15 Minutes with SIM’s Fred and Patrice

According to Morningstar, both the Sanlam Investment Management (SIM) Balanced and the SIM Top Choice Equity Funds have comfortably beaten their peer median over three and five years to 30 September 2017. We’ve interviewed Fred White, portfolio manager of the SIM Balanced Fund, and Patrice Rassou, at the helm of the SIM Top Choice Equity Fund, to find out how they deliver consistent value to long-term investors.

The SIM Balanced Fund offers investors a well diversified blend of asset classes. What role do equities currently play in the portfolio?

Fred: More than ever investors need to get growth on their assets to meet their long-term savings goals, especially given constantly rising longevity, which means investors would need far more money to retire than the previous generation. The unprecedented lowering of global interest rates in the wake of the Global Financial Crisis has led to a change in the pricing of all assets, due to the significantly reduced outlook for returns from global cash and bonds. High price to earnings (PE) ratios are a rational outcome of this re-pricing. Despite the higher prices, equities is still the asset class that is most likely to produce inflation-beating returns over the long term, going forward.

Is the SA equity market currently expensive?

Fred: Given the poor earnings outlook for many South African companies and the high current PE ratios of the major JSE indices (around 20), you may think that local equities are currently expensive. However, any local equity measure is heavily influenced by Naspers, which has grown to around 20% of most of our indices. Once SIM excludes Naspers from its valuation measures, local equities ex Naspers seem much more palatable (PE ratios of around 15x historical earnings), especially in a global context of higher priced equities. Furthermore, companies that primarily derive their earnings from South Africa have become cheap.

How comfortable are you with the excessively large PE ratio of Naspers?

Fred: As value-oriented investors we are naturally sceptical of companies trading on high PE multiples, but the business models of companies are being turned on their heads. Naspers is the best known local example, but there are now several of these high growth companies around the globe – Amazon, Alphabet (Google), Facebook and eBay, to name a few. And it is not rare for these to trade at high PEs. Despite Naspers’ very high PE ratio, the share still offers upside, just not when measured by elementary methodologies such as PE multiples. It requires a proper analysis of the business model and potential and an appreciation for the under-valuation of much of Naspers’ non-Chinese investments.

How does the SIM Balanced Fund protect investors against drawdowns?

Fred: Among other things, we put protection in place for shares like Naspers – to reduce investors’ losses in the case of a big drawdown. By doing that, there is the risk of incurring an opportunity cost: should the Naspers share price rise by even more than expected our fund’s exposure would be capped. But at least by the time that happens investors would already have received massive upside and could rest assured knowing that they’re not exposed to the full potential downside of the share’s price. So we effectively follow an approach of investing in the most likely growth opportunity and putting in place “calamity insurance” where that growth opportunity might come with an increased risk of drawdown. We aim to get the best of both worlds: vigilantly seeking returns, being bold when necessary, and also cautiously searching for protection.

Why is the SIM Top Choice Equity Fund such a compelling offering?

Patrice: The fund has delivered returns well above its unconstrained equity peer group while taking risks broadly in line with the peer group. This has resulted in a compelling risk-adjusted return since inception. The fund is still quite nimble and has been able to gain exposure to some of the less liquid mid-caps, such as Dischem, since listing. This is also reflected in the fact that the fund has been in the first or second quartile ranking in an extremely competitive category over most short- and long-term periods – testimony to consistent outperformance.

What is the process for selecting a stock for the SIM Top Choice Equity Fund?

Patrice: The fund represents the best ideas of the general equity and sector specialists at SIM. We aim to scan the universe of some 250 large and small caps and select around twenty of the best ideas which are likely to outperform the market over the long term by leveraging a team of analysts who are experts in their field. As pragmatic value investors, a rigorous bottom-up valuation process remains our bedrock in order to identify undervalued stocks.

Almost 20% of the SIM Top Choice Equity Fund is invested in Naspers. What is your view on this company?

Patrice: Naspers has a market cap of over two trillion rands and Tencent, an associate investment, has grown to become one of the ten largest global companies by market value. Therefore, Naspers provides a way to gain exposure to the global technology theme and to a wide range of emerging markets, including China and India, without having to use any of one’s annual offshore allowance. At the moment Naspers trades at a large discount to the value of Chinese internet giant Tencent, providing a sufficiently large margin of safety.

What should investors expect with regards to the returns of SA equities for the rest of the year?

Patrice: While the JSE has hit record levels, we still see pockets of value. However, equity markets are likely to be braced for a potential credit downgrade and the outcome of the ANC policy conference in December. Market reaction is likely to be binary and hinge on political developments. The SIM Top Choice Equity Fund has withstood a number of shocks since the Global Financial Crisis and has come through with flying colours. We have invested in companies with dominant positions in their industries and diversified geographical footprints. Any dislocation usually presents excellent entry points to pick up quality stocks.

Although all reasonable steps have been taken to ensure the information on this website/advertisement/brochure is accurate, the Sanlam Collective Investments (RF) (Pty) Ltd does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision.

The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. The Sanlam Investment Management (SIM) Balanced Fund is a multi-asset, high-equity fund and is exposed to equities, which means the prices will go up and down. The Retail class is the most expensive class offered by the Manager. The maximum fund charges include (including VAT): An initial advice fee of 3.42%; annual advice fee of 1.14% and annual manager fee of 1.25%. The most recent total expense ratio (TER) is 1.67%. The SIM Top Choice Equity Fund is a high conviction, pure equity fund. The fund is exposed to equities, which means the prices will go up and down. Sanlam Investment Management Top Choice Equity Fund aims to deliver above average growth of capital over the medium to long term. The fund may display high volatility in the short to medium term and is suitable for the sophisticated investor with an aggressive risk profile. The Retail class is the most expensive class offered by the Manager. Maximum fund charges include (incl VAT): Initial advice fee, 3.30%. Initial manager fee, 0.00%. Annual advice fee, 1.14%. Annual manager fee, 1.02%. Total expense ratio (TER), 1.19%.  Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any  deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date.  Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The fund may from time to time invest in foreign instruments which could be accompanied by additional risks as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates.  The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme.