Top funds may be for you
This article was first published in the second-quarter 2012 edition of Personal Finance magazine.
The 16th annual Raging Bull Awards to honour the managers of leading unit trust funds took place in Cape Town at the end of January. The event is co-sponsored by Personal Finance and its data providers, ProfileData and PlexCrown Fund Ratings (in the Plexus Group).
Eight Raging Bull Awards and almost 30 certificates are awarded to funds that are top in their respective unit trust sub-categories, while two Raging Bull Awards and two certificates are made to companies that have achieved consistency of performance based on risk-adjusted returns over five years across their range of funds. (Refer to “How a fund wins an award”, below.)
You should not select unit trust funds based on their performance alone; they should be suited to your needs, and you should understand the manager’s investment philosophy.
To assist you in determining whether any of the funds or investment houses honoured at this year’s awards ceremony may be suitable for you, this article provides an overview of their mandates and investment philosophies, and the needs they aim to meet.
Domestic Management Company of the Year: Allan Gray
Allan Gray claimed the Raging Bull Award for the leading manager of rand-denominated unit trust funds for the fourth year in a row.
Nedgroup Investments was again the runner-up, and Coronation returned to third place after a few years out of the top three.
If you invest with one of these three managers, you are investing with the managers with the best track records for delivering consistently good performance across all their South African-domiciled funds.
The management company awards and certificates were based on the results of the PlexCrown survey of management companies to the end of December 2011.
The PlexCrown survey is useful for identifying management companies’ areas of strength and weakness. It takes into account the PlexCrown ratings that each manager obtained for its qualifying funds. The PlexCrown ratings provide a single score for each fund based on four or five different measures of risk-adjusted performance over two different measurement periods.
Generally, index funds, money market funds, and funds in the varied specialist and the targeted absolute and real return sub-categories do not qualify for inclusion in the PlexCrown survey because the performances of these funds should not be compared with each other due to their diverse mandates.
Allan Gray has six funds that qualify for PlexCrown ratings. Its Bond Fund, Balanced Fund (domestic asset allocation prudential variable equity) and Orbis Global Equity Feeder Fund (foreign equity general) each achieved the highest PlexCrown rating of five PlexCrowns.
The Equity Fund (domestic equity general), Stable Fund (domestic asset allocation prudential low equity) and Orbis Global Fund of Funds (foreign asset allocation flexible) each achieved the next-highest rating of four PlexCrowns.
As a result, Allan Gray obtained an overall average score of 4.500 for periods up to five years to the end of December last year. This score was the highest overall average and resulted in Allan Gray being named as the top domestic management company of 2011.
To determine the overall average score for each asset management company, PlexCrown Fund Ratings calculates each manager’s average score in various broad unit trust sectors and ranks each manager on these scores. These rankings can help you to identify a manager’s strengths and weaknesses in the various unit trust sectors. Allan Gray, for example, was joint-first in foreign equity and joint-fourth in foreign and worldwide flexible. The combination of these average scores gave Allan Gray the top ranking for the management of foreign funds compared with its peers, according to Ryk de Klerk, executive director of PlexCrown Fund Ratings.
For domestic fund management, Allan Gray was joint-first in domestic fixed interest, sixth in domestic asset allocation and joint-sixth in domestic equity. Overall, it was the leader among its peers for the management of domestic funds, De Klerk says.
Allan Gray’s strong performance in fixed interest was thanks to its Bond Fund, which collected a Raging Bull Award as the top-performing domestic fixed-income fund over three years, as well as two certificates.
Allan Gray also collected a certificate for its Allan Gray-Orbis Global Equity Feeder Fund, which was the top performer on a risk-adjusted basis in the foreign equity general sub-category over five years. This fund feeds into an offshore fund managed by Orbis, which is Allan Gray’s offshore sister company in Bermuda.
Allan Gray has a “valuation-based” investment approach and follows a bottom-up asset allocation. It allocates to the securities it believes will out-perform cash. Once it exhausts these securities, it invests in cash (within the constraints of both a fund’s mandate and a unit trust sub-category’s asset allocation limits) until the right opportunities arise.
The manager targets shares that are trading well below what the company believes are their intrinsic value (or the value a prudent investor would pay for them) and earnings potential. Once the prices of these shares return to fair value, the shares can deliver good long-term returns.
As its investment approach includes a margin of safety, Allan Gray’s performance relative to that of other managers is particularly strong during periods characterised by market downturns, such as the severe one of 2008.
Allan Gray had R127 billion in assets under management in rand-denominated unit trust funds at the end of last year. Total assets under management, unit trust fund, retirement fund and other assets amounted to R320 billion at the end of last year, and Allan Gray is regarded as one of South Africa’s larger asset managers.
