Top Centaur flexible fund seeks quality shares at the right price

[First published in Personal Finance, January 2017]

CENTAUR BCI FLEXIBLE FUND

Raging Bull Award for the Best South African Multi-asset Flexible Fund on a risk-adjusted basis over five years to December 31, 2016

Long-term investors in the Centaur BCI Flexible Fund must be smiling from ear to ear. The fund, one of two unit trust funds offered by Cape Town-based boutique manager Centaur Asset Management, produced the best risk-adjusted (as well as straight) returns over five years to the end of 2016 of all 71 funds in the South African multi-asset flexible sub-category, achieving an average 18.87 percent a year, according to ProfileData.

This figure is well above the performance of the FTSE/JSE All Share Index (13 percent a year over the five years) and Centaur’s own benchmark (11.1 percent a year). The benchmark is a composite of the Financial and Diversified Industrials Index, the Resources Index and the repo rate.

The fund has been managed by Roger Williams since its inception in 2004, after he founded Centaur Asset Management in 2000. He has an honours degree in economic science and is a Chartered Financial Analyst, with experience as a foreign exchange dealer, equity analyst and stockbroker.

Multi-asset flexible funds are allowed to invest across all the asset classes of equity, bonds, listed property and cash instruments in any proportions, the only limits being a maximum exposure of 30 percent to offshore securities (including five percent to Africa) and 10 percent to any single share.

Equity forms the backbone of the Flexible Fund’s portfolio. Williams says: “At Centaur, we identify three equity market states: positive, neutral and negative, and in each market state, where our target equity content is 90 percent, 80 percent and 60 percent respectively. These market states are identified based on proprietary indicators and savvy judgment.”

He says the fund’s asset allocation is designed to bolster returns in major bear markets by protecting capital, while buying into the deep-value opportunities that such a market spawns. “We have a high degree of flexibility to move out of equities into other asset classes, but practically don’t find changes in market states happening often.”

Williams says that once the overall allocation has been decided, Centaur’s basic philosophy is finding quality shares at the right price. “Good quality is defined by reasonably stable profits, great management, a high return on equity and good growth prospects. Opportunities arise when there is a wide disparity between our estimate of the value of a share and the market price.”

As part of their investment strategy, Centaur focuses on 11 “areas of opportunity”, including turnarounds, corporate actions, domestic cyclicals, and stalwarts. “For example, our corporate action category consists of companies that are restructuring, often presenting valuable opportunities for astute stock pickers,” Williams says.

On the past five years, Williams says it is no secret that the period has produced challenges. “Fortunately, Centaur has geared itself through its investment processes to successfully navigate volatile times.”

He gives the following examples of how the Flexible Fund has successfully negotiated the market:

  • Centaur moved about 10 percent of the fund into euros and United States dollars in 2011 at excellent levels and capitalised on the subsequent rand weakness.
  • Centaur bought a 10-percent holding in Rand Merchant Insurance in 2011, which more than tripled in value by 2015.
  • In 2015, with over 20 percent held directly offshore, the fund benefited from a falling rand and excellent international stock picks. In early 2016 the fund locked in a portion of gains on rand weakness using futures.
  • In late 2015 and early 2016, Centaur invested in selected deep value and resource stocks, which have performed exceptionally.

Looking ahead, Williams and his team are optimistic about the Flexible Fund’s prospects, expecting an economic recovery off a low base, leading to improved confidence and better economic momentum.

“We have identified selected shares with high prospective return potential and are targeting an equity content of over 80 percent, with a focus on South African equities,” he says. “From a sectoral perspective, we have increased exposure to domestic cyclical shares, which have excellent recovery potential, and select resource counters at the expense of offshore-oriented shares.

“Our mission at Centaur Asset Management is to keep doing what we do by implementing calculated moves to offer our clients optimal returns,” Williams says.

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