Anil Jugmohan: ‘Best of breed’ and moms’ portfolio breakdown
Investment Analyst for Nedgroup Investments' Anil Jugmohan joined Alec Hogg for a chat today regarding the 'best of breed' in unit trusts, the recent performance of RECM, and the type of share portfolio he would suggest for his mum.
There's presumably a whole lot more to 'best of breed' approach regarding unit trusts than saying 'well these are the top performers at a point in time. Let's bring them in.' What do you mean by 'best of breed'?
Yes, that's a very good question Alec. Thanks very much for that. The 'best of breed' model is quite unique in the South African market place. It's an approach whereby we partner with asset managers, who we believe are going to be the best, long-term stewards of our clients' capital. There's quite a few key words there, such as 'steward', 'long-term' and 'client' and these are really sort of the key pillars of our approach and our philosophy. It is very different to the fund manager, where they're potentially, looking to match a manager's philosophy to the next three to five-year outlook. For us, it is more about a permanent partnership and we view that as permanent, until there is very good reason to change.
We saw there was some controversy lately about RECM, Pete Viljoen earlier this week framed the recent criticism as being a good indicator of the company doing things 'the way that we like to do it.' Have you received a bit of that criticism?
Absolutely, so the Managed Fund has certainly taken quite a lot of flak in recent times, for relatively poor performance. Certainly, we are also disappointed that it has lagged the peer group so much but it goes back to exactly the reasons why we appointed Piet Viljoen and RECM in the first place.
Effectively, when we look to partner with a manager, it's about making sure that they have the right alignment of interest, making sure that they have the right philosophy in process, and making sure that they're really focusing on the long-term as opposed to maximising their next bonus.
Now Piet Viljoen and the guys at RECM actually prefer all these criteria very well. Now something, which we really like about them, is that they are very strict about their evaluation philosophy and their value discipline. They are very careful to make sure that they only invest in those opportunities where they can be sure that there's a significant margin of safety. The protection of capital is something, which we see, particularly in weak market conditions. Some of the best managers in the world actually have actually produced great long-term track records by focusing on protecting client's capital in down-markets. In fact, one of the managers that we regard very highly, globally made a comment, which summed it quite nicely, which said, 'we'd rather lose half of our client-base than to lose half our client's money'.
That is quite a nice way of capturing this philosophy. Particularly with RECM and Piet Viljoen, they've actually been true to their philosophy and process, which is the reason we appointed them in the first place.
That's interesting that if they had deviated from it you wouldn't have wanted them in the first place, so this is the philosophy. Clients know exactly what they're getting and they're delivering on that, even though the performance hasn't been that great.
That is exactly right. I don't need to be telling you that performance is the end result of a number of various factors and obviously, skill plays a factor in there and luck obviously plays a part as well. Now luck is not something, which you can predict with any reasonable level of certainty. If I ask you to flip a coin to see what's going to come up next. You don't really know for sure what's going to come up.
If you look at the skill aspect, skill certainly is a lot more clearly defined and over time, we've worked up quite a significant expertise in being able to judge, who are the managers who have a certain degree of skill, so skill is something which, unfortunately you can be doing the right thing. You can be taking the right positions you can be really positioning your portfolio in the right way for a given market, but what is risk? Risk means that certain things that can happen won't happen and you don't really know beforehand, in a way that you're positioning your portfolio, how it's going to turnout in the next two to five years.
That is very nicely put. You said three to five years. What's the ideal holding period for investors or would you have different holding periods for people who come through to Nedgroup Investments?
Absolutely, so we have a range of unit trust funds, and effectively we don't try to just proliferate the products. For us it is about very carefully trying to identify valid client objective and client needs, and then launching the appropriate products, to meet those requirements. Some people are obviously, extremely risk adverse, so they would be requiring a Money Market Unit Trust, for example. Some people have a much longer time horizon, so they're very happy to be investing at a Pure Equity Fund, like a Rainmaker Fund. We really try to ensure that our product and marketing material try to properly explain and elaborate to the clients what kind of risk characteristics, or what are the potential drawdown and capital losses that a particular product might endure over time. We try to explain the fund manager's philosophy in managing the product. It is all about making sure that the client is very much aware of what they are getting themselves into, when they invest with us.
