ABSA SELECT EQUITY FUND
* Raging Bull Award for the Best Domestic General Equity Fund – the top-performing fund on a risk-adjusted basis in this sub-category over five years to December 31, 2010
Superior stock-picking skills delivered a return well above the FTSE/JSE All Share index (Alsi) to investors in the top-performing domestic equity fund over the past five years and earned it a Raging Bull Award for risk-adjusted performance over the same period.
The Absa Select Equity Fund won its second Raging Bull Award in a row this year on the basis of its PlexCrown Fund Rating for risk-adjusted performance over periods up to five years to the end of December last year.
Although the Absa fund was one of five funds that earned the highest PlexCrown rating of five crowns in the domestic equity general sub-category, the Select Equity Fund had the highest overall score.
The fund delivered 18.61 percent a year to its investors over the five years to the end of December and was the top-performing fund in the domestic equity general sub-category over this period, according to ProfileData.
The Alsi returned 15.23 percent a year over the same period.
Errol Shear, the manager of the fund and the chief investment officer of Absa Asset Management, says the key to the fund’s success is picking good-quality companies at the right price, a philosophy he describes as a “pragmatic, value-orientated investment style”.
Shear cited some examples of good share picks the fund has made over the past five years:
* Retailer Mr Price, which the fund bought in 2008 when its share price was R20. Mr Price is now trading at about R58 a share. The Select Equity Fund held a 4.58-percent holding in this share at the end of December last year.
* Pharmaceutical company Cipla-Medpro, which the fund bought into three years ago when the share was trading at less than half the price at which it is now. The fund is still invested in this share.
* Food producer AVI, which the fund bought into after its share price was knocked back by a failed attempted merger with Tiger Brands in 2009.
* Pinnacle Technology, the computer hardware and software distributor, which the fund bought into in 2009 at less than half of its current price when the share was not popular in the market.
* The Foschini group. The retailer has battled in recent years to get its stock position right, but it now seems to be back on track.
Shear says the Select Equity Fund also benefited in the past five years from calls on resources stocks, including ARM and Implats. After enjoying some excellent returns on these shares in 2007 and early 2008, exposure was reduced ahead of the fall-out from the credit crisis. Recently, the fund has been acquiring shares in Anglo American.
In 2009, the fund benefited from the performances of life assurer Old Mutual, Mr Price and food producer Tongaat Hulett.
In 2008, the fund lost money, but while the Alsi was down more than 23 percent, the Select Equity Fund’s losses were only half of that.
The market crash offered the fund a good opportunity to buy great defensive companies at low prices, and at that time the company switched out of cyclical shares into the likes of Shoprite, Mr Price and general industrial company Remgro.
Absa Asset Management is a long-term investor and hence there is a low turnover of shares in the Select Equity portfolio, he says. Shares are typically held for three or more years.
The fund aims for a holding of 25 shares but typically has about 35. This is because often a share will move to a level where it no longer offers value before the fund has bought a big enough stake in it, Shear says.
The top half of the fund tends to be more focused, he says, but smaller holdings make up the bottom half.
You have to do the hard work to pick the right stocks: check the financials, visit the company and analyse the company’s fundamentals. Absa Asset Management has a really good team of investment research professionals, Shear says.
Looking ahead, Shear says the market is trading at a price-to-earnings (PE) multiple of 17, which is quite high relative to the market’s long-term average of about 14.
A PE ratio gives you an indication of how expensive a share price is relative to the share’s earnings, and a trailing PE is based on earnings already declared.
Foreign buyers have over the past year dominated the market and to some extent distorted it, he says. This makes stock picking more difficult, he says, but it is still possible to find value. For example, Anglos is on a single-digit forward PE and might benefit if the rand weakens.
This year could well be the one in which returns are lower than they have been over the past five years, Shear says. However, he advises investors to take the long-term view when investing.