MoneyMarketing May 2017 | Page 20

Boutique asset managers have potential to produce excellent returns
20 INVESTING 31 May 2017

INVESTING

MICHAEL MOYLE Head of Multi-Asset , Prudential Investment Managers

Although heightened uncertainty has dominated local financial markets in the weeks since the Cabinet reshuffle and sovereign credit rating downgrade , Prudential ’ s view on potential investor returns over the medium term , subsequent to these events , has been less gloomy than one might imagine . The weakness seen in South African nominal bonds , listed property , and financial and retail shares has presented good opportunities for investors to buy up attractive assets at discounted valuations that should produce above-average returns over the medium term .

In positioning our multi-asset portfolios in the ‘ post-downgrade ’ environment , as valuation-based investors it ’ s important to note that we have not changed our approach : we continue to place great importance in building well-diversified portfolios of attractively valued assets with the appropriate risk . These characteristics provide some level of inherent protection against future market shocks .
So how are our funds positioned to earn the best possible returns over the medium

Amid uncertainty , outlook for returns isn ’ t so gloomy

term ? First of all , our portfolios have been , and continue to be , at or near the maximum allowed offshore exposure , which acts as a strong rand hedge . We believe foreign equities in aggregate are priced around fair value , despite the strong run in US equity markets since President Trump ’ s election in November 2016 , as corporate earnings growth has accelerated and the market has re-rated as well . As such , we are neutrally positioned in our offshore equity holdings . And with government bond yields remaining very low across the globe , we are underweight offshore bonds . We prefer foreign cash assets , and are overweight in many of our portfolios since this gives us the ability to take advantage of opportunities as they arise .
Among South African assets , we are moderately overweight equities , nominal bonds and listed property at the expense of inflation-linked bonds ( ILBs ) and local cash . The FTSE / JSE All Share Index ’ s 12-month forward P / E , at around 14.1x at the time of writing , is trading just below our estimate of long-term fair value , and is somewhat cheaper than offshore equities . In our selection of shares , our portfolios are overweight wellpriced rand hedges like Naspers , British American Tobacco , Sasol , Anglo American and Glencore . We have also been overweight undervalued financial stocks , which remain attractive on a risk / reward basis .
Listed property is another overweight holding for Prudential , having sold off following the Cabinet reshuffle and downgrade . At the time of writing , listed property companies ( excluding developers ) were priced to return approximately 16 % p . a . over the medium-term ( assuming no change in the market ’ s valuation of property ), comfortably above inflation and , we believe , ample compensation for the risk involved .
Finally , Prudential ’ s multi-asset unit trusts have been overweight in South African government and corporate bonds for some time now , and remain so , albeit to a lesser extent . We believe 10-year government bond yields of over 9 % following the recent sell-off , as with listed property , offer an appealing return for the potential risk .
KIM HUBNER Business Development and Marketing , Laurium Capital
FIGURE 1 . LAURIUM FLEXIBLE PRESCIENT FUND PERFORMANCE ( GROWTH OF R100 000 INVESTMENT AT INCEPTION TO 31 MARCH 2017 )

Boutique asset managers have potential to produce excellent returns

What is a boutique asset manager ? Investors have different interpretations of what boutique really means . For some , boutique is related to the number of employees and size of assets , typically fewer than 20 staff and assets less than R20bn seems to be a common rule of thumb . For others , what is often more important in the definition of boutique is the ownership structure and extent of personal assets invested by the investment team in the portfolios that they manage . Finally , boutiques have a differentiated and focused approach to investing , compared to larger managers .
Why is this important ? Smaller asset managers can be more nimble and opportunistic in their stock picks and play outside the large cap universe . Managers at larger firms may have greater liquidity issues if their funds are sizable , thereby restricting their
investment universe , and lengthening the time that it takes to execute a view in their portfolio . The flat organisation structures of boutiques mean that investment decisions are made and implemented quickly .
Typically , boutiques are owned by their founders , who often are responsible for asset management and have a significant portion of their personal assets invested in the portfolios they manage . At Laurium Capital , besides the cofounders , key people across the operations and investment areas also have equity and are invested in the funds .
What to look out for Asset managers can often become victims of their own success . If assets under management grow too quickly , making and implementing successful investment decisions
becomes more challenging . Managing a successful boutique is not as easy as it may seem . As the company grows , it is important to ensure that the core entrepreneurial DNA is maintained and that no bureaucracy creeps into the organisation , changing the way that you manage money .
Successful investment management and sustainability of the businesses is often dependent on key individuals , so it is important to have a good succession plan in place .
About Laurium Laurium Capital is an independently owned asset manager . The Company was started in August 2008 by Murray Winckler and Gavin Vorwerg , who
remain the majority shareholders and portfolio managers across all funds . Laurium Capital manages several award winning hedge and long-only funds in South Africa and the rest of Africa .
The Laurium Flexible Prescient Fund has a four year track record and remains ranked no . 1 in the South Africa Multi-Asset category since inception at 1 February 2013 to 31 March 2017 , with a cumulative return of 87.4 % and return per annum of 16.3 % after fees , well ahead of the FTSE / JSE All Share Index . The Laurium Balanced Prescient Fund , which has over a year ’ s track record now is also off to a good start , ranking 16 out of 150 funds in the South African Multi-Asset High Equity category since inception at 9 December 2015 to 31 March 2017 .