On the lookout for a good discount

[First published in Personal Finance, January 2016]

On the lookout for a good discount

Nedgroup Investments Global Flexible Fund

Raging Bull Award for the Offshore Global Asset Allocation Fund on a risk-adjusted basis over five years to December 31, 2015

Bad news is good news for the Nedgroup Investments Global Flexible Fund, because, as fund manager Steven Romick says, negativity in the markets often results in opportunities to find assets that are trading at a discount.

Over the five years to the end of 2015, the Global Flexible Fund achieved a rating of five PlexCrowns in the global asset allocation flexible sector, which means it delivered the best consistent returns without too much risk.

According to ProfileData, the fund’s return on straight performance averaged 23.72 percent in rands, or 4.3 percent in United States dollars, a year over the five-year period. The fund was ranked ninth out of 23 funds with a five-year track record in the global asset allocation flexible sector of funds registered in South Africa. The sector achieved an annual average return of 22.67 percent in rands, or 3.4 percent in US dollars, over the period.

The objective of the Global Flexible Fund is to provide long-term capital growth by investing in a diversified range of global asset classes and currencies.

The fund is suitable for investors who want exposure to developed financial markets as part of their overall investment strategy, with maximum capital appreciation as their primary goal, and who do not wish to make complex asset allocation decisions. Investors should have a high tolerance for short-term volatility in order to achieve long-term objectives.

The fund, which was launched in 2008, is domiciled in the Isle of Man. Romick, a financial analyst with First Pacific Advisors (FPA), which is based in Los Angeles, California, has managed the fund since 2003.

He describes FPA’s approach to investing as value-based with a contrarian bent. The fund has a global “shopping cart”, but it looks for sectors that are out of favour. Where there is negativity, market participants are generally selling, and shares can be found that are trading at a discount to their net asset value, Romick says.

Once potential companies in an “unloved” sector have been identified, he says FPA undertakes a large amount of research into a company, to understand the business thoroughly. In particular, FPA aims to model the company’s cash flows two or three years down the line. The fund won’t invest in a company if its long-term earnings can’t be modelled easily. (He cites the example of Apple: although it is a good company, it is not among the fund’s holdings, because it is unclear how the company will maintain its earnings in future.) Once the fund has ascertained that a company will earn at a certain level in the future, and the fund is comfortable with the price, it will buy.

The fund’s approach means that it can end up sitting on large amounts of cash while it waits for suitable opportunities. Its current cash holding is about 40 percent, which, Romick says, is higher than average.

The fund has reduced its bond exposure – it is now down to four percent. Romick says the fund would like to increase its exposure to high-yielding (corporate) bonds as prices weaken.

Shares that have contributed to the fund’s performance include Alphabet, the parent company of Google, lightweight-metal manufacturer Alcoa, computer company Microsoft, and lift and escalator manufacturer Otis.

The fund has significant exposure to technology-based companies and companies that are tied to the global consumer economy. It is expected that these companies will grow their earnings as infrastructure expands to accommodate growing populations.

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