Speaker 0:
with advisors and investors facing a bewildering choice from over 1200 investment funds, we ask South Africa's top fund allocators to share their top tips and ideas to find the winners. Welcome to investment.

Speaker 1:
Hello and welcome to the investment den. I'm joined today by Tian Fri, founder at responsible capital. Welcome, Tian.

Speaker 1:
Hi. Thanks for having me. So perhaps we should recap, uh, the two funds that you selected, Um, in the last investment day, namely the Net Group of Art Worldwide Flexible fund as well as the mundane, um, World Leaders Fund. How would they perform for you?

Speaker 1:
OK, I mean, as we discussed in the previous session at responsible capital, we follow a quantitative or an algorithmic approach to terms of which strategies we favour in which cycles of the market Um, And when we last spoke in September 2022 the market was, uh both in South Africa and in the US was actually in what we would phrase our extended market valuation cycle, uh, or cycle four by by number.

Speaker 1:
Um, and what's interesting is that cycle has historically been dominated by strategies that are either active in risk management so in terms of embracing volatility well

Speaker 1:
and predominantly, it also favoured active investment strategies, be it all the way from value, which is managed to also outperform the market in that space. But the best performing strategies tend to be quality orientated or healthcare dominated. Interestingly enough,

Speaker 1:
so based on that scenario, we selected the Brava and the mundane funds as options in September 22 because they fit within the the framework of areas where we see opportunity of outperform into the future. And what's interesting is in spite of all the volatility we've had in the last nine months or so, um,

Speaker 1:
the environment or the from a cyclical perspective, based on our animal spirit indicator still indicates that we are in cycle four, and hence it would make sense for us to retain both of these positions into the future until such time that we have a have a change in regime, uh, based on our indicator.

Speaker 1:
OK, so these are two funds you've previously recommended and are still top picks for you focusing on the Ned Group Data Worldwide Flexible fund. What is it about this fund that fits into cycle four in your animal spirits. Um, indicator.

Speaker 1:
So I mean, what what's interesting for us? When we look at the animal spirit indicator, we we identify acid classes and strategies that have historically shown precedent in a given cycle. So it means in that cycle those strategies have either performed well or performed poorly because it's good to know either outcome.

Speaker 1:
And what is interesting to us is what cycle four tends to bring is volatility. It tends to be, and it doesn't necessarily mean that volatility is always negative. It just means there's a lot of movement and moving parts, and I think we can all agree the last let's call it 12 to 15 months have definitely fit that bill in terms of being quite volatile and active and lots of opportunities and volatility arises.

Speaker 1:
And hence, when you identify managers that have historically shown the ability to navigate those kind of, uh, markets or cycles, well, the probability that they could do it this time around is higher than someone that has never done it before. At least that's what the empirical data says. Um, and I think this is the other important thing, you know, when we look at, uh, how we look at things

Speaker 1:
at responsible capital is we recognise that we also have our own biases just like our managers have their own biases. And hence we need to find ways to compensate for that and objective data is one of the best ways to do that. And that's actually why we we we designed the animal spirit indicator is to bring a level of objectivity into our decision making processes.

Speaker 1:
So it's not just driven on how well or poorly a fund has done or how well a certain strategy is doing right now. It's more based on what is history shown this strategy to do, like in a given cycle of the market. OK, so perhaps we should focus on, um, a as A as a manager. What particular? What particularly does stand out for you? Um, with regards to A as a manager and the management of this fund?

Speaker 1:
OK, I mean, so a by name, Uh uh. Walter started the business in 2000, and I wanna say 2004, but it's probably 2005,

Speaker 1:
Uh, and you know, it's been owner managed and influenced since then, OK, and it and it actually reflects his personality quite well, too. You know, he's a He's a bit of a chameleon at times, you know, and I respect that about him. Um, and he's also shown he's found ways to address his own bias as well, which at times, you know, like right now it's quite an interesting one. You know, he was saying to me earlier, I, you know, uh, engaged him earlier this week just to find out how the fund's positioning has shifted and what was interesting. He said to me, You know what? Since March, the March fund,

Speaker 1:
actually, that came out because they do three monthly fund functions. Nothing has really changed, except for the fact that, you know, I've probably kept my risk assets the way they are, regardless of how they've changed in value. There has been some opportunities where I've taken some money and put it in cash because short term cash rates looks too high, you know, and that's an interesting take. So it talks to his contrarian nature in many ways where when a lot of people are embracing risk, he often actually takes a bit of risk off the table and Conversely, I mean, uh, covid was a great example.

Speaker 1:
You know, uh, when When? When? When? When things really went south quickly. He also had the ability to then apply the capital that he had available at that time. So I think that's one of his greatest differentiators is his active risk management approach. And also, you know, I think he embraces skill where he finds it, you know? So when he's built up a relationship with certain management team, he he he he tends to back them quite well as long as they stick to their nothing. You know, um, so I think that brings a consistency to to the outcome, Um, which which I think is positive for investors,

Speaker 1:
OK, and then just understanding how you would implement the use of this fund specifically into some of the solutions that you have at responsible capital. So one of the great reasons why we think brava is such a great option is the fact that it is a worldwide flexible fund which in theory means it can drift above the regulatory limits around R 28

