Manager Research

We recently completed a full review of the Mazi Prime Equity Fund. The outcome of this review is that we have downgraded the fund from Tier 2 to Tier 3. Below we provide an overview of our rationale.

Background

Mazi Capital was founded in 2006 by Malungelo Zilimbola after he left RMB. The company was originally set up as a joint venture with Visio Capital and was called Mazi Visio. In 2013, Mazi and Visio parted ways, essentially forming two separate asset managers – Mazi Asset Management and Visio Capital. In addition, Malungelo also brought Asanda Notshe, Mazi’s current chief investment officer (CIO), along with him after the joint venture split. Asanda was an analyst at Mazi Visio at the time.

Mazi was originally set up as a hedge fund business and was one of the first black-owned hedge fund businesses in South Africa. Over time, the company has transitioned into the long-only space, with the bulk of its assets in the institutional equity mandates. They have a broader range of institutional offerings which include multi-asset, income and property strategies, although these strategies are not as developed as their equity strategies. Their flagship retail offering is the Mazi Prime Equity Fund, which is a South African equity fund with no offshore exposure.

Rating Overview

We have downgraded the Mazi Prime Equity Fund from Tier 2 to Tier 3. We are comfortable with the Mazi business and feel that the shareholding structure, low team turnover and culture support a company that has the potential to become a much larger asset management business going forward. However, we felt that there were some inconsistencies in their quality-driven investment process that has led them to investing in companies that do not explicitly form part of their investment philosophy. This has led to what we see as being suboptimal investment outcomes for investors.

We provide further detail on the areas which inform the rating below:

Business and Shareholder

Overall, there is a lot to like about the Mazi business. It is 100% staff owned, which is unusual for an asset management business and there seems to be an alignment in thinking between the shareholders and fund managers. In addition, the company has very low levels of turnover and the senior investment team is well established. The business recently went through a leadership reorganization with Malungelo being appointed to the newly created CEO role with Asanda taking over as CIO. We feel that the change was a good one and through our interactions with Mazi, it has been well thought through. We also believe that Malungelo has been less involved in the investment side of the business in recent years and Asanda has been fulfilling a CIO-type role for a while, this was therefore a natural progression. It is also quite clear that Malungelo and the team are focused on building out Mazi’s multi-asset and offshore capabilities. In 2020, they hired Walter Rauch and Andreas van Der Horst from Rootstock Investment Management to build out their offshore equity capability and they are also looking to bolster their multi-asset team. Ultimately, we feel that from a business sustainability perspective this decision makes sense, although we feel it will take a while for them to develop a fully fleshed out multi-asset process.

Team

The investment team has seen very low levels of turnover since the company's inception in 2013 which makes it stand out among other boutiques in South Africa. On average, the team is quite experienced, although their Head of Research, Seth Boakye-Dankwah, is set to retire at the end of 2021 and we will monitor his replacement. One concern that we did raise during this round of reviews was that we always viewed Asanda as second in line to take over investment responsibilities from Malungelo. However, that change has now happened and we aren’t fully comfortable that the bench beyond Asanda is in place yet. In the past, we have also raised concerns around the expanding product range which may divert the attention of the team from the equity process, this is something that we will continue to monitor.

Investment Edge and Process and Past Investment Actions

During our most recent review was where we identified material concerns. Mazi’s hedge fund roots show in the basis of their equity process, which they would describe as a hybrid between quality and value. In our previous review, we noted that they were inherently defensive in their position taking, looking for companies with strong balance sheets and quality management teams. However, over the past few years, they seem to have strayed somewhat from this mindset and have invested in companies that by their own admission would not be considered quality businesses. This has left them in a difficult position, often being caught in value traps and timing their exposure to the resources sector incorrectly. Ultimately, we feel that their articulated investment philosophy is quite dissimilar from how they actually invest and there seems to be some confusion around clearly defining their investment philosophy. We feel that this situation is understandable, as to run an efficient and successful SA-equity process in South Africa managers often have to implement their investment philosophy in a constrained or pragmatic manner. That is, it is difficult to run a true quality-equity process in South Africa because non-quality stocks form a considerable part of the market, and all successful equity managers are pushed to take a view on a subset of companies that in any other market would not meet the quality threshold. However, we feel that as a result the process has developed into something that creates uncertainty around future investment decisions.