[TOP STORY] Multi-style funds and how they are constructed

‘We really think of it as the back-to-basics of active investing’ – Rademeyer Vermaak – STANLIB Asset Management.

SIMON BROWN: Chatting now with Rademeyer Vermaak, head of index investments at STANLIB Asset Management. Rademeyer, I really appreciate the time today. Talking multi-style funds – I suppose the first question is what exactly is a multi-style fund, and how would a fund such as this be constructed?

RADEMEYER VERMAAK: Hi Simon, thank you very much for the opportunity and hello to all the listeners. Simon, I think a couple of important points to land are how such a multi-style equity fund can give a client balanced and diversified exposure to the main drivers of returns in the stock market, which are quality, value and growth; how this has translated into persistent alpha over the last six years and why we believe it can persist in future; and why it’s able to do so at a very effective and optimal cost structure in order to blend this with other managers.

So in terms of your question on what exactly is multi-style, I think this is an equity fund, but I’m going to give you an example of how to think about style investing by just asset class from equity to a property. I want you to imagine that you’re a real estate investor. Now a value property is a property that is in a bit of the cheaper side of town but, because the municipal rates and taxes are low, you actually generate quite a significant cash rental income on the property relative to the price that you’ve paid. Now, that is a value property.

On the opposite side of town is an expensive property. It should have a new bathroom, top-quality finishes, but because it’s in the best part of town it’s expensive with a lot of rates and taxes on it, and therefore it is of lower risk but better quality.

Growth property is one where, for example, you’ve already had the municipality sign off on building plans for you to build a granny flat [in which] you can put a student.

So if we take the same concepts of value, quality and growth from the property example over to the real equity market where we invest, we’ve got the same concepts, but applied slightly differently where, when we talk about growth, we talk about for the business, the sales, the top line and the potential for growth in the sales of the business. When we talk about quality, we talk about the ability of the business to translate the top line to the bottom line, so from sales to profit. And then value is the valuation multiples that you pay for this business.

Now, we want to try and build a balanced portfolio because these different investment styles perform through different parts of the macroeconomic cycle. When there is a flight to quality, that’s typically when everybody wants to own the best property and own the highest quality stocks. When the central banks open the liquidity taps there is a sort of a dash for trash, and everybody is quite happy to buy value companies and cheap stocks.

We are trying to build a portfolio that gives you a blended exposure across these return drivers at a very competitive price.

SIMON BROWN: In other words, you’re never chasing the new hot space because you’ve already owned some of it and it gives you, I imagine, a lower volatility as well.

RADEMEYER VERMAAK: One hundred percent. That is the aim. So we try and build a portfolio that is better than the benchmark. In this instance the benchmark is the JSE Capped Swix (JSE Capped SWIX All Share Index), but we try and build a portfolio that is better than the benchmark. So better quality than the benchmark, better growth potential than the benchmark, and even at the same time cheaper – the stock’s cheaper than the benchmark. The translation and the net effect of that is persistent alpha generation at low cost and low correlation.

SIMON BROWN: Which is exactly what we’re looking for as investors. Is it a very systematic approach? Almost quantitative, perhaps, in terms of selection and the different styles?

RADEMEYER VERMAAK: One hundred percent. We aim to take the emotions out of the investment process, so it’s important to know that we use the same information that any other active fund manager uses. And from the financial statements we have isolated those key return drivers of quality, value and growth. But then we remove the emotions to form this balanced and realistic view on every stock and, because we use science and technology, we are able to measure not only the return side of the equation, but also the risks. Because we can measure the risk, we can manage the risk and build this optimal portfolio. We really think of it as the back-to-basics of active investing.

SIMON BROWN: The STANLIB Enhanced Multi Style Equity Fund, how does it add value to an existing blend of funds? Obviously there’s outperformance; that always is going to add value. I imagine that that lower volatility makes it a less a less-scary ride.

RADEMEYER VERMAAK: Simon, I think there are three main points perhaps to touch on here. There is the fact that over the last five years the fund is in the top 20% in terms of performance in the Morningstar General Equity category, but as important, it is in the bottom 20% in terms of net expense ratio. So when you combine it with other funds, it will bring down your cost that you have to show or that you see on your fund fact sheet; it will generate alpha. And because the investment process is different from what other traditional managers do, there’s a diversification benefit. It’s giving you this blended exposure to these core investment styles, which means this fund can be used as an equity building block, and as a core equity building block.

SIMON BROWN: And that net expense ratio –you’ve mentioned that a couple of times – is significant, it’s massive. It’s particularly massive over the long term because of course that compounds and the extra money stays in your account and on your fund portion of the fund.

A last question. The name of the fund in particular that you’re managing there?

RADEMEYER VERMAAK: The fund is called the STANLIB Enhanced Multi-style Equity Fund.

SIMON BROWN: We’ll leave it there. That’s Rademeyer Vermaak, head of index investments at STANLIB Asset Management. I appreciate the time today.

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