Speaker 1:
OK, because it tends to operate on a 50 50 split roundabout. Uh, Sometimes it gets a bit lower and the opportunities are really good in South Africa, like post covid, and right now it's drifting slightly higher. But what's interesting is you know there's still a lot of South African rand exposure because interest rates are so attractive. And and Walter balance is that well, um, but what I think what makes it a great uh uh addiction to an existing let's call it multi managed or a split funded balanced fund

Speaker 1:
is the fact that most balanced fund managers would be below the 45% limit today in any case, so most model portfolios or split funded portfolios tend to have a slight underway towards let's call it global and more quality orientated strategies. And as I said, based on the animal spirit indicator, those are the strategies should be favouring OK and hence introducing Brava into AAA portfolio mix

Speaker 1:
will probably increase your global exposure slightly than and more so than other balance funds. And what's interesting is because of, uh, a strategy on managing risk. He's actually tended to be less volatile than many of the the Balance fund peers, OK, especially in the current environment, and I know it's not a like for like

Speaker 1:
by comparison, because this is a worldwide flexible strategy. But it just points to the fact that perhaps reviewing how we look at our portfolios on a holistic basis is important. We can't just pick a pick a balanced fund all the time. Sometimes it might make sense to bring in slightly more aggressive or less aggressive strategies. And I think Bravada fits that bill. Well, OK, so now focusing on to the mundane World Leaders Fund, what is it about this fund that fits the phase four of animal spirits indicator?

Speaker 1:
Yeah, OK, so I mean, in terms of for us, you know, again, we've assessed we try and look at long term data. Uh, we can find as possible. So currently on the on the global strategies, we have up to up to 50 years data on things like world quality and a couple of other strategies that have that have been around quite consistently and also can be modelled quite consistently into the back end. I mean, so when MS C I puts together an index on a quality basis, it's great to actually have data back to 1974

Speaker 1:
and I mean it. It clearly highlights that in certain cycles, quality has AAA definite advantage now quality, although quality has shifted in in, in, in, in in industry over time,

Speaker 1:
The metrics we have used to assess quality within companies have remained reasonably consistent because it's quite academic in nature, like quality of balance sheet, low financial leverage, you know, consistent capital allocation, cash generation. You know, all of these things are are highly important stable profit margins or increasing profit margins.

Speaker 1:
And companies that exhibit these characteristics are not rare. But they are they they they often go through cycles of mispricing. OK, because sometimes people think these quality companies are worth a lot more than they actually are. And sometimes they think they're worth a lot less than they actually are. And I think for for embracing a quality metrics makes sense in the current environment.

Speaker 1:
But now, to combine that with someone or his manager has that has shown the ability to identify these quality companies but also manage the risk around, you know, sometimes having a bit of cash in the portfolio or favouring certain industries in certain uh, cycles that are less cyclical. or more cyclical, and it's subtle changes, you know, 56 10% of the portfolio. But those changes add up through time.

Speaker 1:
And that's where when you look at mundane, you know, they've had a consistent out performance track record relative to the to the market and over its 20 year history. And it's it's probably got one of the the best global equity track records in in the market, and yet it's quite an unknown fund because it's, you know, it's not in a very it's the structure is, is, is quite limiting. Um,

Speaker 1:
and it's quite an I it it it it It was perceived as quite an expensive structure. Now the team at mundane main changes to both of those to better serve their investors because the biggest investor in the mundane fund is actually the management team, you know. So that's the important thing. And and that's rare in a global equity strategy that has done so well,

Speaker 1:
Well, because most of the time, you know and and we can think of many successful global equity strategies marketed in South Africa, as soon as those funds start, you know growing, they or they do well they attract so much capital. You know that even if the manager invested 100% of his net worth in those funds, it's a fraction of the overall assets with these guys, it actually is their own money.

Speaker 1:
And I think that's brought a unique dynamic into the into play. OK, so just to close up the session now, and I'd like to understand how the mundane, um, world leaders funding would fit into certain solutions. Um, at responsible capital. And who is this fund, perhaps on a standalone basis, uh, most appropriate for

Speaker 1:
Yeah. So, as I said, I think I see it as one of the best quality slash global franchise solutions in the market. OK, And so anyone that has exposure to some kind of quality orientation, this would be appropriate for But we have to recognise it is still a global equity exposure or global equity building. Uh, it has historically shown less volatility than the market because it tends to manage the risks well, and it tends to go for certain assets that are, uh, that have lower risk inherent.

Speaker 1:
Um, but in general, the point would be is, uh, this is a fund that suits investors that want to embrace global equity exposure. OK, and what is interesting is they have shown persistence of out performance through the cycle. OK, and this cycle specifically favours their strategy. And I think the other thing that's been interesting is mundane went through quite a difficult period last year because they owned a lot of tech stocks, you know,

Speaker 1:
And and and it's not, you know, uh, and some of these tech, their biggest stock is actually Amazon, which has actually lagged the market quite significantly of like because it isn't just straight a I or linked directly to a I. And yet they believe one of the greatest uh uh, benefits of,

Speaker 1:
uh, a Amazon. A W is obviously their A i capabilities, and it's not being priced in the market today. So I think that that, to me is also another reason why it really looks attractive. Because I think on a on a three year basis, there's still a lot of room in their in the nav expansion that hasn't been priced in yet.

Speaker 1:
Thank you very much for taking us through your two top panics. We appreciate your time. Thank you. Thanks for having me. Thanks