Manager Research

We have concluded reviews on a range of funds across several managers recently. The reviews form part of our ongoing monitoring of funds under coverage, which undergo a formal review over a 12-18 review cycle. The commentary below summarises our views on the funds, highlighting any updates and changes to our outlook and ratings.

Truffle:

We are comfortable that the investment proposition is underpinned by a supportive shareholder, which enables staff to engage in long-term decision-making which aligns them with investors, and which promotes continuity and stability in the investment team.

While there is sufficient depth and breadth to cover local equities, we don't have the same comfort levels around the maturity of the offshore equity capability. Similarly, the fixed income team, which is composed of Hannes van der Westhuizen and a recently hired analyst, is stretched given the research and portfolio management responsibilities across the mandates.

Truffle remains an equity-centric business, starting with a focus on SA risk assets with residual allocations going into other asset classes. Although we struggled to identify an investment edge in their process, they can demonstrate a good level of insight and depth into the local equities market, which is positive. Offshore research depth is still developing. For example, they continue to use passive instruments to gain exposure to some markets offshore, which goes against their detailed fundamental bottom-up local equity research process and philosophy. Fixed income comes across as a secondary function in this business, with a structural bias away from duration and an equity-centric credit process. Overall, we retained our positive outlook on the funds and have kept our ratings across the funds unchanged at Tier 2. These are positive ratings, which indicates that we have sufficient levels of comfort in the business, team and investment process, but where we have some minor concerns.

The table below gives a summary of the ratings on the funds:

36One Asset Management:

This business is owner managed (which enables long term decision making and alignment with clients), with a sensible core product range that falls within the team's circle of competence and managed to a common central investment philosophy. They were recently appointed by PPS as sub-advisers on a new balanced fund, which does fall outside of their core competencies historically, but which is expected to be managed to the same equity-centric mindset as their other funds. We remain concerned that the remuneration structure, shareholding, initiatives to retain key staff and succession (outside of the founders) is sufficient to ensure the culture and philosophy remains embedded over the long term. Shareholding is tightly held, and the performance incentives seem to reinforce a short to medium term performance mindset in the investment team. Nonetheless, the investment team has been relatively stable over a long period of time, which give us more comfort in that regard. The team is also experienced and broad enough to cover their investment universe adequately.

The funds are managed to an investment philosophy and process that is sensible and consistently implemented. There is a lot of detail in the research and a good understanding of the market. We think that their investment time frames are generally shorter (relative to peers) and more sensitive to news flow. Their process is also more opportunistic. To implement this successfully over time requires managers to have a strong feel for the market – a trait that is quite difficult to impart on to the next generation, highlighting the importance of succession and continuity in this business.

Overall, we have sufficient levels of comfort around the team, business and process to retain our positive ratings on the funds. The table below summarises our views on the funds:

Mazi Capital:

A positive development since our initial review of the process in 2017 has been Mazi's focus on creating capacity around founder and CIO Malungelo Zilimbola, considering that his responsibilities are quite broad, and our view was that he is stretched. The team developed an investment committee consisting of Malungelo, portfolio manager Francois Olivier and portfolio manager Asanda Notshe which executes based on majority approval allowing the workload to be shared more evenly across the team. Mazi received lots of negative attention when they were accused of benefitting from an improper relationship with the PIC at the commission of inquiry into misconduct at the PIC in February this year. Mazi was briefly mentioned in a lengthy email trail by an anonymous whistle-blower. We engaged Mazi for more information on the matter and they were very open in sharing information with us, giving us access to their shareholding register, the timeline of flows they received from the PIC etc, which gave us more comfort at that stage. PWC investigated the emails sent by the anonymous whistle-blower and found no evidence of wrongdoing by the individuals mentioned in the emails. This was later reiterated by the PIC inquiry evidence leader, Adv Jannie Lubbe. There are also no further investigations or pending legal disputes against Mazi.

While we gained some comfort from Mazi's openness and feedback on this matter, our biggest concern is the potential fall-out from any further negative publicity, whether or not there is any wrongdoing on Mazi's part, impacting the business. We have retained our rating on the equity funds and withdrawn our rating on the property fund, which had closed:

Nedgroup Investments Global Cautious Fund:

We announced earlier in 2019 that Nedgroup had appointed Pyrford as sub-adviser on the Nedgroup Investments Global Cautious fund, replacing Chartwell, where the investment team walked out. Our team in the UK recently completed their review of the underlying strategy, i.e. Pyrford Global Total Return, which had a Tier 1 rating allocation historically. The rating has been retained following the review. Although both funds are managed to the same strategy, there are nuanced differences that we had to understand. The Pyrford fund is UK-centric, seeking a GBP return, while the Nedgroup fund seeks a total return in USD. Following the review, we have allocated a Tier 1 rating to the USD fund, resulting in the Nedgroup fund being upgraded.

Foord:

We recently concluded our review of Foord's worldwide flexible and global funds (which include Foord Flexible Fund of Funds, Foord International Fund and Foord Global Equity). The outcome of the review was to downgrade Foord Flexible from Tier 2 to Tier 3, while the ratings on Foord International and Foord Global Equity were unchanged.

The change on Flexible was informed more by our general level of confidence in the fund to achieve its objectives over time rather than any specific event. As we mentioned above, we currently have a Tier 3 rating on the Global Equity fund, and Foord Flexible allocates roughly a third to that fund. We don't yet have confidence in their global equity process and need more evidence of stability in the Singapore team filtering through into demonstrable investment skill in global equities. We also question whether they have sufficient capability in other asset classes, like credit, to enable a fully flexible offering to investors.

Satrix:

We have reviewed a broad range of Satrix's passive capabilities, including several new vanilla index trackers and smart-beta multi-asset funds. We are still finalising our ratings on the smart-beta funds, but we have concluded on the vanilla index funds. Covering passive capabilities is inherently more quantitative than the forward-looking qualitative research on active funds. Essentially, what we look for in passive funds are:

1. Scale: passive investing is a low margin industry which means a passive manager needs a lot more assets than active managers to cover the basic running costs of a business, especially the high technology and compliance costs associated with a fund manager.
2. Capability across several mandates: since there are no investment views implemented in passive funds, there is no real need to diversify between passive managers, provided they run a proper business. It is therefore beneficial to have a passive manager that can provide solutions across mandates.
3. Implementation: the ability to implement at a low tracking error. Most passive managers can implement at very low tracking errors, so while important, this is not a stand out feature in selecting passive managers.
4. Fees: The purpose of a passive fund is market exposure at low cost. While fees don't play a role in our active ratings (it is a value for money argument though), fees do play an active role in our view on passive funds.

Satrix is the largest third-party passive business in SA, so they have sufficient scale to run a passive offering efficiently (although they are still small by global standards). They can implement at low tracking error across several strategies. The investment team is substantial for a passive business. A big consideration for us is the fact that fees came down across their fund range, to average around 0.25%. The combination of good implementation and lower fees, resulted in us allocating Tier 1 ratings across their vanilla passive fund range, see below. Note, the Satrix MSCI World Feeder Fund goes into the 0.3% offshore fee class - on the high side for a passive fund. This is why the fund missed out on a Tier 1 rating.

You may notice that the TIC's on several of the funds are high, resulting in an overall higher cost to client despite lower fees. This is something that passive managers struggle to get around. SARS levies a tax on every transaction in a fund. Therefore, as a fund grows quickly transaction costs are elevated due to the tax component. This is especially so in passive funds due to the ongoing need to rebalance back to index. Essentially, transaction costs are expected to come down as the fund size increases, which further highlights the need for scalability in the passive space.