Small Manager Punches Above its Weight

[First published in Personal Finance, January 2014]

HARVARD HOUSE BCI GENERAL EQUITY FUND

Raging Bull Award for the Best South African Equity General Fund – the top-performing fund on straight performance in the South African equity general sub-category over three years to December 31, 2014

A small fund managed on a long-term buy-and-hold strategy, mostly for the benefit of private clients, has taken the honours as the top-performing equity fund over three years at this year’s Raging Bull Awards.

The Harvard House BCI General Equity Fund out-performed its peers, with an average return of 24.78 percent a year over the three years to December 31, 2014.

The FTSE/JSE All Share Index (Alsi) returned an average of 19.48 percent a year over the same three-year period, according to ProfileData.

The Harvard House BCI General Equity Fund is managed by Michael Porter of the Harvard House Group, a financial services group based in Howick in KwaZulu-Natal. The company provides accounting and bookkeeping services, tax planning, private client wealth management, pension fund management, financial planning and the administration of deceased estates.

Porter says Harvard House’s unit trust funds were established about eight years ago to take small investments (below the threshold for a discretionary portfolio) from the company’s private clients. Its General Equity Fund is small relative to its peers in the South African general equity sector, with just R110 million under management, whereas its larger competitors have between R10 billion and almost R40 billion under management.

Porter says that, in managing the fund, Harvard House follows the same investment principles that it does with its private clients’ money – it invests in equities that produce an income and demonstrate the ability to grow their dividends consistently. If the income stream is growing, the capital value of the share will follow suit, he says.

The fund’s top 10 holdings at the end of last year included New European Property Investments, a property company that invests in shopping centres in Eastern Europe, Coronation Fund Managers, the listed asset manager, cigarette manufacturer British American Tobacco, petrochemicals group Sasol, media company Naspers, paper maker Mondi, banking group FirstRand, technology company EOH Holdings and cellular network operators Vodacom and MTN.

Porter says the fund has held most of these shares throughout the three-year period, and it typically holds 18 to 20 shares, although it currently has about 25.

Other good performers in the portfolio over the past three years have been pharmaceutical group Aspen, the diversified Bidvest group and hospital group Mediclinic.

The fund has a buy-and-hold strategy, rather than trading frequently. Trades are minimal, at two to three a month.

Porter says he is happy to hold shares for 10 years regardless of price fluctuations, if necessary. Shares are sold out of the portfolio only if they become too expensive, and it is clearly time to take the profits, or if the outlook for a company’s profits, and consequently its dividend policy, deteriorates, Porter says.

The fund does not worry about tracking the shares in its benchmark index – the Alsi – and being a small fund enables it to invest in shares, such as New European Property Investments, that other, larger competitors cannot hold, Porter says.

Harvard House does not have its own team of analysts like other larger managers do, but buys research from top research houses and will supplement this with various company visits, he says.

Although it prefers shares with a high and growing income, it does not always exclude lower income earners, such as Naspers, with a dividend yield of 0.23 percent. Despite the low yield, Naspers has grown its dividend by 27 percent a year over the past 10 years. That fits well into Harvard House’s philosophy, Porter says.

Over the past two years, the fund’s performance relative to its peers has been assisted by its low exposure to mining shares. Exposure to these shares, excluding Sasol, has been just six percent, he says.

Over the next three to five years, Porter expects the fund to continue to deliver solid, inflation-beating returns. Although markets are in flux and quite volatile, you cannot ignore the positive impact of the falling oil price, the downward adjustment of inflation expectations and the consequent impact on the consumer sector of the economy, he says.

At the same time, Harvard House remains wary of global developments and the possible impact on the rand. The fund will retain a balanced portfolio with exposure to local shares that can benefit from rising consumer spending, while also protecting investors against rand weakness if it materialises, he says.

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