STANLIB Multi-Manager SA Equity Fund

by Albert Louw

Albert Louw

In constructing the STANLIB Multi-Manager SA Equity Fund, multiple facets of the underlying managers and how they blend together are considered, with a view to achieving the objectives of the Fund. The STANLIB Multi-Manager buy-list generally comprises managers that use a fundamental valuation approach to equity investing and display various characteristics during different market environments. Therefore, it is not always possible to box these managers into a specific style, since they generally invest where they see opportunities. Some of these managers may be more nimble than others and some may have higher conviction weights for their stock picks.

Investec included, passive removed

As part of our continuous assessment of managers and the market, we have reviewed the Fund’s portfolio construction framework. The following changes have been made to the manager selection and weighting:

Removed the passive allocation

  • The STANLIB Multi-Manager SA Equity Fund had a 10% allocation to a passive tracker since November 2014. This passive component was originally mandated to track the SWIX
  • In July 2017, the Fund’s benchmark changed from the peer group average to the Capped SWIX. At the same time, we changed the passive component to track the Capped SWIX
  • We have assessed active managers relative to the Capped SWIX benchmark and found that, on average, active managers have beaten the Capped SWIX over the three years to June 2019 (net of fees). This makes sense fundamentally, as global quantitative easing initiatives slowed or halted. In addition to this, South Africa’s deteriorating economic fundamentals have made active management even more important
  • The STANLIB Multi-Manager SA Equity Fund aims to achieve a 2% return ahead of the Capped SWIX benchmark on a gross of fees basis. In order to achieve this excess return, the Fund – through its underlying managers – needs to have sufficient active stock picks or positions. The number and size of these active positions in the overall Fund is measured by the tracking risk relative to the benchmark
  • We therefore prefer a higher allocation to active managers. This increases the tracking risk of the overall Fund, especially in a murky market environment and as a result, we have removed the 10% allocation to passive

Included Investec Equity

  • The overall Fund has a more defensive position relative to the market with the underlying managers holding a small amount of cash and being overweight resources. Investec has a similar position but has higher weightings to shares that they really like. They have demonstrated that their portfolio mix is flexible, especially in the context of the other underlying managers in the overall Fund
  • We like increased flexibility of Investec, which is a result of their differentiated investment process. Investec focuses on the direction and magnitude of company earnings forecasts, which are derived by their highly experienced analysts
  • By focusing on earnings revisions, Investec has a momentum bias. This is a characteristic we would like to add to the overall STANLIB Multi-Manager SA Equity Fund. We believe that the inclusion of Investec will widen the tracking risk of the Fund, to within our target range of between 2% and 4%

Reduced Prudential’s strategic allocation from 22.5% to 18%

  • Prudential’s relative value approach has produced good returns for the Fund. Their investment approach and strong house factors make them a good anchor in the Fund
  • From a risk management perspective, we reduced their weight in line with Coronation, Truffle, Investec and Visio, in order to create a more uniform allocation to our active managers
  • In addition, Prudential’s investment approach makes them more benchmark cognisant. By reducing their strategic weight in the portfolio, we again increase the tracking risk of the overall Fund, which in turn increases the potential to achieve our alpha target of 2%

Reduced Foord’s strategic weight from 17.5% to 12.5%

  • Given the persistently weak local economy, Foord prefers companies with offshore earnings. Some of their large positions have been in British American Tobacco, Sasol and Aspen. These companies have faced regulatory or company specific headwinds, which has negatively impacted Foord’s performance
  • Companies that derive a large portion of their earnings offshore – known as rand hedges – typically do better as the rand weakens. Over the three-year period to July 2019, the rand has only depreciated 1.3% relative to the US dollar and thus, not playing in Foord’s favour
  • Of more significance, many of the returns in the local market have come from resources, a sector where Foord has been underweight
  • For these reasons Foord underperformed the Fund’s Capped SWIX benchmark, as well as the other underlying managers. Their weight in the Fund has therefore, settled close to 12.5%
  • Foord is positioned differently to the other managers in the Fund and we believe their performance could come through if the rand weakens significantly. However, their differentiation also implies the potential for higher tracking risk. Given the other changes noted above, we will manage this risk by keeping Foord’s strategic weight at 12.5%

The Fund has a robust blend of managers with different approaches to equity selection. Three of the managers – Coronation, Truffle and Visio – are long-term value managers that focus on bottom-up stock analysis. We believe this approach has the potential to outperform the benchmark through various market cycles over time. These managers, however, typically have a less consistent alpha profile. Therefore, these managers have been complemented by Prudential’s relative value approach that generally produces a more consistent alpha profile. Investec is likely to outperform when shares with good earnings growth, drive the market – a more momentum-oriented market.