Offshore Management Company of the Year: Investec
The Raging Bull Award for the offshore management company of the year was awarded to Investec for the second year in a row. The company scored the highest average PlexCrown rating for the management of offshore (foreign currency-denominated) funds that are registered with the Financial Services Board (FSB) in South Africa.
To qualify for inclusion in the offshore management company rankings, a manager of funds registered in South Africa must have at least one fund in the global equity general or the global asset allocation (flexible and prudential combined) sub-category, and it must also have at least three funds that are rated by PlexCrown Fund Ratings.
Investec has 10 offshore funds domiciled in Luxembourg that are rated by PlexCrown Fund Ratings, and its average score for these 10 funds was 3.722, the highest among the qualifying managers for the periods to the end of December last year.
Investec GSF’s Global Strategic Managed Fund (Accumulating) and Global Strategic Managed Fund (Income), both global asset allocation flexible funds, achieved the top rating of five PlexCrowns each.
The Global Strategic Managed Fund (Income) won the Raging Bull Award for the top offshore asset allocation fund at this year’s awards ceremony.
The Investec GSF Asian Equity Fund (Income) and the Global Bond Fund (Accumulating) (A class) achieved four PlexCrowns each. Four other funds achieved three PlexCrowns each, one scored two PlexCrowns and one a single PlexCrown.
When the average scores of the qualifying managers in various sectors were compared, Investec’s offshore management company came out top in global asset allocation and Far East equity, De Klerk says.
Mimi Ferrini, head of investments at Investec’s London operation, says Investec does not have a house philosophy or style; it believes in small focused teams that specialise in various investment areas.
However, the company also believes that successful investing requires the discipline of process, and each investment team has its own rigorous process.
Worldwide, Investec managed R711.6 billion at the end of 2011. Investec’s offshore business managed R403 billion at the end of last year, with about R145 billion in offshore funds registered in Guernsey, Luxembourg and Ireland (the fund ranges in which South African investors would be invested).
Best Offshore Global Equity Fund: Coronation Global Emerging Markets Fund
If you do not want to hold all your investments in rands, you may be looking for a fund in a foreign currency domiciled in a country other than South Africa.
Although you are free to invest in any one of the thousands of global equity funds around the world, investing in a fund run by a company that is registered with the FSB gives you the peace of mind that you will be able to find someone in South Africa to help you deal with administration issues.
Many offshore management companies are deciding against running funds suitable for South Africans, but local managers are setting up offshore collective investment schemes to offer you funds domiciled somewhere other than home.
Coronation has two offshore global equity funds: one focuses on global markets and the other on emerging markets only.
The latter fund, the Global Emerging Markets Fund, earned Coronation the Raging Bull Award for the top global equity fund on straight performance over three years to the end of December 2011.
Coronation says the fund is suitable for investors who are building up wealth and do not require an income yield in the short term. The manager says you must be able to withstand short-term market fluctuations when pursuing long-term returns.
Coronation’s website notes that the Global Emerging Markets Fund has had a maximum drawdown of 49.52 percent (that is, the percentage loss that a fund incurs from its highest fund value to its lowest fund value), although this occurred during the height of the financial crisis in late 2008.
As is the case with all the manager’s equity funds, Coronation recommends you have an investment horizon of at least five years to invest in this fund.
The fund is domiciled in Ireland and denominated in United States dollars.
The Global Emerging Markets Fund achieved an average annual return of 16.6 percent over the past three years in rand terms, according to ProfileData.
Coronation says the fund out-performed its benchmark, the Morgan Stanley Capital International (MSCI) Emerging Markets index, by an average of 1.5 percent. It out-performed the MSCI World index, against which most global equity funds are benchmarked, by 9.7 percent a year over this period.
Suhail Suleman, who co-manages the fund with Gavin Joubert, says they make investment decisions on a stock-by-stock basis and have consistently bought quality businesses that have attractive valuations on a five-year view.
The fund’s holdings have a strong consumer focus, with the managers preferring the shares of emerging market retailers, cola bottlers, beer brewers and high-quality consumer goods brands that are dominant in their markets.
The fund has generally avoided exposure to the shares of companies that produce basic materials, construction companies, small banks and information technology companies with little intellectual property, Suleman says.
The largest companies in the MSCI Emerging Markets index are mostly lower-quality shares, such as commodity businesses and state-owned banks where the lending criteria are not always economically sound, he says. In contrast, the fund has very little commodity exposure, while its banking exposure is typically comprised of the market leaders in countries where state-directed lending is less of an issue.
Highly cyclical businesses, such as construction companies, can look good when money is being thrown at infrastructure, but when the money dries up, these businesses’ margins fall dramatically, Suleman says.
