Profit-turners Make a Compelling Case for Sasfin Equity Fund

[First published in Personal Finance, January 2014]

Sasfin MET Equity Fund (A)

Raging Bull Award for the Best South African Equity General Fund on a risk-adjusted basis over five years to December 31, 2014

Buying – and holding – the shares of companies with good management and a track record of producing high earnings resulted in the Sasfin MET Equity Fund receiving the Raging Bull Award for risk-adjusted performance by a South African general equity fund. The fund achieved a rating of five PlexCrowns, which means it produced the best consistent return without too much risk.

The fund’s return on outright (straight) performance was 19.93 percent a year over the five years to the end of December 2014, and the fund was ranked fourth among its peers in the equity general sub-category. The benchmark for the sub-category, the FTSE/JSE All Share Index, returned 15.79 percent over five years, while the average annual return for all equity general funds over the period was 14.04 percent.

The fund used to be called the Sasfin Value Fund. In 2013, it won the Raging Bull Award for the best broad-based domestic equity fund for top outright performance in the domestic equity general, value and growth sub-categories over three years to December 31, 2012. On January 1, 2013, the value and growth sub-categories were discontinued, and many of the funds in those sub-categories were moved into the equity general sub-category.

The portfolio’s objective is to out-perform the FTSE/JSE Shareholder Weighted All Share Index (Swix) over time, particularly during periods of weaker equity market growth.

The fund’s fact sheet states that it has a “value bias”, but fund manager David Shapiro says his investment strategy is not simply to find undervalued stocks.

He is attracted to companies that, as far as he can forecast, can be relied on to sustain good earnings over the next four to five years, and that are run by a “solid” management team.

Shapiro says he is a “big (Warren) Buffett man, but not in the value sense”. He believes that the era of being able to generate out-performance by unearthing deeply discounted stocks is over. He says this approach worked when information about companies was very hard to come by, but today a plethora of information can appear on a computer monitor at the touch of a button. Another departure from the typical value strategy is that Shapiro will not sell a share simply because it has returned to fair value. He cites global media conglomerate Naspers as an example of his approach: although it is not undervalued, he would still buy it today, because he believes the company has “momentum” – the ability to keep generating good profits over the long term.

Instead, Shapiro says he analyses a company in terms of what it does, what it sells, the markets in which it operates, and its earnings track record. He prefers large-cap shares to small- and mid-cap shares, because the latter are typically not very liquid and he wants the freedom to buy up or sell down quickly.

Quality management features large in Shapiro’s investment approach. He likes companies headed by dynamic chief executives with a proven ability to extract value in good and bad times, and who are interested in growing their companies.

He is also attracted to shares that consistently pay high dividends. “I never underestimate a company that has the ability to generate cash.”

Shapiro is a high-conviction manager, investing sizeable amounts in a smaller number of shares (between 20 and 25 shares, with an allocation of between four and six percent in each one). Once he has decided that he likes a company, he tends to stay with it, and he thinks long and hard before adjusting the fund’s portfolio. “I will add a share only if it is performing better than my worst-performing share.”

Shapiro says he does not pay much attention to the Swix when selecting shares. “I do look at the top 40 companies in the benchmark and throw out the ones I don’t like.”

South African equity general funds may invest up to 25 percent in offshore markets. Shapiro says the fund is too small to invest directly in foreign shares, so it invests in them via index-trackers: the db x-trackers MSCI USA Index Fund and the db x-trackers Euro Stoxx 50.

Looking at the winners and losers in the portfolio over the past year, Shapiro says clothing retailer Mr Price, pharmaceutical company Aspen and Naspers came up trumps. Financial services company Discovery, and multi-consumer services company Bidvest did well, while British American Tobacco (BAT), global beverage company SABMiller and luxury goods company Richemont held their own.

On the downside in 2014, the slump in commodities, particularly oil, “really hurt” the fund via its exposure to Sasol (5.38 percent exposure at the end of last year), BHP Billiton and Glencor. He says the fund currently has an exposure of less than 15 percent to resource shares, and “I would prefer that it was nothing”.

He made the right call in selling out of chemical company Omnia once he realised that earnings growth was slowing and economic conditions were not in its favour. On the other hand he says, in retrospect, he should have bought Mediclinic instead of Life Healthcare, because the former is benefiting from its divisions in the United Arab Emirates and Switzerland.

What will shape his stock selection process in the year ahead?

Clearly, the lower oil price will have a major impact on consumer spending, and boost the earnings of companies with a major footprint in the consumer goods and services markets. At the same time, lower oil – and commodity – prices are a worry when it comes to exposure to resource shares. He says that Sasol’s earnings could halve in 2015 if oil remains at these levels. “If I had something better, I would dump it,” Shapiro says.

He will continue to back companies such as BAT and SABMiller because of their exposure to huge consumer markets in India and China.

He says the weaker euro has made him more optimistic about European companies that derive significant earnings from exports.

He also favours companies that stand to benefit from developments in technology, such as healthcare, robotics and e-commerce.

Shapiro is wary of investing in Africa, because, he says, the economies are very much aligned with the fortunes of commodities. Therefore, he will avoid South African commodity and construction companies that are hoping to benefit by expanding into the rest of Africa.

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