Nedgroup Investments has dropped RE:CM as the manager of its massively under-performing Managed Fund and awarded the management contract to Truffle Asset Management.
Nedgroup Investments says it intends to merge – subject to regulatory and unit-holder approval – the Managed Fund with the Truffle MET Balanced Fund after the Balanced Fund has been transferred to Nedgroup Investments.
Nedgroup Investments has a “best of breed” approach to fund management: it outsources the management of its funds to managers that it believes will produce the best performance over the long term.
The Managed Fund has been the worst performer in the South African multi-asset high-equity sub-category over various periods to September 30. According to ProfileData, the fund returned minus 12.37 percent over three months, minus 21.34 percent over a year, minus 0.53 percent over three years, 2.23 percent over five years, 5.4 percent over seven years and seven percent over 10 years. (Returns are annualised.)
The average returns of the fund’s peers were: minus 0.84 percent over three months, 6.34 percent over a year, 12.6 percent over three years, 11.88 percent over five years, 11.59 percent over seven years and 11.47 percent over 10 years.
The fund’s under-performance is partly the result of the deep-value, contrarian investment style of its manager, Piet Viljoen, the founder and chairman of RE:CM.
A value, or valuation-based, manager selects shares or securities that are priced below the value of the company, as determined by the manager, in the belief that the share price will return to fair value. A deep-value manager follows the same principles as a value manager, but looks for the cheapest shares and holds them for long periods. A contrarian manager goes against the trends in the market, buying assets that are not liked by the market and selling them when they are popular.
Viljoen’s investment style has seen the fund investing heavily in commodity shares: its top three holdings at September 30 were Impala Platinum (5.4 percent), Anglo Platinum (4.8 percent) and Anglo American (4.5 percent). Over the past year, Impala's share price has fallen by 51 percent, Anglo Platinum’s by 31 percent and Anglo American’s by 49 percent, according to ProfileData.
The Managed Fund was the only fund of Nedgroup Investments’s 19 funds that qualify for a PlexCrown rating to receive the lowest rating of one PlexCrown in the ratings to the end of September. The fund was the lowest-rated fund of the 75 funds in the multi-asset high-equity sub-category that qualify for a PlexCrown rating.
Nedgroup Investments was rated the top manager of both South African-domiciled funds and offshore funds in the third quarter, based on the risk-adjusted performance of its funds as assessed by PlexCrown Fund Ratings, and 12 of its 19 funds received an above-average rating of four or more PlexCrowns. This is the sixth consecutive year in which Nedgroup Investments has been ranked among the top three managers in South Africa.
Nic Andrew, the head of Nedgroup Investments, says the decision to replace RE:CM was a difficult one. He says Nedgroup Investments assesses a manager’s performance over the full investment cycle and in relation to a fund’s long-term objectives.
Nedgroup Investments has made a judgment call based on what it believes are the long-term interests of its clients, Andrew says.
Nedgroup Investments had communicated regularly with investors and financial advisers in the run-up to the decision, he says.
Nedgroup Investments had recognised that RE:CM’s investment philosophy would result in periods of under-performance, and it has stood by RE:CM for more than 10 years. However, it had not expected that the Managed Fund would under-perform, in relative and absolute terms, to the extent that it has, he says.
As a result of under-performance and outflows, the assets under management in the fund have halved over the past two years, Andrew says. According to the fund’s fact sheet, it had a market value of R2.95 million at September 30.
The fund’s under-performance was only partly the result of RE:CM’s investment style; RE:CM had also make investment mistakes, Andrew says.
The resignation of RE:CM’s chief investment officer, Daniel Malan, in March had also influenced Nedgroup Investments’s decision, Andrew says.
In a letter to investors in July, Andrew said that, as a result of the Managed Fund’s “sustained under-performance”, Nedgroup has been “actively engaging with the fund manager, both to understand the under-performance and to challenge the robustness and quality of their thinking”.
Viljoen says he was “disappointed” by Nedgroup Investments’s decision, which he said was a business decision, not an investment decision. However, the loss of the Managed Fund will definitely not result in RE:CM changing its investment process or style.
The decision will have a “fairly substantial” impact on the company, but, as a result of its conservative business approach, RE:CM will withstand the loss, and there is no need for investors to be concerned about the future of RE:CM.
In a letter to investors in March, RE:CM said the main reason its funds have under-performed is that “South African markets have been driven higher by expensive assets becoming even more expensive, whereas the attractively priced assets keep getting cheaper. This is typical of the late stages of a bull market, as we’ve had for the past six years.”
