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Approaching a Reg 28 fund differently pays off

The High Street High Equity Prescient Fund is up more than 22% over 12 months – Ross Beckley, High Street Asset Management.

RYK VAN NIEKERK: Welcome to this Market Commentator podcast. My name is Ryk van Niekerk, and it’s my weekly podcast, where I speak to leading investment professionals. My guest today is Ross Beckley. He’s a fund manager and analyst at High Street Asset Management and has been in the industry since 2011. He is the fund manager of the High Street High Equity Prescient Fund, which is a very, very interesting Regulation 28 fund. Over the past 12 months it has gained more than 22%, while the average return of multi-asset high equity funds was around 3.2%.

Ross, thank you so much for joining me. That is a big, big difference, especially if you look at the fact that it is a Regulation 28 fund. But you approach the Reg 28 regulations a bit differently. You only invest your local portion into shares with significant offshore exposure, and it has stood you in good stead. Can you just take us through your strategy in this fund?

Read:
High Street High Equity Prescient Fund fact sheet
High Street Wealth Warriors Fund fact sheet

ROSS BECKLEY: Good morning, Ryk. Thanks for having me on your show. A few years back, we decided to offer our investors something unique. Obviously there was a lot of angst around the economy and whether people could sustain their retirement going forward.

So, as I’ve previously mentioned to investors, we don’t oscillate between being bullish and bearish on South Africa and try and find value. We simply offer them a rand-hedge product, if they feel inclined to go that route. What the fund does, we’ve got just shy of 90% rand-hedge bias at the moment. The share with the highest African exposure is MiX Telematics, with 60%. Other than that, most of them are predominantly offshore-focused on their revenue streams.

Over the past year it’s been very good for us. Obviously the rand has depreciated, but not as much as many people would think, with only slightly less than a 5% depreciation. So, in light of that, we are actually very pleased with the fund performance, which has been driven mainly by our exposure to the tech sector. And we all know how that sector has benefitted post lockdown.

RYK VAN NIEKERK: Yes, the top shareholding in the fund is Naspers, Prosus, British American Tobacco and Trencor. But I think one of the factors of the fund that should have some people worried is that you don’t have too many of these big rand-hedge options in South Africa. I can think of around 10; is that your investment universe here?

ROSS BECKLEY: Spot on, Ryk. At the moment we monitor about 10 to 12 locally listed shares which are in our universe. Fortunately we also have the property sector, which we can consider. We are still quite a small asset manager, so we are able to invest in these names without materially moving the price. Some of those names would be Sirius Real Estate, MAS Real Estate and Stenprop – many of them in the sectors which we like in an ever-changing economy. So the likes of distribution and light industrial.

RYK VAN NIEKERK: Trencor is an interesting company in this portfolio. Especially in the context of the portfolio, it’s relatively small – R680 million market cap. And the share has not performed well during this year, year to date down close to 60%. Why do you like Trencor so much?

ROSS BECKLEY: Ryk, it hasn’t been a great performer, but you do have to remember that they paid those special dividends of R1.60 – that was paid about a month ago. So that has to be factored into the calculation. But even after considering that, it is still slightly down for the year.

Why we like it? Our roots at High Street Asset Management go back to 2011, when we ran a multi-strategy hedge fund and we used to do a lot of trading within Trencor; between Trencor and Textainer, its biggest underlying holding. So we’ve got a very good grasp of the happenings there.

As it stands today, Trencor is basically a cash shell with the majority of the cash in US dollars, and it’s at a 30% discount to its underlying [asset value]. Management has committed to unwinding the structure, and that is all dependent on an indemnity which lasts until the end of 2024. The indemnity arose when they restructured within the company and got rid of the Halco Trust ownership within that company.

So Ryk, a 30% discount and holding on to US dollars obviously could be a very attractive return, with the major risk being that something comes of the indemnity.

RYK VAN NIEKERK: If you just take a bit of a helicopter view of this fund, there are so many people complaining about Regulation 28, the significant investments that need to remain in South Africa and the poor performance we’ve seen over the past five years. Do you believe Regulation 28 in its current form gives you enough flexibility to be able to get the offshore exposure you want – if you want it?

ROSS BECKLEY: Ryk, I believe the only reason why we are able to achieve such a big rand-hedge bias within the fund is because of our size. So, as we get bigger that may become an issue, although discussions are under way in the office to gate the fund, to restrict new investors should we get to a certain size.

I don’t really want to comment on Regulation 28 per se, but if changes were enacted to Reg 28 which allowed investment to flow out of the economy, the locally listed shares would really be a bit short on funding. What we saw on the back of Covid and the lockdowns was that a lot of these locally focused companies had to come to the market to raise capital. If Reg 28 allows investors to invest everything offshore, it could be a bit detrimental to the South African economy.

RYK VAN NIEKERK: Absolutely. I see the fund size is around R130 million, so it is actually quite small. But there are some really interesting things happening in South Africa … [from] Treasury, which announced that the inward-listed shares and other instruments could be regarded as local assets. The FSCA, the Financial Sector Conduct Authority, has not decided or issued a proclamation on whether it would impact Regulation 28 – but what do you make of the proposed regulation?

