Last year was a strong one for unit trusts, particularly those focused on the domestic equity market. You could have had a return of almost two-thirds (65,6%) from the top-performing fund of the year, Sanlam Value.
The top performer of the year is the only fund that wins an award in the Standard & Poor's (S&P) Investment Fund Awards purely on its unadjusted performance.
The S&P Awards use the relative risk adjusted (RRA) return methodology. This is used for S&P Awards all over the world and takes account of the volatility of performance against the peer group. Funds that win with very different portfolios from their peers are penalised in this system. S&P's director of statistics, Karen Coleman, says this excludes outliers which might have won by moving outside their mandate.
For example, Stanlib Bond failed to win the one-year award for bonds, though it was comfortably top on an unadjusted basis, because it bought preference shares that helped the total return for the year but increased the volatility of performance relative to the peer group materially.
Over one and three years Old Mutual High Yield Opportunity was the top general equity fund on an adjusted and unadjusted basis in the general equity category. Oasis Crescent Equity was top over five years on both bases.
However, over five years, RMB Strategic Opportunities was top in the growth category but because the bulk of this outperformance took place in 2000 and 2001, and there has been a sharp fall-off as the rand strengthened, on an RRA basis the five-year winner in the sector was Stanlib Capital Growth, which came third on an unadjusted basis.
But Stanlib Resources - which along with RMB Strategic Opportunities has been winning every year since these awards began - loses out on the RRA basis over five years to Old Mutual Mining & Resources.
Besides winning the top fund of the year award, Sanlam Value was top of the highly competitive value sector on an RRA return basis over one year. Fund manager Omri Thomas attributes his strong showing in the fourth quarter to local diversified industrials such as Imperial, Bidvest and Barloworld, along with a heavy 35% financial weighting, which outperformed both industrials and resources during the year. His main picks in the sector were Nedcor, Remgro and Absa.
A further 23% was in the highly successful cyclical services sector, including retailers such as LA Group, Ellerine and Truworths. He also made some shrewd picks among small caps, such as Grintek, Highveld Steel and Grindrod.
Gold medals are a great boost for any company, and Sanlam is justly proud that it has won the fund of the year award for the second year running. Last year's winner, Sanlam Small Cap, has been no slouch this year either, with a 59,3% return.
But the most important S&P Awards are certainly the group awards, which, like the rival Plexus Awards, judge management companies across the product spectrum.
S&P divides its awards into two categories - smaller groups and larger groups. Larger groups had at least five eligible funds since the beginning of the period (that is for the full year, three years or five years). Investec once again won the five-year and three-year larger group awards, even though it had a lean haul of gold medals.
Investec Opportunity and Investec Value were top of their sectors over five years and Investec Value won a gold for three years. But the overall award was boosted by top-quartile returns from funds such as Investec Equity, Investec Managed, Investec Gilt and Investec High Income.
Investec Asset Management (SA) MD John Green says Investec has been able to keep talent by giving them ownership of their own silos or "propositions" and much of the freedom they would enjoy in a boutique environment, with the research and marketing infrastructure of a large company.
"Some of our competitors have one house view and just dial the risk up and down. But with our system there is enough autonomy so that if one part of the business is not doing well, it will not necessarily affect the others."
Clyde Rossouw at Investec Opportunity, John Biccard at Investec Value and Gail Daniel at Investec Equity have all had a successful 2004. Investec Growth under Mark Breedon, a previous sector winner, had a tougher time.
Investec Value is by far the biggest fund in its category, with R2,74bn under management, which gives it a lot less flexibility. It could not boost its performance simply through the selection of a handful of small caps but still ended the year second with a 57,9% return. Biccard says he now has the luxury of operating with a closed pool of money, as the fund no longer takes in new money. He does not have to continually manage cash flows.
Biccard has maintained the bias towards domestic industrial and financial shares - long-time Biccard favourites such as Reunert and Truworths remain in the fund's top 10 - but he has begun to buy into resources, taking positions in Implats, Ispat Iscor and Assore.
The biggest positions, however, continue to be FirstRand and Standard Bank. Though there is constant speculation that Biccard's high profile means he will inevitably set up his own boutique, he insists that Investec remains an ideal working environment. "It's a pleasant place and we all can take charge of an area we can call our own."
Investec has also confounded the sceptics by maintaining a strong position in the flexible category with Investec Opportunity. Rossouw, in charge of the fund for two years, has maintained the philosophy of his predecessor, Piet Viljoen. The fund invests primarily in low-risk, low-volatility equities such as Afrox and Pick 'n Pay. It is not a prudentially managed fund but has chosen to remain no more than 75% invested in equities. Still, its returns have been competitive with funds that were almost fully invested in equities.
Investec failed to repeat its clean sweep of the larger group awards as Old Mutual Unit Trusts took the honours over one year. It had five category winners over one year, three over three years and one over five years.
Old Mutual has traditionally been stronger in the core equity and balanced categories but Peter Linley, the new chief investment officer of Old Mutual Asset Managers, has been strengthen ing its specialist equity capability.
The top performance of Douw Steenekamp's High Yield Opportunity fund has demonstrated its value-management skills. Until recently the performance of the value fund itself was hampered by its 20% offshore holding.
