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 Deborah Slaver, director and portfolio specialist at Morningstar Investment Management. Welcome back, Deborah. Hi, Chloe. Nice to be here.

Speaker 1:
So, Deborah, perhaps we can recap two of the last two top fun picks that you selected, namely two equity funds, the Fair Equity Pre Fund, as well as the DODGEN Cox Global Stock Fund. How did these funds perform for you and your solutions?

Speaker 1:
Um, of course, Chloe. So let's reflect back on Dodge and Cox, First of all, so you would recall that I said, It's It's a It's a global value manager. They quite bottom up stock pickers. So they do have quite a uncorrelated, um, alpha cycle.

Speaker 1:
And what we've found in 2023 is actually been the recovery has been in a very narrow part of the market, almost driven by this obsession with artificial intelligence at the moment. So you've seen this, uh, a recovery in these large tech shares, um, in the US and some of the other sectors have been left behind. It's almost a complete reversal of what we've seen in 2022

Speaker 1:
so performance has been absolutely fine. Um, but it's lagged its growth, Um, counterparts. And of course, in Rand terms it looks fantastic because the weak rand has been, um, actually quite a tailwind for global global investing.

Speaker 1:
I think one of the big detractors in this portfolio, however, has been their financial exposure. So you would recall earlier in this year I mean, the US, um, there's been some cracks. Um, that started to show in some of the regional banks, and as a result, there's been a bit of a spill over into the financial sector as a whole.

Speaker 1:
So Dodgen Cox does have exposure to banks as well as financial services in general and asset managers. They don't have exposure to the regional banks, but there has been a bit of a spill over, So that's been one of the detractors. Um, but they still have a valid role to play in the portfolio, and I think that's quite important.

Speaker 1:
And with regards to the fair Tree Equity press fund. Did it fulfil the role that it was selected for in your solutions? Yeah. I mean, I think at Morningstar we pick funds through the cycle, and I mean, what we like about fair tree is that they are style agnostic. They're very high octane. They're not afraid to trade. They've always had a bit of a resource buyers. Um, but they're not afraid to change that and turn that portfolio quite quickly. So over time, they've done a phenomenal job of keeping

Speaker 1:
up with with peers without performing, um, peers as well as benchmark. But lately it has been a bit tougher for them. And the reason main reason why is that resources come under pressure both in the diversified sector as well as in the platinum sector.

Speaker 1:
Um, on the other hand, they do have some defence in the portfolio. So they've done, uh, well out of some of their goal positions and then the fact that they've been underway. Some of the cyclical parts in S a and financials in particular, has also helped help performance.

Speaker 1:
Yeah, we are now focusing on to the new funds that you've selected. Which funds have you selected and why exactly? So for today I have selected to chat about the Matrix Stable Income fund and then also on the global side, the 91 Global Franchise Fund.

Speaker 1:
And I mean, I think the reason if I can talk through the Matrix Fund first is just It's an environment where cash rates today are a lot more attractive than two years ago, so you don't really have to go down the quality curve to pick up yield. You don't have to take on too much duration risk to to pick up yield in a portfolio.

Speaker 1:
So it's actually a very nice solution for clients looking to park short term cash, but also in our multi asset portfolios. I mean, we've tried to take a bit more of a barbell approach, and what I mean by that is actually buying a bonds at a duration. I call it 6.5 and then buying something with a little bit duration, but still

Speaker 1:
yield like a matrix, for example, So matrix, I mean, they really play in the high liquidity, um, spectrum low, very low credit risk. They've got di diversified return drivers within the portfolio, and they don't go down that quality curve to try and pick up yield, which is quite important for us at this stage in the cycle.

Speaker 1:
So, Deborah, Now, with interest rates possibly peaking globally, how are they positioned? Duration wise if they anticipate possibly a, um a lowering of interest rates in the short to medium term future. Yeah. So, Chloe, I think, um, in South Africa, I don't think we are near cutting rates as yet. I think shorter, shorter term rates is gonna stay high for a while.

