As you know I am a big supporter of managing your investments yourself.
The most important reason is that only you truly have your own interests at heart.
This is unlikely in the money management industry where the interests of investors, in most cased, come a distant last.
You can read more on this in my article Incentives – Can they make you a better investor?.
But in spite of all the negatives there are also good fund managers. They are not easy to find. But if you do not want to manage your investments, the time and effort you spend looking for one is the best investment you can make.
You must however be prepared to look beyond the well known names and companies.
What I have found is that the best fund managers are all relatively unknown. They focus on generating outstanding returns for their investors and not on marketing or interviews on television.
This article is an interview with just such a fund manager. One that I have recommended to my parents for part of their retirement investments.
He has been at it for a long time, his returns are excellent, and he and his company are relatively unknown.
He is based in South Africa and manages an international fund with an outstanding track record that has no initial charge or performance fees.
On to the interview.
How did you end up managing a very successful international investment fund from beautiful Franschhoek?
The unit trust has been run since inception in 1997 in conjunction with Dave Foord.
Given modern communications, one can run an asset allocation fund focusing on large quality companies / investments from most places in the world.
I work either from my homes in Cape Town and Franschhoek or twice a week from Foord Asset Management’s Pinelands, Cape Town office. I had purchased a tiny farm in the centre of Franschhoek sight unseen in 1987 and this helped motivate me to return.
Prior to joining Foord Asset Management in 1994, I was for many years chief investment officer and managing director of Lloyds Bank’ institutional investment arm in London. I was born in Cape Town and left in 1969 after graduating with BA[honours] in Economics and MBA at Cape Town university, returning in 1994.
Describe the investment philosophy of the Foord International Trust you currently manage?
A low risk fund seeking to outperform the developed world equity index but with much lower volatility, and in the process delivering annualized returns in US dollars over time in excess of 10%.
Describe your investment approach and how it has developed over time?
Assessing the likely returns of different asset classes, taking a long term view, and investing accordingly.
This has not changed over time and remain focused on what could go wrong, hence seek to buy with an appropriate margin of error built into the asset price.
We will not participate in market manias, hence our temporary under-performance during the technology boom of 2000.
On a micro level, focusing on high quality companies with predictable earnings per share growth where the valuations, in either absolute or relative terms, do not reflect this.
Over time, earnings growth drives share prices, whereas over the short term, rating changes can dominate.
How do you typically find ideas and what is your selection process before an idea gets added to the portfolio? How do you approach valuation?
Extensive reading of financial periodicals and broker reports and use of proprietory value based screening methods.
We look at various metrics such as return on equity, cash-flow, gearing, dividend yield, forward Price to Earnings ratio and Price Earnings Growth ratio.
Our approach is typically top down, identifying the appropriate [changing] mix of asset classes thereby controlling risk of losses and under-performance versus our twin targets of low volatility and a US dollar return of more than 10%.
On stock selection, we aim to invest in the best of breed companies in the themes we might focus on, provided valuations are attractive.
For example we would avoid a Google or Amazon despite their strong growth prospects due to earnings volatility and unpredictability.
We like companies with strong balance sheets and cash flow, typically self financing with robust business models.
We also favour hidden value where a particularly attractive aspect of operations is not fully reflected in the valuation.
So if either of the two very seasoned managers has an idea, it needs to be approved by the other before inclusion in the portfolio. This limits risk too.
We focus chiefly on the top 500 companies by market capitalization. For smaller companies, we would invest indirectly by identifying specialist investment trusts or closed end funds with an excellent track record and management at an appropriate discount to net asset value
Describe some of your most notable investment mistakes and what did you learn from them?
That numbers e.g. screening can only provide a framework for further analysis. And that investors can be deceived by fraud as with Tyco for example.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Importance of having a focused portfolio on a theme basis where each investment is well known to us and makes a difference to performance i.e. no closet indexing.
No equity position would exceed say 7% of the total portfolio or be less than 2%. We do not go short or gear the portfolio – consistent with the low risk approach.
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How did you manage to do so well in the turbulent markets since mid 2007?
The unit trust had a defensive bias in 2007 largely avoiding financials and companies with weak balance sheets.
We were also not fully invested in equities then but raised weightings significantly by end 2008 although unfortunately unwound this prematurely in 2009 as markets appeared to have risen excessively rapidly from the March lows.
This was done to protect the portfolio’s gains.
What is the current geographic mix of your portfolio?
About a third in Europe, UK and US.
In equities [2/3 of the trust]: about a third each in Europe, UK and US.
But most of the UK companies have limited links to the UK economy or the British pound.
However we are more theme driven than country focused e.g. currently: agriculture, power generation and energy, Asian consumer and healthcare.
The balance of the portfolio is in commodities [gold and grains], corporate bonds [$] and cash [$ and Singapore $]
How concentrated is your portfolio?
We run a very concentrated but marketable portfolio. For example when the trust was a mere $10m we had 20 equity holdings; now at over $400m we have the same number of positions.
Apart from the equity positions the fund has four corporate bonds, two commodities and two currencies.
Do you follow any key risk-management guidelines in managing the portfolio?
Not specifically apart from ensuring there is adequate [but not excessive] diversification by asset class, specific investment and currencies and that companies are soundly financed.
A minimum standard of corporate governance is expected from companies we invest in – one of the reasons there is currently a low emerging markets exposure.
We do not follow any specific sell disciplines like stop losses but prefer to use our experience.
How do you handle currency exposures?
Our neutral position is to hold cash in US dollars in the unlikely event we have no strong currency views.
We do not do any currency hedging or currency overlays.
What companies do you find interesting at the moment and why?
The top five positions that make up 36% of the funds equity investments are:
- General Electric
Our largest holding is Nestle which is attractive on a food peer group Price to Earnings comparison, adjusting for its marketable stakes in other companies.
It has strong emerging economy exposure, good cash flow generation and a management keen to enhance margins.
It is also defensive insofar as earnings are not economic cycle sensitive. Multinational growth stocks as a class within the world stock market remain attractively valued – this is merely one example of this.
General Electric has been de-rated owing to its financial exposure but we like its infrastructure involvement in emerging economies.
Syngenta is a crop protection and seeds company which should benefit from increasing farming acreage and commodity prices as the Asian consumer in particular upgrades his diet to more meat.
LVMH is an international luxury goods company. Its alcoholic beverages and luggage are much in demand from the increasingly affluent emerging economy consumer.
Vodafone is attractive on valuation grounds and the value to be extracted once dividends are eventually received from its US joint venture.
Are you and co-manager Dave Foord invested in the fund?
Both Dave and I have very substantial investments in the fund, directly and indirectly.
Furthermore it is the sole means for Foord institutional and private clients who are discretionary managed by us to access international markets. So it is pivotal to our clients’ investment performance apart from those who give us a SA only mandate.
Our families, directly and indirectly are also holders of the fund and have been in many cases for some years.
Bruce, thanks for your time and insights