Discovery joins up with Goldman Sachs to create new global investment fund

Craig Sher, head of product and development at Discovery Invest, joined Alec Hogg to unpack Discovery’s latest fund in partnership with Goldman Sachs Asset Management – the Global Megatrends Fund. The fund focuses on four main themes that are shaping the world – healthcare provision, technology, environment and sustainability, and Millennials. As Sher explains, these are the shares “that are primed for growth in the future.” – Claire Badenhorst

Craig Sher on Discovery Invest’s new partnership with Goldman Sachs: 

We are very excited that they are our partner. They are a global powerhouse. They have over $1.8 trillion in assets under management. I just think it’s a staggering scale. That’s over R25 trillion that they manage. So collaboratively with them we’ve launched a fund called the Global Megatrends Fund. And really the idea behind this fund is that it focuses on the main themes or four main themes, to be precise, that are shaping the world today and these are the things that we think are going to be sort of the themes of the future – where the world is going.

The themes sort of look at things like healthcare provision – what that’s going to look like in the future. Technology, which obviously affects every single part of our lives. The huge focus on the environment and sustainability – that is a topic that is very hot at the moment and something that governments around the world are grappling with. And then importantly, what we call a new age consumer. Millennials. These are people that are born from 1980 onwards and their spending habits, and to be able to invest in the places that these people are going to spend their money. Those are the companies and shares that are primed for growth in the future.

It’s actually made up of four funds – four individual funds. These funds are actively managed by Goldman Sachs. So Goldman Sachs has a healthcare provision fund, they have a technology advancement fund, an environment and sustainability fund, and a new age consumer fund called the Millennials Fund. This structure that we’ve put together invests equally in each of these different components and it gives South African investors the ability to get access to these themes, to where the world is going, to growth in the future through these particular strategies.

We package it as one single fund. So once you invest in this fund, you get access to all four of those at the same time. There are different funds around the world if you wanted to particularly buy healthcare shares or technology shares by themselves, obviously you’re able to get hold of that. But that’s not what this does. What this does is it diversifies your investment across these different themes because importantly, you know, themes will perform at different times. It’s very important that you get a basket that is adequately diversified and that the correlation between the themes is relatively low, so that when one is doing very well and when one is doing poorly, you have others that are picking up. That’s the idea behind this fund.

On the Millenials component of the fund:

The fund is investing in stocks that it thinks or that the managers behind Goldman Sachs think are going to be the future. Importantly, the component that focuses on millennials and how millennials are spending their money is actually quite well focused on emerging markets. They reckon that a big part of this cohort, of these people that are going to be spending their money – that were born from 1980 onwards – are going to be spending in emerging economies. Just some examples. Some of the sharing economy – Airbnb, Uber – these are quite big companies, but they’re still 1.8% market share. But they think that in the future, these numbers will catapult to 50% market share by 2025. So investing in these types of companies are the ones that are going to be the future.

On the healthcare component: 

The Covid vaccine was developed, I think, in around nine months. If you think about it in a world of vaccine development, it is incredibly fast. It’s incredibly fast compared to how long a vaccine typically would take to get out. I mean, typically these things take years. And the world of healthcare provision – you know, precision medicine, genomics, those minimally invasive operations, and digital healthcare provision – has rapidly increased and the cost is decreasing at an incredible rate. They say it’s 99.99% cheaper than it used to be to map the human genome and what this means for us is the success rate of some generic drugs for genetic diseases typically could be in the range of a 5% success rate. Now, once you’ve mapped out and you can do this, I mean, the success rate could move to 100%. It means that you could get personalised medicine. So companies that are focused on this and companies that are investing in the future here are ones that you want to hold in your portfolio because they’re going to see stratospheric growth.

On the technology component: 

Data is sort of the new currency, and we live in a data-driven world and that’s actually one of the themes in the fund – technology advancement and the world of A.I. and quantum computing and the digitalisation of manufacturing. Again, it’s investing in companies that are on the forefront of all of this and data rules everything that we do. And so, again, it’s very important to have stocks that are focusing on this. It’s important that the stocks that the fund is investing in are not necessarily your stocks like Apple. You know, those big companies. It’s really the emerging companies that are far more interesting. It’s the ones that are going to see a lot of growth in the future. Snapchat, for example, is one of the holdings in the fund. So when you see those things growing, it’ll be very exciting.

On how you invest in this new fund at Discovery Invest: 

It’s offered exclusively from Discovery Invest. You can invest in it on our local platform. So we have it in our endowments. You can even include it in part of your RA or your preserver from another company or in a living annuity, even if you want it as a portion of your money. We also have the fund available on our offshore platform. If you want to externalise your money, turn it into dollars, take it offshore. You can invest in this fund on our offshore platform as well.

Part of it’s a rand-denominated fund so you can take your rands, you can invest in it and still get exposure to the movement of these shares in dollars. When you sell out of it, you get your rands back.

On the fund being actively managed:

The portfolio is actively managed so each of the different components are done on an as-and-when basis. When they see a new opportunity, they’ll go and buy it. I don’t think it has a specific mechanism to it but it does rebalance back to the four main themes in equal proportion on an ongoing basis.

We believe that the benefit of having active management here is if a specific theme or shares within a theme are not performing well, you have an engine room of hundreds of people at Goldman Sachs that can react to this. I don’t think this is a fund where you want to follow an index and just sort of see wherever it goes. This is something where you actually do want that active management.

On backtesting: 

Well, the portfolio is relatively new, so it doesn’t have a lot of backtesting behind it. Having said that, each of the different components within the fund have got a bit of history. Over the last year, the technology component has done over 80% growth in dollars. The environmental one has done 86%. The Millennials piece has done over 72% and the healthcare component has done 20%. But importantly, the focus here is not on past performance. These are long term trends that are actually coming in the future. So although it’s had an incredibly strong performance over the last year or so, it’s really the future that’s the most exciting for us.

If you look at just the S&P 500, the 500 largest stocks in America, and then you deconstruct that and you look at which of those stocks were actually aligned to these themes from 2014 to 2020 – so over the last six years, which of these were aligned to these themes and which of these were not aligned to these themes? So which of these companies are disruptors and which of them are going to be disrupted. The ones that are disruptors have outperformed by 182% and those that have underperformed have underperformed by 97%. It is actually staggering. Those shares that have done very well because they are aligned to these themes and those that have been left behind, and you want to be in those shares that are aligned to these secular growth themes.

On how you should invest in the fund: 

Like any investment, you should diversify adequately. Different people have different needs. I would say that you would need a long-term horizon for these. As I said, these are long-term themes that will come out over time and you may experience volatility along the way. And again, a lot of South Africans live in South Africa, so you do need to have a big chunk of your money in rands in South Africa. But for your global component, we would definitely say that a portion of the offshore component could be invested in this millennial’s portfolio.

On the costs of the fund: 

This fund on the offshore platform is 1.65%, which is pretty much in line with other actively-managed funds and on the local platform, it’s 1.75% as an annual fee. There’s a very important feature that this fund has – if you buy it on the offshore platform, Discovery will provide a benefit and let you buy in at cheaper than the prevailing exchange rate at the same time. So if it is about R14 to the dollar, you’d invest in this fund about 60 to 70 cents cheaper than that. You’d get at about R13.30. So you can invest in this fund and get it at a better exchange rate than is allowable anywhere else in the country.

On the Discovery offshore platform, there is a feature that is a currency enhancer, which means that any fund that you choose, you actually get it cheaper than the prevailing exchange rate. If it’s one of the qualifying funds and this one is a qualifying fund as well. So you buy in cheaper and then you get extra units in the fund with that extra money and then all of that is invested for you.

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