Manager Research
all members of our manager research team have over ten years of investment experience.
As the Rezco Value Trend fund lagged in performance against peers and its benchmark in 2016, many investors have come to question the fund manager’s ability to add value to their portfolios. As part of our ongoing fund review process we have recently spent time with Rezco to understand how their investment views are playing out in the current market.
How REZCO manages money
The base Rezco investment philosophy is ‘preserving capital, creating wealth’. They take this motto particularly seriously, in that when they see inordinate levels of risk in capital markets, they move to protect client capital. This enables them to take less risk through a typical investment cycle to achieve high levels of real returns, by avoiding deep drawdowns.
Currently, Rezco is very bearish on South Africa. They consider the political risks in South Africa, the potential of a looming sovereign debt downgrade and isolationist rhetoric in the US and Europe as material risks to the local economy and the value of the Rand. To protect against this risk, Rezco has positioned themselves defensively, which has been applied as follows:
| POSITION | REASONING |
| Low SA equity holdings | Low economic growth results in low earnings growth for local companies. Low earnings depress equity prices. Valuation levels are generally high, leaving a small selection of shares which qualify. Rezco does not aim to hold shares which fall outside of its process, and will prefer to hold cash or other assets rather than reduce the quality and alignment of the portfolio. Currently they hold 24% in local equity, materially lower than the regulated maximum. Largest holdings include Discovery, Sasol and Bid Corp (the food services division of Bidvest which recently unbundled). |
| High Rand hedge exposure | Given their poor outlook for SA at an economic and political risk level, they have opted to allocate their risk budget in favour of rand hedge based shares such as Investec, Old Mutual and Redefine International. These shares would benefit from a weakened SA currency. |
| Low SA bond exposure | Rezco has seen limited value in SA bonds which is now a fairly contrarian call. in line with their negative view on SA, they believe the SA risk premium is underpriced and that the risks in SA will be negative for bonds. As a result they have held marginal bond exposure. |
Overall, considering their outlook, Rezco’s positioning makes sense to us. It is true to their investment philosophy and we would be concerned if they were to dislocate their portfolio construction from their investment outlook. Their risk averse nature is clear in the positions held: low equity, high cash, rand hedge.
PERFORMANCE EVALUATION
Considering their outlook and positioning, the major economic events that transpired in 2016 were not supportive. Firstly, the British resolution to leave the European Union caused material depreciation in the Pound against most global currencies, including the rand. Rezco’s exposure to British property and equities, in the form of Redefine International Plc, Investec Plc and Old Mutual therefore detracted from performance. This positioning was not out of step with most of the industry, very few managers were not caught out. The main detractor was that Rezco’s rand hedge view was implemented via Sterling, not USD.
Rezco has also held low levels of resource shares due to their cyclical nature and inherent operational risk. Although not detracting from performance, the sharp rebound in commodity prices and resultantly, in resource share prices caused Rezco to lag peers that had exposure to this sector. Rezco’s general equity portfolio performed much in line with the market during the course of 2016.
Finally, the strong Rand, which appreciated by over 10% against the Dollar and Euro and by over 25% against the Pound stunted performance in the Rand hedge equity counters the fund had exposure to.
Effectively, Rezco’s investment process resulted in the fund having the unusual position of being very defensively positioned (over 50% held in cash at decent yields), and having growth assets such as equities and property held across a narrow range of shares with a rand-GBP hedge (a concentrated view relative to a normal environment). Overall, we are not concerned with this view, it makes sense to us within the context of their process. The world was shaken by unexpected ‘black swan’ events last year. Very few investors expected a Brexit vote. Equally few expected a Trump victory and Rand strength. We also remind clients the last time Rezco implemented such a cautious portfolio we had the GFC in 2008, where this position cost investors in the run up, but offered material capital preservation when global markets fell, the net effect being positive for investors. As a diversifier within a portfolio it offers a well supported, differentiated view as well as protection against SA specific risk. Performance wise, it is important to note that this is a multi-asset high equity fund, with a JSE All Share Index benchmark. The fund lagged the sector and benchmark by around 3.5% over the last year, but it is still broadly in line with both over a two-year period, and ahead over longer periods. They have delivered on their mandate at materially lower levels of risk than the market, as is the basis of their process.
1-Year Period: the focus of most investor concerns
3-Year Period:
5-Year Period:
OUTLOOK
Where other fund managers have turned more bullish on South Africa in the new year - primarily on the back of stronger commodity prices, perceived lower political risk levels and prospects of a growth recovery, Rezco maintains their bearish outlook on the local economy. Their contrarian yet preservation focussed positioning is not surprising, given the way the fund has been managed historically.
We will continue to monitor the fund going forward, focussing on portfolio concentration risk which may result indirectly from their high conviction outlook.
Rezco Value Trend Update
10 Mar 2017