To the end of September, the IP Global Momentum Equity fund was up 94.0% for the previous 12 months. Over three years, it has gained 172.6%.
That makes it the second-best performer among all global equity funds available to South African investors over both time periods. Only the Tesla-fuelled Baillie Gifford Worldwide Long Term Global Growth fund has done better.
Amongs funds managed by South African firms, it is the top-performer.
Fund manager Shaun Krom described the fund’s approach as both an art and a science, as it uses a combination of quantitative and thematic investing. The quant portion is an algorithm whose base recipe looks for four attributes:
- Value companies – companies that are trading at a discount to fair value
- Quality – companies that show earnings quality, consistent cash flow and gross profit margins, and are generally consistent dividend payers whose dividends grow over time
- Stability – companies that exhibit low volatility relative to the market
- Momentum – companies that are showing high growth rates in both revenue and upward trending prices.
Krom said the fund is 100% algorithmic with its factor allocation between value, quality, stability and momentum.
‘However, if we just ran the algorithm, we would end up with a portfolio with hundreds of shares. We need a human intervention once we have run the algorithm. The human intervention also allows for more alpha capture as we invest in highest conviction ideas.’
Krom said that this is done by looking for investment themes within the asset allocation of the algorithm.
‘For example, if I see a lot of cloud companies coming through, I can focus on that as a theme,’ said Krom. ‘We then go and do some deep analysis of each of the stocks in that theme.
‘Additionally, once I have identified themes, I look at the intersection between them. The selection narrows and the weighting is determined by the strength of the theme and the stock intersection across different themes.’
An example in the current environment in the intersection between security and data management companies.
‘That makes sense because the idea of people working from home exploded with Covid-19, and companies need to ensure that their data is secure,’ said Krom. ‘Software security companies are interacting with the cloud on an increasing basis.’
There are, however, also themes that may not intersect with others. For example, pharmaceutical companies are popular right now on the back of vital vaccine research and trials.
Green companies are also being identified as a theme. However, the lack of intersections with other themes mean that currently these stocks form a small part of the portfolio.
“An advantage of this thematic investing is that the fund moves with the market,’ said Krom. ‘Different themes come and go over time, so we never get fixated on any individual sector or geographic region.”
What is the fund currently holding?
At the end of September the fund’s top five holdings were:
- Shopify – 5.1%
- The Trade Desk – 5.0%
- Sunrun – 4.4%
- Roku – 3.9%
- Facebook – 3.9%
‘We’ve held Shopify for about three years, and it has performed incredibly,’ said Krom. ‘Just this year, returns were up 170%. It has definitely been a strong driver in the fund. At one stage, it was 13% of the fund, but within the last three months we reduced the holding.’
The Trade Desk has also done well, with a return of 1 241% over three years, and a 60% average gross profit margin over that period. Trade Desk is a big player in the online advertising space that matches companies and products to their target audiences on different social, mobile, and video platforms.
With risk management, Krom said the fund is 100% benchmark agnostic (the benchmark is the S&P 500).
‘We don’t try to match the index or anticipate market movements,’ he said. ‘Rather we look for companies with more than one tailwind.
‘I can tell you exactly how and why there are particular stocks in the fund. And the factors that influence their selection and weighting make the macro market factors irrelevant over the long term, as these are the companies that drive and change the economy.’