The Small Cap Fund That Hunts High And Low For New Ideas

Sanlam walked away with several certificates at the annual Raging Bull Awards last month. The certificates are awarded to star managers in the local unit trust industry, measured on their long-term performance.

Vanessa van Vuuren collected the certificate for the best smaller companies equity fund in SA, awarded to the Sanlam Investment Management (SIM) Small Cap Fund. Vanessa tells us more about her fund below.

Q: How did you experience 2015?

Small and mid-cap shares underperformed the large cap TOP40 shares last year, so our investment universe was under some pressure. This is partly explained by the high composition of resource shares in the small and mid-cap indices, which had a torrid year, while the TOP40 remained supported by large dual-listed blue-chip industrial stocks that once again proved to be resilient investments. Against this backdrop, our fund enjoyed a relatively decent performance in the tough investment environment that characterised last year. The SIM Small Cap Fund generated a total return of 11% last year, while the broader market was up 5% (FTSE/JSE All Share Index total return including dividends) and the average small and mid-cap fund returned 7%. What was pleasing was that some of our higher conviction, concentrated investments to which we allocated significant capital performed well and supported the overall portfolio (Curro, Adapt IT, ADvTECH and Bowler Metcalf). The macro-economic backdrop remained tough last year, so we purposefully tried to focus the fund by investing in higher quality companies with more defensive business models that would hopefully withstand a more challenging economy.

Q: Returns always need to be viewed in the context of the risk taken to achieve that performance. How do you manage the risk in the portfolio?

We view risk management as a multi-faceted issue that is a critical component of our investment process. On a micro-level, we manage the liquidity profile of our investments carefully, as this is a specific nuance to small-cap investing that needs thorough consideration and risk management. So when investing in a new counter, we clearly understand the liquidity profile and the risk management with regards to trading in and out of a particular investment. The next level of risk then pertains to our risk of permanent capital loss through exposure to companies that may face bankruptcy or a major recapitalisation or perhaps some other structural threat to their long-term survival. We manage this risk by monitoring the levels of debt within the companies that we invest in – or analyse – and we avoid investing in companies that we believe are over-indebted with potential balance sheet issues. On the structural front, if we believe the long-term sustainability of a company’s business model is precarious or at risk, we will also avoid investing our client’s capital into such stocks. Lastly, we do monitor risk parameters overall on a quantitative basis as well, by analysing our tracking error (relative to our fixed benchmark and investment universe) and monitoring our sector and factor risk (to specific economic sectors and specific factors, such as rand hedge qualities).

Q: Which shares do you have a mandate for?

The fund has quite a large investment universe. We can invest in any equity share outside of the JSE TOP40 Index. From a JSE perspective, this universe is essentially comprised of the mid cap index, small cap index, fledgling index and the ALT-X index. If we hold a share that moves into the TOP40 Index, we are not forced to sell it, but we cannot buy more of it. We can hold cash up to a maximum threshold of 20% and can also take up to 25% of our client’s capital offshore and invest this into foreign holdings and an additional 5% into African equities.

Q: What do you expect of the year ahead?

We believe that the year ahead is going to remain extremely challenging. The economy is going to be under significant pressure and growth is expected to remain depressed. A rising interest rate cycle to manage inflation risks will place consumers under further pressure and will have a negative influence on equity markets. The volatility of the rand has further complicated the trading environment for many small and mid-cap SA companies and we continue to monitor the effect of this on the shares that we are analysing or holding in our portfolios. In a turbulent market, our objective is first and foremost to protect the capital of our clients and we will do this by concentrating our exposure to areas of the economy where we see more resilience to the cycle, such as our focus on education stocks and healthcare stocks. It is worth highlighting that these market conditions are also an excellent breeding ground for new investment ideas and can often provide an opportunity to invest in companies that were previously over-valued, so this is a time when our research process is focused on combing our investment universe and hunting for new ideas. Having been through these cycles before, we understand that many of these cyclical headwinds will pass and the companies that we invest in will reap future returns beyond the turbulent short-term dynamics that we are currently contending with. We are therefore focused on identifying those entry points into new investments that will generate excellent returns for our clients over the medium to longer term.

To view the SIM Small Cap Fund factsheet click here

Mandatory disclosure

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate advice after a thorough examination of a particular situation. We endeavor to provide accurate and timely information but make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information or opinions. Any representation or opinion is provided for information purposes only. Unit trusts are generally medium to long-term investments. Past performance of the investment in no guarantee of future returns. Unit trusts are traded at a ruling price and can engage in borrowing and scrip lending. Sanlam Investments consists of  the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Radius Administrative Services (Pty) Ltd (“Radius”), Blue Ink Investments (Pty) Ltd (“Blue Ink”), Sanlam Capital Markets (Pty) Ltd (“SCM”), Sanlam Private Wealth (Pty) Ltd (“SPW”) and Sanlam Employee Benefits (Pty) Ltd (“SEB”), a division of Sanlam Life Insurance Limited; and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”) and Satrix Managers (RF) (Pty) Ltd (“Satrix”). Although all reasonable steps have been taken to ensure the information in this document is accurate, Sanlam Collective Investments (RF) (Pty) Ltd (“Sanlam Collective Investments”) 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. Sanlam Group is a full member of the Association for Savings and Investment SA (ASISA). 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 may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments, 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.  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. International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk 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.