Stanlib's track record as a manager of unit trust funds has been rather mediocre in recent years. So what did it do differently to make it South Africa's top management company of 2007? Apart from ditching its weaker multimanager division, a key factor is that Stanlib created specialist investment teams, each with the freedom to chart its own course to out-performance.
It is not a good idea to fight a war on two fronts, German Chancellor Otto von Bismarck warned his countrymen when the Bulgarian crisis arose in 1888.
Many would similarly argue that a collective investment scheme manager should not try to out-rank its competitors in too many unit trust sectors.
But this is not the tactic adopted by Stanlib Collective Investments, the latest winner of the Raging Bull Award for the top-performing domestic management company in South Africa.
Stanlib Collective Investments manages a full suite of funds - some 44 in all - and its top performance among all the qualifying unit trust management companies was based on the risk-adjusted performance track record of 20 of these funds over periods up to five years. This is a large number of funds across which to strive for good, consistent returns, especially compared with the number of funds that counted when previous winners of the company of the year award were determined in recent years.
Just six years ago, the Stanlib brand was formed through the merger of Liberty Asset Management and Standard Corporate and Merchant Bank Asset Management. Stanlib is now owned by Liberty Life, whose owners include the Standard Bank Group and various black economic empowerment organisations.
Stanlib, which manages R340 billion in assets, incorporates the country's third-largest asset manager after Old Mutual Investment Group South Africa and Sanlam Investment Managers.
There are four subsidiaries in the Stanlib group: Stanlib Collective Investments; Stanlib Asset Management, which manages not only the assets of the unit trust funds but also Liberty Life's investment and retirement portfolios; Stanlib Wealth Management, the financial services provider; and Stanlib Multimanager.
About a third of Stanlib's assets have been placed with it by Liberty Life, and the rest come from institutional investors, such as retirement funds, and individual investors in unit trust funds.
Just under a quarter of the assets under management - some R77.5 billion - is managed as collective investments for about 450 000 clients. It was Stanlib's performance with these assets over periods up to five years to the end of December last year that determined its leading position as the management company of 2007.
Stanlib Collective Investments's predecessor, the unit trust company in the Liberty stable, won the Raging Bull Award for the top domestic management company in 2001 and was a runner-up in 2002.
But after that, despite top performances by a few leading light funds, the house's overall performance was middle of the range until about two years ago.
In the quarterly rankings of management companies for 2006, Stanlib's performance improved dramatically after it dumped its under-performing multimanager division in order to raise its ranking. From that year, the Association of Collective Investments allowed companies that house more than one manager to consider each one differently for the purposes of performance, provided each manager has a clearly distinct brand.
Stanlib's multimanager division, which outsources the management of its funds to Investment Solutions, was ranked last out of 13 managers in the rankings of unit trust management companies to the end of December last year.
Stanlib has 12 multimanaged unit trusts in addition to its 44 single-manager funds.
Getting shot of its multimanager division's poor track record moved Stanlib from ninth position out of 12 managers in the management company stakes in the third quarter of 2006, to fourth out of 13 managers at the end of 2006. Its climb to the top from there has to be attributable to two factors.
Just two years ago, the house abandoned asset management by consensus and allowed its team to specialise into franchises.
There are now 14 different franchises, and the investment professionals within those franchises are free to manage the assets invested with each franchise as they deem fit, as long as they follow set processes and adhere to certain stock-selection criteria.
The specialist teams are free to make investment decisions on securities in which they have a strong conviction and no longer have to conform to house views or asset buy lists, as is common at many traditional investment houses.
Stanlib's franchises do however draw on the research that is used to inform Stanlib's house view.
The creation of specialist teams within larger investment houses is a worldwide trend brought about by the demand from institutional investors for cheaper core portfolios that track an index, as well as satellite portfolios that are invested with specialised active managers.
George Brits, the chief executive officer of Stanlib, says within the franchises, investment professionals can be much more focused on how they want to manage money.
Brits says he has never understood why asset managers employ a group of highly intelligent individuals and then put them in a room together for two hours and force them to make usually lame investment decisions based on consensus.
Within the franchise model, asset managers are free to formulate their own investment ideas and this means there is a sense of conviction about the investments made for the portfolios, he says.
