Managing a balanced fund means finding the right balance between cyclicals, yield, high or low quality, defensive, value and earnings growth.
Having a flexible approach to these and other variables, and being style-agnostic, are some of the ways portfolio managers and analysts work to ensure that the Fairtree Balanced Prescient Fund is managed optimally.
The fund invests in equities, property, bonds and money market instruments, but its predominant investments are in domestic securities.
“We find the SA equity space really exciting and there are a lot of opportunities,” says Chantelle Baptiste, an equity analyst at Fairtree.
SA equity market offers much opportunity, regardless of how SA Inc is performing
“Many people make the mistake of thinking that SA equity means investing in South Africa, but our market is very externalised, with approximately 70% of the revenue of the top 50 companies generated from sources outside South Africa,” she says. This gives the fund access to companies like Naspers, with its exposure to Chinese consumers, and resources companies selling commodities to the US and China in hard currencies.
The fund is exposed to all the major equity sectors ranging from resources (from base metals to paper, oil and gas, and precious metals), offshore defensive (offering dividend yield and safety such as alcohol and cigarettes counters), offshore consumer growth (through companies like Naspers and Richemont) and ‘SA Inc’ (locally oriented companies exposed predominately to the SA macro environment).
“We rotate within these four broad sectors, depending on where we see opportunities and this allows us to capture performance no matter how the South African economy is performing,” she says.
Investing directly in offshore companies is a different ball game. “Offshore equities are not our strength. We are not on the ground and we would rather play to our strengths and have exposure to companies that we know and understand.”
Being flexible is our key discipline
One of the fund’s strengths, and the key characteristic differentiating Fairtree, is its flexibility. “The willingness to be flexible has to be inherent; it has be part of your DNA,” Baptiste says.
“If you wake up today and a stock you are positioned in is not the best for your clients – either because it is not generating the performance you anticipated, or something happened in the world that changes the investment case for the stock – then you need to have the discipline to change, potentially cut your losses and put [your] clients’ investment in a better position.”
To achieve this discipline, as far as Fairtree is concerned, an asset manager needs to be exposed to the liquid part of the market being the mid to large caps which allow for the flexibility to move in and out of positions. This is more challenging in the small cap space, which can be less liquid and where an investor may need to be positioned for a longer holding period.
The asset manager also needs to be the right size as this allows for the agility to move in and out of positions when required. With R12 billion in unit trusts and R42 billion in institutional funds, Fairtree is considered boutique.
We are style-agnostic
“Key for us is our flexibility, and we are style-agnostic – we don’t deem ourselves value or growth, which we consider restrictive”.
“Our philosophy and investment style needs to withstand any economic cycle, it needs to stand the test of time. We view the market within seven strategic focus areas – cyclicals, yield, high quality, low quality, defensive, value and earnings growth. These are not mutually exclusive, nor are they exhaustive”.
For example, at the moment growth is low in South Africa and commodity prices are supportive. Growth “is just not here in SA Inc”, and Fairtree does not want to gravitate to value or low quality as that can be a value trap, so it has a preference for higher quality over low quality in the SA Inc space – like FirstRand, which has a strong management team, is still achieving high growth and pays an attractive dividend, rather than a lower quality peer, which is lower quality in terms of its management and is struggling to make earnings although it operates in the same environment as FirstRand.
“Earnings growth is what we value the most – companies that are able to generate high earnings growth in any given environment and convert that into cash, and that have high quality management teams able to allocate capital efficiently and focus on shareholder returns.
“Anyone can identify value, but you need a catalyst for value to be unlocked,” adds Baptiste. “That is one of the reasons we are style-agnostic. We focus on total shareholder return – earnings growth, dividend and rerating, and out of those, the most important is earnings – how this company is going to generate earnings and what its future growth is going to look like.”
How are we currently positioned?
Fairtree remains constructive and exposed to the resource sector.
“Commodity prices are currently supportive; however, the market is pricing in a recession and demand is softening, and this is where the opportunity lies. Since the last global recession, most resource companies have been repairing their balance sheets, paying down debt, spending less maintenance capex and almost nothing on growth capex and generating cash that could come back to shareholders in the form of dividends and share buybacks.
“We keep a close eye on the global macro and we do not anticipate a global recession imminently, we also don’t see a hard landing for China any time soon which is supportive of metal prices.”
She says China is a $12 trillion economy that is still growing at 6%, which is supportive for commodities, and that Fairtree remains overweight in resources.
Locally, Fairtree believes the election outcome was favourable and South Africa has been in a stabilisation phase under the current administration as President Cyril Ramaphosa tries to stop corruption and put the right people in key economic places.
The next phase will be one of reform, where he needs to resolve the Eskom issue, downsize cabinet and ensure investors are comfortable with SA property rights, Baptiste says.
“But investors cannot ignore that GDP is anaemic, below 1%. Consumer and business confidence is lacking. The next growth phase needs to come from the private sector and SA needs foreign investment and confidence to return.
“We think that in the short term there is still some pain to be felt, the 2019 first quarter GDP print will be very poor, although we are close to the bottom of the cycle,” she adds.
Fairtree will remain selective in SA Inc, investing in strong financials such as FirstRand, Sanlam and Capitec, and remaining underexposed, for now, to telcos and hospitals, and with only selective exposure to some retailers.
Baptiste says Fairtree’s position on South Africa is what keeps her awake at night. “When foreign money comes back into our market, it comes quickly,” she says – and this means local asset managers can miss the rally if not positioned well.
Brought to you by Fairtree.