Nedgroup Investments has followed a rather different business model to most of the other large asset management companies in South Africa
Unlike the others, Nedgroup doesn’t have its own investment managers to run their 47-odd funds. Instead, since launch, it’s followed what a so-called “Bests of Breed”approach to investment management, whereby they select and outsource the management of the various funds they offer to clients, mostly investors from within the banking group.
In fact, so protective was Nedgroup of this approach that it’s actually registered the trade-mark “Best of Breed” in South Africa, so that it could not be copied.
Conceptually it’s an innovative idea which has a lot of merit. Any client using the Nedgroup channel to make their investments are assured that the choice of the fund manager has undergone a rigorous process by the smart people at Nedgroup Investments, thereby removing some of the risk in selecting a fund or fund manager in a very crowded space. It also removes a lot of uncertainty and time-consuming research for the thousands of Nedgroup investors who can assure their clients that the risk of a dud fund manager is greatly reduced as a result of this process.
Nedgroup says it sticks to fund management companies that are smaller than normal, owner-managed and also a sound intellectual basis for making their investment choices.
Nedgroup Investments Rainmaker Fund (R30 billion) run by highly regarded Tim Alsop and Omri Thomas, has probably been the biggest success. Other notable good choices was that of Dave Foord to run the Stable Fund (R30 billion) plus the smaller Nedgroup Investments Value Fund.
Process that works
By and large this process seems to work. Nedgroup has quietly moved up in the Plexus Crown-rankings over the past few years, which further endorses this methodology of choosing fund managers.
It has however, for the past four years if not longer, been saddled with an ever-increasing problem with one of its choices – the Nedgroup Investments Managed Fund, outsourced to deep-value independent asset managers RECM, headed by colourful if not forceful Piet Viljoen.
I have in previous articles made reference to the poor performance of the so-called ‘deep value’, ‘bottom up’ or ‘contrarian’ investment managers over the past four years. The underperformance of some of these fund managers masquerading or marketing themselves as value-style investors ala Warren Buffett has since the middle of this year got progressively worse.
Big bets on gold and platinum shares have so far failed to rectify the situation and, in fact, have simply worsened their predicament. The last six months has been truly disastrous for these managers: a collapse on the global commodity cycle, platinum and gold mine strikes, plus some fund managers loading up on African Bank Investments just before it crashed, left fund managers red-faced and their ever-shrinking client bases ruing their choice of investment managers.
RECM, which styles itself on being contrarian with deep-value style managers, has been running the Nedgroup Investments Managed Fund for the last ten years in terms of the Best of Breed approach. There have been times of short-term outperformance: for instance in the four years after the Great Financial Crisis, it outperformed its peer-group by a relative 4% per annum basis (in a declining market). But overall, since inception, the fund has underperformed the SA Multi Asset High Category in which it falls, every year for the past ten years now.
The under-performance over the past five years has been nothing short of shocking. Over the last year the fund was second to last in its category, 52 out of 53 funds in that category. This is a consequence of its outsized bet on platinum, iron ore and other mining companies which, as most investors who follow the market know, has been thumped by the events of the past few weeks.
If the global commodity cycle continues weakening as many analysts are suggesting, then more pain can be in the offing for investors in some of the RECM funds, particularly its equity fund but, more importantly for investors in the Nedgroup Managed fund – a much larger animal than the R300 million-odd RECM Equity Fund. The latter fund is down 15% over the past six months and down 7% for the year.
The Nedgroup Investments Managed Fund at end September 2014 had R5 581 million under management. Allowing for the market drop of 6% over the past month, there must have been additional withdrawals from the fund which two days ago stood at R4.7 billion. So some investors must have voted with their feet, no longer prepared to see their so-called balanced investments lose so much money so quickly. Bear in mind that this is a Regulation 28 fund which investors have to use for their pension funds, retirement annuities and preservation funds.
The column was in fact prompted by an investor complaining that his fund has not grown by any measure so far this year which I initially disputed. On further checking it was proved that he was right: he was down 6% for the year while the average fund in its sector so far this year is up 7%.
This I feel, is where Nedgroup Investment has a major problem. Its packaging and marketing is creating the expectation that its funds are “Best of Breed” and that the investing public has one less thing to worry about. But the reality is that the marketing hype and the performance are worlds apart. Could Nedgroup be hauled before the Advertising Standards Authority to explain this massive under-performance?
Could the phalanx of Nedgroup advisors be called to account by their clients who are in this fund?
What do the managers say?
I made a call to Shaun Anderson and Matthew de Wet who are in charge of Nedgroup Investments. It was a wide-ranging session with many issues discussed, but in the end I walked away not entirely satisfied that the Nedgroup-team know what to do with its predicament, which is getting bigger every day.
Question: “Are you happy with the performance of the fund”?
Answer: “No were are not.”
Question: ”What are you doing about it”?
Answer: We are in continuous discussions with the fund management company.”
Question: “Can you describe the management as being Best of Breed?”
Answer: “No, we can’t”.
Question:” Would you invest your own money into this fund?”
Answer: “No we wouldn’t”.
Question: “Why don’t you change the fund manager?”
Answer: “It’s very difficult to change a fund manager”.
And so we went round and round the Mulberry bush.
In the end I felt that Nedgroup Investments was hoping that it will all quietly go away and no-one will notice. Or else praying for a massive reversal in the market which will hopefully lead to a better relative performance. But those are the outcomes of big global macro bets which have a high probability of not coming off.
It’s also not fair that your mom and pop investors of a large banking group should be exposed to the uncertain vagaries of a contrarian investment style which has, over ten years, not proven itself.
*Magnus Heystek is the investment strategist of Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.