At least 80 percent of the fund is in “pure” emerging market businesses, while up to 20 percent can be in companies listed on developed market stock exchanges but that earn at least 40 percent of their revenues or profits from emerging markets, Suleman says. Yum Brands (KFC and Pizza Hut) and brewer Anheuser Busch-Inbev are just two of the shares that are listed in developed markets but earn most of their profits from emerging markets.
Suleman says because emerging market share prices have risen sharply in recent years, it is sometimes cheaper to buy developed market shares with exposure to emerging markets than it is to buy shares listed on an emerging market exchange.
In emerging markets, strong macro-economic factors underpin consumer-facing companies and this ensures that they should do well. These factors include urbanisation, rising wealth, increased spending and better education, Suleman says.
The fund had US$683 million invested in it at the end of 2011.
Best Foreign Equity Fund: SIM Global Best Ideas Feeder Fund (A class)
If you want exposure to foreign equity markets but do not want the hassle and expense of converting your money into a foreign currency (and having to obtain tax clearance if your investment is greater than R1 million in any year), a rand-denominated foreign equity general fund is a good option. These funds invest in shares around the world.
The SIM Global Best Ideas Feeder Fund was the top-performing fund on straight performance in the foreign equity general sub-category over three years to December 31, 2011.
The fund had an average annual return of 9.5 percent in rand terms over three years to the end of December 31, 2011, while its benchmark, the MSCI World index, returned 3.94 percent a year over the same period, according to ProfileData.
The fund invests in one underlying fund, the Sanlam Global Best Ideas Fund, which is domiciled in Ireland and denominated in US dollars.
The Sanlam Global Best Ideas Fund aims to invest in undiscovered or neglected global equities that fund manager Kokkie Kooyman identifies as undervalued and offering above-average potential over time.
Unlike other global equity funds, which target the larger shares listed on stock exchanges around the world, the Global Best Ideas Fund generally has a higher weighting in smaller and emerging market shares, because these are often the most mis-priced.
But, Kooyman says, investors don’t know most of the shares the fund owns. When investors get scared – as they did last year during the unfolding debt crisis in Europe – buyers for these little-known shares dry up and their prices fall heavily, he says.
Bigger, better-known shares typically do not fall as much as the smaller ones do, but the ensuing rebound in share prices is usually greater for smaller shares than it is for larger ones.
The Global Best Ideas Fund had a bad year in 2011: the feeder fund recorded a return of minus 6.88 percent in rand terms (according to ProfileData). Similarly, the fund had a poor 2008: the feeder fund returned minus 42.82 percent. But in 2009, when the markets rebounded, the feeder fund was up 39.61 percent. Investors in the fund therefore need the stomach for short-term volatility, although they should be rewarded over the longer terms.
The feeder fund has a three-year history only to the end of December 2011, but the Sanlam Best Ideas Fund has a six-year track record, and over this period it returned an average of 3.2 percent a year in rands.
The fund had R463 million invested in it at the end of 2011.
Best Broad-based Domestic Equity Fund: PSG Equity Fund
The PSG Equity Fund won the Raging Bull Award for the best broad-based domestic equity fund. It was the top-performing fund on straight performance among all the funds in the domestic equity general, value and growth sub-categories over three years to December 31, 2011.
Broad-based domestic equity funds are good ones to buy if you are investing for the long term. They invest across all the sectors of the JSE, and this diversification makes them less risky than more specialised funds – such as financial or industrial funds – that concentrate on shares in a particular sector.
Broad-based domestic equity funds can invest up to 25 percent of their assets in offshore equity markets and at least 75 percent of the fund should be invested in shares at all times.
If you have a long investment horizon, an investment in an equity fund should give you good long-term growth, but if you have a short investment horizon or you cannot stomach the ups and downs that come with equity investing, these funds may not be suitable for you.
The PSG Equity Fund, managed by Shaun le Roux, had an average annual return of 18.78 percent for the 10 years to the end of December 2011, and it was one of the top five funds over this period.
The average return, of course, does not show you what the returns have been like each year – in some years the returns may have been significantly less and in some years significantly more.
Explaining PSG’s investment philosophy, chief investment officer Jan Mouton says the company’s strength lies in a process that involves three factors beginning with M.
First, when picking shares, the business must have a good moat, or competitive edge. The company must have a clear and understandable business model that generates plenty of cash that can be distributed to shareholders as dividends.
Second, Mouton says, the business must have a good management team, and the managers or strategic shareholders – in the case of a family business – must have an investment in the company. This curbs corporate extravagance and gives those who run the company a long-term focus, he says.
Finally, there must be a margin of safety in the price of the share: it must be below where it should be and most likely to rise rather than fall further, Mouton says.
