During the 12 months to the end of October, the second best performing fund in South Africa is a flexible value fund that achieved a profit of almost 100%.
The 362 million rand Flagship IP Flexible Value fund rose 92.5% during this period, placing it second out of some 1,300 funds registered for sale in South Africa, according to Morningstar. The best performing fund was the Blue Quadrant Worldwide Flexible Prescient fund, with an annual return of 171.9%.
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The flagship fund is also the best performing fund in Citywire’s flexible rand fund category out of 203 participation trusts.
“The fund came off an extremely low base over the last year,” said the fund’s portfolio manager, Niall Brown, during an interview with Citywire South Africa.
“They had stocks that they thought were cheap and they kept making them cheaper. Then when Covid-19 hit, and world markets faded, as did many small-cap companies, companies with debt, and those exposed to travel, tourism, etc.
“I clenched my teeth and I limited myself to holding those types of actions in which I perceived that the value had fallen too much. However, there has been a great recovery in the type of companies in which I invest. Several stocks have tripled and quadrupled over the last year as they have recovered to more normal levels, ”he said.
Brown said he was a contrary value investor who used standard measures of value like price-earnings ratio and price-book ratio when making his investment decisions.
“I am a contrary investor who looks at fear and greed as well as euphoria and misery to see where investors have gone to extremes, as they did by neglecting smaller companies of decent quality in recent years,” added.
Unlike neglected companies, Brown said the US market was turning into a bubble due to extreme euphoria and greed.
The central theme of the fund has been the purchase of undervalued national small and mid-capitalization companies, mainly industrial companies.
“Nothing in the real estate sector. Minimum exposure to financial companies. No banks or insurance companies. Within that theme, I like to buy companies where management behaves like owners. No massive stock awards.
“I also have a long-term bearish view of the rand, so the issue of hedging the rand is too. Most of the time, I look for seriously undervalued businesses, ”Brown said.
The fund’s top ten South African holdings at the end of October were: Nampak, York Timbers, Caxton, Lewis Group, Stellar Capital Partners, Ethos Capital, African Rainbow Capital, Novus, Frontier Transport and Workforce.
The Flagship IP Flexible Value Fund also has more than 20% of its assets invested in the Contrarius Global Equity fund of $ 2.1 billion (R33 billion), which returned 112.1% in US dollars during the year ended. in October. Stephen Mildenhall is the founder of Contrarius Investment Management and a former CIO of Allan Gray.
“I have great respect for him. He did very well at Allan Gray. My style is similar to yours, ”Brown said.
As for China, Brown said that in addition to the Contrarius fund, it had recently bought a small stake in Alibaba. That acquisition came after Alibaba’s shares were cut in half from more than HK $ 300 to less than HK $ 150. In addition, the fund recently bought a small stake in Naspers for the first time.
On the fund’s outlook, Brown said the fund had made the easy money given strong earnings over the past year, but he believed the fund’s stocks were still undervalued, so there was still more to gain.
Performance from the start
Since the fund’s inception in 2005, the fund has returned 11.8% annually, compared to 11.9% for the benchmark. The fund’s benchmark is the flexible multi-asset sector average.
“Value stocks performed well between 2000 and 2007, and my performance then was brilliant. However, after the 2008 global financial crisis, growth stocks have dominated globally and domestically. As a result, my investment style has lagged, but I held my ground.
“When I launched the fund, I was hoping to do better. But unfortunately, matching the benchmark is not what I was looking for. If you are prepared to take quite contrary opinions, which are not reference, as I am, then I hope that in 20 years it will exceed the reference by 3% to 4% annualized. ”
Brown believed the fund had failed to achieve its goals because it underestimated the strength of the investment growth style, including the performance of companies such as Naspers, Amazon, Apple, Facebook and Tesla.
As a result, it did not assign a significant weight to these types of shares.
“I wish I had maximized the fund’s performance over time, and if that meant moving away from value stocks because I realized they were the wrong place to be at the wrong time, in hindsight I should have done it,” Brown. said.
The Flagship IP Flexible Value Fund is one of the five Rand-denominated funds of Flagship Asset Management. The fund manager also has USD denominated funds and segregated portfolios targeting high net worth individuals.
Flagship has R3.1 billion in assets under management, and the fund manager invests much of those assets abroad.
Justin Brown is at Citywire, providing knowledge and information for professional investors around the world.
This article first appeared on Citywire South Africa hereand republished with permission.