Because managers are free to make their own decisions on securities, they do not have to fight with one another to get a security on to a list of shares the house agrees to invest in, and as a result are more open to listening to views contrary to their own. Brits says the franchise model has definitely contributed to Stanlib's top performance in the management company rankings.
Investment in expertise
Another factor that has contributed to Stanlib's success has been an increase in the size and experience of its asset management team.
Over the past 18 months, the team has grown from 39 investment professionals to more than 50.
Brits says the company invested heavily in both asset management and research expertise. New recruits to the team include Ashraf Mohamed, who manages the recently launched Shariah Fund; Henry Munzara, who is in charge of the targeted absolute and real return funds; Hlelo Giyose, who manages the value funds; Robin Eagar, who is in charge of life equities and also runs the Nationbuilder Fund; Ryan Hill, who is in charge of the resources funds; and Thobelani Maphumulo, who is in charge of core equities and balanced funds.
Six managers left when Stanlib adopted the franchise model. Brits says the model does not sit easily with some managers who have spent their whole careers managing different kinds of assets.
In hiring replacement and new staff, transformation of the company has also been a key objective, and 10 of the 18 most senior positions in the investment team, including that of chief investment officer Patrick Mamathuba, are occupied by black professionals. Twenty-five percent of Stanlib's senior management is black, 40 percent of middle management is black and 60 percent of junior management is black.
Brits says the target for this year is to raise the proportion of black people at senior management level to 35 percent and at middle management level to 50 percent.
Award-winning funds
Stanlib is known in the investment industry as a house that has particular expertise in managing fixed-interest and property portfolios.
It's no surprise therefore that besides winning the domestic manager of the year award, Stanlib also won the 2007 Raging Bull Award for the best domestic fixed-interest fund, for the performance of its Income Fund over three years to the end of December 2007.
Although Stanlib's domestic real estate fund, the Property Income Fund, was among the top performers, it missed out on being honoured this year. But eight other funds earned certificates for top performance in various unit trust sub-categories for periods to the end of December last year. They were:
- The Income Fund, which won the certificate for being the top performer in the domestic income sub-category over three years;
- The Value Fund, which was the top-performing domestic equity value fund over three years;
- The Small Cap Fund, which, together with the Sanlam Small Cap Fund, won the certificate for the top-performing domestic equity smaller companies fund over three years;
- The Capital Growth Fund, which won the certificate for the top-performing domestic equity growth fund over three years;
- The Stability Fund, which won the certificate for the top-performing domestic asset allocation prudential fund over three years;
- The International Aggressive Fund of Funds, which won the certificate for top performance on a risk-adjusted basis over periods up to five years in the foreign asset allocation flexible sub-category;
- The European Fund of Funds, which won the certificate for the best foreign equity general fund on a risk-adjusted basis for periods up to five years; and
- The US Dollar Bond Fund of Funds, which won the certificate for the top-performing foreign fixed-interest bond fund over three years.
Close call
Despite collecting so many certificates and seeming to dominate so many sub-categories, Stanlib did not claim the title of top domestic manager too easily.
It was a close finish and one that was finally decided only in the dying days of the last quarter of last year, when the markets were extremely volatile.
The winning manager is determined from the average PlexCrown rating that the manager achieves when the PlexCrown ratings of its individual qualifying funds are taken into account.
The PlexCrown ratings measure the risk-adjusted performance of funds on the basis of four different measures and combine these into a single rating of between one and five, with five PlexCrowns being the highest rating.
These ratings are used to determine an average rating for each manager in each unit trust sector - for example, domestic asset allocation funds, domestic equity funds or domestic fixed-interest funds.
These average ratings are, in turn, used to determine an average score for the management of domestic assets and foreign assets.
Finally, the overall rating is determined by weighting the average scores obtained for domestic fund management and foreign fund management towards the score for the performance of the funds that invest in domestic markets. The average score for the management of domestic funds accounts for 75 percent of the overall weighting, while the average score for managing foreign funds accounts for only 25 percent of the overall score.
Of Stanlib's 20 qualifying funds in the periods to the end of December last year, 10 obtained a rating of four or five PlexCrowns and only two funds obtained a below-average rating of two PlexCrowns.