PSG follows a bottom-up approach to investing: it decides on shares based on each company’s fundamentals, rather than choosing market sectors it believes will out-perform, and then chooses shares within those sectors accordingly.
“If we are unable to find exceptional businesses at low valuations (a low price relative to the expected company profits or earnings), we patiently wait in cash for the right opportunities,” Mouton says.
Fund managers – such as PSG – that invest in shares and other securities based on their valuations, or price relative to earnings, generally do very well when markets fall but may have periods of under-performance during bull markets.
The PSG Equity Fund returned an average of 22.32 percent a year over three years to the end of 2011, compared with the annual return of 17.27 percent of the FTSE/JSE All Share index (Alsi), according to ProfileData.
Over five years, the fund was ranked 39th against its peers and had an annual return of 6.03 percent – below the Alsi’s 8.09 percent.
On risk-adjusted performance over periods up to five years, as measured by the PlexCrown ratings, the fund obtained the second-highest rating of four PlexCrowns and was ranked 18th relative to its peers.
The fund had R738 million invested in it at the end of 2011.
Best Domestic Fixed-interest Fund: Allan Gray Bond Fund
The Allan Gray Bond Fund won the Raging Bull Award for the best domestic fixed-interest fund: it was the top-performing fund on straight performance in the fixed-interest bond and income sub-categories over three years to December 31, 2011.
Bond funds are generally suitable for investors who invest to earn an income or who want to add bonds to their portfolio in order to diversify across the asset classes, typically with the help of a financial adviser.
Bonds can reduce the volatility your portfolio would experience if it were invested only in equities, because the performance of bonds is not correlated with that of equities and these two asset classes perform differently at different stages of an economic cycle.
Bond funds place your capital at greater risk than do money market funds. However, bond funds can provide a better return, because, unlike money market funds, they can invest in instruments with longer dates to maturity and because bond fund managers can trade bonds to make capital gains.
A good bond fund manager can maximise the interest you earn from bonds, as well as the capital appreciation you enjoy, because the manager will know when to invest in bonds with different dates to maturity.
The Allan Gray Bond Fund returned an average of 9.62 percent a year over the three years to the end of 2011, according to ProfileData, while the bond sub-category benchmark, the SA Bond index, returned 7.39 percent a year over the same period.
Over the three years to December 31 last year, money market funds returned on average of 7.08 percent a year, and the top-performing money market fund, the Cadiz Money Market Fund, returned an average of 7.39 percent a year.
Andrew Lapping, who co-manages the Allan Gray Bond Fund with Sandy McGregor, says he and McGregor avoid frequent trading in bonds, because they believe it is too difficult to predict short-term movements in interest rates. Instead, they prefer to position the fund so that it can benefit from their medium- to long-term outlook for inflation and hence interest rates.
Allan Gray’s bottom-up approach results in its investing in bonds when these offer
better value than cash and moving into cash and money market instruments when the outlook for these instruments is superior.
To reduce risk and maintain liquidity, Allan Gray keeps its corporate bond exposure to less than 25 percent of the fund, with the remainder in cash and government bonds.
The Bond Fund obtained the highest PlexCrown rating (five PlexCrowns) for its performance over periods up to five years. In recognition of this achievement, it received a certificate at the Raging Bull Awards for its performance on a risk-adjusted basis. The fund also received a certificate for best straight performance over three years in the domestic fixed-interest bond sub-category.
The fund had R467 million invested in it at the end of last year.
Best Domestic Asset Allocation Flexible Fund: PSG Flexible Fund
Investors who have neither the time nor the skills to make decisions on how to allocate their investments across the asset classes should consider investing in an asset allocation fund, where a skilled fund manager makes these decisions for you.
Flexible asset allocation funds can invest in any combination of asset classes, whereas prudential asset allocation funds are limited to investing no more than 75 percent of their assets in equities – and sometimes less, depending on the type of prudential fund.
The PSG Flexible Fund won the Raging Bull Award for the best domestic asset allocation flexible fund on a risk-adjusted basis over periods up to five years ending on December 31 last year. This was the second year in a row that the fund won the award.
The fund had an average annual return of 12.59 percent over the five years to the end of December last year, according to ProfileData, and it was ranked second in the domestic asset allocation flexible sub-category over this period.
The fund aims to provide returns that are similar to those you would earn by investing in equities but without the volatility you would have to endure when investing purely in equities.
Mouton, who manages the PSG Flexible Fund, says the investment team uses a bottom-up approach.
Listed property features in the fund when these counters are attractive, and bonds only when these instruments offer a compelling investment case. PSG tends rather to take risks in equities, Mouton says.
