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 Fawaz Fakir, portfolio manager at the Old Mutual Investment Group. Welcome, Fawaz. It's a pleasure to be hosting you.

Speaker 1:
Thanks clearly great to be here. So for us, perhaps we can recap the last two funds that were put forward by the old Mutual investment group, namely the Old Mutual Balanced and the Old Mutual Investors Fund. Did they fulfil the mandates which were set out for them?

Speaker 1:
Yes. So maybe I can start with a balanced fund. Um, the last session, as I recall, was done roughly a year ago so we can talk to the last year and then maybe just touch on longer term as well. So the balanced fund has delivered. It's delivered quite well versus its CP I benchmark,

Speaker 1:
and that's a function of generally all asset classes is doing well, um, much to, uh, a lot of people's surprise. You know, the yields are good on the fixed income side. Equity markets have been running and things were besides all the doom and gloom and the sentiment, um, things were generally good in the last year. So against our official benchmarks, um, the balance fund has been doing quite well from

Speaker 1:
in terms of how we positioned and how we were positioned a year ago.

Speaker 1:
Uh, we are positioned fairly defensively. Um, and we the portfolio management team, expects a recession. I guess from if anything was from a surprise perspective, um, we expected that recession or the recession to come a lot earlier

Speaker 1:
instead of, you know, um, further down the road. So we've been positioned defensively for quite a while, meaning we've taken equity off the table and allocated more towards our fixed income, especially, um, in the global space.

Speaker 1:
And yeah, I mean, the view is still largely the same.

Speaker 1:
Um, so, uh, tracking tracking fairly well against its official benchmarks. So over the last year, then if I move on to the Investors Fund, which is, um, just to just to refresh a, um, a S, a equity focused fund. Um, that fund over the last year has had a bit of a tougher time.

Speaker 1:
Um, also positioned fairly defensively, um, bigger positions in global defensives. It's not global fund, but, uh, they look at the world in terms of, um, uh, Rand hedge companies and then SAS a in companies. And they position their largely, um

Speaker 1:
uh in more global global defence of nature, also underweight, um, resources and very selective within S a Inc and favourable on banks. So that's largely the the position. Um, it's been largely the position over the last year. What's happened over the last year, though, is there were two or three counters that kind of detracted from performance. One of them was transaction capital, all no

Speaker 1:
up there with the earning surprise and the structural problems within the taxi industry. So we had a a significant or or a a larger than we'd like overweight position in transaction capital that detracted from performance as well as the the holdings in sa we. We, we like sale continue to like sale, and that's that's detracted a bit as as well as, uh, British American tobacco.

Speaker 1:
So for us now focusing on the two new funds that you're putting forward two ESG funds, perhaps you can highlight these for us. And what is the approach that you take when investing in these funds?

Speaker 1:
So, yes, So there's the local ESG fund that's just over three years old now and then the newly launched Global ESG Fund, which is actually, uh, available at the beginning of this month in in, uh to S a investors in a feed a fund format. So Rand based, So it's fairly new. Uh, we have been running it as a usage version since December last year,

Speaker 1:
so they are largely the same. They're largely managed in the same way with the same ESG objectives. And maybe I can run through that very quickly. What it gives investors from an ESG perspective is there's three ways in which ESG is incorporated into the fund. The one is via screening. So the fund

Speaker 1:
direct, um uh directly screens out non ESG compliant industries and companies, so that's taken out at the offset and uninvestigated.

Speaker 1:
The second is that we only invest in highly rated ESG companies, both locally and globally. We do our own proprietary research in that space in terms of, um, our own, uh, ESG rating for every company we invest in or or that we consider.

Speaker 1:
And it's based on that rating that we

Speaker 1:
hold and and evaluate the companies we hold from the ESG perspective. So locally, we talk towards 20% higher ESG rated companies than the benchmark at a fund level, versus the benchmark 20% higher. Globally, we only invest in the top 20%. Um, of of ESG rated stocks to a is the benchmark on the global side. So you have about 600 stocks that fall in that top 20% the top quintile,

Speaker 1:
so that's the second part. The third part is the carbon reduction. So there's explicit carbon reduction measures, both both in the local fund and the Global fund. The local fund would target 40% less carbon than the benchmark. The Global fund is Paris aligned, which has certain requirements for carbon reduction, which is 50% less than the benchmark. It's a bit easier to get the reduction globally than it is locally, and we can touch on that.

Speaker 1:
But, um, the Paris Alignment agreement requires us to be at least 50% lower, as well as have a 7% year on year decay of of absolute carbon emissions. So, um And then there's other requirements, such as not not holding fossil fuel companies.

Speaker 1:
And we comply with that. It gets our stamp of of approval of of Paris alignment.

Speaker 1:
Yeah, and then I, I think, just to mention those were explicit ESG objectives alongside the ESG objectives. Um, we do seek excess returns or or we seek to generate Alpha in conjunction with giving investors these ESG objectives. So you we're promising investors a better return in the market over the long term as well as a a highly cognizant um, ESG fund.