Overall, Stanlib obtained an average PlexCrown rating of 3.8886. Runner-up Prudential was right behind, with an average PlexCrown rating of 3.8747, and last year's winner of the domestic management company of the year award, Oasis, was in third place, with a score of 3.7914.
An analysis of the average PlexCrowns Stanlib obtained in each unit trust sector shows up its strengths and weaknesses.
Fixed-interest expertise
Thanks to the outstanding performance of its fixed-interest team, Stanlib had a leading position when companies were ranked on the basis of their management of domestic fixed-interest funds.
Stanlib's Bond Fund, which is managed by its head of fixed interest, Henk Viljoen, has won four Raging Bull Awards. Stanlib's Income Fund this year won the Raging Bull for being the top-performing fixed-interest fund over three years, as well as the top-performing fund in the fixed-interest income category over three years. This is the eighth year in a row that the Income Fund has been the top performer over three years in this sub-category.
The fixed-interest team also manages five other fixed-interest funds, which are classified as varied specialist funds. Because varied specialist funds have very different mandates, they are not ranked and they do not qualify for inclusion in the PlexCrown ratings.
This was fortunate for Stanlib this past quarter, because its Dividend Income Fund turned up as one of the worst-performing funds overall based on returns over three years. The Dividend Income Fund returned just 3.93 percent a year over the three years to the end of 2007 (according to ProfileData).
Strong foreign fund management
Another area in which Stanlib came out strongly was in the management of foreign funds. On its average PlexCrown ratings for foreign funds, Stanlib shared first position with Prudential.
Among its foreign funds, the European Fund of Funds obtained five PlexCrowns. It was the best-performing fund in its category on PlexCrowns and on straight performance over five years to the end of December last year, with a performance of 16.13 percent a year over this period, against the benchmark Morgan Stanley Capital World index's return of 9.61 percent a year over this period. The European Fund of Funds was second in the ranking of foreign general equity funds over three years.
The RMB International Fund of Funds won the 2007 Raging Bull Award for the top-performing foreign general equity fund - an award the European Fund of Funds won for 2006.
The fund is managed by Paul Hansen, Stanlib's head of retail investing, and invests in other mutual funds managed by Fidelity, Stanlib's offshore asset management partner based in the United States.
Stanlib's other foreign equity general fund, the International Equity Fund of Funds, earned four PlexCrowns and was ranked fifth over three years on straight performance, with a return of 22.99 percent a year (for the A-class fund). This fund also invests in underlying Fidelity funds.
Its focus on American equities has resulted in it under-performing the European Fund of Funds over three and five years to the end of December.
Apart from its two foreign equity general funds, Stanlib has three foreign asset allocation funds: the International Aggressive Fund of Funds, the International Balanced Fund of Funds and the International Conservative Fund of Funds. These funds attained PlexCrown rankings of five, four and three crowns respectively.
The three funds also invest in underlying Fidelity funds - the Aggressive fund has about 70 percent of its assets in Fidelity's equity funds, 13 percent in its global bond funds and about five percent in its global property funds.
The Balanced fund has about 52 percent of its assets in global equity funds, 25 percent in global bonds, eight percent in global fixed-interest funds and eight percent in global property funds.
The Aggressive and Balanced funds are managed by Kent Grobbelaar.
Hansen manages the Conservative fund, which has about 30 percent in Fidelity's global equity funds, 50 percent in global fixed-interest funds and 14 percent in global property funds.
The other foreign fund Stanlib manages that was included in the calculation of its overall management capabilities was the US Dollar Bond Fund of Funds. This fund was the top performer over three years and earned a PlexCrown rating of three. Eighty percent of this fund is invested in the Fidelity International Bond Fund and the Fidelity US Dollar Bond Funds. The rest of the fund is in the Fidelity's USD Accumulating Shares Fund and foreign cash funds.
Five other funds make up Stanlib's suite of offshore rand-denominated funds, but none of them is ranked in the PlexCrown ratings system. Two are money market funds that are not ranked - one is a euro currency fund and one a US dollar fund.
Two funds in the worldwide equity general (Multi-National Fund) and worldwide equity technology (Global Science and Technology Fund) sub-categories are not ranked because there are too few funds in these sub-categories. Worldwide funds can invest in local and offshore markets without restrictions.
