DailySun
For over two decades, the Foord Equity Fund has been a fundamental part of South Africa’s Equity – General unit trust landscape. Starting from 1 October 2024, the fund has been reclassified to belong to the newly established SA Equity – General sector, which is aimed specifically at equity funds that concentrate exclusively on South African equities.
This article examines the motivations behind this reclassification, along with an overview of the Foord Equity Fund’s objectives and accomplishments.
Fund Classification
The Foord Equity Fund was introduced in 2002, initially classified under the well-known Domestic Equity – General unit trust category. At that point, the relaxation of exchange controls made JSE-listed equity funds especially attractive to investors. Most funds focused on local share investments, often overlooking those listed abroad.
Over time, the government also began to relax exchange controls for institutional investors, inclusive of unit trust portfolios. Currently, these schemes can invest up to 45% of their assets offshore. Fund managers now have the option to build portfolios that are either strictly South African, those that allocate 45% internationally, or entirely foreign, as long as the total offshore investment does not surpass 45%.
In the years following, around half of the funds within the Equity – General sector began incorporating international stocks into their portfolios. This resulted in an assortment of funds with differing levels of foreign investment, complicating meaningful comparisons. Thus, the need to differentiate between funds with foreign exposure and those focused solely on domestic equities became apparent.
While many competitors are exploring hybrid SA-foreign equity funds, Foord has chosen to uphold a South Africa-only investment strategy for a number of convincing reasons.
Firstly, we aimed to provide a focused, single-asset fund that can serve as a foundational component of an investor’s portfolio. For those interested in crafting a hybrid approach, we already offer a global equity product. Furthermore, our other offerings, like the Foord Balanced Fund, can invest up to 45% abroad, and the Foord Flexible Fund is suited for investors seeking broader geographical options.
Most importantly, we strive to continue our remarkable performance record.
Investment Objective
The Foord Equity Fund has a comprehensive investment mandate that enables it to invest in shares and listed properties on South African exchanges. It benchmarks against the FTSE/JSE Capped All Share Index, which limits individual constituents to a maximum weight of 10% to avoid excessive concentration.
The fund aims to outperform this benchmark after accounting for fees, over extended periods. In doing so, we seek to provide investors with substantial returns that surpass inflation.
Effectively outperforming the benchmark necessitates deviating from it, which is intrinsic to our approach as we filter out numerous companies based on their quality. Additionally, we may give more weight to small or mid-cap stocks that show promising growth potential and favorable valuations compared to the index.
Paul Cluer, director of Foord Asset Management. Image: Supplied
Strategy
To achieve benchmark outperformance, we must consider it; however, we refuse to be restricted by it, a practice commonly referred to as ‘benchmark hugging’ within the industry. Instead, fund managers evaluate expected returns based on historical performance, current valuations, and projected economic indicators in the medium term.
They aim to exceed these expectations significantly, without being overly concerned about share weightings in relation to the benchmark. This influences portfolio construction while effectively managing the inherent risks of permanent capital loss by concentrating on high-quality companies and diversifying across various economic factors.
The starting point for the portfolio predominantly includes shares that fit our macroeconomic and fundamental analysis criteria. Fund managers are continuously on the lookout for specific opportunities that can thrive even in adverse market conditions.
Currently, the Foord Equity Fund stands at about R4 billion. Therefore, any listed equity with a market capitalization exceeding R2 billion can significantly affect the portfolio’s performance. This allows the fund to deviate further from the benchmark than larger competitors typically tend to do. We believe it has significant potential for growth before experiencing diminishing returns.
Performance
Our strategy of not being tethered to the benchmark means that the fund’s performance will naturally vary in relation to it. Such fluctuations are anticipated and completely normal. Typically, the fund may underperform during phases dominated by robust trends, such as a resources boom when the benchmark is heavily weighted toward certain sectors, or during market rallies when lower-quality stocks perform well.
In contrast, it often outperforms during market downturns or extended sideways trends, known as stock-picker’s markets, where the emphasis on quality is heightened.
Data supports this perspective: the Foord Equity Fund has consistently outperformed its benchmark in 71% of months when the benchmark was negative. Overall, we expect to outperform the imbalanced benchmark over rolling three- to five-year periods, with reduced volatility and improved downside protection.
Over the past 22 years, the fund has delivered an annualized return of 14.1% after fees and expenses, compared to the benchmark’s 13.8% per year. During this time, inflation averaged just 5.3%, providing long-term investors with considerable real returns.
An investment of R100,000 at the fund’s inception would have grown to R1.9 million today. Over the last three years, the fund has achieved an impressive annual return of 14.6% for investors compared to the benchmark’s 10.5%, and it recorded a 5.1% lead over the benchmark in the past 12 months.
We are confident that the benchmark is attainable in the long term. Our investment team works diligently toward this objective. Our investment process is clearly articulated, well-supported, and, in our assessment, replicable.
We encourage our investors to exercise patience and allow ample time to reap the rewards of long-term investing.
Paul Cluer is the director of Foord Asset Management.
This article is brought to you by Foord Asset Management.
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