STANLIB Multi-Manager Equity Fund – appointment of Truffle Asset Management

Keeps you updated with news and changes within STANLIB Multi-Manager.

The STANLIB Multi-Manager Equity Fund is a fully invested, domestic equity fund that aims to beat the reference return of the FTSE / JSE All Share SWIX. Unlike many of its competitors the Fund does not invest in direct global equity. As a multi-managed fund, the fund benefits from the collective equity wisdom of the South African asset management industry with manager acting independently of one another. The portfolio construction aims to diversify manager’s skill and their various approaches to building an equity portfolio.

Following a review of the portfolio in October 2014 and the manager changes that resulted in November 2014, STANLIB Multi-Manager completed a similar review of smaller managers in 2015 and has decided to make a further manager change. Truffle Asset Management has been appointed and the mandate with ABSA Asset Management, which was appointed in November 2008, has been terminated.

Background

As highlighted in the table below, performance relative to the SWIX has been disappointing. There are several reasons for this, most notably the underperformance of active managers in general relative to the benchmark.

STANLIB Multi-Manager Equity Fund 3 Months 6 Months 12 Months 36 Months (p.a) 60 Months (p.a)
STANLIB Multi-Manager Equity Fund Gross B3 10.7% -0.4% -3.2% 13.4% 12.8%
Benchmark (SWIX Gross) 9.7% 1.3% -0.4% 15.7% 15.1%

Recognising this in November 2014, SMM made several changes to its manager line up to make the overall portfolio more “relative value” in its approach. These changes had a positive impact on performance relative to not making the changes, and we estimate that this additional performance to be around 4% for 2015. The appointment of Truffle is a further step in this direction.

Key reasons for underperformance

Perhaps the largest contributor to underperformance of many manager strategies has been an underweight position in Naspers relative to the benchmark weight – currently 16%. For risk management purposes many managers wouldn’t hold 16% of their portfolio in one share, and given the near 50% p.a. rise in Naspers over the last 3 years relative to the market return of 15%, underperformance has largely been concentrated in one stock. With this in mind, we wanted as many managers as possible thinking about how much Naspers to have in a portfolio. The inclusion of Truffle at the expense of ABSA supports this assertion.

Another cause of underperformance has been a slight overweight to the resource sector and although resource shares have outperformed year to date in 2016, this positioning has hurt over the last 1 and 3 years.

About Truffle Asset Management

Truffle Asset Management was established in 2008, by Hannes van der Westhuyzen, Louis van der Merwe and Charles Booth. Together they have more than 70 years’ of collective experience in the South African financial markets.

These individuals have a long history of working together, most notably in the RMB group since the early 2000’s and the inclusion of senior Portfolio Manager, Iain Power (also from RMB Asset Management) also supports this. In terms of structure, we see the 77% ownership by staff as alignment of the manager’s interest with investors. The remaining 23% is owned by RMB Structured Insurance (Pty) Ltd (part of listed RM! Holdings Ltd).

The culture of Truffle is team-based and collegiate, with portfolio managers also performing in-depth company analysis. Therefore, the Portfolio Managers have displayed rigorous bottom-up research pertaining to business analysis, interactions with companies and assessing the quality of companies, it’s management teams and competitive positioning. This rigorous bottom-up analysis is core to Truffle’s investment philosophy. Truffle has a sound portfolio construction process to ensure well diversified active positions, while also keeping an eye on downside risk protection.

Changes to the portfolio tie in with our risk management

The long-standing bull market, driven by global quantitative easing has been supportive of managers with a momentum or growth orientation. As such, managers with a strong value biased have not fared well during these conditions, and unfortunately ABSA has been one of them. We point out though that changes in the house factors and the way the business has been reorganized has weighed more heavily in our decision, than performance alone.

As way of background, in 2015, ABSA announced the reorganization of its Asset Management division from a team orientated, central portfolio management function under the stewardship of Errol Shear into a decentralized franchise model. Under this model, the team has been separated into various franchises where Errol Shear now makes up one of the Portfolio Managers within the Equity franchise run by Stephen Arthur. This type of organization reshuffle can negatively impact on individuals within the team and can take their time to settle down. We have taken the view that from a risk management perspective we would rather not expose our clients hard earned savings to this form of uncertainty.

In 2012, ABSA’s weight in the Fund was around 30% and thus by down weighting them, we did well to partially avoid some of the poor performance from the manager in recent years. Since we became aware of the change in house factors, we down-weighted ABSA from a weight of 10% to 7% as an interim risk management measure prior to making the decision to remove them from the portfolio completely.

Impact of changes on the portfolio

Our previous manager line-up collectively led to the fund having a slight underweight to non-resource Rand Hedges. The inclusion of Truffle increases the Fund’s exposure to the likes of Naspers and British American Tobacco, which reduced the underweight to these stocks. Exposure to the resource sector is a little bit lower but not materially different. Overall, these moves should lower the Funds tracking error relative to the Funds benchmark (the SWIX).

Conclusion

The decisions to include Truffle, down weight and now remove ABSA all form part of our overall investment process, which focuses on manager house factors, portfolio positioning, performance as well as the overall’s fund’s positioning and construction (blend).

The table below provides the strategic allocations to the underlying managers within the Fund before the removal of ABSA and after the inclusion of Truffle. In summary, reorganization within ABSA and what appears to be changes in the support and responsibilities of the lead PM, Errol Shear, has promoted us to reduce the our funds allocation to ABSA, and subsequently remove them from the Fund. We now include Truffle, which helps reduce the Funds overall underweight to non-resource Rand Hedges. In order to include Truffle at a reasonable weight of 10% in the portfolio we reduced the allocation to Prudential from 25% to 22.5%, which in itself brings in an element of risk management.

We also highlight that Truffle being a boutique manager, has reduced the funds overall weighting to larger managers, implying an increase in the overall nimbleness of the Fund and its ability to exploit smaller opportunities.

Manager Old Weight New Weight
Salient Value 4% 4%
ABSA AM 7.5% 0%
Coronation FM 18.5% 18.5%
Foord AM 15% 15%
STANLIB AM Passive SWIX 10% 10%
Prudential FM 25% 22.5%
Visio AM 15% 15%
Truffle AM 0% 10%
Salient Momentum 5% 5%
TOTAL 100% 100%