Did some value fund managers fail investors in 2009?

Some analysts described the 3rd March 2009 price lows, when the JSE All Share index was at 17 953 as 'the buying opportunity of a generation'. So which fund managers actually went to the sale and loaded up their trolleys? And how do results compare if we also throw in those fund managers who say they sail their ships under the colours of value investing?

 According to the EFS Investment Solutions statistics, only two value funds were included in the list of top twenty funds for the calendar year 2009. It must be noted that funds in the value sector did not perform badly; the top performing value fund in the sector produced an absolute return of 43.49%, and the tail-ender a not so shabby 26.67%. The Allan Gray Equity Fund, a general equity fund that markets itself as a fund with a value bias, produced a return of 21.61%.

Of all fund managers, value fund managers are the ones most trained in bargain hunting, they are the ones that can spot the diamonds in the dust. So in the year of bargain basement share prices, did value fund managers manage to stick to the basics of evaluating shares; examining PE ratios, Price to Book ratios, and searching for companies trading at a discount to their net asset value? Or did they get caught up in the global financial turmoil and macro financial analysis, thus missing important buying opportunities? 

We have included a selection of 'value biased funds' in the list below such as the PSG Alphen Growth Fund, the Cannon Equity Fund and the Allan Gray Equity Fund for comparative purposes.

Mark Ansley, fund manager of the Cadiz Mastermind Fund said that he attributes his fund's outperformance to the fact that Cadiz has developed fundamental research analysis on the intrinsic value of range of shares, and that the asset management took the view that funds trading at low PEs and high discounts to NAV would revert to their mean value in due course.

'When we saw the prices of certain shares fall below our intrinsic value levels, we simply went out and bought them', he said. 'We didn't try and second- guess either the market or our clients. We didn't impose a macro view on our decision to buy,' said Ansley.

Of the ten companies that increased in price most between the market low of March 3^rd 2009 and the end of the year, the Cadiz Mastermind Fund had exposure to six. These companies included Old Mutual, Anglo American Plc, Steinhoff, Investec Ltd, Richemont and Nedbank Ltd.

The value proposition

How does a value investor invest? Given the enormous popularity and success of Warren Buffet, the chief priest of value investing, many investors have claimed to have a 'value bias' or a 'value style' in the hope of being on the receiving end of inflows into their funds.

According to Adrian Saville, CIO of Cannon Asset Managers, there is a range of ways to 'test' for value. 'However, some obvious measures include the portfolio's price-book ratio, price-earnings ratio, price-sales ratio, price-cash flow ratio and dividend yield relative to the market,' he said.

The war chest

Funds classified in the Value category and the General Equity category are permitted to have a maximum of 15% of their portfolios in cash. Nevertheless, most equity funds take the view that they should be as fully invested as possible, they assume more cautious investors will have made provision for diversification in other ways.  

Asked what he regarded as a litmus test for value managers,  Adrian Saville, CIO of Cannon Asset Managers said that 'if a true value manager wasn't already fully invested (ie the value trait of getting in too early) then he should have been working actively to building a fully invested position.'

The table below shows that the Investec Value Fund (ranked 9^th) for the 12 month return to 31/12/09 and the Stanlib Value Fund (ranked 11^th) had the highest exposure to cash or money markets in September 2009, at 11.24% and 12.43% respectively. Imagine the potential performance of the Metropolitan High Dividend Fund, a fund that was ranked 4th despite a cash holding of 14.26%. 

It is possible that these fund managers are waiting for further buying opportunities in 2010, but their cash holdings in 2009 certainly detracted from year-end performance.

*General equity funds with a value bias. 

Underlying sectors

Considering that resources companies and financial sector shares dominated the JSE in the course of 2009, we looked at the resource allocation of value funds. Co-fundmanager of the RMB Value Fund, Stephen Brown was quoted in an earlier article published by EFS said that underperforming value funds 'could have missed the cheap resource shares… possibly due to the fact that the market was looking at resource shares on a short term earnings basis rather than trying to determine an underlying asset base value'.

While this may be true, a glance at the table below shows that exposure to the basic materials, oil and gas sectors was not a pre-requisite for success during the year.  The PSG Alpen Growth fund had a 19% exposure and an annual performance of 43.49%. The Stanlib Fund had an exposure of 8.64% and a performance of 26.67% and relative under-performer Allan Gray Fund had an exposure of 30.7% and a performance of 21.61%.

*= General Equity Funds with a value bias. Source: This information was sourced from November 2009 Fund Fact Sheets, supplied by asset management companies. In cases where 'resources' were not separately identified, the Basic Materials and Oil &Gas sectors were added together.

Stock picking choices

So, taking the next logical step we looked at the stock picks of the different fund managers. We assumed that a true value fund manager would have identified which shares were below their historic or intrinsic value on March 3^rd and bought them.

The shares that appreciated the most between March 03^rd 2009 to December 31^st 2009 were the following: Old Mutual (133.68%), Anglo American Plc (129.84%), Steinhoff International (118.85%), Naspers (98.12%), Investec Plc  (98.07%), Kumba Iron Ore (97.18%), Richemont (94.73%), Anglo Platinum (93.88%), Investec Ltd (91.3%) and Nedbank Group Ltd (87.21%).

Not all of these shares would qualify as value shares according to the definitions above, but we would have expected value managers hunting for bargains to pick up at least some of the shares priced at below Net Asset Value prices. It is clear that the outperformers of the year did indeed identify this value opportunity, while under-performers did not.

Below is a table of fund managers who had exposure to the top 10 performing shares as of 31/09/09.

Source: Moneyweb website

Mark Seymour  of Alphen Asset Management's multi-manager division said that in his view, a classic value manager would have become very interested in shares which looked very cheap in March 09 and might have started to become weary of holding more defensive shares which had out-performed on a relative basis during the crisis (Nov 07 to March 09).

'The classic value investor is quick to point out that macro economics are impossible to forecast and therefore stocks are picked on the basis company fundamentals alone (price, dividends, earnings, product, competitive advantage, etc)

'In this case I imagine that one would have considered meaningful exposures to the likes of Old Mutual, Northern Platinum, Anglo, Investec and Steinhoff, as a result of the extremely favourable historic price to earnings and high dividend yields these companies were trading on. The short answer is - the litmus test for value investors is whether or not fund managers owned some of the shares I've just mentioned during the course of 2009,' he said.  

Michael Schroder, fund manager of the Old Mutual Value Fund, commenting on the performance of value funds during the year said that his first thought was that performance during 2009 - and from the March low in particular - was determined by the fund manager's macro call: 'If you did believe that the world was not coming to an end, equities were obviously very cheap at the time,' he said. 

'And if you also believed that the emerging markets in general - and China in particular - would come out of this global crisis comparatively better positioned, then it was logical that resources were the area to play. Resources shares had been classified "Growth" during much of 2008 but some had corrected so sharply in the second half that they were offering outstanding value,' he said.

However, most value fund managers claim to ignore the macro trends, discounting them as unpredictable, focusing instead on the value of specific companies.

It will certainly be worth keeping an eye on the future performance of the value winners of 2009. It is possible that the benefits of the 'once in a generation' buying opportunity will give them an edge for years to come.

But then again, today's 'laggards' may well have the last laugh.