Fund Name: Investec Equity Fund Co-Portfolio Manager: Chris Freund
Fund Description
An equity-only fund for investors seeking capital growth over the long-term. The investment philosophy is focused on investing in companies where expected future profits are being revised upwards at reasonable valuations. A disciplined investment process, based on detailed fundamental analysis and an appreciation of the economic cycle is taken into account.
Background and Past Performance
The fund achieved enormous success over the last three years growing its assets under management to R8.1bn and winning prestigious Raging Bull awards.
This can be attributable to a good investment performance over the last five years of 14.3% p.a., above its benchmark of 12.7% p.a. and industry sector average of 10.0% p.a.. A major reason for its success is due to current co-fund manager, Chris Freund, taking over the fund’s management four years ago and introducing its current investment philosophy.
Generally bull markets and the later part of the investment cycle suits the fund’s investment style, which favoured the fund to the end of 2015. Volatile markets, such as 2016, are unfavourable for the fund.
Over the last 10 years the fund has returned 10.3% p.a., below its benchmark of 10.7%, but above the industry sector average of 8.6% p.a.. The benchmark is 87.5% JSE All share Index and 12.5% MSCI World index.
Its other co-fund manager Rhynhardt Roodt, is leaving the fund to head up Investec’s global equity business in London. This move is unlikely to have a negative effect on the fund as its process and team support are well entrenched.
Investment Style
The fund invests in companies whose future expected earnings are being revised up by the market, which are largely initiated by stock broker analysts. This method is a form of investing “ahead of the curve” and has proven successful as the rest of the market catches up with these revisions.
Alternatively, in a poor economic environment, when earnings are being revised down, companies with the least downward revisions would be selected, which should limit the downside risk.
The process is combined with fundamental analysis and reasonable valuation checks provided by a large team of investment analysts.
Although cross references are made with their view on the current economic cycle, a top down approach does not drive investment decisions and neither does sector allocations.
Current Positions
Top Overweight Positions
Tiger Brands 6.7%
Tongaat-Hulett 3.4%
Sappi 3.0%
Investec 2.7%
Billiton 2.6%
Top under-weight positions:
Naspers -9.5%
MTN -2.2%
Remgro -2.2%
Aspen -2.1%
Standard Bank -2.1%
Biggest Macro risk to the fund
The Chinese economy slowing down further which would hurt the resources sector and the fund’s overweight position.
Currency Hedge
The fund’s benchmark has a 12.5% MSCI world index composition. Hence the fund generally has a direct offshore position of around 12.5%. This holding generally moves between 12.5% and 25% based on their view of offshore markets and the Rand. Currently the position is 12.5%.
Fund Manager Views
The only major event risk in 2017 surrounds Donald Trump’s international trade wars. Global markets should be more consistent in 2017 and global economic growth should improve accross developed countries. In developed markets, the US is the most expensive, while Europe and Japan offer better value.
Locally the economy should grow slightly faster (2%) than expected in 2017 with a probable 0.5% interest cut in the second half of 2017. The market does not appear to be discounting this.
The Rand is expected to strengthen in 2017 and the US Dollar should weaken as three 0.25% interest rate increases are already discounted into the price.
Politically, Pravin Gordhan is unlikely to be removed as Finance Minister and a ratings agency downgrade is not expected.
Flow of Funds
Strong inflows of approximately R1bn have continued into the fund over the last 12 months.
Fund Manager invested in Fund
Investec’s remuneration policy is to have 50% of one’s bonus invested into your own fund. Overall remuneration is heavily weighted by bonuses.
Investonline View
A key event is co-fund manager Rhynhardt Roodt leaving the fund. We don’t believe this will have a negative effect on the fund as its process and team support are well entrenched.
The fund’s investment style is fairly unique and has proven successful over the last four years in a market environment that has particularly suited the fund. This is a rising market driven by consistent earnings growth, part of this growth being fuelled by a weakening Rand.
Importantly to note is that the investment style is rigid. So when market conditions are unfavourable, such as volatile or being effected by a slowdown in economic growth, the methodology is unlikely to identify consistent outperforming shares.
We support the fund manager’s current macro economic and market views and believe the fund should have a reasonable 2017 and 2018 barring any market volatility. We therefore recommend the fund to be part of an aggressive investment portfolio for the next two to three years.