The fund can invest up to 25 percent of its assets in offshore markets, and it invests directly in offshore shares rather than in other unit trust funds, as many local managers do when investing offshore.
When it comes to shares, as is the case with the PSG Equity Fund, the focus is on quality shares, and Mouton looks for the three Ms: a competitive edge or moat, good management and a margin of safety.
Mouton says at the end of 2011 the management of the companies or strategic investors were invested in 25 of the 39 shares the fund owned.
Some of the shares in which the PSG Flexible Fund is invested are Berkshire Hathaway, the company of investment guru Warren Buffett; information technology companies Microsoft, Dell and IBM in the US; Roche, the Swiss pharmaceutical company that is a world leader in cancer medicines; ING, the Dutch banking group; Volkswagen, the German vehicle manufacturer; Porsche, the European holding company of the German luxury car manufacturer; Tesco, the British retailer; and Capital Shopping Centres, the British property company that was formerly Liberty International.
The fund’s benchmark is inflation as represented by the consumer price index (CPI) plus six percent over three years.
Best Domestic Equity General Fund: Aylett Equity Fund
Longer-term investors looking for exposure to a good general equity fund would do well to consider the Aylett Equity Fund, which is run by one of the industry’s long-standing star managers.
The fund won the Raging Bull Award for the best domestic equity fund on a risk-adjusted basis for periods up to five years to December 31, 2011.
The Aylett Equity Fund delivered an average annual return of 11.06 percent over the five years to December 31, 2011, while the Alsi returned an average of 8.09 percent a year, according to ProfileData.
Although this return saw the Aylett Equity Fund ranked third in the domestic equity general sub-category, it achieved the highest PlexCrown rating in its sub-category, based on risk-adjusted returns.
The Aylett Equity Fund led among six general equity funds that scored five PlexCrowns each.
Walter Aylett is a price conscious stockpicker who is averse to losing money. He looks at companies rather than the economy and seeks out shares that are trading below their fair value.
“We critically value each company, much as an owner would evaluate his own business. We seek great businesses that are well run and managed, trading at a discount to their intrinsic value.
“In an industry driven by benchmarks and peer reviews, it demands conviction and tenacity to buy and hold out-of-favour companies, which often require the benefit of time to reflect their true worth. We follow the adage that the return of an investment is determined not by the exit price but by the price one pays,” he says.
Aylett describes himself as “benchmark agnostic”, so you can expect the Equity Fund to look quite different to the Alsi.
He tends to choose shares to buy and hold, and so he is not a frequent trader of shares. But the funds of managers who buy shares when they are below fair value may under-perform their peers over the short term from time to time, and you, as an investor, need to understand that. It takes time and conviction to wait for a share to return to a good price.
Over the longer term, Aylett is focused on not losing any of your money.
He follows Buffett’s rules of investment: “Rule one: Never lose money. Rule two: Never forget rule one.”
Aylett says he obeys these rules by including a margin of safety when making investments and not overpaying for an investment.
He favours buying shares when they are trading at a discount of about 40 percent to their fair value, although this percentage may be adjusted up or down depending on the power of the company to generate a cash flow, he says.
The Aylett Equity Fund is one of the smaller equity general funds, with about R351 million in assets under management. Equity funds range in size from almost R9 billion to just a few million, with most of the bigger players managing between R1 billion and R3 billion.
Running a smaller fund offers Aylett a bigger universe of shares. While larger managers can choose from some 20 shares, Aylett says he has a universe of some 120 shares from which to choose. (Larger managers are unable to take meaningful positions in mid- and small-cap shares without taking on the risk of the share not being liquid should the manager wish or need to sell its holdings.)
Like many boutique – smaller, owner-managed – asset managers, Aylett and his team “eat our own cooking” to align their interests with yours: their personal and company wealth is invested alongside that of their investors in the retail unit trusts and hedge funds they manage.
Best Offshore Global Asset Allocation Flexible Fund: Investec GSF Global Strategic Managed Fund
If you want to diversify offshore in a foreign currency, an asset allocation fund is a good option. The manager of the fund can make calls on both the asset classes and the countries or regions in which you should invest. In some cases, these funds also manage the currencies to which your investments are exposed.
You are free to choose from any offshore unit trust fund across the world, but investing with a well-known brand in South Africa that also has a strong international investment team is likely to give you some comfort.
Investec’s offshore global asset allocation fund, the GSF Global Strategic Managed Fund, won the Raging Bull Award in this category, because it was the top-performing fund on a risk-adjusted basis over five years to December 31, 2011.
The fund, which is managed by Investec’s London team, was the top performer on a risk-adjusted basis among the foreign-currency global asset allocation funds that are registered with the FSB as funds that can be marketed to South Africans.