Speaker 1:
OK, so for us, you've spoken about this carbon reduction approach. Perhaps. Is there an element of stewardship in there? And does it extend to the S and the G? When, When, um, looking at the ESG metrics?

Speaker 1:
Yes, Chloe, absolutely. There's an element of stewardship. Um, the we have a dedicated stewardship team that sits in house separate to the investment team within within old mutual investment group. And their responsibility is really to to engage with companies across the board across all our holdings, as as a house as a as a company. And

Speaker 1:
we get that benefits directly within both ESG funds as well as all the funds we manage. So that is where real meaningful change is effected, You know, in terms of engaging with with the company's directors and board.

Speaker 1:
And, you know, we've gotten that process to a very good space now, where, um, you know, everything's transparent, all the engagements, the dates that's happened on what issues are being engaged on, where they are with the process, where they're going, what the what the actions have been. And I mean, it's it's communicated clearly and crisply across the company, and it's quite transparent in that regard. So the guys have done a lot of work with with the stewardship side over the last year or two.

Speaker 1:
OK, for a while. So you've mentioned, um, the global um ESG Equity FIDA Fund Being Paris aligned, um, you mentioned that the that the benchmark is the MC R A. But perhaps on the local side. Why is it a challenge to align the local ESG fund toward Paris alignment?

Speaker 1:
Yes, that's a good question. We we try to be as consistent as possible between the two funds, but I mean, as as as we all know, we live in South Africa, Not necessarily in Norway or Sweden, and and our economy is

Speaker 1:
generally fossil fuel. Um, powered, you know, um, so we do live in an emerging market country, and we still have a long way to go before we can decarbonise as as an economy and as a country.

Speaker 1:
So taking into taking into account that that structural issue, um, we we actually did a lot of work on what the optimal level of of decarbonisation is, um, in our portfolios versus the benchmark, and we find that 40% is a meaningful reduction while not impacting the risk of the portfolio in, in in, in in an in a, um,

Speaker 1:
in a negative way. So we find that even going an extra 10% from 40 to 50% which doesn't really sound like a lot, it becomes, um, marginally, um, obtrusive, almost, you know, in terms of getting more more of a carbon reduction, and it starts affecting your

Speaker 1:
your your sector holdings and your individual stock holdings and your risk profile of your portfolio. So we we think 40% is a good a good number Now for South Africa, given it's the structure of our markets And given the the fact that we are still very much fossil fuel, um, dependent. So, for perhaps we can just look at some of the top holdings and their value propositions within the ESG fund.

Speaker 1:
Yes. I mean, locally, we start with the local fund. Um, we do like financials. Um, Napa process as well in the tech space. Naturally, those companies lend itself to much lower carbon emissions. So from that angle, you know, we always prefer them from carbon emissions angle. They're also showing a fairly decent value. Your financial, especially your banks at the moment. Um, you know, in the in the, uh, uh, rising interest rate environment.

Speaker 1:
So we position favourably on on financial resources, We slightly underweight. It would have a slightly underweight resources skew from a carbon reduction perspective. But we do manage the sectors it won't always be. We won't always be underweight resources. A lot of, um um, investors ask, you know, Is it the structural underweight? No, it's not. We do try and, um, keep the sectors as close to neutral as possible.

Speaker 1:
Um, so you know your your holdings in the local fund? Um, process Napa is overweight. We prefer diversified miners as opposed to single, um, exposure miners like like your Kumba et cetera. We prefer Anglos bulletins. So those are in the top top holdings, as well as some, such as Mr Price and Clicks. Um, you know, alongside the ESG objectives we're trying to meet, we also have a

Speaker 1:
quality value and growth philosophy. So we're picking we we modelling companies based on good quality, good growth and good value characteristics and and your retailers, and are showing are showing good good earnings at the moment and good, good quality metrics as well as looking quite cheap,

Speaker 1:
um, moving on to globally just from a from a sector and country perspective, uh, from a country perspective, we underweight the US and China overweight Europe.

Speaker 1:
Um, and then from a sector perspective, we are positioned quite defensively in in this environment. Um, and we prefer healthcare, um, as well as the technology and and financials very similar to to the local portfolio. And we are underweight. Um

Speaker 1:
uh, consumer discretionary. You know more, um, being more cyclically orientated.

Speaker 1:
Um, from a from a top 10 perspective globally, we like, um, a Nova no disc is up there as one of our biggest holdings, Uh, very, very good quality company. Also brilliant on ESG low carbon emissions. It's almost everything we look for in a in in in our portfolio at a that's embodied in a in a stock. Um, they one of the world's, um, they're the biggest insulin producer in the world if they supply 50% of the world's insulin.

Speaker 1:
So I mean, it's really a shining star for us on on the on the global side. And then if you just look generally at the other holdings, um, it's really high quality companies there, Um, more, more with lower beta, more defensive characteristics. Well, on that note, I want to thank you for sharing your two top or the ESG funds. We appreciate your time.

Speaker 1:
Thanks so much, Chloe. You appreciate it.