PSG FLEXIBLE FUND
* Raging Bull Award for the Best Domestic Asset Allocation Flexible Fund – the top-performing fund on a risk-adjusted basis over five years to December 31, 2010
* Certificate for the Best Domestic Asset Allocation Flexible Fund on straight performance over three years to December 31, 2010
Sell high and buy low. Sticking to this basic principle of investing helped the PSG Flexible Fund to ride out the market crash of 2008.
ProfileData figures show that over the five years to December 31, 2010, the Flexible Fund returned 16.51 percent a year against its benchmark of inflation plus six percent, which was 12.8 percent a year. The fund earned the top PlexCrown rating of five crowns, winning it the Raging Bull Award on a risk-adjusted basis for 2010.
“We aim to give our clients high returns but at lower levels of risk. Over the past five years, we have achieved this goal, as the fund not only out-performed its benchmark but also the FTSE/JSE All Share index (15.23 percent a year), while exposing clients to much lower levels of risk,” Jan Mouton, the fund manager, says.
The fund has a flexible asset allocation mandate, which means it can invest in any mix of asset classes in any proportions.
Mouton has managed the fund since 2004, during which time the assets under management have grown from R3 million to R960 million.
The core of Mouton’s investment philosophy is to buy shares in exceptional businesses at low valuations, he says.
“When we can find good-quality undervalued shares, we have a higher equity exposure and lower cash exposure,” he says.
When looking to invest, Mouton looks for the following characteristics:
* The business must be managed by individuals with proven track records;
* The business must have some form of sustainable competitive advantage, such as a brand or patent rights;
* There must be a clear and understandable business model;
* The business must generate plenty of positive free cash flow, which is distributed to shareholders in the form of dividends; and
* Management must be honest and financial reporting must be transparent.
“If we are unable to find exceptional businesses at low valuations, we patiently wait in cash for the right opportunities, and it is precisely this strategy that paid off for us in the past five years,” he says.
Mouton says that because he could not find many good-quality undervalued shares towards the end of 2007, he invested about 32 percent of the fund in cash, which was a safe investment at the time, while the remainder of the fund was invested in more defensive or lower-risk shares.
“Consequently, when the financial crisis hit South Africa during 2008, the fund fell far less than the All Share index. Therefore we were in a better position to gradually use the cash to invest in high-quality shares as their share prices fell and they became more undervalued.
“In March 2009, the fund was fully invested in deeply undervalued shares, and since the market’s bottom in March 2009, the fund has generated growth of 97 percent,” he says.
About 44 percent of the fund is invested in companies that generate their profits outside of South Africa, Mouton says.
“This is to reduce risk by diversifying the fund’s holdings across industries and countries.”
Mouton says the fund’s largest equity holding (at 9.94 percent) is Steinhoff International, a furniture company that operates mainly in Europe. A key strength of Steinhoff is its business model – the company owns the process throughout the value chain, from manufacturing to retailing.
The fund’s second-largest equity holding is Sasol, at 6.91 percent.
Mouton says the recent increase in the oil price should drive profit growth at Sasol.
Other large holdings include Capitec Bank, Berkshire Hathaway, British American Tobacco, Anglo American, EOH, Tiger Brands, Capital Shopping Centres, SABMiller, Volkswagen and Tesco.
“Looking at the year ahead, we are positioned more defensively, with equity exposure of around 72 percent and the rest safely in cash,” Mouton says.