INVESTEC EQUITY FUND (A)
Special Raging Bull Award for the Best South African Equity General Fund on straight performance over 20 years to December 31, 2015
The Raging Bull Awards celebrated their 20th year this week, and to mark the occasion the superior performance of the top-performing South African equity fund over the past two decades was honoured with a special Raging Bull Award.
The Investec Equity Fund was the top-performing fund among 14 funds in the South African equity general sub-category over the 20 years to the end of December, with an average return of 16.65 percent a year, according to ProfileData.
Over the period, the FTSE/JSE All Share Index (Alsi) returned 14.88 percent a year, on average.
The fund also won the special Raging Bull Award for performance over 10 years to the end of 2005 at the 2006 Raging Bull Awards. At that time, it was the top performer out of 16 funds with a 10-year history.
Over the years, the fund has had a number of managers, including Investec Asset Management chief executive officer Hendrik du Toit.
The manager of the fund 10 years ago was Gail Daniel. At the time, she said the fund had neither a growth nor a value bias, but aimed to combine the strengths of both styles. She also said the investment team used both a bottom-up approach (choosing shares first) and a top-down approach (choosing market sectors first and then individual shares).
Daniel highlighted the fund’s successes after that decade as its bet on information technology (IT) growth stocks, such as Didata, during the mid-1990s, and its exit from these shares before the IT bubble burst in 2000.
Towards the end of 2000, she said, the fund was overweight relative to its benchmark, the Alsi, on rand-hedge shares (shares of companies that make money from offshore activities or exports), but then switched to the shares of retailers and local consumers.
When the local market bottomed in 2003, Investec skewed the portfolio towards shares with a focus on the domestic economy, such as consumer stocks and banks, which benefited from the market’s recovery.
Over the past 10 years, the fund has been managed by Chris Freund, and Rhynhardt Roodt has co-managed the fund since 2012.
They say the fund’s philosophy, which is not dependent on any single factor, has helped it to beat the market consistently under a variety of conditions.
Roodt and his team believe that markets are inefficient because of investors’ behavioural errors, and that these errors can be exploited within a disciplined, evidence-based process.
They use a combination of screening and rigorous bottom-up fundamental analysis to generate investment ideas.
“We select companies that are receiving positive earnings revisions and are offering reasonable value. We are prepared to be different. The best investments are often uncomfortable at first, but a focus on revisions enables one to remain unemotional,” Roodt says.
Roodt says he and Freund are comfortable running high-conviction portfolios (portfolios with fewer shares and larger investments in those shares).
For example, not owning resource shares over the past two years made a material contribution to relative performance, because most resource companies’ earnings were being revised downwards and commodity prices did not recover.
The fund has also not had any exposure to MTN over the past year, unlike funds that are more cognisant of the benchmark.
The fund’s investment style of investing in shares with upward earnings revisions helped it to pick a number of winning stocks over the years, such as Old Mutual, Steinhoff, Naspers, Mondi and FirstRand.
But Roodt says consistent performance is not only about picking the winners; it is also about avoiding the losers.
“A focus on earnings revisions avoids the bias of dogmatically holding on to long-term losers. Persistent negative revisions often highlight industries in structural decline, and companies with weak business models and poor management,” he says.
About 18 months ago, Investec stopped allocating its offshore holdings (up to 25 percent of the fund) to a single Investec global multi-asset fund. Instead, the London investment team’s research assists the fund to find offshore assets that improve the fund’s diversification.
Roodt says economic growth in South Africa slowed in many sectors last year, compared with 2014, and the broad theme for 2016 is negative earnings revisions.
In South Africa, it is going to be more about which shares a manager owns than a rising tide lifting all boats, he says.
The fund’s exposure to shares that are exposed only to the South African economy is limited to defensive businesses, such as Vodacom, or companies with “self-help potential”, such as Tiger Brands. Naspers remains the fund’s largest holding.
Investors should prepare themselves for continued volatility and lower their return expectations, Roodt says, but Investec remains optimistic on the outlook for 2016.
“But volatility creates opportunities that can be harnessed to the benefit of our investors through active management and careful stock selection,” he says.