ROSS BECKLEY: Ryk, we believe investing offshore is the best way to maximise your returns going forward. So I think for the industry as a whole – I’m not considering the negative effects it could have on the local companies – I think it’s good for the retirees. Whether the FSCA actually approves the reclassification of these inward-listed ETFs [exchange-traded funds] is yet to be seen.

But obviously our unique selling point is that we can offer a largely rand-hedge product. And should these new regulations be passed by the FCSA, we’re going to have to reassess. But we are in constant negotiations with our administrators, Prescient, and we’ll see what happens going forward. We expect to hear an answer in the coming months, but I’m not too sure what’s going to happen.

RYK VAN NIEKERK: But that could, in theory at least, change the local investment dynamic significantly – if those inward-listed instruments are regarded as local investments and Regulation 28 can adapt and invest in those shares with the their local allocation.

ROSS BECKLEY: I agree wholeheartedly. I think it will be very beneficial to the retirees, but to us it kind of flies in the face of what they’ve been trying to do with Regulation 28, possibly seeing prescribed assets coming through, and really trying to keep the money in South Africa. So we don’t have a firm view on it at this stage. But for the meantime, we are just going to continue with our strategy, and that’s maximising a rand-hedge exposure.

RYK VAN NIEKERK: A significant portion of your High Equity Fund is invested in the Wealth Warriors Fund, the global fund, which has significant exposure to the big international tech stocks – Amazon, Facebook, Alibaba and the likes. It’s interesting, because I’ve spoken to many fund managers with global funds and they tend to shy away from these big tech stocks, the Faangs [Facebook, Amazon, Apple, Netflix, and Google parent Alphabet], because they believe they are overvalued. Obviously you don’t. You believe in a momentum strategy. Just take us through the thinking there.

ROSS BECKLEY: We very much believe in the strategy. It was founded four years ago. Our decision was once again to offer investors something more unique. So we adopted a mandate which is thematic in nature, and it’s focused on the disruption of conventional industries through technological innovation and changes in consumer behaviour.

Some of the themes in the fund relate to medical innovation, planet preservation, digitalisation, software as a service, and new leisure.

The themes are endless, and we believe the world is devolving at a fast pace and people have to take advantage of these.

If we look at the growth-versus-value debate, if we go back to 2007, growth has outperformed value by 120%. Do we believe this is going to continue in the short term? There could be a reversal. Obviously a lot of these growth names have benefitted from the lockdown measures, as they are lockdown-proof in their business models. So we could see some rotation there.

But even inside Wealth Warriors we are able to adjust the fund somewhat to focus on a bit of a recovery in some of these names. For example, we hold Lyft and Uber. Obviously the majority of operations are in the US and the Uber share price has actually performed quite nicely, as the business has been buoyed by food delivery. So the view could be there, if the vaccine comes through and the ball’s going to slowly return to normal, that Lyft is set to perform better because it’s a purely ride-hailing service.

So, while once again we believe that there could be a short-term reversal, in the long term we stick to the mandates – and that is thematic investing, based on the industries of tomorrow.

RYK VAN NIEKERK: But these shares have run phenomenally well, and a lot of analysts believe they’ve risen into bubble territory. Are you worried about a correction?

ROSS BECKLEY: Ryk, I wouldn’t say a correction. Obviously now, even though there is positive news on the vaccine, we are seeing cases surging throughout the world and various levels of lockdown are once again being implemented. So we’ve seen the tech shares rebound there a bit.

One point I will mention is that we are allowed 30% directly offshore. At the moment we have 17% invested in Wealth Warriors, but I am able to rotate for that other 10%. And I could invest in the likes of an AbbVie in the pharmaceutical space, or Lockheed Martin. So there has been some sort of a rotation within our fund, but obviously our holding in the Wealth Warriors Fund we will hold indefinitely.

RYK VAN NIEKERK: You haven’t been in the business that long, not even 10 years. And it’s interesting how your views differ from some of the asset managers with lots of grey hair. Would you, for example, if you could, consider investing in bitcoin, or including bitcoin in the fund?

ROSS BECKLEY: We have discussed it with the incumbent fund manager. It’s not something which we would consider at this stage as we feel that’s a completely different risk profile. I feel if an investor wants to go into that, then a direct investment in bitcoin is a better option there. I mean, we’ve seen bitcoin go from $10 000 to $16 000, and it could as easily reverse. So what we are trying to offer here is growth, but without that extreme volatility.

And, talking about grey hairs, that’s where I learned my trade – with Michael Patchett in the business. He’s been in the industry for longer than I’ve been alive. And so I do have some philosophies which I adopted from the guys with grey hair.

RYK VAN NIEKERK: But do your views differ? Do you sometimes growl at each other?

ROSS BECKLEY: We do differ, but I feel that’s active debate, and that warrants a better outcome at the end of the day.

RYK VAN NIEKERK: Just for interest’s sake, if you do choose to invest in bitcoin, would you be able to include it in a Regulation 28 fund?

ROSS BECKLEY: Not to my knowledge, no.

RYK VAN NIEKERK: Interesting indeed. Ross, thank you so much for your time today. That was Ross Beckley. He’s a fund manager and analyst at High Street Asset Management.

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