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Is this SA’s best equity fund?

How the Mazi Capital MET Equity Fund has positioned its portfolio.

CAPE TOWN – Next month, the Mazi Capital MET Equity Fund will be four years old. It was only launched in August 2010, but has already established a sizeable reputation.

Over the last three years, it has delivered the third best return of any South African general equity fund. Over that time it has delivered an annualised performance of 25.72%.

Where it has been particularly impressive however, is how it has rated in terms of its risk-return profile. Using the Sharpe ratio calculated by Morningstar, which measures a fund’s returns against its volatility, the Mazi Capital MET Equity Fund is currently top of the pile in a three year review.

To the end of May, it showed a Sharpe ratio of 1.98, which is exceptional. The next best in the general equity category was the Sasfin MET Equity Fund, at 1.77.

To many investors, this risk-return metric is the real gauge of how well a fund is managed. And if you take that view, then the Mazi Capital MET Equity Fund has been head-and-shoulders the best equity fund in the country over the last 36 months.

That being the case, there is obviously a lot to learn from how the fund managers have run their portfolio. And an examination of the fund’s holdings over the last year reveals some very interesting facts.

The first is how little the portfolio has changed over that time. At June 30 2013, the fund was invested in 46 different stocks. By March 31 2014 that had grown to 52 stocks, but it still held 44 of the same counters it had held in June.

In other words, the fund only sold out of two shares during that time and bought into an additional eight.

This is a remarkable level of consistency that demonstrates not only the fund managers’ willingness to take a long term view, but also to stick with their convictions. It may be a basic tenet of investing, but it’s something that is not very easy to do.

Another thing worth noting is that the fund’s top five holdings did not change at all between June last year and the end of March this year. As the below table shows, although their weightings have shifted, the same five counters have at all times made up at least 27% of the fund.

Mazi Capital MET Equity Fund Top 5 Holdings

Stock

31 June 2013

30 Sep 2013

31 Dec 2013

31 March 2014

MTN Group

6.01%

5.94%

5.85%

6.02%

Old Mutual

5.94%

6.22%

6.03%

6.20%

Naspers

5.69%

6.57%

6.98%

7.62%

SABMiller

5.54%

5.15%

4.80%

4.90%

Sasol

4.36%

4.56%

5.07%

7.08%

Total

27.54%

28.44%

28.73%

31.82%

Source: Morningstar

It should also be obvious that these five counters are five of the biggest on the JSE. All of them are within the top ten companies on the bourse in terms of market capitalisation.

This is a particularly noteworthy finding, because it illustrates how the Mazi Capital MET Equity Fund has delivered its exceptional performance on the back of larger stocks, which it has held for long periods of time.

If that sounds familiar, that’s because this is exactly the strategy that we pointed out just a couple of weeks ago as the one that has underpinned the stellar performance of the Coronation Top 20 Fund. And it once again reinforces a vital, but basic, investment lesson: one of the best ways to make money is to find great businesses with big competitive moats, and stick with them over the long term.

Something else this fund shares with the Coronation Top 20 Fund is that it has produced its returns while remaining 100% invested in the JSE. It does not hold any international counters, which shows that is has been possible to deliver superior returns without looking offshore.

This is in no way meant to discourage anyone from investing in international stocks or to disparage those funds that have, because having some offshore interests is a vital part of a diversified portfolio. But this does highlight how local equity funds haven’t necessarily had to look offshore to be top performers.

Where the Mazi Capital MET Equity Fund has an advantage over the Coronation Top 20 Fund however, is that its size also allows it to invest extensively in the small cap space. Although only one of its 20 biggest holdings could be considered a small cap – that being Mpact – it has consistently held at least 10 stocks with market capitalisations under R5 billion since June last year.

While their weightings may be small, the likes of ARB Holdings, Elb Group, African Media Entertainment and Howden Africa Holdings have all shown strong recent share price growth. So while the fund has used established large cap stocks as the core of its portfolio, it has also used the growth potential of selected small caps to boost returns.

Again, this illustrates how great investing is so often about doing the basics well. A portfolio based on a foundation of proven large cap stocks supported by a selection of small caps is about as straight down-the-line as it gets. But the Mazi Capital MET Equity Fund has shown what can happen when you get it right.

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