De Wet Van der Spuy

The STANLIB Multi-Manager Flexible Property Fund is a diversified income portfolio with a strong bias to listed property shares. The fund has a mandated property range of between 40%-85% at the discretion of the underlying managers, with the balance invested in fixed interest securities. Given that the fund has had around 60% exposure to listed property on average, it is a more conservative portfolio compared to a fully invested property portfolio. The fund seeks to generate a reasonably high level of income and moderate capital growth. In the long-term, it is designed to provide most of the upside to the Listed Property Sector with significantly less volatility and has done a good job in this regard.

The fund does not directly invest in offshore assets, although indirect foreign exposure is obtained through the offshore property holdings of local listed property shares. In order to maximize the fund’s exposure to these indirect foreign assets or inward listed shares, we recently took the decision to split the current passive property mandate with STANLIB’s Passive Franchise into two components. One tracking the SA Listed Property Index (SAPY) and the other tracking the Capped Property Index (PCAP). This note briefly outlines our rationale for doing this.

Performance and fees

As highlighted in the table above, the fund’s performance relative to its benchmark over the long‐term has been pleasing. The fund has also outperformed its peers and while we are happy about this result, we are concerned about the variability (tracking error) of its outperformance. Clearly, a lot of the absolute performance of the fund has been delivered through its exposure to local listed property, which has done exceptionally well over the past 10 years.

It should be borne in mind that the ASISA MA Flexible category contains managers that use a wide array of strategies and asset classes to compete. Given this, the relative risk between the different managers can be substantial and in many cases should not be compared and definitely need to be understood by investors.

In the case of the STANLIB Multi-Manager Flexible Property Fund, it uses locally listed property as a core asset to produce inflation beating returns, whilst allowing the underlying managers to tactically allocate to local cash and fixed interest assets to control the risk when property is expensive. It currently cannot invest in global assets (which we are looking to address), which places it at a significant disadvantage relative to those managers that can, especially when the rand depreciates relative to global currencies.

The additional diversification that the global exposure brings also tends to lower portfolio volatility. In reviewing this, our analysis highlighted that the largest contributor to the higher tracking error was that over 75% of the managers in the category have exposure to global assets, with an average holding of around 16%.

Notwithstanding the fund’s outperformance relative to the peer group as displayed above, being structurally underweight global assets relative to peers is a risk we would rather not take. To address this, we have included the Capped Property Index (PCAP). The most obvious risk mitigating decision would be to convert rand’s into foreign currency and buy direct offshore exposure, but the fund’s current mandate precludes this.

Over the past couple of years, domestic listed property companies have been diversifying their portfolios outside of South Africa and some of the offshore listed companies also have secondary listings in South Africa. This provides the opportunity for the fund to indirectly access offshore assets by holding a greater exposure to those South Africa listed property companies with either full or partial global assets.

The PCAP is an index of property shares that aims to capture more of this trend by including an additional three domestically listed offshore companies in its construct – Intu PLC, Capital and Counties PLC and Redefine PLC. Together, the indirect offshore exposure in this index is estimated to be more than 45%. This is nearly 20% higher than the reference index (the SAPY) and hence becomes an effective vehicle to gain such exposure where desired.

Conclusion

The fund has out-performed its benchmark and peers over the long‐term. The decision to switch to the PCAP will provide the fund with additional exposure to the global property market and hence give it more rand hedge qualities. This should result in higher risk-adjusted returns. It will also reduce the tracking error relative to competitors in the ASISA MA Flexible category and promote the continued outperformance of the fund.

We believe that the additional diversification enjoyed by the new manager line up will benefit investors over the long-term. Going forward we will also look to change the mandate of the STANLIB Multi-Manager Flexible Property Fund to make it more flexible by allowing it to access global property directly and thereby further improve its diversification benefits and appeal to investors.

Multi-Manager funds, long thought of as expensive, can cost investors less, while providing numerous benefits. However, you need to know how to choose them.

Financial advisers often think of multi-managers as a hard sell to investors because of perceived higher costs. However, in reality investors could be missing out on one of the best-kept secrets of successful long-term investing.

Avoid looking at the collective when expressing a view on fees!

Confusion about the fees charged by fund of funds and those of multi-managers tends to blur the issue. Fund of funds tend to be very expensive, partly because these managers don’t have the scale necessary to negotiate better fees typically the smaller Discretionary Investment Managers (DIM’s). Multi-managers, on the other hand, benefit from having significant scale, allowing them to negotiate cost-effective fees. Multi-manager funds charge far less than fund of funds and are often even more cost-effective than single manager funds.

