How this balanced fund returned twice its benchmark

‘The people we let into Granate have to pass a very high hurdle.’
Granate Asset Management portfolio manager Paul Bosman. Image: Supplied

The R86 million Granate SCI Balanced fund has been a top performer over the past 12 months. For the year ending October 31, the fund ranked 11th among unit trusts in the Citywire mixed assets – aggressive South African category, with a return of 36.4%.

Granate Asset Management portfolio manager Paul Bosman believes what sets Granate apart from other firms is its carefully selected team, philosophy and investment approach. Bosman co-manages the fund with Bronwyn Blood and Vaneshan Naidoo.

Since its inception in February 2020, the fund has returned an annualised 19.6% compared to the benchmark’s 9.4%. Its benchmark is consumer price inflation plus 5%.

“Many asset managers are obsessed with assets, but we are obsessed with people and our culture. The people we let into Granate have to pass a very high hurdle, not [only] in terms of capability but also in terms of fit and sharing our values and purpose,” Bosman told Citywire South Africa.

“To manage money requires a commitment. It is not something you can do eight to five. It takes tremendous dedication. If we don’t do our jobs properly, our clients end up not having enough money to retire.

“Your philosophy needs to create favourable odds without taking big risks. By risks, I mean highly concentrated portfolios or investing in instruments that could either shoot the lights out or do poorly.”

Turning to portfolio drivers, Bosman said domestic equities contributed the most to the fund’s performance over the past year.

“Since February 2020, domestic equities have contributed 16% to the fund’s total cumulative return, and foreign equity contributed 12%. Bonds contributed just over 4%. Our best-performing stocks that contributed to fund performance were Capitec, Afrimat, LAM Research Corporation, which supplies materials to the semiconductor industry, Mr Price and Raubex.”

At the end of September, the fund had a 40% weighting to local equities, while 26% of its holdings were held in foreign equity. The fund also carried a 24% weighting to bonds, including 10% invested in inflation-linked bonds, and a 6% weighting to property.

Asset class views

Bosman said South African government bonds at yields of between 9% and 11.5% remain appealing.

“We continue to get inflation linkers at very high real yields. So bank paper north of 4% real is very attractive, but that opportunity won’t be around forever.”

He said local equities are also still significantly undervalued.

“[Even] companies that are looking expensive, like Mr Price and Capitec, can still do very well. Those companies will continue to grow at a very steady clip over the next five to 10 years. Then there are industrial companies that could also do very well, even with marginal economic growth, like Raubex and Hudaco Industries.

“A company like Afrimat that has its exposure especially to underappreciated and underdeveloped mines can grow nicely. We are finding selected consumer-related and industrial stocks attractive. Nedbank is significantly undervalued. The true rating of the bank could be higher given the return on equity it generates.

“Capitec can keep growing their profits for a long time. Capitec started in the unsecured loans market and in that portion of the market have a 24% share. That is a reasonable percentage, but they can continue to grow there. With retail deposits, they only have 8% of the market. There is plenty of growth there too.

“They have around a 4% market share in credit cards, so they can grow in that area for a long time. Funeral policies are a huge profit area for financial services companies, and Capitec’s market share is meagre. On banking for small and medium enterprises, where they bought Mercantile Bank, their market share is very low. Across those product ranges, they can still grow for years.

“Value investors would say that Capitec is expensive on a price-to- earnings ratio. But if you have been looking at it that way, you have been wrong, from R2 to almost R2000 a share. It is a company that can keep growing quickly.”

Granate Asset Management has assets under management of more than R5 billion and 15 staff. The Granate SCI Balanced fund is one of the fund manager’s four unit trusts.

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

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

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