Speaker 1:
They do have. So from a duration perspective, they're sitting at a duration of less than one at this point in time and actually interesting. They have been cutting duration ever since, Um, actually going into 2022. I mean, that was really the start of the rate hiking cycle. They took duration off the table, and as a risk

Speaker 1:
result, they've actually done very well. So currently they're sitting with a duration of less than one. And as I mentioned, you don't really need to take on a lot of interest rate risk to get the yield in your portfolio at this point in time. So in in the South African space. We don't actually think that rates are gonna go down soon. Um, maybe it's It's a it's slightly different in in the US and across other developed markets.

Speaker 1:
So with this fund in particular, Deborah, how would you employ the use of this fund in some of your solutions at Morningstar?

Speaker 1:
Yeah. So great question. And that's what I mentioned earlier. So that bell approach. So what we would do is we would go and buy bonds with duration of 6, 6.5, uh, years out, and you lock in that fantastic yield a real yield of 6% that S a bonds are giving you at the moment. And on the other hand, you have this much lower duration, but still high yield in the portfolio with

Speaker 1:
virtually zero credit risk, Um, and with very high levels of liquidity. So that's how we will apply it in our multi asset portfolios.

Speaker 1:
OK, so now focusing on to the 91 Global Franchise Feeder Fund, this is a fund that, uh, one of your colleagues Sean has put forward before. Why is it still a topic for you?

Speaker 1:
Yeah, I guess. Uh, Chloe, it's a fund that we've hold through the cycle for, uh, one very big reason. And it is because it's a concentrated portfolio of defensive, um, developed market quality names. That's very uncorrelated to more of the

Speaker 1:
cyclical parts in South Africa now in in South Africa. So from a portfolio perspective, it works incredibly well, especially for a S a investor. And I mean, I think it's even more relevant today. And why am I saying that? Because global, the global economy is slowing down, it's no surprise to anyone. So therefore, there's this continuous pressure on earnings,

Speaker 1:
so earnings resilience is gonna be very important going forward and the 91 Global Franchise Fund. What they do is they focus on, um, businesses with some level of earnings resilience that can generate cash flow through the cycle. They have a competitive advantage. They've got strong balance sheets, they've got low capital intensity,

Speaker 1:
and I mean and these businesses can range, um, anything from from medical device makers to food producers. It doesn't it's not specific to a sector. So that's why we we like we still very much like that fund.

Speaker 1:
So speaking about sectors Deborah, how have they adjusted their sector allocations in light of the economic environment that we find ourselves in.

Speaker 1:
Yeah, I don't think on a sector basis they haven't. They haven't changed sectors dramatically over the last last, um, last while and as I mentioned, it's quite a concentrated portfolio. So there's only about 30 stocks in there. Um, but what you would find in that portfolio is things with very resilient earning streams, like a visa or a booking dot com that they actually bought during covid. Where

Speaker 1:
and that stock price fell dramatically because no one was travelling anymore. Um, very, very good business model a Microsoft that's got recurring earnings, Um, and Nestle a SD Lauder, for example. So? So I wouldn't say that they've made massive changes on a sector basis. It's just about how they they acquire these stocks, and they tend to hold on to stocks for quite quite a long time.

Speaker 1:
So then, with this fund, in which solutions would it be most appropriate for? And do you have a higher allocation to, let's say, in a more aggressive, um, equity solution?

Speaker 1:
Yeah. So, um, also great question. So how we would size this is directly correlated to um, the amount of offshore exposure that we have in the portfolios. So for a low equity portfolio, at this point in time, we only have 25% global exposure. Not all of that is going to to 91 global franchise. Of course, we mix it with other managers, but, um, and we also get offshore exposure through the local equity managers that that we have. So the natural,

Speaker 1:
the position sizing for for franchise would be a lot smaller. Whereas in our, um, global equity portfolio or multi asset high equity portfolio, the rating would be quite quite a bit more when it comes to a matrix. Um, there would be, of course, higher allocations to more conservative portfolios and zero allocation, for example, in a multi asset high equity portfolio. Because there you don't need a lot of liquidity levers. You can get that out of a general multi asset income fund.

Speaker 1:
Deborah, thank you very much for taking us through your two top fun packs. We really appreciate it. Pleasure. Thank you. Chloe. Thanks for having me