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Where to for the Nedgroup Investments Managed Fund?

Changes at RECM raise questions.

Investors in the R4.8 billion Nedgroup Investments Managed Fund were told last week that Daniel Malan, the long-standing chief investment officer at RECM and one of the portfolio managers of the fund will be leaving his position. 

“There are a number of important personnel changes occurring at RECM; the manager of the

Nedgroup Investments Managed Fund,” Nedgroup Investments Clients were told in a note. “These changes are being made in response to poor investment performance, decreasing assets under management at RECM, as well as the fact that the business has recently outsourced its administration to a third party, rendering certain functions redundant.

“In terms of the investment process, the most material change is that Daniel Malan, Chief Investment Officer of RECM, will be leaving the business by mutual agreement at the end of March 2015.”

The news comes amidst growing concern from investors about the fund’s recent performance.

 The Nedgroup Investments Managed Fund is the worst performer in the South Africa multi asset high equity category for the 12 months to 31 January 2015. It is the only high equity fund to have shown a negative return over that period.

Over one, five and ten years, the fund is in the lowest quartile of the category.

The below table shows its performance over these periods relative to the median of the sector and the FTSE/JSE All Share Index:

 

Performance of the Nedgroup Investments Managed Fund to 31 January 2015

 

1 year total return

5 year total return

10 year total return

Nedgroup Investments Managed Fund R

-6.82%

8.74

11.19%

Fund rank

111/111

61/64

25/28

Category median

12.71%

13.23%

13.51%

FTSE/JSE All Share Index

17.06%

17.33%

18.20%

Source: Morningstar

 

RECM has positioned the fund in line with its value philosophy, which is a style that has not enjoyed much reward of late. In the most recent fund commentary, RECM mentions that it owns more than one position in platinum, commodities and Russia.

At the end of January, all three major platinum producers, Anglo American Platinum, Impala Platinum and Lonmin were in the fund’s top ten holdings. Respectively, these three counters have fallen 13.9%, 32.4% and 46.3% in the last 12 months.

An analysis of the fund’s most recently published full portolio, which showed its holdings at the end of December 2014, reveals that just under 21% of its assets were held in mining stocks at the time. This has been a major source of under-performance, as the resources index on the JSE is around 20% down over the last year.

Will the fund change its approach? 

On top of these disappointing returns, Malan’s departure will now add a further point of uncertainty for investors. However, Matthew de Wet, the head of investments at Nedgroup Investments told Moneyweb that it’s important to consider that Malan co-managed the fund with Wilhelm Hertzog and Paul Whitburn. Each of the three handled a part of the portfolio on their own, and Hertzog and Whitburn will now take over responsibility for Malan’s portion as well.

“From that basis, we wouldn’t expect there to be any material changes,” De Wet said. “Although it does create uncertainty in the short term, the fund continues to be managed as it was.”

Nedgroup Investments has told clients that they are assessing whether RECM remains “the most appropriate” manager for the fund. However, De Wet pointed out that they will not make any short term decisions.

“Whenever there is a change, you have to understand the implications of that change,” said De Wet. “Clearly RECM management sees this as a step in the right direction. Ultimately the performance buck does stop with the chief investment officer, so it’s obvious that they are making moves to rectify the situation. 

De Wet noted that the significant under-performance in the fund has really been over the last six months, accelerated by the fall in the oil price and other commodities. However RECM is not the only manager that has been hard hit recently, as a number of deep value managers have seen their positions under pressure.

“It is concerning, and obviously we don’t like it, but you also don’t want to do the wrong thing and make a rash decision,” De Wet said. “Because you can make the wrong decision when things are going against you, and then you effectively lock in that under-performance.”

As deep value investing is part of RECM’s DNA, Nedgroup Investments does not expect the fund managers to change that approach. However, De Wet does believe that the company will be evaluating its processes and making tweaks where necessary. 

“Anyone in the market who knows RECM understands that they are passionate believers in their process and philosophy,” De Wet said. “In the lead up to the credit crisis, they were quite widely castigated for not holding any resource companies when they that sector was flying high.

“RECM under-performed at that point in the cycle as well, quite similar in magnitude to the what we are seeing now, but when the credit crisis came they made that up and more. So they have been heavily tested, but they didn’t capitulate then and actually recovered from it very well.”

De Wet believes that it is important that this approach stays consistent.

“It is when managers change their philosophy that it’s time to worry,” said De Wet. “Because then what you have bought into has changed.”

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