Stephen Brown and Cor Booysen with the Raging Bull Award they received for the Fairtree Equity Prescient Fund. Photo: Bheki Radebe

FAIRTREE EQUITY PRESCIENT FUND

Raging Bull Award for the Best South African Equity General Fund on straight performance over three years to December 31, 2017

Raging Bull Award for the Best South African Equity General Fund on a risk-adjusted basis over five years to December 31, 2017

Tailoring the investment style to suit prevailing market conditions has paid off handsomely for the Fairtree Equity Prescient Fund, which won Raging Bull Awards for both straight performance and risk-adjusted performance this year. 

The fund’s managers, Stephen Brown and Cor Booysen, say their investment style is a blend of value and growth, “and we therefore prefer to be labelled style agnostic”.

Managers who follow a value approach select shares that are believed to be trading for less than their intrinsic value, while growth managers typically invest in shares whose earnings are expected to grow at an above-average rate compared with the overall market or a market sector.

There is merit in both value and growth styles, but they do not provide above-average investment returns through all market cycles. We strongly believe that having the flexibility to choose the most appropriate style for the prevailing market conditions will allow us to provide clients with consistently superior investment performance,” Brown and Booysen say.

There were 121 funds in the South African equity general sub-category with a performance history of at least three years at the end of December 2017. The average annual return for the sub-category was 5.73% over the same period, and the FTSE/JSE All Share Index returned 9.28% a year, according to ProfileData.

The Fairtree Equity Prescient Fund produced an average annual return of 11.26% over the three years to the end of December last year.  

The top-performing fund in the equity general sub-category over three years, the Satrix Momentum Index Fund, which returned 13.22%, is an index-tracking fund, and, therefore, does not qualify for a Raging Bull Award.

The Fairtree Equity Prescient Fund won Raging Bull Award for risk-adjusted performance because it had the highest PlexCrown rating over five years.

The fund aims to outperform the FTSE/JSE Capped Shareholder Weighted All Share Total Return Index (Capped Swix). Since the fund was launched in 2011, it has returned 17.05% a year, while the Capped Swix has returned 14.28% a year.

When the fund was launched in November 2011, its benchmark was the Swix, but in May last year the benchmark was changed to the Capped Swix. The Swix is based on market capitalisation, but excludes a company’s foreign shareholdings. The Capped Swix limits a share’s weighting in the index to 10%.

Brown and Booysen say they chose the Swix as the fund’s benchmark because it was a more balanced benchmark and was not dominated by certain large-cap shares as the other indices. They say they decided to change the benchmark the Capped Swix for two reasons:

• It is well diversified, while limiting exposure to individual large-cap shares, such as Naspers; and

• It aligns with the interests of the fund’s investors by limiting single-stock exposure, which provides a well-balanced proxy for the South African equity market.

Prescient is the fund’s third-party administrator, but all investment management decisions are taken by the fund’s co-managers. Brown, who established Fairtree’s long-equity strategy in 2011, has managed the fund since inception. Booysen joined him as co-manager in 2013.

The managers say their investment philosophy is based on three principles:

• Holistic. Because of the externalised nature of the South African equity market, both top-down analysis and bottom-up analysis are required to make sound investment decisions. (Top-down investors select the shares of companies that they believe will benefit from macro-economic trends, while bottom-up investors disregard macro-economic conditions and select shares based on the attributes of the company.)

• Diversified. It is better to own a well-diversified portfolio that is positioned to perform under several outcomes than to concentrate the portfolio towards a few positions that will do well during a single economic event. 

• Flexibility. The portfolio must be repositioned when the environment changes, so that it can adapt quickly to different economic conditions that affect the earnings outlook of companies.

The five shares that contributed significantly to the fund’s performance over the past three years were Naspers, Sappi, Kumba, Anglo American and South32, Brown and Booysen say.

“We recognised in 2016 that the macro-economic environment had changed significantly to become supportive of resource companies such as Anglo American, South32 and Kumba, combined with very appealing bottom-up valuations for these companies. Our bottom-up analysis identified Sappi as a turnaround story driven by improved internal capital allocation. We recognised that Naspers was the dominant new-economy growth company in China.”

They say that some of the main changes made to the fund’s asset allocation over past three years were:

• Significantly increasing the fund’s allocation to diversified miners and gold during the early part of 2016 after a substantial commodity collapse in 2015;

• Reducing exposure to defensive rand-hedge shares as it became clear that the global economy was entering a recovery phase; and

• Reducing exposure to the South African economy as consumer and business confidence continued to deteriorate.

At the end of last year, the fund’s top 10 holdings were Naspers (13.65%), Old Mutual (4.56%), Sappi (4.16%), Anglo American (3.68%), African Rainbow Minerals (3.61%), South32 (3.21%), Sanlam (3.13%), Mondi (3.09%), Shoprite (3.09%) and Impala Platinum (2.89%).

Although South African funds can invest 25% of their assets offshore and a further 5% in Africa, excluding South Africa, the fund is 98.8% invested in South African equities, with the balance in cash.

“There are enough opportunities within the South African equity market to keep us busy, and we can also get meaningful exposure to offshore opportunities through local shares,” Brown and Booysen say.

They believe the global economy will continue its recovery this year, with gross domestic product growth expected to be 3.5%. Against this backdrop, they are bullish about the prospects for resources companies, because of their attractive valuations, and for companies directly exposed to the local economy.

“We want to believe that, with the change in the South African political landscape, business and government will start to work together to generate the growth that is desperately needed to improve the lives of all South Africans.”