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.