Manager Research

In this note, we cover fund research updates that pertain to the downgrade of the Laurium Flexible Prescient Fund to Tier 3, benchmark changes for the Ninety One Equity and Value funds, a leadership change at Foord and a portfolio manager change for the Allan Gray Bond Fund.

Laurium Flexible Prescient Fund

As part of a broader review of all rated funds that were affected by the changes to the offshore limits as stipulated by Regulation 28, we have recently reviewed the Laurium Flexible Prescient Fund and decided to downgrade the rating from Tier 2 to Tier 3.

To recap, in February last year South Africa’s Finance Minister, Enoch Godongwana, announced that retirement funds could increase their offshore allocation to 45%. Previously, Regulation 28 set this at a maximum of 30% with an additional 10% allowed in Africa. African exposure was very limited, so the change effectively meant an opportunity for most investors to increase their direct offshore exposure from 30% to 45%. Although the Laurium Flexible Prescient fund is not classified as a Regulation 28 compliant fund, this fund is subject to the same offshore limits as Regulation 28 funds and as a result, has also formed part of our broader Regulation 28 fund review.

Laurium is an independently managed and staff-owned business and we continue to believe that this creates a healthy environment for investment management. Clearly, the business is investment led and this has played a central part in developing a strong SA equity capability.

However, where we have struggled to gain comfort in this review is across two areas. Firstly, the Flexible fund’s offshore allocation has always been managed using passive fund components. We have historically been comfortable with this because it gave us a reasonable level of certainty surrounding the expected investment outcome from this portion of the fund on a forward-looking basis. However, what we have now seen is the business starting to build out an actively managed equity proposition that we feel will likely be meaningfully added to the fund going forward. As a result, we are less certain of the investment outcome that can be expected over the appropriate investment horizon.

Secondly, we have struggled to gain comfort in the fund’s ability to add value on a net-of-fee basis going forward. Until recently, fees have not formed an explicit part of our rating view. However, we now feel that it is important to consider fees as part of the rating view as they have a substantial impact on the outcome that investors can expect. In part, the ability for us to incorporate fees into our ratings analysis has been driven by the broad-based establishment of clean fee classes across the funds that we rate.

In summary, the uncertainty surrounding the likely way the offshore portion of the Flexible fund will be managed and the effect that fees have on the fund’s ability to add value on a net of fee basis have been the key drivers behind our decision to downgrade the fund from Tier 2 to Tier 3.

Ninety One Value and Equity Funds – Benchmark Changes

Following the changes to the offshore investment limits in February 2022 as stipulated by Regulation 28, the benchmarks for the Ninety One Value and Equity Funds will change to reflect the ability to allocate more capital to global equity markets going forward.

The table below shows how the benchmarks for each of the funds has changed:

Ninety One Equity Fund

*SWIX CAPI: FTSE/JSE Capped Shareholder Weighted All Share Index TR
MSCI ACWI: MSCI All Country World NR (ZAR)

Ninety One Value Fund

*JSE ALSI: FTSE/JSE All Share Index
MSCI ACWI: MSCI All Country World NR (ZAR)

The increase in the offshore limit allows the portfolio managers of these funds to allocate more capital to offshore equities. We are comfortable that the benchmark changes reflect our expectations for the split between local and offshore assets for both funds and that they represent a more appropriate performance fee benchmark due to this.

We currently rate the Ninety One Value Fund Tier 1 and the Ninety One Equity Fund Tier 2.

Foord Asset Management

Nick Balkin was recently appointed as the Chief Investment Officer (CIO) of Foord Asset Management South Africa, which was previously a role carried out by Dave Foord (co-founder of Foord in 1981). Dave Foord continues in the role of global CIO, offering investment counsel to the broader investment team as needed. Although he has given up his CIO responsibilities in South Africa, he remains a portfolio manager on Foord’s local multi-asset portfolios.

Nick has worked at Foord since 2002 and as a portfolio manager since 2010. Over that time he has also fulfilled the role of head of research. His appointment does not come as a surprise as we have met with him in the past, and got the impression that he would be the natural successor to Dave, given his increased involvement and responsibility in the business over the past several years. His appointment does not impact our rating view of any of Foord’s funds.

In addition, we recently met with Brian Arcese, one of Foord's Global Equity portfolio managers. This is our first meeting with Brian following our last review where we upgraded the fund to Tier 2 in 2021. We are pleased to see that the team has remained stable since then and that their investment process has remained relatively consistent.

Brian took us through some of the team's views on China which they have held for some time and it is also pleasing to see that thinking coming through to portfolio positioning.

Allan Gray Bond Fund

Allan Gray has recently informed us that Londa Nxumalo, the portfolio manager for the Allan Gray Bond Fund, will be relocating abroad and will hand over management of the Bond Fund to Thalia Petousis.

Thalia has been with Allan Gray since 2015 and forms an integral part of Allan Gray’s fixed income capability. We have met with her several times in the past and she has displayed a strong working knowledge of South African fixed income markets.

Although Londa will be leaving Allan Gray, she will be joining Orbis and will work closely with Mark Dunley-Owen in a global fixed income capacity. Londa took over management of the Allan Gray Bond Fund from Mark back in February 2020.

As we have highlighted in the past, the trend of portfolio managers and senior investment professionals relocating abroad continues to create change in the South African asset management industry.

We will be spending some more time with Thalia in the next month to better understand the portfolio management transition and will provide another update appropriately following that meeting. 

We currently rate the fund Tier 2 and still believe that it is a strong option within the fixed income space in South Africa.