It said past market cycles have shown that “a disciplined strategy of consistently avoiding over-priced assets and investing in those trading at far less than they're worth will ultimately deliver good investment returns over the full cycle. However, the evidence of this has not yet come through in the current cycle.”
In the equity portfolios it manages, “the resources sector – to which we have significant exposure – has lagged and the financial and industrial sectors have continued to out-perform, despite starting from already high valuations. We believe that this is precisely the time to capitalise on one of the most extreme market dislocations in history and allocate capital to a value manager ... We’re confident under-performance will be recovered and our investment philosophy will prove itself again over time.”
Cape Town-based financial adviser Gregg Sneddon told Personal Finance that he was bitterly disappointed by Nedgroup’s decision to replace RE:CM. It was known that Viljoen was a contrarian manager and he has been buying cheaper, under-performing shares, including commodities, for some time. The adviser said he had advised his clients to stay in the fund until the market cycle turned – as it inevitably will — because they their losses had been only on paper.
However, Nedgroup’s decision to change managers will result in investors realising their losses, because the new manager will sell out of the cheap, under-performing shares and buy expensive shares that are performing better. Effectively, Nedgroup has done what investors are told never to do: sell out of under-performing shares when they are cheap.
Andrew says the assumption that the fund will automatically sell all its cheap, under-performing assets is incorrect. Truffle’s mandate is to position the fund to reflect where it assesses greatest value going forward, taking into consideration current valuations.
Andrew says Truffle was chosen to manage the Managed Fund because it exhibits the qualities that Nedgroup Investments looks for in a manager. In particular, Truffle has a “robust” investment process that focuses on downside risk and risk management.
The other qualities include: it invests alongside its clients; it is a good steward of investors’ capital; it has a stable and experienced investment team; it manages assets of only R10 billion, which enables it to exploit investment opportunities across the market capitalisation; and it has a good track record across a range of asset classes.
In a statement this week, Truffle said it expects formally to take over the management of the Managed Fund within the next month. It said that, subject to approval by the Financial Services Board and unit-holders, the Truffle MET Balanced Fund will be transferred to Nedgroup.
Andrew says that, until the Balanced Fund is transferred, it will remain a co-branded and administered by MET Collective Investments. Nedgroup Investments will be allowed to distribute the fund.
Nedgroup Investments would like the transfer and merger to take place as soon as possible, he says, although this will depend on regulatory and unit-holder approval.
Both the Managed Fund and the Balanced Fund comply with regulation 28 of the Pension Funds Act, which means they are regarded as suitable investment vehicles for retirement savings.
Regulation 28 prescribes the extent to which a unit may be exposed to certain asset classes and investment instruments – for example, 75 percent to equities and 25 percent to listed property. At September 30, the Managed Fund’s exposure to local and foreign equities was 56.6 percent, while that of the Balanced Fund was 50.6 percent.
The Managed Fund has about 5 700 investors, Andrew says.
Andrew says Truffle’s management of the Managed Fund will not affect the minimum investment amounts (R10 000 lump or monthly debit order of R500). However, Nedgroup Investments is reviewing the Managed Fund’s fee structure, and expects that the fees on some of the fund’s classes will decrease.
According to ProfileData, the performance of the Balanced Fund to the end of September was: 0.8 percent over three months, 14.28 percent over one year and 18.11 percent over three years.
The Balanced Fund did not qualify for a PlexCrown rating.
Truffle was formed in 2008 by Louis van der Merwe, who was the chief executive of RMB Asset Management, and Hannes van der Westhuyzen, who was the head of global markets at Nedbank Capital.
TAKE CARE WHEN CHOOSING A FUND
Wouter Fourie, the chief executive of Ascor Independent Wealth Managers and the 2015 Financial Planner of the Year, says the biggest mistake investors make is to select a fund solely on its latest returns, without understanding the risk the fund manager takes to achieve those returns.
When investing, it is important to have a thorough understanding of a fund’s mandate, its consistency of returns, and the philosophy and investment style adopted by the manager. This is why it is in your interests to consult a qualified financial adviser who has insight into how a manager works.
He says Ascor has never offered the Managed Fund to its clients, because of the fund’s level of volatility. However, he says, if the fund were still managed according to RE:CM’s investment style, it could have been a good buy now – when the shares favoured by RE:CM are very cheap – provided you were prepared to wait for possibly five years before the market cycle turned.
Fourie says he believes Nedgroup’s decision to replace RE:CM was influenced by the need to protect its brand and its position as the leading fund manager. The Managed Fund’s PlexCrown rating of one has been a drag on Nedgroup’s overall rating.