How do you measure performance? Do you go from, as Piet says, he likes to be from the peak of one cycle to the peak of another. That's the way he would like to be assessed. How do you do it?
A good question. I can turn that around a little bit and ask you, 'how long is a bull market' or 'how long is a market cycle'. It depends. Over different time periods, different bull markets and market cycles have lasted for different periods of time'.
What we try to do at Nedgroup Investments before we appoint a manager, is we try to look at the longest available track record. In some cases, managers have worked at different asset management houses so we try to patch together their track record, during those different periods of time. We also try to evaluate how the manager has done that is relative to the peer group, and relative to the potential stock-index. If it's perhaps a balance fund, we try to construct an index of various underlying asset classes, and we really try to understand how well the manager's process and philosophy matches up to the returns of the fund. Particularly where there appears to be under-performance, has the manager been true to their process and philosophy? Obviously, if they've deviated from their process and philosophy, and they've ended up at a bad outcome that's really non-negotiable from our perspective.
Even if they've ended up with a good outcome, we really would need some very good reasoning for them to deviate from their state and philosophy and process.
The big subject of the past year has been on-shore versus offshore. Some financial advisors saying 'take all the money that you can to other parts of the world'. Others are saying, 'it doesn't really matter because the JSE, if you're going for equities, has such a huge offshore component anyway'. How do you view this debate?
It is definitely dependent on evaluations because the worst thing is to invest into a market that's very expensive, because the chances of you making money from that point onwards, is probably not going to work out very well. It is obviously, very easy to pick asset classes and to pick funds in hindsight, because you can just look at the performance levels. For us, we think that, at the moment, probably offshore equities are offering better value than local equities. Particularly within the local market, it seems like resources are significantly undervalued, when compared to industrials and financials.
Within our unit trust funds, we have different mandates that the manager has to follow. Depending on the mandate, the managers are positioned slightly differently, and that often depends on their philosophy and process because, as you know, if you partner with a number of different asset management businesses, each with a slightly different take on the value philosophy and, of course, in the way that they implement is slightly nuanced as well.
If you were to break down a portfolio for your mum, how would you do it today? What would your ideal, structured portfolio be, and imagining that you mum was only 30 years old, so I'm talking about someone very close to you, who's going to live for quite a long time. How would you structure it?
Yes, I definitely think that a fair amount of money offshore. Let's assume that you're not constrained by Regulation 28. I'd say you'd need to have about half of your money in South Africa and half offshore. The reason for half being in South Africa is because, presumably, you plan to live in South Africa, so you need to have a certain degree of consistency between matching your assets to your liabilities. South African assets would, hopefully perform in line with South African inflation, plus obviously a certain margin.
The reason you have offshore is for the certification because obviously, in South Africa you're probably left in one percent of the world's market-cap and we also don't have a lot of industries available that we can invest in, within South Africa that is, maybe available overseas.
I think in terms of overall asset allocation, probably maybe a high equity approach, so maybe 75 percent maximum equity and a fair amount in cash as well just for those really great potential negative events, where you need to have cash or liquidity available for you to then make an investment into an equity market that has potentially fallen.
Anil, just to close off with, what about property, and does that fall into the equity portion?
We view property as quite a distinct asset class. Over time, it certainly has behaved differently to the equity market in particular. Particularly where you see where the yields in property, tend to follow the yields and bonds fairly closely, but obviously property compared to bonds, it's almost like a fairly certain income stream that's growing, so it does make it quite a unique and distinct asset class. Yes, we certainly view it as a different asset class and certainly as a diversifier, to a balanced portfolio.
If you had 75 percent in equities, what percentage would you be comfortable with, in property?
Different people have different views and, for me I would say probably say ten to 15 percent in property, of that 75 percent. I know I said just now that we do view those as distinct, so yes, probably 15 percent in property and maybe 60 percent equities.
Anil Jugmohan is with Nedgroup Investments.