The Global Strategic Managed Fund achieved the top PlexCrown rating of five PlexCrowns based on the consistency of its performance and low volatility.
Philip Saunders, the London-based manager of the fund, says while the fund’s benchmark is 60 percent of the MSCI World index and 40 percent of the Citigroup World Government Bond index, the GSF Global Strategic Managed Fund has taken its equity exposure as low as 50 percent – notably in 2008 before the credit crisis – and as high as 75 percent – notably during the recovery from the crisis in 2009.
Investec takes a long-term view of how it should allocate across the asset classes and adjusts this to take account of shorter-term market movements, he says.
Macro-economic factors, natural disasters, policy mistakes and overbought or oversold markets can all lead to shorter-term volatility. Saunders and his team make decisions on how to react to these factors.
Besides asset allocation, Saunders focuses on careful selection of stocks and other securities.
Despite an essentially bottom-up investment approach, Saunders says Investec also considers securities that fit within investment themes that it believes will out-perform.
Another tool in Investec’s return-enhancing kit is currency management. Saunders says the currencies to which the fund is exposed are tweaked after the underlying assets have been chosen.
Best Domestic Asset Allocation Prudential Fund: Old Mutual Real Income Fund
The domestic asset allocation prudential sector is where you may want to look if you have to choose an underlying fund for your retirement annuity. Prudential funds comply with regulation 28 under the Pension Funds Act, which governs how retirement funds can invest.
To protect your retirement savings by ensuring adequate diversification across the asset classes, this regulation prevents retirement funds from investing more than 75 percent in equities, 25 percent in property, and 90 percent in a combination of equities and property. They are also limited to 25 percent in offshore markets.
Prudential funds have developed over the years, and they now have widely varying mandates and hence investment risks. As a result, the funds have been divided into four different sub-categories:
* Those with a mandate to invest not more than 40 percent of the fund in equities (low equity);
* Those with a mandate to invest not less than 40 percent but not more 65 percent in equities (medium equity);
* Those with a mandate to invest not less than 65 percent but not more than 75 percent in equities (high equity); and
* Those that can vary their equity exposure between zero and 75 percent of the fund (variable equity).
The higher the fund’s exposure to equities and other growth assets, such as property, the greater the chance that the fund will generate good long-term returns close to those you could expect to earn if you were in a pure equity fund. Prudential funds with a lower exposure to equities will typically return more modest returns, but with fewer ups and downs.
Among the funds with lower exposures to equities are those aimed at retired investors who need an income as well as capital growth to ensure that the income that is generated keeps up with inflation.
This year’s winner of the Raging Bull Award for the top-performing asset allocation prudential fund on a risk-adjusted basis over five years, the Old Mutual Real Income Fund, is aimed at those who invest for a growing income.
You should choose a prudential fund that suits your investment needs and time horizon and your ability to stomach volatility. And if you need a growing income, the Old Mutual Real Income Fund is a good one to consider.
The fund achieved an average return of nine percent a year over the five-year period ended December 31, 2011 (according to ProfileData).
The fund achieved the second-highest PlexCrown rating over this period.
The Absa Absolute Fund out-performed the Real Income Fund in the PlexCrown ratings, but this fund was not eligible for a Raging Bull Award because it changed sub-categories during the past year.
Over five years, the Old Mutual Real Income Fund was placed third in the prudential low-equity sub-category. The top performer in the low-equity sub-category and the top performer among all the asset allocation prudential funds over five years was the Absa Absolute Fund, which returned an average of 10.56 percent a year over this period. Second-best in the low-equity prudential sub-category was the Allan Gray Stable Fund, with an average return of 9.44 percent a year for the five-year period.
In the broader prudential sector, the Real Income Fund was also out-performed over five years by three top performers in the variable equity sub-category. But for consistency of performance on a risk-adjusted basis over five years, the Old Mutual Real Income Fund was top after the disqualified Absa fund.
The Old Mutual Real Income Fund’s income-focused mandate prevents it from investing more than 25 percent in each of the riskier asset classes of equities or listed property, with a combined total limit of 35 percent.
Peter Brooke, the fund’s manager, says he makes the most of opportunities to generate a good income, rather than moving the fund in and out of equities as is usually the case with asset allocation funds.
The fund’s recent strong performance has been a result of its manager’s skills in finding asset classes that deliver income and grow the capital base, such as preference shares and convertibles. The fund has also benefited from higher yields delivered by government and corporate inflation-linked bonds.
The fund draws on the credit risk skills of Futuregrowth, the fixed-income boutique in the Old Mutual Investment Group SA stable, when selecting instruments such as corporate bonds and floating rate notes, Brooke says.
