Avoiding resources pays off for equity fund

[First published in Personal Finance, January 2016]

Avoiding resources pays off for equity fund

36ONE MET Equity Fund

Raging Bull Award for the Best South African Equity General Fund on straight performance over three years to December 31, 2015

An aversion on the part of Sandton-based boutique manager 36ONE Asset Management to resources shares is one reason its equity fund was the top-performing fund in the South African equity general sub-category over three years to the end of 2015.

According to ProfileData, the fund delivered, on average, 20.83 percent a year – more than eight percentage points more than the FTSE/JSE All Share Index (Alsi), which climbed 12.28 percent a year, on average. If you had invested R100 in January 2013, it would have grown to R176 by December 2015.

Last year alone, despite the volatile trading conditions, the fund returned an impressive 18.37 percent, against the Alsi’s 5.13 percent. What’s more, these returns were achieved without undue risk.

Evan Walker, who co-manages the fund with 36ONE co-founder Cy Jacobs, says that, as one of South Africa’s largest hedge fund managers, the firm’s investment philosophy is to “protect and grow capital using the least risk mandated to each specific fund”.

Although its benchmark is the rolling two-year return of the Shareholder Weighted All Share Index, Walker says the fund is benchmark-agnostic, which means the manager ignores the make-up of the index when making investment decisions. Also, 36ONE does not adhere to a particular investment style.

“We don’t believe that a specific style of investing is relevant to a small market like South Africa. Hence, we predominantly invest in companies that we believe operate above-average business models with returns that are attractive enough to warrant our consideration,” Walker says.

He says the focus has been to blend “top-down macro-economic analysis with bottom-up sector- and stock-specific analysis to arrive at a portfolio that has been predominantly defensive in nature with a high rand-hedge component”.

The fund’s big winners over the three-year period were Naspers, Steinhoff, SABMiller, British American Tobacco, Mondi, Old Mutual and FirstRand, Walker says. It had virtually no exposure to the disastrous resource sector.

“Resource companies are, by nature, poor business models, and we are thus always sceptical of their ability to perform over the longer term. Having had virtually no resource shares in the funds over the past three years was not a difficult decision for us, given the significant ramp-up in supply over the five years prior to that. Global capital investment is a function of the amount of debt in the financial system, and three years ago this was already at extremes. We doubted that growth could continue at the rates estimated by global mining companies, given the amount of debt around the world and predominantly in China, the marginal buyer,” Walker says.

He says 36ONE finds very little value in the current market, given the poor macro-economic backdrop, particularly in South Africa. “We remain at this point in a capital-preservation mode, with a strong rand-hedge component to the portfolio. We expect the markets to worsen from here, which will again provide us with domestic buying opportunities,” he says.

36ONE Asset Management was founded in 2005. It manages individual portfolios for private and institutional investors, runs five hedge funds and has two white-label unit trust funds under the MET banner: the Equity Fund and the Flexible Opportunity Fund (a South African flexible multi-asset fund). Both unit trust funds are regular top performers in their sub-categories.

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