awards as well as two Raging

Bull awards. It has graduated from theranks of emerging managers: it has R49bnunder management and a 15-strong invest-ment team. A large part of its success canbe attributed to its prescient decision totake the largest holding in its peer group ofNaspers, which makes up no less than22.6%of the fund.

Most of this was boughtat R1,000. Theshare price is now R3400.

Fund manager Malungelo Zilimbola saysthat while he is still optimistic about theprospects for the group he is unlikely to let

MAZICAPITALReturn % Rank

6 months -413 148 of 223

1year 2.41 134of215

3 years* 3.42 80 of 170

5 years* 9.68 18of 129

7years* 14.31 1of 101*annualised return

Fund size (Rm): 1005Total expense ratio (TER): 1.23%

Source: ProfileDataFundAnalytics

the holding go above 25%of the fund. Hehas also not been afraid to take a large beton financials, though in the June quarter hereduced the weighting from 34%to 26%.

FirstRand, Standard Bank and OldMutual are the three big financial holdings.Zilimbola says he usedto work forFirstRand in his days at RMB Asset Man-agement, where he built up a respect forthe management team, now invigoratedwith Alan Pullinger in the hot seat. Stan-dard Bank has not had such a gloriousrecent past, but Zilimbola says the outlookhas improved nowthat its new core bank-ing system has been installed and there isjust one CEO. The fund also holds Investec.

The fund has some exposure to SA Incindustrials through Shoprite and Aspen, butZilimbola says it will take several morequarters before there is a true turnaroundin the local economy, which is why sharessuch as Imperial and Barloworld remainoff the radar screen.

The fund has taken profits on Pick n Paybut still holds TFG and Truworths. Its otherlarge industrial holding is British AmericanTobacco. The fund has been a longtimeholder of Old Mutual plc and has beenhappy to see a 15%uplift in the Quiltershares it received in the unbundling. Zilim-bola says it is encouraging that Old Mutualhas stayed flat, as the rand has weakened.

The fund has been a grateful holder ofAnglo American, which has had good newsthrough a large special dividend fromKumba, the sale of coal assets and the out-look for the re-engineered Anglo Platinum,now largely out of deep-level mining. Sasolhas also proved to add value, with anunexpectedly steep recovery in the oilprice to about $80 a barrel. @

FunddatasuppliedbyProfi|eDataFundAnalyticsTheinformation,data,analysesandopinionsabovedonotconstituteinvestmentadvice,andallinformationshouldbeverifiedbeforeusingit.Donotmakeanyinvestmentdecisionwithouttheadviceofaprofessionalfinancialadviser.