Over the past 12 months, the average return from South Africa multi-asset high equity funds has been 2.7%, according to figures from Morningstar. Over that same period, the High Street High Equity Prescient fun has gained 25.4%.
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While this fund is a multi-asset strategy, it is clear from even a cursory glance at its asset allocation that fund manager Ross Beckley is doing something unusual.
The portfolio has almost no bond exposure, at just 0.1% of assets. It also carries a high weighting to property, with 17.5% invested in this sector.
The reason for this is that Beckley’s target is to allocate in such a way that the fund maintains an 80% to 100% rand hedge bias. The intention is to offer a Regulation 28-compliant vehicle into which South African investors can invest in rands, but is minimally exposed to the local environment.
‘We don’t oscillate between deciding whether to be bearish or bullish on South Africa,’ said Beckley. ‘We leave that up to the investor.
‘Currently, the fund will only invest in rand hedge instruments or, at a bare minimum, counters with a material offshore component. Currently, Mix Telematics is the holding with the lowest offshore component of approximately 40%.
‘A rand hedge bias of 80% to 100% is the existing target,’ said Beckley. ‘However, this is subject to change should retirement regulation be amended, or it becomes infeasible because our investment universe shrinks to a level where it becomes imprudent to simply focus here. Our mandate allows us to change tack should either of these scenarios unfold.’
He estimates that the rand hedge component of the fund is around 90% of the portfolio at the moment.
The first part of achieving that is through making full use of the fund’s 30% offshore allocation allowance.
‘Typically, that 30% offshore allocation will predominantly be in equity,’ said Beckley. ‘We look for exposure to companies and sectors that we don’t have in our local market.’
This includes investments in mega-cap growth stocks like Microsoft and Alibaba, but also more nuanced positions in companies like Lockheed Martin.
Listed locally, focused internationally
For the 70% that has to be invested in South Africa, High Street looks for companies that are either dual-listed on the JSE or make a large proportion of their revenues from international operations. This includes prominent large cap stocks like Naspers, Prosus, AB InBev and Mondi, but also allocations to small caps like Mix Telematics and Master Drilling.
‘We are not a small cap fund, but we are small enough to play in that area,’ said Beckley.
As a multi-asset strategy, the fund does consider the importance of yield. However, Beckley is not currently prepared to invest in local government bonds. He could do so and stay within the fund’s objective of maintaining an 80% to 100% rand hedge bias, but he believes that the risks are too high.
‘We could hold South African government bonds if we wanted to,’ said Beckley. ‘But we would have to see a major shift in the underlying environment before we ventured there.’
As a proxy, he therefore prefers to invest in British American Tobacco, which is currently trading on a dividend yield of 8.1% according to Bloomberg.
The fund also takes advantage of the relatively high number of locally-listed property counters that have assets offshore. Three of the top 10 holdings in the portfolio are real estate stocks – MAS Real Estate, Sirius Real Estate, and RDI Reit.
‘We have to have a relatively high weighting to property, because our equity universe is so limited and for the yield,’ said Beckley.
This highlights a key challenge that he faces in managing this portfolio. If the intention is to only invest in companies with high exposure to offshore earnings, the opportunity set on the JSE is extremely limited.
‘Our investible universe is about 10 to 12 names in South Africa, plus the property stocks,’ said Beckley. ‘At the moment, given the strategy of the fund, it is very unlikely that we are we going to be holders of local banks or local retailers. That eliminates a significant part of the JSE.
‘But we are utilising all of the asset classes available to us. We are currently increasing our exposure to gold, and we do have a position in platinum.’
The fund has 9.4% of its portfolio in the New Gold ETF, and 2.9% in the New Gold Platinum ETF.