Stanlib's International Property Fund is classified as a foreign equity varied specialist fund, and varied specialist funds are not rated in the PlexCrown system. This was fortunate for Stanlib, because this fund has been making large losses over the short term thanks to the US subprime crisis, a slowdown in the rental market and investors' perceptions of higher risk in the global listed property sector.
Domestic equity funds
Ryk de Klerk, a director of PlexCrown Fund Ratings, says the performance of Stanlib's domestic equity and domestic asset allocation funds was "above average".
Stanlib was ranked only 12th out of 28 qualifying companies when the managers of domestic equity funds are ranked. Stanlib has 13 domestic equity funds. Eight of these funds were ranked in the PlexCrown rating system. The best among them, the Value Fund, achieved a five-crown rating. The Industrial Fund achieved a four-crown rating.
Four funds obtained three crowns - the Wealthbuilder Fund and the Prosperity Fund are both general equity funds, the third fund is the Small Cap Fund and the fourth, the Capital Growth Fund, is in the domestic equity growth sub-category.
The difference between the Wealthbuilder Fund and the Prosperity Fund is that the Wealthbuilder Fund has 70 percent of its assets invested in line with Stanlib's house view, while the Prosperity Fund, run by veteran manager Ian Woodley, takes a more aggressive stance.
Stanlib has an index fund in the domestic equity general sector, but index funds are not rated in the PlexCrown system, because the aim of these funds is to track an index.
The manager also has two newer general equity funds that do not have long enough track records to be included in the PlexCrown ratings. Funds must have a track record of at least three years in order to be included in the ratings.
The Shariah Equity Fund will invest only in shares screened by the Shariah Advisory and Supervisory Board, and specifically excludes the shares of companies involved in conventional insurance contracts, intoxicants, gambling, pornography, unlawful meat, taking interest-bearing deposits or raising interest-bearing loans.
The Nationbuilder Fund was launched a year ago and was one of the top-performing funds for the year to December 2007, with a return of 51.23 percent. The fund invests in a mix of equities that are expected to benefit from government and private enterprise investment aimed at developing South Africa's economy and infrastructure.
Despite its average PlexCrown rating, the Small Cap Fund has been vying with the Sanlam Small Cap Fund for top position in the smaller companies sub-category for many a quarter.
Stanlib's large-cap fund, the Alsi 40 Fund, tracks the FTSE/JSE Top 40 index, and is therefore not rated in the PlexCrown system.
Two of Stanlib's equity funds, its Resources Fund and Financial Fund, obtained only two PlexCrowns, and on this rating were the house's worst performers.
The Stanlib Gold and Precious Metals Fund was not ranked because gold funds are specialist funds and not comparable with the other funds in the domestic equity resources sub-category.
Above average on asset allocation
In the domestic asset allocation sector, Stanlib was again not among the top performers but achieved a position of 13th out of 37 qualifying management companies. Only three of the house's 12 asset allocation funds were ranked.
Of the three, Stanlib's best performer, the Stability Fund, is a medium equity prudential fund (a fund that can invest between 40 percent and 65 percent of its assets in equities). This fund achieved a PlexCrown rating of four crowns.
Stanlib's low equity prudential fund (a fund that invests less than 40 percent of its assets in equities), the Balanced Trustees Fund of Funds, achieved a rating of three crowns, while its flexible fund, the Stanlib Quants Fund, also achieved three PlexCrowns. A flexible fund does not have to comply with Regulation 28 under the Pension Funds Act and can invest as much as its mandate allows in equities.
Stanlib recently launched five funds in the flexible sub-category, but none of them was ranked in the PlexCrown system in the period under review because they did not yet have a three-year history.
Four of the funds are funds of funds that invest in other Stanlib funds, with three aimed at investors who fall into one of the three traditional risk profiles - aggressive, moderate or conservative.
The Aggressive Fund of Funds, for example, is aimed at investors who can stomach the volatility that comes with investing heavily in equities. It invests between 75 and 95 percent of its assets in Stanlib's domestic equity funds, including the Prosperity and Value funds. The rest of the portfolio is invested in Stanlib's Bond Fund, and in institutional property and money market funds.
