Manager Research

Please see the below commentary and updates on the funds and managers that we have reviewed recently.

CORONATION:
Coronation’s funds have, quite broadly, gone through a difficult time from a performance perspective over the last few years. Their relative underperformance was largely caused by exposure to specific stocks. Consequently, one of the issues we wanted to test was whether they had any gaps in their research process that caused them to miss important aspects and expose investors to the wrong side of Brexit, Steinhoff, MTN, Tata and others.

After spending time with the equities team, we found no evidence of gaps in their research or risk management process. For example, they were aware of the risks involved in Steinhoff (to the extent that an outsider could) and they were aware of the risks MTN faced in Nigeria. Their process is to assess risks and account for it in the discount rate used in their valuations. So, the more risk is involved the higher the required return they must expect from a stock before investing. There is a difference between being completely unaware of risks and being aware but accounting for it at a point in the process. The team continues to do incredibly detailed work, and we remain confident that they will be able to deliver over time.  They do, however acknowledge that both Steinhoff and Tata are selection errors, as opposed to temporary underperformers.

One fund where our view did change was on the Coronation Property Equity fund, where we upgraded the rating from Tier 3 to Tier 2. Our primary concern with this fund historically was that the extent of active decisions taken wasn’t enough to justify the active fee. As the listed property market has been specialising and has become less homogenous and larger in terms of size, the team has been able to, and have actively taken, larger active views. Evidence of this was in their large underweight position in the Resilient group of companies in early 2018, which resulted in significant outperformance of the benchmark. We have grown more confident in the team’s willingness and ability to take high conviction calls when they feel it is justified.

We retained our positive ratings across the remainder of Coronation’s fund range.

PRUDENTIAL:
We reviewed the full Prudential fund range during Q3/Q4 2018 and covered two new local funds, being the Prudential Core Value fund (now rebranded the Prudential SA Equity Fund) and the Prudential High Yield Bond fund.

Prudential’s performance lagged in 2018, as their relatively high structural exposure to property and benchmark cognisant portfolio construction process resulted in a relatively high exposure to Resilient in their property carve-out. This detracted significantly from performance across their fund range. Prudential’s listed property exposure was managed very differently to equities historically, largely tracking the index but with small deviations where they had conviction. The depth of research wasn’t on par with their equities. We think this was a mistake on their part. The business implemented changes to their property process in the last quarter of 2018. Property now falls within the equity team under Johnny Lambridis and follows the same detailed research process. Overall this is an improvement, with the property decisions and unfortunate cost for clients.

Our team in the UK covered Prudential’s global funds during the past quarter, which consists of four new retail offshore funds (including Global Bond, Global Inflation Plus, Global Balanced and Global Equity) and two “building block strategies” (Worldwide Real Return and Worldwide Managed) which they use as the offshore component in the local multi-asset funds (Inflation Plus and Balanced respectively) and which are not available for direct investment.

Prudential’s ex-CIO, Marc Beckenstrater, moved to the UK in 2017 and is responsible for managing the offshore funds. While his mandates are set by Prudential SA, he sits within the M&G Episode team and is guided by their investment views. M&G is Prudential’s parent company based in the UK, and the Episode team is responsible for M&G’s flexible asset allocation funds. We’ve covered several of the Episode team’s funds before and they are skilled asset allocators. Consequently, we were comfortable that Marc could leverage off the Episode team’s multi-asset skills, resulting in positive ratings on Global Inflation Plus, Global Balanced and Worldwide Real Return (the offshore building block for Inflation Plus). Our concerns relate to the Episode team’s skill in stock selection, which is not a primary focus of theirs. This resulted in negative ratings on the mandates with high single-asset exposure, i.e. the Global Bond, Global Equity and Worldwide Managed (building block for Balanced) funds.

Our negative views on the offshore building blocks in Prudential Balanced, Equity and Dividend Maximiser, are not material enough to detract from our positive ratings on these funds at this stage. We will monitor the development and exposure to the offshore component over time. Overall, we remain confident in the Prudential team to deliver on their investment objectives over time. They have delivered strong performance over long periods of time, and their funds have consistently high hit rates (i.e. proportion of correct calls), from both a stock selection and asset allocation perspective.

See the summary of our new ratings on Prudential’s fund range below. We will be releasing the new rating reports in the next few weeks.

STANLIB:
We concluded on Stanlib’s income fund range and allocated negative ratings to their Income, Flexible and Aggressive Income funds. Our concerns are primarily related to the general portfolio construction level competencies within the team, and we struggled to get comfort around the team’s understanding and control over asset allocation and risk management in these mandates.

In addition, there have been broad and ongoing changes to several key areas of the business, especially in the multi-asset and equities franchise. Despite the business being very candid and transparent in our meetings with them, these changes make it very difficult for us to get any degree of comfort in the funds over the longer term.

As a result, we have downgraded our views across the multi-asset and equity mandates.
We will be releasing the new rating reports over the next few weeks:
 

 

FAIRTREE:
We upgraded the Fairtree Flexible Income Plus and the BCI Income Plus funds from Tier 3 to Tier 2. The two funds share the same process, but with the BCI Income Plus fund targeting a slightly lower return (CPI+2 vs CPI+3). Our primary concern with the fund before was that the lead portfolio manager and founder of the franchise moved to London in mid-2017 to develop Fairtree’s offshore credit capability. This was a major concern for us as we had no line of sight of Paul Crawford’s continued involvement with the funds. Additionally, we had less comfort in the rest of the team outside of Paul to be able to manage the process in his absence. It has now been more than a year and a half since Paul’s move to the UK, and we are much more comfortable with his commitment to the business and to the funds, and with the support he gets from co-manager Louis Antelme.

SANLAM INVESTMENT MANAGEMENT (SIM):
We reviewed the full SIM fund range and also covered the SIM Enhanced Yield fund, to which we allocated a Tier 2 rating. Melville du Plessis has been managing the Enhanced Yield fund for the last 7 years, in addition to taking over the SIM Active Income fund after Philip Liebenberg resigned to move over to Abax. While Melville is still building multi-asset portfolio management experience (as required in the Active Income fund specifically), he is a practical and measured portfolio manager and is supported by a broad and experienced fixed income and credit team under the leadership of Mokgatla Madisha, which gives us comfort in the process.

We have retained our ratings on SIM’s other funds. The rating on SIM Enhanced Yield will be released in the next few weeks.

NORTHSTAR:
We will no longer be covering Northstar in our fund manager research and have withdrawn the ratings on Northstar Managed Fund and Northstar Income Fund.

DENKER:
Denker announced that the SIM Value fund’s name has changed to the Denker SCI Equity fund as of the 1^st of January 2019. This is part of Denker’s ongoing process to rebrand their funds under the Denker banner. There will be no changes to the way that the fund is managed. We are reviewing Denker’s funds in March 2019.