Equity exposure over the past five years has not exceeded 20 percent at any time, he says, and at times the fund holds as few as five or 10 shares. Shares are chosen for their good dividend yields and because their dividends are expected to grow at rates above inflation, he says.
All the shares in which the fund invests are high-quality defensive ones, and, as a result, when the share markets crash, the fund can be expected to hold up well, as it proved it could in 2008, Brooke says.
Listed property features in the fund when this asset class offers the opportunity to earn a good and growing income.
The mandate of the Real Income Fund prevented it from investing in offshore equities until late last year, when the mandate was amended. Brooke expects that the fund will invest more in this asset class in future as opportunities arise.
The fund’s benchmark is the inflation rate as measured by CPI, but it has a performance target of CPI plus three percentage points.
Certificate for Second-best Domestic Management Company: Nedgroup Investments
Nedgroup Was in second place in the PlexCrown Fund Ratings survey at the end of December last year and has been among the top three managers for 11 out of the past 12 quarters.
Nedgroup has 13 funds that qualify for PlexCrown ratings. The Financials Fund (domestic equity financial) and the Value Fund (domestic equity value) achieved the highest rating of five PlexCrowns.
The following funds achieved four PlexCrowns each: the Bond Fund (domestic fixed-interest bond), the Rainmaker Fund (domestic equity general), the Quants Core Equity Fund (domestic equity general), the Entrepreneur Fund (domestic equity smaller companies), the Mining and Resources Fund (domestic equity resources and basic industries), the Managed Fund (domestic asset allocation prudential variable equity), the Bravata Worldwide Flexible Fund (foreign asset allocation flexible), the Global Balanced Feeder Fund (foreign asset allocation flexible) and the Global Equity Feeder Fund (foreign equity general).
The Growth Fund (domestic equity growth) and the Balanced Fund (domestic asset allocation prudential variable equity) achieved three and two PlexCrowns respectively.
With these fund ratings, Nedgroup achieved an overall average score of 3.786.
The risk-adjusted performances of its funds placed Nedgroup in joint-third position among its peers for the management of fixed-interest funds and in joint-fifth position for the management of domestic equity funds, Ryk de Klerk, director of PlexCrown Fund Ratings, says. This put it in second position among its competitors for the management of domestic funds.
For the management of foreign funds, Nedgroup was placed joint-third – it was in joint-third place for the management of its foreign equity fund and in joint-fourth position for the management of its foreign asset allocation fund, De Klerk says.
Nedgroup outsources the management of its funds to what it describes as the “best of breed” managers, which include a number of successful boutique – or small independent – managers.
It also makes use of portfolio managers employed by other asset managers whose skills in a particular area are not being utilised within their own house. For example, Kokkie Kooyman from Sanlam Investment Management manages Nedgroup’s Financials Fund.
The Financials Fund earned Nedgroup a certificate as the top performer among the domestic equity financial funds over three years to the end of December 2011.
At the end of 2011, Nedgroup had R62 billion in assets under management in rand-denominated unit trust funds. Total assets under management, unit trust funds, and retirement fund and other assets amounted to R112 billion.
Certificate for Third-best Domestic Management Company: Coronation
Coronation moved into third place in the fourth quarter of last year after an absence from the top three managers in the PlexCrown rankings since 2007.
In 2002, 2004 and 2005, Coronation was the domestic manager of the year.
In the quarter to the end of 2011, Coronation ousted Prudential, which, until the fourth quarter of last year, had been in either second or third position in the management company rankings for all but three quarters over the past four years. Prudential slipped into fifth place, after Investment Solutions.
Coronation has 13 rand-denominated funds that qualify for a PlexCrown rating.
Two of its funds, the Balanced Plus Fund (domestic asset allocation prudential variable equity) and the Equity Fund (domestic equity general), achieved the top rating of five PlexCrowns each.
The following funds achieved four PlexCrowns each: the Coronation Absolute Fund (domestic asset allocation flexible), the Financial Fund (domestic equity financial), the Industrial Fund (domestic equity industrial), the Market Plus Fund (domestic asset allocation flexible), the Optimum Growth Fund (worldwide asset allocation flexible) and the World Equity ZAR Fund of Funds (foreign equity general).
Four of the other five funds obtained three PlexCrowns each and one, the Jibar Plus Fund (domestic fixed-interest income), achieved only two PlexCrowns.
These funds’ PlexCrown ratings gave Coronation the following places among its peers in the broad unit trust sectors: joint-sixth in domestic real estate, seventh in domestic asset allocation, joint-10th in domestic fixed interest and eighth in domestic equity, Ryk de Klerk, director of PlexCrown Fund Ratings, says.
