Manager Research

We recently completed our review of the Foord fund range and have downgraded the Foord Equity, Balanced, Flexible Fund of Funds, Global Equity, International and Nedgroup Investments Stable Funds to Tier 3. All of these funds were previously rated Tier 2.

We have rated Foord funds since 2013 and, as such, our current assessment is informed by a long history of due diligence engagements with Foord. Before setting out our thinking, we reiterate that our ratings are forward-looking assessments of investment capability, rather than backward-looking judgements based on recent performance. That framework is grounded in the belief that active investment management is difficult; most fund managers do not add value over meaningful time horizons, and positive ratings therefore require a high burden of proof. As a reminder, a Tier 3 rating reflects our view that there are one or more material concerns with the investment proposition and that we believe stronger alternatives are available for investors.

This review covers a defined selection of Foord’s local and global funds, rather than the full fund range managed by the business. This reflects our approach of focusing our research effort on funds that we believe are most relevant to our clients, and we are satisfied that the Foord funds currently under coverage meet this relevance threshold.

When we first reviewed the fund range in 2013 our concerns focused primarily on succession and concentration in decision-making around the founder. These concerns in turn made us question the culture of the business. However, the sensibility of Foord’s investment philosophy, which we viewed as coherent, consistently applied and backed by investment merit was enough for us to conclude Tier 2 ratings across a select group of their local funds. When we first rated their global funds a few years later, we reached similar conclusions, with the additional concern that their global capabilities were less entrenched and managed by a less experienced team than the local funds. Ultimately, prior to our most recent review we were comfortable that the funds that formed part of this review all met the appropriate Tier 2 rating threshold – good funds with several minor concerns.

Between our first review of the Foord fund range and our most recent assessment, a number of our concerns have remained recurring areas of focus. Some of these relate to the broader Foord business and therefore influence multiple funds, while others are specific to individual strategies. Historically, we viewed these concerns as minor, given the coherence of Foord’s broader investment approach. However, our latest review has led us to conclude that the balance between mitigating factors and unresolved risks has shifted. The cumulative effect of these issues now has a more material bearing on the forward-looking investment merit of the funds under review. In addition, the business faces a number of structural challenges, some of which are outside of Foord’s control, that further raise the burden of proof required to retain positive ratings.

Foord’s South African equity capability is a central building block across the local funds included in this review. The team follows a long-term, bottom-up fundamental approach, investing in businesses where they believe the market is mispricing future earnings, and applying a relatively high quality threshold in a concentrated, benchmark-agnostic manner. Our assessment is that the opportunity set for implementing this approach effectively within the South African market has narrowed materially over time. This has meant that successful outcomes have become increasingly constrained by the limited availability of opportunities that meet the manager’s quality and valuation criteria within the South African market. To date, we do not believe the evidence across the funds reviewed demonstrates a sufficiently repeatable ability to navigate this more constrained opportunity set to meet our forward-looking expectations. This is important because these decisions have a material impact on the manager’s ability to add active value. Some examples of this which we have discussed with Foord in the past have been investments in companies like Aspen, EOH and Metair.

A further consideration in our assessment is the evolution of decision-making responsibility within the Foord investment team over time. Succession has been a recurring topic in our engagement with the business for many years; however, our latest review suggests that Dave Foord’s continued step-back from the South African funds has reached a point where our default assessment of the investment capability should no longer be structured around his direct involvement, but rather the depth, clarity and effectiveness of the broader investment team. As a result, the burden placed on demonstrated autonomy and skill among the next generation of decision-makers has increased. We have not yet seen sufficient, consistent evidence to form the same level of forward-looking confidence in these succession arrangements as we have historically placed in the founder, and we therefore now view this risk as more material than in previous reviews.

Apart from our concerns regarding the efficacy of the local equity process, we do not observe compelling evidence of sustained stock-selection skill across the funds covered in this review. In seeking to understand the drivers of this outcome, within South African equity there have been several material stock-specific decisions which, in our assessment, detracted meaningfully from investor outcomes, alongside notable omissions that stem from the strict application of Foord’s quality threshold and benchmark-agnostic stance. While these decisions are consistent with the stated philosophy, their cumulative impact raises questions around the ability to execute this approach successfully on a repeatable basis. Our assessment is based on a fund-by-fund, holdings-based review of investment decisions rather than a generic critique of the philosophy itself.

When reviewing the Foord Global Equity and Foord International funds, as well as the offshore exposures within the local multi-asset funds, we continue to see merit in the underlying global investment philosophy and the broader opportunity set in which it is applied. Our concerns in this area are therefore less about the conceptual soundness of the process or the breadth of opportunities compared with the South African market, and more about governance, succession and alignment. In particular, ongoing reliance on a narrow group of decision-makers, combined with incentive and retention structures that do not, in our view, provide sufficient long-term certainty around portfolio-management responsibility, makes it difficult for us to form a clear forward-looking assessment over an appropriate investment horizon. This limits our ability to underwrite these strategies with confidence, notwithstanding the broader appeal of the philosophy.

Our multi-asset fund ratings incorporate business and investment team views that we believe will specifically impact the investment merit of each fund. We spent a significant amount of time reviewing each underlying capability and how it is applied to each specific fund. Ultimately, South African equity and global equity are crucial components of each of the funds we reviewed. For the Nedgroup Stable Fund, there are also additional considerations given the relatively high fee (TIC), even after incorporating the drop in the fee charged by the Foord global team within the portfolio.

Concluding Remarks

Our rating views across the Foord fund range are underpinned by concerns across the business outlook; the narrow opportunity set in the local market for Foord’s process to deliver; evidence of skill and our confidence level in this looking ahead; and the retention and alignment for their global team.

While none of these considerations are new in isolation, our assessment is that the cumulative impact now outweighs the mitigating factors that have historically supported a higher rating. Our views have been tested by Foord and we did not receive sufficient additional comfort that our concerns were mitigated.

A summary of our ratings is provided below:

*Including feeder funds