BlueAlpha Global Equity Fund's focus on cash flow gives them a lead
BLUEALPHA GLOBAL EQUITY FUND
Raging Bull Award for the Best South Africa-domiciled Global Equity Fund on straight performance over three years to December 31, 2018
A philosophy that focuses on businesses that are able to generate a lot cash and grow their income base, rather than agonising over valuations, enabled the BlueAlpha Global Equity Fund to outperform all other global equity general funds over three years to December 31, 2018, making it a Raging Bull Award-winner.
The fund earned a return of 4.22% a year over three years, while the average return of the 63 funds in the sub-category with a performance history of at least three years of 1.14%, according to ProfileData. Over the same period, the benchmark for the sub-category, the MSCI World Index, returned 1.65% on average a year.
BlueAlpha follows a “quality” investment philosophy – it uses clearly defined criteria to identify shares that it believes have proven ability to produce superior returns for investors over the long term. Nicola Broekhuysen, a research analyst at BlueAlpha, says the main pillars of the asset manager’s investment process are:
- Value creation – whether a company can generate strong cash returns on its investments or projects;
- Growth potential – whether a company has the ability to grow; and
- Quantitative analysis – in-house quantitative models that are used both to identify possible new investments and to confirm existing research.
“Share selection is driven by focusing on a company’s earning’s cycle – specifically cash earnings, because prices follow earnings over the long term,” says Broekhuysen.
“Companies that generate high cash earnings and are growing are able to reinvest at high rates of return. This is an essential driver of long term real economic profit generation, which in turns drives shares prices and dividends – ultimately benefiting the long-term investor.”
The Global Equity Fund has been managed by Richard Pitt since it was launched in 2014. Walter Jacobs has co-managed the fund since June 2017.
The fund invests in “high-quality” businesses – those that generate high returns on invested capital – substantially above their cost of capital. “High-return companies typically also deliver strong cash generation. High-quality companies can reinvest in high-return growth without undermining the underlying returns of the business as a whole,” says Broekhusen.
Over the past three years, Mastercard and Boeing have made a particularly strong contribution to the fund’s performance.
“Mastercard has been particularly effective in positioning itself as the infrastructure on which many other businesses operate. In this way, they are effectively more of a technology company than purely a credit card provider. They also tick all the boxes in terms of value creation and growth – their economic profit is strong and increasing; and their growth potential is enhanced by the businesses that operate within their ecosystem – largely tech-based projects with a long runway in terms of growth potential.
“Boeing has high returns and strong cash flows. It also looks likely that this will continue, due to their focus on growing their narrow body product line, as it’s a higher-margin business. From a macro perspective, a growing middle class and tourism growth implies a growing customer base for airlines, and therefore a steady demand for aircraft.”
In view of the fund’s quality tilt, BlueAlpha is not concerned about swings in market sentiment or changes in the macro-economic environment over the coming year. Rather, it prefers to focus on company specifics.
“We see our approach as practical and consistent in that all we’re trying to do is buy the best companies that can generate the best returns for investors over the long run. This means that we don’t change positioning too often. Positions will be modified if an investment idea has fundamentally changed, or there is a better opportunity that we believe will benefit investors more than an existing holding. The portfolio is positioned to maximise value creation for investors and compound returns over the long run,” says Broekhuysen.