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The top-performing fund with ‘no regard for the index’

A key Baobab strategy is to invest in owner-managed businesses run by people with integrity, a good track record and proper skin in the game.
Baobab Investment Management shareholder Sandy Le Roux is the boutique’s sole portfolio manager. Image: Supplied

One of the top-performing funds in the Citywire Mixed Assets Flexible South African rand category – the R95-million Baobab SCI Flexible fund – is run by a boutique with just one portfolio manager.

Baobab Investment Management shareholder Sandy Le Roux is the boutique’s sole portfolio manager. The fund is the fourth-best performing out of 203 over the year ending October 31 in the aforementioned Citywire category, with a return of 58.3%.

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Le Roux puts the recent performance down to the decisions he made at the onset of Covid-19.

“When we went into Covid-19, we saw the small- and mid-cap industrials area of the South African market offering value,” he said.

“From March 2020 to September 2020, that market area got hard hit with the lockdowns, booze bans, etc, and we took advantage of the extreme mispricing. What you have seen is very strong re-ratings since then.”

Turning to the fund’s outlook, Le Roux said he was wary about markets but confident about the fund’s portfolio of companies.

“In most instances, the companies have come through Covid-19 relatively well. They have gone from absurdly cheap to very cheap. If one looks over the medium- to longer term, the opportunity for out-of-favour companies, whether in South Africa or overseas, is still significant.”

Le Roux said South African equity was much cheaper than offshore equity.

“I like the valuation of the assets in South Africa, but I am aware of the limited number of great businesses in South Africa. Therefore, we take advantage of our offshore allowance to invest overseas. That helps us improve the quality and balance of the portfolio.”

Owner-managed businesses

A key Baobab strategy is to invest in owner-managed businesses.

“We like to align ourselves with good jockeys.

“I thought the price was everything in my earlier years, but investing alongside the right people is more important,” he said.

“We are looking to invest alongside people who have high integrity, a good track record, and we like people to have proper skin in the game. If you listen to a CEO over several years, you can get a feel for their level of integrity.”

Part of Baobab’s philosophy is to co-invest alongside its clients.

“My retirement savings are in the unit trust, and my offshore investments are in the same companies we own for our clients,” Le Roux said.

On the fund’s costs, he conceded that at this point they are relatively high. The fund’s total investment charge was 2.27% at the end of September.

“The management fees of 125 basis points are fairly standard, but the other costs are a little higher than they would be over time because the fund is new and small. I would expect that to drift down slightly.”

Equity-focused

Le Roux has more than 20 years’ fund management experience. Before establishing Baobab, he was a director of Personal Trust International. More recently, he joined Counterpoint Asset Management and set up the Counterpoint Private Capital division, which evolved into Baobab.

“Baobab is equity-focused. Because we have no regard for the index, our portfolios differ greatly from the index,” he said.

“It makes little sense for us to manage our portfolios against an index to deliver something of value. Baobab pays no regard to what other people own. We like to invest in businesses we understand.

“We find companies we want to invest in, then size them according to our framework and level of conviction. Baobab believes that is quite a value proposition and allows us to take advantage of our size, particularly in the domestic market.”

Baobab’s sweet spot is for a stock to have a weighting of between 4% and 6% in the fund. The maximum the fund will hold is an 8% weighting.

The fund’s benchmark is consumer inflation plus 5%. Since the fund’s inception in May 2018, it has returned an annualised 9.94% compared to the benchmark gain of 9.06%.

“We purposely did not want to benchmark the fund against the market. Instead, we wanted to illustrate that what we are trying to do in the fund is give equity-like returns but hopefully at slightly less risk than the market.”

Baobab has assets under management of about R500 million. Besides the flexible unit trust, the fund manager offers a local segregated share portfolio and a global segregated share portfolio.

“Our portfolios are concentrated at between 20 and 25 stocks, so we only need to find a few ideas every year,” Le Roux said.

On being the only portfolio manager at the firm, Le Roux said: “It gets heavy, like last year when a lot was going on, and there are many opportunities. It is a case of so much to buy, what do I buy? During those times, there can be a lot of pressure.

“It gets quite stressful being alone, but it has a lot of advantages. What I try to convey to our clients and partners is that you have to do the work yourself if you are the sole investment decision-maker. You are not investing based on recommendations from other people.”

Le Roux is the key man at Baobab, which he said has a backup plan, which he could not disclose.

“The key man risk is significant. However, we don’t see it as a major issue because the investments we make are of a long-term nature.”

Justin Brown is a journalist at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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