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Lessons from SA’s best equity fund

The power of dividends, listed property and staying invested for the long term.

CAPE TOWN – The Natal Midlands might be a great place for dairy farmers and antique shops, but it’s probably not the place you would expect to find a top asset manager. And yet, South Africa’s best equity fund is run from offices that are within earshot of where the Umgeni River makes its famous 95 metre drop over the Howick Falls.

The Harvard House BCI Equity Fund has won two awards in as many months, making it the current undisputed champion of this category. Yet this fund run by an independent firm in Howick is far from a heavyweight.

The fund manages a little over R100 million in assets, which is hardly worth a mention in a category with an overall size of R300 billion. The Allan Gray Equity Fund, which dominates this sector, manages over R40 billion alone.

At the end of January, Harvard House won the Raging Bull award for the best South African general equity fund for the three years to December 2014. That was calculated on a pure three year performance basis.

Then, last week, the fund was again recognised as the category leader when it won the Morningstar South Africa Fund Award for the best South African equity fund. Morningstar uses a unique methodology to identify the country’s top collective investment schemes on a risk-reward metric over the last one, three and five years.

It’s an exceptional story for a money manager that still knows most of its clients personally. Fund manager Michael Porter even admits to finding it a bit surreal.

“We didn’t set out to be top of the pile,” Porter says. “Our goal is to be in the top quartile consistently over time and to compete effectively with the larger managers so that our private clients can feel that they are dealing with a smaller firm, but aren’t sacrificing performance.”

The question worth asking is how a fund manager in an out-of-the-way place like Howick manages to produce this performance for its clients.

A good part of the explanation is in the approach to their mandate. As Porter explains, they run the unit trust in very much the same way that they run private client portfolios, which generally means taking relatively few, consolidated positions, and sticking with their investments over the long term.

It’s the least sexy investment strategy on the planet, and yet from Warren Buffett to the Coronation Top 20 Fund, it consistently proves to be hard to beat.

“We believe in having quite focused portfolios, and having the courage of our convictions to back something,” Porter says. “At the moment we do have a few holdings that are between 1.5% and 2.0% of the fund, but generally we are looking for slightly bigger exposures to give the portfolio a chance.”

In other words, the performance in any one holding should be able to influence the portfolio as a whole. At the moment, the fund holds only 24 different shares.

Porter also points out that some of the counters in the portfolio have been in there since the fund was launched in 2006. This includes Bidvest, New Europe Property Investments, British American Tobacco and FirstRand.

“We are quite happy to hold shares for ages,” he says. “Sometimes this can mean we miss out on opportunities in a volatile market, but our style is to be long-term investors. If the market falls 5% or 10%, we don’t get too concerned.”

In private client portfolios there tends to be little movement in and out of shares because of the capital gains tax this would attract. Although this does not apply for the unit trust, they have nevertheless followed the same approach.

In a similar vein, its private client portfolios are very often geared to suit retirees, which means an emphasis on generating income. This is also carried through to the unit trust and results in two clear biases – towards companies that are able to consistently pay dividends, and to listed property.

“We like to demonstrate to unit holders that the interest they are getting is rising all the time,” Porter says. “If they compound that it becomes a virtuous circle, or otherwise they can take the income. We’ve been successful in growing the income consistently over last six or seven years, bar the financial crisis when dividends were under pressure.”

With regards to listed property, Porter points out that while it is probably unusual for many general equity funds to have even as much as 5% of their portfolios in listed property, their fund might have between 7% and 10%. Its largest single holding is currently New Europe Property Investments, at a weighting of 7.7%.

“We are big believers in the power of listed property,” he says. “In some ways that sets us apart a little bit.”

If the performance of the fund alone isn’t enough to please their clients, Harvard House also recently announced that from 1 March it will be dropping its management fee from 1.25% to 0.95% per annum. Primarily this is to bring its unit trust fees in line with those charged to its private clients so that there can be no conflict of interest when moving money between portfolios.

However, Porter believes that there may well be a move from more collective investment schemes to start reducing what they charge.

“There is a lot of consumer pressure building up and asset management fees will probably come under more and more scrutiny,” Porter says. “We want to make investing as cost-effective as possible.”

For more, visit Moneyweb’s Click-a-unit trust/ETF tool.



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I do invest with Harvard House Unit trust. I struggle to determine if Harvard House will offer the new Tax free investment products.

@Ferrari: I have spoken to the team at Harvard House and they are working on a tax-free savings account, but they want to make sure that they can offer it at a competitive cost.

I don’t understand how HH BCI equity fund can get such a glowing report when for 9 out of 12 reporting periods on the graph against its peers/SA equity index it performed less well!!

@elmien: If you are refering to the chart in the click-a-unit-trust tool, that chart is wrong. It might be part of the teething problems of the new site. Thanks for pointing it out.

I dont know if I missed it but nowhere does it actually say how the funds have performed in the last years. Its only about fees. Fund fees are ridiculous generally, even though they never overperform the market in the long run. I rather invest in stocks directly using or just buy the same big cap shares every mutual funds is buying anyways

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