For example, if you take the largest multi-asset ASISA category i.e. high equity , you will see that the majority of funds of funds are more expensive than single manager funds, whereas multi-manager funds from those managers with scale, such as STANLIB Multi-Manager’s, are generally much cheaper than these and even cheaper than many single manager funds.

Additional layer of fees doesn’t necessarily translate into higher fees

A multi-manager is a fund manager that creates a portfolio by choosing multiple managers to manage the underlying mandates. The aim is to diversify risk and the potential returns through blending some of the best managers in a particular portfolio. By their very nature multi-manager funds have an additional layer of fees (the fee they charge for their service and the fee paid to the underlying asset managers). This does not necessarily translate into a higher overall fee or total expense ratio (TER), as a large multi-manager like STANLIB Multi-Manager can negotiate very competitive fees with the underlying asset managers.

Be prudent when comparing multi-manager fees with that of single managers - additional benefits at no extra cost

The investor gets all the benefits offered by multi-managers. As an example, STANLIB Multi-Manager conducts extensive research on the investment industry to understand the landscape and the players. We spend huge resources on understanding these managers through an investment due diligence process that covers the underlying managers’ investment philosophy and process in detail. This covers house factors, people and teams (including how they are incentivised) and principles and policies to help decide how to weight each mandate (from our buy list of managers researched) within the overall fund. STANLIB Multi-Manager’s sizeable and experienced investment team, processes and systems mean that all research and ongoing monitoring is rigorous and robust.

Don’t forget the extra layer of governance when looking at fees

Having the STANLIB Multi-Manager investment team responsible for investment due diligence is like having your own personal lawyer by your side whenever you sign a new contract. You have a professional on your side that knows what to look for and knows how to decipher the often complex financial language. STANLIB Multi-Manager, by constantly reviewing a fund’s investment positions and mandate adherence, aims to identify and prevent catastrophic risks before they occur.

There have been a number of high-profile fund failures which bring to the fore the importance of operational and governance due diligence. The 2008 Fidentia scandal saw R1.4 billion siphoned from a pension fund aimed at paying an income to widows and orphans of mineworkers. In 2013, the Sharemax-promoted Zambezi Retail Park property syndication turned out to be an illegal scheme with billions of investors’ capital disappearing. As recently as December 2015, a SA unit trust lost 66% of its value in two days when the fund manager couldn’t get out of complex derivative positions.

The lesson is clear. Operational due diligence and governance procedures matter. Changes in regulations are raising questions about the manager’s risk governance and attention is shifting to the administrator and trustee. In cases like these, financial advisers could be next to come under the magnifying glass, especially if the work they have performed before recommending a fund to a client is superficial, baseless, or based on past performance.

By partnering with STANLIB Multi-Manager many of these risks are mitigated for both you and your clients.

Our STANLIB Multi-Manager investment team has more than 120 years of collective investment experience. In addition, we are the largest collective investment scheme multi-manager in South Africa and have in excess of R150 billion assets under stewardship.

Please contact your regional Business Development Manager or e-mail Albert Louw, Head of STANLIB Multi-Manager Business Development at albert.louw@stanlib.com, if you have any queries or would like to understand what role STANLIB Multi-Manager can play in improving your investment value proposition to your clients.

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.

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.

We have implemented a change within the manager line-up of our Global Equity Fund. In this regard Arrowstreet Capital have been appointed at the expense of Fidelity - effective March 2016. As a group STANLIB has a strong relationship with Fidelity dating back to 1996. We continue to believe they are a world class asset manager; however we think the addition of Arrowstreet Capital, a quantitative manager, compliments the fundamental stock pickers within our current composite of manager line up.

Why the change?

We have implemented a change within the manager line-up of our Global Equity Fund. In this regard Arrowstreet Capital have been appointed at the expense of Fidelity - effective March 2016. As a group STANLIB has a strong relationship with Fidelity dating back to 1996. We continue to believe they are a world class asset manager; however we think the addition of Arrowstreet Capital, a quantitative manager, compliments the fundamental stock pickers within our current composite of manager line up.

Looking for a quantitative manager

For some time now we’ve been looking at including a quantitative manager within our line-up. We view the addition of someone who looks at the world from a different perspective (such as trading on the basis of a model which eliminates the emotional attachment to a particular share) as a complimentary skill set to our bottom up stock pickers. We believe Arrowstreet Capital will add to the diversification of our portfolio while not compromising on excess returns.

Who is Arrowstreet Capital?

By way of background, Arrowstreet Capital is an institutional global equity manager with $57 billion in AUM. They were founded in 1999 and are 100% employee owned. Most of the partners are ex CIO’s or Directors of research who earned Ph.D.’s at Princeton, Yale and Harvard University. The investment team is therefore extremely well resourced and continually research and invest in infrastructure to maintain an edge and offer a sustainable source of alpha.