Rezco’s flexibility gives it the asset allocation edge
REZCO VALUE TREND FUND
Raging Bull Award for the Best Domestic Asset Allocation Flexible Fund – the top-performing fund on a risk-adjusted basis over five years to December 31, 2012
The flexibility that comes with being a boutique manager, good stock-picking and high-conviction investing contributed to the success of the winning flexible asset allocation fund at this year’s Raging Bull Awards.
The Rezco Value Trend Fund returned 13.49 percent a year over the five years to the end of December (according to ProfileData), placing it in third place among its peers based on straight performance. However, the fund emerged as the leader among its peers based on risk-adjusted performance, which takes into account the risk the fund took to earn its returns and its consistency of performance over the five-year period.
The fund obtained the highest PlexCrown rating of five PlexCrowns.
This is the fund’s third Raging Bull Award – it won in 2010 based on its performance to the end of 2009 and in 2009 based on its performance to the end of 2008.
Rezco is a boutique manager that was established by Wally Gray in 1981. He started the Value Trend Fund, the first of only two unit trust funds managed by Rezco, in 2004.
Both funds are asset allocation funds that invest across equities, bonds, cash and listed property, and both comply with regulation 28 of the Pension Funds Act by limiting their equity exposure to 75 percent of the fund. This makes these funds suitable investments for retirement funds.
Rob Spanjaard, portfolio manager of the Value Trend Fund, says because Rezco is a small boutique manager, it has the flexibility to act as it sees fit, and the fund’s holdings do not have to adhere closely to a benchmark.
Being small enables the manager to act quickly when buying and selling securities, he says. To maintain its flexibility, the fund tends to favour mid- and large-cap shares over the more illiquid small-cap shares.
The fund also invests with a high conviction in the shares it picks. It typically has between three and seven percent of the fund in any holding, and only 15 to 20 shares in the portfolio. Some fund managers hold as many as 60 shares at a time.
Despite its name, the Value Trend Fund does not invest only in shares that are cheap.
Spanjaard says the fund will at times buy a growth share, but it focuses on companies that the manager believes are worth owning and are undervalued by the market. In determining this, the company looks for businesses that have a competitive advantage, are in what will be a good environment for the next five years, are well run and have expanding margins or sales, he says.
Before the start of the five-year period in 2008, Rezco drastically reduced the fund’s exposure to equities. When the financial crisis hit that year, the Value Trend Fund had only 15 percent in equities.
In 2008, the fund returned about eight percent, Spanjaard says, whereas many of its competitors lost money for their investors.
Reducing the fund’s exposure to equities seemed the obvious thing to do at the time, he says, because there was a bubble in the United States housing market and the US economy was feeding off that bubble.
In 2009 and 2010, the fund increased its exposure to local equities, and since the middle of 2011 the fund has been increasing its exposure to foreign equities, Spanjaard says.
At the end of 2012, the fund had 22.5 percent in foreign equities and 50 percent in local equities. Together with some exposure to foreign cash, the fund has reached the maximum permitted exposure to foreign investments (25 percent).
Spanjaard says the European debt crisis has been totally overplayed, and this has enabled the Value Trend Fund to invest in the foreign shares at low prices and to reap the rewards when their prices recovered.
Rezco benefited from exposure to local retailers, because foreign buyers turned to these shares and drove up their prices, he says. However, the fund has since reduced its exposure to retail shares, Spanjaard says.
The Value Trend Fund sold off its resources shares in the latter part of 2011 and in 2012 before these shares were adversely affected by negative sentiment last year.
The fund had a particularly good 2012, benefiting from both its offshore and local share portfolios, and the fund returned 29.58 percent for the year, according to ProfileData.
Spanjaard says although the fund had only about 70 percent of its assets in shares last year, the shares it chose delivered good returns.
In particular, foreign-listed shares such as banks, technology companies and companies that sell branded goods in China performed well for the fund, while locally listed shares such as AVI, Mr Price, Foshini and Richemont proved to be good picks.
Other asset allocation calls that have helped the fund over the past five years were some property unit trusts, such as Redefine, and having as much as 10 percent in bonds for about two years until last year. The fund has since reduced its exposure to bonds and listed property, because Spanjaard is of the view that “the party is over” for South African bonds.
Looking ahead, Spanjaard says the fund needs to remain very flexible and rely on stock-picking, because there are no obvious themes in which the fund can invest.