High Yield was closed to new investors, as Old Mutual believed it was no longer realistic for it to aim to offer a 5% dividend yield to clients at a time when the Alsi dividend yield had fallen to 2,5%. But the mandate of the Value fund has been changed so that it now looks at total return rather than capital appreciation. This will give it the chance to operate like a High Yield fund Mark 2.
With the recent consumer boom, Old Mutual has been fortunate that it has SA's last explicit consumer fund (OMC). It did not pick up the award for one year in the industrial category as it was beaten by Sage Industrial. Run by Investec's Rob Forsyth, this fund also had a strong consumer bias. But OMC still walked away with the three-year RRA return award. It produced a 33,1% return over one year, while second-placed Coronation Industrial got 29,9%.
OMC fund manager Patrick Ntshalintshali says consumer spending is still going well, partly because today's consumer is more interested in spending on clothes and home than on an overseas holiday, for example. But volume growth is not sustainable at 12%-13%.
"Fortunately retailers are not expensive and they still have strong balance sheets." The fund does not invest in basic industries such as construction, Iscor or Sappi, but it can diversify outside the retail sector into shares such as Remgro, MTN and Imperial.
Old Mutual has taken over Stanlib's mantle in the mining & resources sector as the fund to beat. The main driver of its success in 2004 was the 17% holding in steel shares, divided between Ispat Iscor and Highveld. Its main rival in the sector is now Coronation Resources, which took the three-year award. Under fund managers Hugo Nelson and Mike Lawrenson, the fund has concentrated on shares that should do well even when the rand is strong, leading it to large holdings in Implats and Sasol and almost no gold, except when it had a stroke of luck and took a speculative position in Gold Fields just before the Harmony offer.
Coronation took eight gold medals, including a clean sweep in the financial category. Fund manager Neville Chester had a hunch that the discount at which Sanlam and Metropolitan were trading against their embedded value would pay off, and he was right. Chester was working from a strong base provided by his predecessor, Kokkie Kooyman, and the foreign holdings were liquidated early in the year.
Coronation Top 20 wins the three- and one-year awards in the large-cap category. The category is dominated by index funds, including Satrix, but it has achieved an 11,1% annualised outperformance since inception. The fund has a concentrated 15 holdings and 40% of the assets are made up by four shares: Telkom, Naspers, Remgro and Sasol.
Another multiple winner was Stanlib. The returns of its fixed interest team under Henk Viljoen are a regular feature of all unit trust awards, but its equity performance is often overlooked.
This year it won both the five-year award in the growth category, with Stanlib Capital Growth, and the one-year award in the small-cap category.
Stanlib Capital Growth, under Richard Middleton, is one of the few growth funds to use a growth-orient ated screening tool in its share selection - the peg ratio. This looks at the p:e as a ratio of the expected earnings growth. If the peg ratio is below 0,5 (for example, if the p:e is 9 and the expected growth is 20), the share should be attractive to a growth fund. In resources, for example, Kumba and BHP Billiton are the most attractive shares on this basis.
Stanlib Small Cap, managed by Anthony Sher, has focused on genuine small caps rather than midcaps and its holdings included Grindrod, Argent Industrial, Cashbuild and Amalgamated Appliances.
RMB had a relatively disappointing haul of four awards, but the full range of skills in the house was on display, with the three-year award in the flexible category for RMB High Tide, managed by Andrew Vintcent and Jonathan Stewart, and the one-year award for RMB Balanced.
The team running RMB Balanced, Sophie-Marie van Garderen and Saul Miller, also won for RMB Emerging Companies over three years in the very different small-cap category.
Van Garderen says the Balanced fund aims to offer a house view but because it is so much smaller than most institutional portfolios (with R383m under management), it can still generate alpha (excess returns) from some favoured small caps such as Astral, Astrapak and Group Five.
Both funds have a domestic bias but she says the fund managers will take rand-hedge exposure in the funds when they do not have to pay a premium on it. Examples would be Omnia, AECI and Tiger Wheels.
Miller says most small-cap funds have similar core holdings. To make a difference he sought out the more unusual shares to supplement those such as African Media Entertainment, now a pure radio company, and Howden Africa, a supplier of parts to Eskom power stations. Among its financials, Glenrand MIB has recently been disappointing but Cadiz has been a good find.
Conventional wisdom is that multimanagers tend towards the average and should not win unit trust awards. Yet Investment Solutions was the top smaller group over one year, Momentum Aggressive Prudential Fund of Funds was the top high equity prudential fund over three years, and Galaxy Defensive, run by Symmetry Multimanagers, was the top low-equity prudential fund over one year, for a second year running.
These awards prove that multimanagers are not committed to mediocre or, at best, average returns.
Nedbank and Sage both claim to offer a best-of-breed approach and the proof that they can deliver is in these awards.
Sage has three gold medals, Sage Global, run by Brandes from San Diego in the US, as well as two funds run by Investec, Sage Industrial and Sage Performance, both winners over one year.
And Absa once again gets onto the winners' podium with Absa Flexible, and the return of Brett Bishop, once a hyperactive fund of funds manager, as manager of this fund. He has been invested primarily in the three winning sectors: property, retailers and banks. His 53% return was no fewer than 22 percentage points ahead of the sector average.
See The List of Winners.