The same mix of funds is used in the Moderate Fund of Funds, but in different proportions. This fund invests between 45 and 55 percent of its assets in equities, and has a higher exposure to bonds, cash and, at times, property.
The Conservative Fund of Funds will not invest more than 20 percent in equities, and the fourth fund, the Moderately Aggressive Fund of Funds, targets between 60 and 80 percent in equities, and anything up to 20 percent in listed property.
The fifth fund is the Aggressive Income Fund, managed by Viljoen, which invests in a combination of property and fixed-interest instruments with the aim of achieving high income and capital growth.
In the domestic real estate general sub-category, Stanlib's Property Income Fund achieved a four-crown rating.
As a result of its average ratings in each of the domestic equity, domestic asset allocation and domestic real estate sectors, Stanlib obtained an average rating of 3.8515 for the management of domestic funds. This placed it in fourth position after Oasis and BoE, which were jointly in first place, and Sanlam.
When Stanlib's rating for domestic fund management was combined with its top score for foreign and worldwide fund management - with a 75-percent weighting to the domestic fund management score - Stanlib came out on top, albeit narrowly.
Offshore assets
Stanlib also has 24 offshore funds that are denominated in foreign currencies. About R2.5 billion is invested in these funds.
The performance of 22 of these funds was rated in the PlexCrown ratings for offshore funds. The ranking of management companies with offshore funds that are registered with the Financial Services Board are determined from these ratings. To qualify for inclusion in these rankings, managers must have a global equity fund and a global bond fund.
Seven managers qualified for the overall ranking, and Stanlib was placed third.
Stanlib's offshore funds are registered in Jersey and are managed by Fidelity fund managers, with the exception of the asset allocation funds, which Stanlib manages itself.
How managers can add value
There are many opportunities that portfolio managers from Stanlib's different franchises can exploit, George Brits, the chief executive officer of Stanlib, says.
The markets are efficient at pricing securities, as a result of the collective consequence of the activities of fund managers and other investment professionals, he says. But this efficiency is a result of data - the raw material with which fund managers work - which causes incremental price adjustments in the securities, and this data is not efficient, Brits says.
Secondly, Brits says there are no absolute values for securities. Rather, the value of a security in which a fund manager invests is judgmental. He says a company can trade at single-digit price-to-earnings multiples one day and high teens a few months later, with no ostensible change in its underlying fundamentals. And stocks that are virtually identical on the surface can have vastly different share price outcomes over time, Brits says.
Managers who are better at spotting these divergences can add significant value over time.
Finally, Brits says prices do not exist in a vacuum. There is always a macro-economic, industrywide, regulatory or other context to the behaviour of financial instruments. This is another source of potential value add, he says.
Brits says the important question is how a manager goes about extracting the value on a consistent basis. The answer, he says, lies in blending the art and science of investing. The science of investing refers mostly to the investment process.
Beyond the science of investing, however, he says, "a great deal of what we do is a question of judgment first and foremost - more art than science.
"It is much harder to quantify the magic' that differentiates a top fund manager from the rest of the pack." There are, however, a few things managers can do to give themselves a head start, he says. One of these is to create an environment that is free of bureaucracy.
"Not to be confused with slack governance," Brits says, this refers to "the way managers often throttle free intellectual discourse and open debate" by imposing the likes of model portfolios and buy lists that "are the death knell to a good asset manager".
At Stanlib, he says, there are only two immutable rules. The first is that the portfolio manager has complete autonomy over the holdings in his or her portfolio. However, in order to earn this privilege, the manager has to convince the team that his or her investment philosophy, which is reflected in his or her portfolio, is cogent, robust and durable.
The second immutable rule, Brits says, is that the manager has to engage the team about his or her investment view. The more his or her view differs from the main thrust of the house, the greater the imperative to have this debate.
"One of the biggest single risks any team faces is that it becomes so convinced of its own world view that it ignores the early warning signals and only heeds them when it is too late. The power of a strong team lies in the depth and robustness of its debate.
"And the robustness, objectivity and openness of that debate is a function of how freely you can speak your mind without being press-ganged into acquiescing to the median, which closes the loop back to the first rule!"
This article was first published in Personal Finance magazine, 2nd Quarter 2008. See what's in our latest issue