Two unit trust funds managed by a boutique unit trust and hedge fund manager that is not scared to deviate from the benchmark emerged as the leaders among their peers over the three years to the end of June.
36One Asset Management manages the 36One Flexible Opportunity Fund, which was the top-performing fund in the domestic asset allocation sector over three years, with an annual average return of 29.9 percent over that period.
The fund is a flexible asset allocation fund, which means there are no restrictions on how much it can invest in any asset class. Over the three-year period to the end of June, the average annual return in the domestic asset allocation flexible sub-category was 13.72 percent.
36One also manages the 36One Met Equity Fund, which produced an annual average return of 27.22 percent over three years and 11.72 percent over five years to the end of June.
The benchmark for domestic equity general funds, the FTSE/JSE All Share index (Alsi), returned 18.36 percent a year over the same three-year period and 6.53 percent a year over the five-year period. The annual average returns for general equity funds over these periods were lower.
The 36One Met Equity Fund was classified as a domestic asset allocation targeted absolute and real return fund until the quarter to the end of June. Funds in this sub-category are not ranked, because their mandates can differ widely.
Cy Jacobs, who manages both the Flexible Opportunity Fund and the Met Equity Fund, says the latter is an equity fund but is managed conservatively to a targeted return.
36One has now decided to move its Met Equity Fund into the domestic equity general sub-category, because the fund invests in line with this sub-category’s requirements, namely 75 percent in the equity market at all times.
Jacobs says 36One’s good returns are a result of the manager having a small, focused team, being flexible, investing in shares that offer good value and managing its portfolios with low correlations to the Alsi.
A fund manager that follows an index closely is likely to earn returns very close to it. By not following an index, a fund manager can out- or under-perform it by a wide margin.
At times the fund has had no exposure to shares with high weightings in the Alsi, such as Anglo American and Sasol.
36One looks for the shares of companies that have ungeared balance sheets (low levels of debt), are cash-flush and operate in sectors of the economy where consumer demand remains strong despite the downturn.
Jacobs cites shares such as Naspers, MTN, Cashbuild, Life Healthcare and financial share Old Mutual as fulfilling these requirements.
The Met Equity Fund and the equity portfolio of the Flexible Opportunity Fund have been largely invested in large-cap and mid-cap shares, but the fund has also benefited from some small-cap shares, Jacobs says.
Jacobs says that 36One, as a small manager, is nimble and able to move in and out of sectors when it needs to.
Both the equity fund and the flexible fund have avoided resources shares over the past few years and instead have held a portfolio concentrated on select industrial shares that 36One believed would perform well.
Both funds have also avoided shares in the construction and infrastructure sectors, which have done badly in the economic downturn, Jacobs says.
When the rand was strong relative to the United States dollar at the end of last year, Jacobs says, 36One reduced the equity exposure of the Flexible Opportunity Fund and bought offshore equities and corporate bonds.
The flexible fund has since reduced its offshore exposure from 16 percent to 12 percent, Jacobs says.
Jacobs says 36One expects that its flexible fund will continue to earn good returns from local shares despite the tough local economic environment. This is because many of the shares the fund holds are those of companies that are less reliant on the domestic economy and benefit from other emerging economies – for example, Naspers, MTN, Richemont and British American Tobacco.
When 36One does invest in the shares of companies that rely on local consumers, it chooses those that are involved in industries that do well in an economic downturn because consumers need their goods or services.
Jacobs cites the private healthcare sector as an example – shares in companies such as Netcare, Life Healthcare and Discovery Holdings – because, he says, government continues to fail to deliver good-quality health care.