One of the best performing funds in Citywire’s mixed asset flexible South African rand category, the R95 million Baobab SCI Flexible fund is managed by a boutique with a single portfolio manager.
Sandy Le Roux, a Baobab Investment Management shareholder, is the boutique’s sole portfolio manager. The fund is the fourth best performing of 203 for the year ending October 31 in the aforementioned Citywire category, with a return of 58.3%.
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Le Roux attributes the recent performance to the decisions he made at the start of Covid-19.
“When we entered Covid-19, we saw that the small and mid-cap industrial area of the South African market offered value,” he said.
“From March 2020 to September 2020, that market area was hit hard by closures, alcohol bans, etc., and we took advantage of extreme poor pricing. What they’ve seen is very strong new valuations since then. ”
Regarding the fund’s outlook, Le Roux said he distrusted the markets but trusted the fund’s portfolio of companies.
“In most cases, companies have overcome Covid-19 relatively well. They have gone from absurdly cheap to very cheap. Looking at the medium and long term, the opportunity for disadvantaged companies, whether in South Africa or abroad, remains significant. ”
Le Roux said that South African equities were much cheaper than offshore equities.
“I like the valuation of assets in South Africa, but I am aware of the limited number of big deals in South Africa. Therefore, we take advantage of our offshore assignment to invest abroad. That helps us improve the quality and balance of the portfolio. ”
A key Baobab strategy is to invest in owner-managed companies.
“We like to line up with good riders.
“I thought price was everything in my early years, but investing with the right people is more important,” he said.
“We seek to invest alongside people who have great integrity, a good track record and we like people to have the right skin in the game. If you listen to a CEO for several years, you can get an idea of his level of integrity. ”
Part of Baobab’s philosophy is to co-invest together with its clients.
“My retirement savings are in the unit trust and my investments abroad are in the same companies that we own for our clients,” said Le Roux.
On the fund’s costs, he admitted that at the moment they are relatively high. The fund’s total investment charge was 2.27% at the end of September.
“The 125 basis point management fees are pretty standard, but the other costs are a bit higher than they would be over time because the fund is new and small. I would hope that would be reduced a bit. ”
Focused on equity
Le Roux has over 20 years of fund management experience. Before founding Baobab, he was a director of Personal Trust International. Most recently, he joined Counterpoint Asset Management and created the Counterpoint Private Capital division, which evolved into Baobab.
“Baobab is focused on fairness. Because we don’t take the index into account, our portfolios differ a lot from the index, ”he said.
“It makes little sense for us to manage our portfolios with an index to offer something of value. Baobab does not take into account what other people own. We like to invest in businesses that we understand.
“We look for companies in which we want to invest and then we size them according to our framework and level of conviction. Baobab believes that it is a great value proposition and allows us to take advantage of our size, especially in the domestic market ”.
The sweet spot for Baobab is for a stock to have a weight between 4% and 6% in the fund. The maximum that the fund will hold is a weight of 8%.
The fund’s benchmark is consumer inflation plus 5%. Since the fund’s inception in May 2018, it has returned 9.94% annualized compared to the benchmark gain of 9.06%.
“By the way, we didn’t want to compare the fund to the market. Instead, we wanted to illustrate that what we’re trying to do in the fund is generate returns similar to equities, but hopefully with slightly less risk than the market. ”
Baobab has assets under management of around R500 million. In addition to the flexible unit trust, the fund manager offers a local segregated equity portfolio and a global segregated equity portfolio.
“Our portfolios are concentrated in between 20 and 25 stocks, so we just need to come up with a few ideas each year,” Le Roux said.
As the sole portfolio manager at the firm, Le Roux said: “It gets heavy, like last year when a lot of things happened and there are a lot of opportunities. It is a box of so much to buy, what do I buy? During those times, there can be a lot of pressure.
“It is quite stressful to be alone, but it has many advantages. What I try to convey to our clients and partners is that you have to do the work yourself if you are the only one making the investment decisions. It doesn’t invest based on other people’s recommendations. ”
Le Roux is the point man at Baobab, who said he has a backup plan, which he was unable to reveal.
“The key man risk is significant. However, we do not see it as a major problem because the investments we make are long-term ”.
Justin Brown is a reporter for Citywire, providing knowledge and information for professional investors globally.
This article first appeared on Citywire South Africa hereand republished with permission.