In the foreign sectors, Coronation was in joint-third position in foreign equity and joint-fourth in the foreign and worldwide flexible sector.
It was placed fourth among its peers for the management of domestic funds and joint-third among its peers for the management of foreign funds, De Klerk says.
Coronation follows a bottom-up approach to stock-picking: it invests in shares based on their fundamentals rather than because they are in a market sector or region.
The manager invests with a long-term view, valuing companies based on how it believes they will perform over the next five to 10 years, rather than in a year’s time.
Coronation takes high-conviction views on securities that it believes will perform well.
Coronation’s domestic equity Industrial Fund was the top performer in its sub-category on straight performance.
Coronation had R70 billion in rand-denominated unit trust funds under management at the end of 2011. In total, it had R274 billion under management, making it one of South Africa’s larger asset managers.
HOW A FUND WINS AN AWARD
A unit trust fund receives a Raging Bull Award for either its straight performance over three years or its risk-adjusted performance over periods up to five years. The annual awards are made on the basis of performance over the relevant period to the end of the previous year.
The three-year awards are based on the average annual returns that funds earned according to performance figures supplied by ProfileData.
The five-year awards, which are determined by PlexCrown Fund Ratings, measure performance relative to the risks taken over the three- and five-year periods, and take into account the consistency of these returns. The risk-adjusted awards are therefore a particularly useful guide if you are looking to choose your own fund or funds.
Of the two Raging Bull Awards made to companies, one goes to the manager of foreign-domiciled funds available to South Africans and one is for the manager of domestic unit trusts. Certificates are awarded to the domestic managers that come second and third.
These awards are based on the average PlexCrown ratings that managers achieve for all their qualifying funds and thus measure consistently good performance on a risk-adjusted basis across all the funds under management over periods up to five years.
PROFILE: KOKKIE KOOYMAN
Kokkie Kooyman is a world-renowned expert in financial shares.
Kooyman, who manages the Sanlam Global Financial Fund and the Sanlam Global Best Ideas Fund, was named the top manager of global financial funds by a leading British investment journal, Investment Week, at its Fund Manager of the Year Awards both last year and in 2010.
Not surprisingly, a large chunk of the Global Best Ideas Fund is in financial shares around the world: the fund had about 50 percent of its assets in this sector at the end of December last year.
The fund is not invested in traditional banks and life assurers – Kooyman’s “best ideas” include Adira Dinamika, a company that finances motorcycles in Indonesia; the United States-based World Acceptance Corporation, which provides small loans to people in the US and Mexico who have limited access to other sources of income; and TSKB, a private development and investment bank in Turkey.
Kooyman is a chartered accountant who started his working life as an auditor for, among other companies, Truworths. He moved into asset management in 1989, when he joined Old Mutual Asset Management as a retail analyst. He later took on the banking and insurance sector and became a portfolio manager and the head of the financial services sector at Old Mutual.
He joined Coronation in 1999 and, besides running its domestic financial fund, started the Coronation Global Financial Fund. Kooyman joined Sanlam Investment Management (SIM) in 2004 to start SIM Global. SIM then took over the Global Financial Fund from Coronation.
SIM says the Global Best Ideas Fund has been the top-performing global financial sector fund for the past 12 years.
Kooyman also manages the Nedgroup Investments Financial Fund, a domestic equity financial fund.
PROFILE: WALTER AYLETT
Walter Aylett founded Aylett & Company in mid 2005 after he earned himself a name as the manager of Coronation’s top-performing worldwide asset allocation fund.
Aylett spent seven years at Coronation, initially as the head of research and then as a portfolio manager.
The Coronation Optimum Growth Fund won a number of Raging Bull Awards and certificates while it was under his watch.
Soon after he opened his own company, Nedgroup Investments contracted Aylett to manage its worldwide asset allocation fund, the Bravata Fund. This fund now has R468 million invested in it and achieved an average annual return of 5.07 percent over the past five years in rand terms. It was ranked third in the worldwide asset allocation sector over the same period.
The Aylett Equity Fund is the only other fund that Aylett manages that is open to retail investors. It is listed on Prescient’s collective investment scheme licence.
Besides these two retail unit trust funds, Aylett manages pension fund and private portfolio assets in terms of an equity-only, absolute return, balanced or fixed-interest mandate.
Before joining Coronation, Aylett spent four years at Syfrets Managed Assets, where he managed the then hugely successful Prime Select Fund with another stock-picking legend in South Africa, Tim Allsop.
The Prime Select Fund won a number of Raging Bull Awards. It became part of the Nedgroup Investments stable and was merged with the Rainmaker Fund, which Allsop manages for Nedgroup.
Before joining Syfrets, Aylett worked in the financial industry in London.