We have always recognised the importance of growing investors’ capital and providing sustainable, inflation-beating returns over time. Our focus, therefore, has not been on outperforming a particular benchmark or peers but on compounding investors’ wealth over time, thereby helping them to keep their purchasing power intact. To this end, long-term Investec Opportunity Fund investors have enjoyed strong gains. Since inception*, a R200 000 investment into the Fund would have grown to R4 443 827. This translates into an annualised return of 16.9% since inception, which means the Fund beat inflation by more than 11% per annum. What makes us particularly proud of this achievement, is that we faced a variety of challenging market conditions over the past 20 years, the key ones shown in Figure 1.
Figure 1: Since inception* performance, R200 000 initial investment
Annualised performance (%)
Source: Morningstar, dates to 30.04.17, performance figures above are based on a lump sum investment, NAV-NAV, net of fees, gross income reinvested, in ZAR. Market indices are gross of fees. Since inception* R class (02.05.1997) and A class (02.04.00). Highest and lowest 12-month rolling performance since inception (R/A class) is 61% and -15.7% respectively. The total expense ratio of the Fund (A class) is: 1.99%. Sector: SA Multi Asset High Equity.
We established the Fund when our democracy was only three years old. One year later, the East Asian crisis hit, which had a material impact on emerging markets. The rand came under severe pressure in 1998, and the prime rate was hiked to 25.5% in an effort to protect the local currency. The roller coaster ride continued with the dotcom crash in 2000, followed by a bull market which lasted until 2007. Many investors felt the world was ‘ending’ when the global financial crisis struck in 2008. More recently, the Brexit vote, South Africa’s cabinet reshuffle and rating downgrades caused market jitters. Over the years we’ve learnt to stay focused and continually evaluate information, and to maintain an even temperament through the ups and the downs.
While these types of events test the mettle of fund managers, sharp market movements can create investment opportunities. Equities have been the primary source of generating real returns for our investors over the long term. Returns do not exist without taking on risk – even an exposure to cash leaves investors at the mercy of inflation. So, as long-term investors we do not avoid risk but manage it.
In 2001 and 2007 when markets levels were elevated, the general consensus was that there was not much risk. However, we held the view that we were not being paid to take on risk. As we were increasingly finding fewer opportunities, our equity exposure was relatively low. On the other hand, in 2003 and 2009 when investors turned their back on equities, not distinguishing between good and bad companies, we had full exposure to equities. At the time, the market was depressed, exposing compelling quality opportunities with a significant risk premium, and our positioning benefited the portfolio. Our risk, quality and valuation framework means that we only invest in opportunities where we are paid to take on risk, where there is a sufficient margin of safety. By carefully managing risk, we have achieved attractive real returns at lower volatility than the average fund in the Multi Asset High Equity sector since inception*, as can be seen in the Figure 2.
Figure 2: Risk versus return since inception*
Source: Morningstar as at 30.04.17. Risk-return scatter plot showing the Investec Opportunity Fund since inception*: R class (02.05.1997) and A class (02.04.00) relative to the STeFI Composite Index, JSE ASSA All Bond Index, SA Multi Asset High Equity sector, FTSE/JSE All Share Index and MSCI World Index (ZAR).
We are not short-term traders. Instead, we prefer to take positions in what we perceive as high quality companies that offer good value. Typically, these positions are held over the medium to long term. On the domestic front, shares such as British American Tobacco, Richemont and Steinhoff have been key holdings in the portfolio for a number of years. Not only have these shares proved to be an attractive hedge against rand weakness, their strong brands, consistent earnings and stable cash-flow positions have enabled these companies to contribute significantly to returns over the long term. Of course, quality businesses may also change over time. Our risk, quality and valuation framework plays an integral part in equipping us to identify the ‘BlackBerries’ of the future, i.e. those companies that could be considered a quality company today but might become obsolete in future. We consider factors such as the management, product range, barriers to entry, innovation, changes in technology, operational/distribution models and balance sheet strength. Any of these could raise concerns that a company may not stay the course over time.
The 1990s were characterised by the gradual relaxation of exchange controls, which introduced new investment opportunities for our investors. As the offshore component of the Investec Opportunity Fund grew, we created a stand-alone fund – the Investec Global Franchise Fund. This fund, which is currently the offshore vehicle of the Investec Opportunity Fund, made a material contribution to generating real returns while reducing the risk for our investors over the long term. Furthermore, the Investec Global Franchise Fund has widened the opportunity set, giving our SA investors access to large, mega-cap companies, and exposure to sectors that don’t have much of a footprint in South Africa such as technology, as shown in Figure 3.
Figure 3: Investing in world-leading companies
Nestlé, which has been around for more than 150 years, has been a key holding in the Investec Global Franchise Fund since the fund’s inception. This quality company understands the power of innovation. Research and development (R&D) has helped Nestlé to become an industry leader in nutrition, health and wellness. We are attracted to cash-flush quality companies that invest heavily in R&D and advertising and promotion, as it bolsters product innovation and brand loyalty. We believe this not only contributes to future growth, but strengthens barriers to entry and protects these firms from competitive threats. For every one dollar of sales, companies in the Global Franchise portfolio in aggregate spend four times as much on R&D than the wider market, and still generate higher margins and a higher return on invested capital.
Our focus remains on providing attractive inflation-beating returns to investors over the long term by having a balance of exposures. Different asset classes provide different returns at different points in the economic cycle, helping to smooth returns over time. But it is important to emphasise that we see equities as the engine of inflation-beating returns over the long term. We continue to focus on those equity opportunities that have the highest probability of generating sustainable free cash flow. In this environment, we believe the best opportunity remains global equities generating high returns on invested capital, followed by select local equities. Both opportunity sets provide significant exposure to currencies other than the rand, with strong valuation support in the form of free cash flow.
On the local bond front, the reaction to the removal of the finance minister and the sovereign credit rating downgrades has been more muted than expected. Foreign investors appear to be viewing these events as a buying opportunity, especially given the demand for emerging market exposure. There is much uncertainty in our bond market, and until there is clear policy direction from Finance Minister Malusi Gigaba, this uncertainty will likely continue. Our bond exposure is therefore prudent: lower duration and higher-quality instruments, with the allocation balanced against offshore holdings to limit the potential for loss.
Political and event risk are part of the investment landscape. But as bottom-up quality investors, we do not position our portfolio for specific event risk. Therefore, we are maintaining a balance of exposures in the portfolio that offer protection in a number of different investment environments. With a variety of unforecastable binary risks coming to the fore, we do not believe that it is appropriate to position the portfolio for a particular outcome.
All information is as at 30.04.17 unless stated otherwise. All information provided is product related, and is 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 without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long-term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing, up to 10% of fund net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the Manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The total expensive ratio of the Fund (A class) is: 1.99%. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. The fund is a sub-fund in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission.