PSG Equity is a fund that has consistently added alpha above the benchmark index and is run by a stock picker we know well and trust.

FUND FOCUS

Shaun le Roux 

PSG Equity Fund
Price:	R5.40
Inception:	31 Dec 1997
Domestic Equity General
Fund Size:	R 771.6m
Price Performance
12 months:	7.52%
24 months:	35.57%
More Details...

This is a quote from fund manager Joanne Baynham of Miton Optimal Asset Management (fund manager of the IP Worldwide Flexible Fund), quoted in the Sunday Times ‘Meet the Fund Manager’ column published on September 05th 2011. When a multi-manager invests in an equity fund, perhaps it is time to give the fund a second look. Liz Still spoke to fund manager Shaun le Roux.

How long have you managed the PSG Equity Fund?

Since 2002.

Please describe your investment philosophy.

PSG Asset Management’s investment philosophy is to invest according to the 3 M’s – Moat, Management and Margin of safety.  We conduct rigorous research to ensure that we only invest in companies that meet our criteria for investment. 

An analysis of your fund performance shows that that over the last five years or so  your fund’s performance could be described as top quartile/ above average/ commendable, but over  the last year or so the fund has hovered in the top ten territory. Has your investment philosophy changed? Are you doing anything differently?

Our investment philosophy has not changed.  We have, however, invested significant time and effort in our investment research process to ensure that it delivers more consistent future results.  This has resulted from increased focus on our criteria for investment (the 3 M’s) and beefing up our research team.

Please describe your share selection process.

As described above, we focus on the 3 M’s.  We are looking for companies with a combination of:  a high and sustainable competitive advantage (moat); a competent management team that manages the company in the interest of shareholders; and that trades at a discount to the businesses intrinsic value (at a margin of safety).

We pass ideas that pass our initial review of the 3 M’s on to two of our analysts to do a “deep dive”.  If, after analysis, the stock meets our criteria, the Investment Committee votes to add it to the Buy List together with a conviction level.  The portfolio manager selects shares from the Buy List at his discretion after considering the Fund’s mandate, which is to out-perform the ALSI over time.

Please could you describe your preferred portfolio ‘shape’; the number of shares you hold, your preferred maximum and minimum weightings. Please comment on the fact that at the end of June 2011, your top ten shares constituted 70.4% of your portfolio,  a proportion which is relatively higher than your competitors.

Our process is orientated towards generating fewer, higher conviction ideas.  We aim to restrict the Buy List to 25 stocks.  Conviction levels and liquidity influence the position sizes.  Typically we own around 30 shares, but this varies over time.

We prefer to conduct very detailed research on fewer ideas than hold a large number of shares because we have not been able to build conviction.

You have a ‘tail’ of sixteen shares of under 1%. What do these investments add to the portfolio?

Our tail comprises a combination of:  lower conviction ideas; illiquid stocks and stocks that we are building a position up or down in.  We are sensitive to price levels and liquidity.  We often wait patiently to build a position at what we consider to be attractive prices.  Illiquid stocks often provide the best long term risk/reward proposition but because of liquidity and small market capitalization it is difficult and inappropriate to take large bets. 

However, smaller cap stocks have been a tremendous source of alpha over the years, and we do take advantage of our competitive positioning (being a smaller manager) to invest in smaller-cap companies where our competitors cannot.

It is interesting that your relative out-performance has occurred in a very difficult and volatile investing environment. Please comment.

We focus on bottom-up research and identifying the stocks that meet our investment criteria and spend less time trying to predict economic or macro events.  This has resulted in a consistent process that delivers consistent results regardless of the market conditions.

Your fund blurb says that ‘...the fund manager regularly uses market timing and asset allocation up to the maximum 25% liquidity level to improve the performance of the fund’. Many of your competitors do their very best to discredit market timing, suggesting that timing the market is a fool’s game. Please comment.

The “blurb” is not factually correct.  We have occasionally reduced our net equity exposure (and added protection via cash or derivatives) when we believe our investors can benefit from less gearing to equity markets.  We do not attempt to time markets but rather protect investors on the very rare occasion that we feel this is appropriate and risks are very high.  2008 was a good example, and one could well find that in current market circumstances we deem some equity protection to be appropriate.  The Fund is generally fully invested in stocks from our Buy List.

We understand that capital growth is the main objective for this fund. However many analysts are predicting a low growth investing environment for the foreseeable period. Will you adapt your investing share picks to take more cognisance of those companies that pay dividends?

We would agree with an expectation for lower equity returns going forward.    In our review of whether a company has a moat, we look in particular for ppositive free cash flow which is distributed to shareholders in the form of dividends.  We do not specifically target high-dividend payers, but a high dividend yield is often indicative of a well-managed cash-producing business trading at an attractive valuation.

 According to our records your fund has assets under management of R647 million. Is your fund management style scalable?

Yes.  We take long term investment views and are happy to have a long tail of smaller cap ideas as discussed above.  We are also a small player relative to our competitors on the basis of total equities under management.

Please discuss why you like Steinhoff, Naspers and Nampak and their prospects for the next three years or so.

Steinhoff

It is our view that the company has built a very strong vertically-integrated competitive advantage (moat) in European furniture sourcing, manufacture, distribution and retail.  It is a very fragmented market and their platform should allow for growth and margin expansion even in a tough economic environment.  The management team has performed well and is invested alongside shareholders (interests are aligned).  The company trades at valuation level that factors in no future growth and offers an attractive margin of safety.

Nampak

Nampak management has spent the last two years focusing on closing down or selling businesses (including the troubled European business) that have no sustainable competitive advantage.  They have made material strides in aligning the way the business is run with the generation of long term shareholder value.  We are encouraged by this and see further upside from this process.  The valuation is underpinned by a healthy and growing dividend.  Its African positioning will be an important avenue for growth over the long run.

Naspers

We have been reducing our Naspers exposure in recent months.  We still think it is a fantastic business with a very strong competitive positioning in Pay-TV and internet.  Whilst we do like the long term growth prospects for Naspers, we currently can find better opportunities on the JSE.