Foord Equity Fund — Benchmark Agnostic
The Foord Equity Fund has a stellar track record but has lagged its index benchmark in the last five years. Lead portfolio manager NICK BALKIN revisits the fund’s value proposition and prospects.
The Foord Equity Fund has an explicit index benchmark despite our investment philosophy being benchmark agnostic. That means that we don’t choose our share investments based on the composition of the benchmark. Instead, we apply an absolute-return, risk cognisant mindset to share selection and portfolio positioning.
We build diversified portfolios concentrated on our best share ideas which we believe will deliver excellent risk-adjusted, long-term returns. If we get this right, the portfolio should outperform all indices constructed by arguably arbitrary rules over full market cycles.
The alignment of interests inherent in Foord’s owner-managed team results in a natural buy-and-hold investment strategy that works to grow our investors’ wealth in real terms over time. This allows the team to stay focused on the long-term fundamentals of the companies we buy.
In contrast, short-term speculative success against an index is intoxicating. It causes investors to sell underperformers and hold onto short-term winners. We see evidence of this happening in the market now.
Foord has guided investors for some years on our cautious positioning. The firm has avoided most companies with significant exposure to the beleaguered South African economy, preferring non-resource rand hedge companies with better earnings certainty. Examples are leading luxury goods company Richemont, tobacco and vaping giant British American Tobacco, and brewer Anheuser-Busch Inbev.
The fund’s low weight to the mining sector has been a significant detractor of index-relative performance given the resource sector rally. This mirrors the fund’s underperformance leading up to the 2008 global financial crisis, when resources outperformed materially.
Now, as then, there is a clamour from investors for resources stocks. But we are very worried about valuations, sustainability of resources prices, quality of earnings (miners are price takers) and the inherent risks of operating in unstable jurisdictions (it is easy to tax a mine that makes lots of money and can’t move).
Investors also overlook the very real risk of overexposure to the Chinese economy inherent in most South African equity indices if you combine Richemont, Naspers, Prosus and resources stocks—whose prospects are all correlated to China. We are positive about China and our global funds have many good investments there—however, we try to manage concentration risk in the South African Foord Equity Fund by balancing positions across different economic drivers.
As money chases the current winners, it drains out of the previously high-flying ‘SA Inc.’ companies. We still worry about South Africa’s current economic trajectory—but we also see some enticing opportunities at current valuations, especially in the mid-cap sector.
Restaurant franchise Spur is dealing with the challenges of COVID-19 lockdowns but it and companies like Omnia, Metair, Hudaco, Afrox and others trade on price-earnings multiples of less than eight-times earnings with good prospects in all but the most catastrophic scenarios for South Africa.
We are diligently analysing these and other opportunities with a view to making high-conviction, long-term investments. We have already started to do so, creating a platform for excellent real returns from current levels. When the resources run reverses, these robust returns should also translate into meaningful alpha generation for investors compared to the index benchmark.