Manager Research

We have concluded reviews on a range of funds across several managers recently. The reviews form part of our ongoing monitoring of rated funds, which undergo a formal reviews periodically. This commentary below summarises our views on the funds, highlighting any updates and changes to our outlook and ratings. The fund managers with funds reviewed include Ninety One, Aylett, 36One and Fairtree.

Ninety One

We recently concluded our rating reviews on a range of Ninety One funds. We have retained our ratings on the funds that we have reviewed, and we have placed the Ninety One Gilt Fund on our Watch List.

The reason for moving the Ninety One Gilt fund from our Rated Fund List to our Watch List is that we don’t currently see a demand to rate the fund from our clients. However, we have historically rated the Fund Tier 2 and we feel confident that we understand how the fund is managed.

Overall, our thoughts surrounding the Ninety One business have not changed materially since our last review. We feel the business is well managed with a deep understanding of asset management under the current leadership team. We have also seen evidence of long-term support within the business for all of the strategies that we currently rate.

On a fund specific level, we feel that across the various franchises we reviewed there is sufficient depth and breadth to cover the relevant asset classes. This was particularly evident in our meeting with the Ninety One credit team and we were impressed with how the team has developed more depth over the years. On the quality side, we met with Duane Cable and Clyde Rossouw and we were comfortable that the multi-asset (Cautious Managed and Opportunity) and Global Franchise funds are being managed in a manner that we would expect. Something similar can be said about the Ninety One Diversified Income Fund that has now developed a consistent and embedded process under the management of Peter Kent and Malcolm Charles.

Overall, we have retained a positive outlook on the funds we have rated and have maintained the Tier 1 ratings. This indicates that we have sufficient levels of comfort in the business, team and investment processes implemented by these funds.

We will be reviewing the Ninety One Value and Equity funds in the coming weeks.

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.

The review highlighted material steps which 36One have taken to improve areas where we historically retained concerns. They have put in place good policies and structures to tackle their incentivisation, shareholding, ability to retain key staff and manage succession. We now find a business where there is evidence of low staff turnover, embedded culture and an investment philosophy which has remained consistent over the long term. Within this framework 36One have managed to change the face of their business from being hedge-fund focussed to now being considered investible across a range of long-only solutions.

We provide updates on their 3 rated funds below:

36One SA Equity

We clearly find 36One’s edge to be within SA equities. This edge is threefold, firstly in their ability to integrate macro with their detailed bottom-up fundamental research. Secondly, their hedge-fund mindset allows them to strongly test all relative weightings (by treating an underweight like a short so rigorously assess potential risks to these views). Thirdly, they are willing to quickly adjust their portfolios to take advantage of macroeconomic changes (Their management of the resources sector exposure in Q2/Q3 2021 is one such example of this). They have a track record of getting these right more often than they get these wrong.

Given the reduction in concerns relating to the business and the clear skillset within SA equities we have upgraded the 36One SA Equity Fund to Tier 1.

36One Equity

The same comments made in the previous section regarding SA equity apply to the local portion of the 36One Equity Fund. The differentiator for this fund is that it also invests in global markets. The level of research depth and portfolio construction rigour which we see within SA Equity is not yet present within their global portfolios. While we have seen a strong drive over the past couple of years to develop the breadth of their offshore coverage, we are not yet at a point where we have sufficient confidence that this is developed to an adequate level.

36One Flexible Opportunity Fund

The 36One Flexible Opportunity Fund represents much more of a ‘best ideas’ type portfolio than the other 36One funds we cover. This deviation from their houseview equity portfolios as well as the fact that the fund is going through an evolution from an equity/cash type of flexible fund towards being a more integrated multi-asset offering does make us pause somewhat and consider the risks here. We believe that there has been improvement in their asset allocation process but that this still needs further time to be considered fully established and entrenched.

These concerns regarding the changing nature of the fund mean that we have retained the Tier 2 rating.

Overall, we found the recent engagements with 36One to be very positive and we can clearly see them moving to improve areas where we have retained concerns in the past.

The table below summarises our views on the funds:

Aylett & Co

Aylett & Co is a good example of a boutique manager which is able to add value in the market but where there are a couple of key issues which result in us retaining Tier 2 ratings for their funds.

Historically we retained two primary areas of focus which gave rise to the Tier 2 ratings:

1. The transition of firm leadership from Walter Aylett to Dagon Sachs and Justin Ritchie.

2. Some lack of attention on the business aspects of asset management.

In our recent interactions with Aylett we have seen positive steps across both areas.

There has clearly been a handover of responsibility for the local equity process from Walter to Dagon and Justin. This has enabled us to better understand the decision making driven by Dagon and Justin as well as likely outcomes given their portfolio management approach. Despite this, it is still too early for us to conclude that the transition process has been successful.

The company has hired a dedicated CEO who heads up business development. They have also invested further in their operational capability. These steps have resulted in an improved retail presence and the growth of the business from assets under management (AUM) of R6bn when we saw them in 2018 to R12bn today. There has also been stability in the shareholding structure of the company and evidence of low staff turnover since the inception of the business.

When we consider what Aylett’s edge is, we continue to identify this within SA Equities. Their focus on business risk has allowed them to avoid the errors of commission that many of their peers have made over the past decade. They have also shown an ability to make sensible decisions around asset allocation.

Through the recent interactions with Aylett & Co we have found improvement in areas of prior concern, but still not enough to result in an upgrade to their fund ratings. We will continue to observe the transition of firm leadership, the ability to build out a strong team and the developing track record which Dagon & Justin have within SA equities.

The table below summarises our views on the funds:

Fairtree

Since first rating the Fairtree Equity Prescient Fund in 2017 we have been positive on many aspects of the offering:

• The portfolio managers and research team that supports them have the experience, breadth and skillset required to successfully manage a South African Equity portfolio.
• The research process itself successfully combines a clear top-down macroeconomic view with detailed bottom-up research on individual stocks.
• The track record reflects the ability to get both big sector allocations right as well as the stock selection within these sectors.

The Tier 2 rating was informed by concerns regarding the business structure of Fairtree itself. We historically retained concerns that the shareholding and incentivisation structure would result in misalignment between Fairtree and the portfolio managers of the equity franchise. As time has progressed and Fairtree has managed to grow their equity franchise successfully we have not seen these concerns play out in reality. This evidence of the structure working must be taken into account when rating the fund. As such, the reduction in business related concerns means that have upgraded the fund to Tier 1.

The table below summarises our view on the fund: