The Foord Equity Fund has been a stalwart of South Africa’s Equity—General unit trust category for 22 years. On 1 October 2024 the fund changed sectors to the newly introduced SA—Equity—SA General sector, which is for general equity funds investing solely into South African equities. Director PAUL CLUER looks at the reason for the move and revisits the Foord Equity Fund’s investment objectives and accomplishments.
*This content is brought to you by Foord Asset Management
Fund Classification
The Foord Equity Fund was launched in 2002 into the broad and popular Domestic—Equity—General unit trust category as it was called at the time. Exchange controls had then only been newly relaxed and JSE-listed equity funds were in favour with investors. Almost all funds focused on share investments listed on the local bourse to the exclusion of share investments listed abroad.
Government has slowly relaxed exchange controls for institutional investors, such as unit trust portfolios. Today, unit trust schemes can invest up to 45% of their assets abroad. Unit trust managers can decide which portfolios invest only in South Africa, which can invest abroad up to 45%, which might invest more than 45% abroad and which invest fully abroad — provided the total offshore allocation falls within the 45% limit.
Over time, about half of the equity funds in the Equity—General sector incrementally added global stocks to their portfolios. The sector then became a hodgepodge of funds without foreign exposure and those with up to 45% invested abroad. Comparisons understandably became meaningless. The splitting of the Equity—General sector — into a sector for funds that invest abroad and another for those that do not — is long overdue.
Despite all our big peers moving towards hybrid SA-foreign equity funds, Foord chose to retain the SA-only strategy for several reasons. Firstly, we wanted a dedicated, single-asset class fund that could be used as a building block by investors. We already have a global equity product for investors who wish to construct their own hybrid strategy. Secondly, we already have products that invest heavily offshore — the Foord Balanced Fund can invest up to 45% abroad, while the Foord Flexible Fund is our preferred product for investors who wish to invest in a fund that gives us wide geographical discretion. And, finally, we wished to retain the stellar track record.
Investment Objective
The Foord Equity Fund has a wide investment mandate to invest in shares and listed property counters on South African share exchanges. Its benchmark is the FTSE/JSE Capped All Share Index — a market value-weighted index that caps constituents at a maximum weight of 10% to avoid excessive concentration. The Foord Equity Fund’s investment objective is to outperform this benchmark after fees over long periods. If we do this, we are also likely to produce meaningful, inflation-beating returns for investors. To outperform the benchmark after fees, the fund must be different from the benchmark. For us, this is not difficult — there are many companies we discard for quality reasons. We might also favour small or mid-cap stocks at higher weights than the index where we feel growth prospects and valuations are good.
Strategy
Beating the benchmark requires us to be cognisant of the benchmark. However, we are not beholden to it — which in industry parlance is known as ‘benchmark hugging’. Instead, the fund managers forecast prospective returns over the medium term based on past returns, prevailing valuations as well as forward-looking economic data points.
They then aim to significantly exceed this forecast, rather than being overly concerned about share-level over- or underweights relative to the benchmark. This will inform the portfolio construction along with the overarching requirement to manage inherent risks of permanent loss of capital — by focusing on the quality of underlying companies as well as diversifying risks across economic drivers.
The starting point and largest contributor in the portfolio will be shares that meet our top-down (macro views) and bottom-up (fundamental analysis) criteria. Portfolio managers also look for discrete opportunities that can do well despite a tough economy.
The Foord Equity Fund is currently around R4 billion in size. Accordingly, any listed share with a market cap exceeding R2 billion can make a material difference to the overall portfolio result. This means that our fund can be much more different to the benchmark than our larger peers can hope to achieve. We believe that it can be many times larger before returns may become constrained.
Performance
Because we are not benchmark huggers, the fund’s performance will usually differ from the benchmark. This is natural and to be expected. In the main, the fund is likely to lag when hot themes or trends, such as a resources frenzy, drive the benchmark into extreme lopsidedness; or when the market is roaring and even low-quality names are surging.
However, it usually outperforms when markets draw down or trend sideways for extended periods — known as stock-pickers markets — when quality comes to the fore. Statistics endorse this view: the Foord Equity Fund has outperformed its benchmark in 71% of months when the benchmark was negative. In aggregate, we expect to outperform the lopsided benchmark over rolling 3-5 year periods — with lower volatility and greater downside protection.
Over 22 years, the fund has achieved an annualised 14.3% return after fees and fund expenses, compared to the benchmark’s return of 14.0% per annum. Over this period, inflation averaged just 5.3% and accordingly long-term investors were rewarded with attractive real returns. A R100,000 investment at the inception of the fund would have grown to R1.9 million today. Over the last three years the fund has delivered 15.2% for investors annually against a benchmark return of 14.5%, and the fund has a 6.5% lead over the benchmark in the last 12 months.
We continue to believe that the benchmark is beatable over time. Our investment team dedicates much of their energy to this specific endeavour. Our investment process is well defined, well resourced, and, we believe, repeatable. From investors we ask for enough time and patience to reap the rewards that accrue to long-term investing.
Read also:
