Anthony Sher: Small Cap Wizard

FUND FOCUS

Lance Krowitz 

Stanlib Small Cap Fund (A)
Price:	R1.33
Inception:	12 Oct 1998
Domestic Equity Smaller companies
Fund Size:	R 183.9m
Price Performance
12 months:	-4.42%
24 months:	-46.08%
More Details...

The Stanlib Small Cap Fund has made an interesting appearance in the top ten funds over the past 12 month period, bumping the Old Mutual Small Company Fund into second place. We spoke to the fund manager of the fund, Anthony Sher, who has managed the fund for over two years.

Equinox: Could you start off by telling us a bit about your own background and experience?

Sher: I am a CA (SA) by training and completed my traineeship with Grant Thornton. In 1997, I joined Liberty Life Properties as a manager of the Investments and Developments Department. After that, I was appointed the financial director of a niche private financial services company. In September 2000 I was awarded my CFA Charter and in the same month joined SCMB Asset Management as a Research Analyst. After the formation of Stanlib Asset Management in 2002, I became responsible for the research of small cap companies and the fund manager of the Small Cap Fund.

Equinox: According to our records, the benchmark of your Stanlib Small Cap Fund is a weighted composite of the FTSE/ JSE Mid Cap Index, the FSTE/ JSE Small Cap Index and the FSTE/ JSE Fledging Index. Why do you think that Stanlib decided on such a complicated benchmark instead of the FTSE/ JSE Small Cap Index?

Sher: The benchmark has been constructed as a weighted composite of the FTSE/JSE Mid Cap, Small Cap and Fledgling Indices because the universe from which investments may be sought are included in such indices. No investment is permitted in counters that are included in the FTSE/JSE Top 40 index although one can continue to hold a particular counter that has "graduated" into the Top 40 index.

It should be noted that from a competitive sense the benchmark is not as critically important as is the relative ranking of my fund relative to my competitors.

Equinox: Could you briefly explain the dynamics of the investing environment that has led to the recent outperformance of the small cap sector?

Sher: The out performance of the small cap sector relative to the broader market as characterized by the companies included in the Top 40 index has been driven primarily by the buoyancy of the local SA economy underpinned by strong consumer consumption coupled to previous relative under-valuation of small cap counters.

In a sense the gap between ratings of large caps & small/medium caps has substantially closed but there does remain cases where some small caps offer isolated cases of value.

Equinox: From a fund manager's perspective, could you briefly describe the special challenges of selecting sound small cap shares?

Sher: In one manner the challenges of selecting sound small cap shares are the same as that for large caps. Cognizance of influencing factors like the macro environment, currency, interest rates etc play a role. Of particular relevance to small caps is that such shares are often not very well known, are under-researched and more often that not the tradability/liquidity of the counter is an issue.

Equinox: What do you look for when you buy shares?

Sher: The process I adopt in selecting shares is centered on the performance of proprietary research encompassing financial modeling, management interviews and operational site visits.

When selecting shares to buy, the main areas I examine is the analysis of asset utilisation, margins and capital structure so as to derive an estimate of the particular company's return on capital versus the cost of capital.

If the spread between such variables is positive then the implication is that the company is generating economic value and hence an investment into that company would be justified.

Equinox: Most of your peer group in the small cap sector have high exposure to shares that could be described as 'high street retail',while your holdings in Edgars, Forshini, JD Group, Spur and Truworths are in the 1- 2% range. Why have you avoided higher weightings in these stocks?

Sher: Given that I am also the Stanlib retail analyst, fortuitously the fund had exposure to such retail companies quite early in the cycle. Hence the fund has profited quite handsomely from such exposures. The 1-2% holdings arise mainly from switches made into other opportunities. I would not agree that the fund avoided having higher weightings in retail rather I would like to think that such weighting were reduced to "lock-in" early made profits.

Equinox: With one exception your 4.75% holding in shipping company Grindrod is the highest of any other unit trust. Our records show that you held 4.19% of the company at the end of March this year, 3.17 at the end of June and 4.75% at the end of September. Could you take us through why you like this company?

Sher: The fund's holding in Grindrod has been at significant levels throughout the year mainly because the counter's valuation relative to its earnings prospects has been at undemanding levels. This company has been the beneficiary of strong freight rates and a limited worldwide supply of ships. The China factor has also been a driver of demand for cargo movement.

Equinox: You have also been a consistent fan of Argent Industrial. Our records show that your holding in March this year was 3.28%, in June it was 4.14% and at the end of September was it was 4.64%. Furthermore, your Stanlib Small Cap Fund is the only Stanlib retail fund with current exposure to the company, so we can deduce that it was not a 'house view' investment. The company was a good find: please comment.

Sher: I have liked Argent for quite some time because the stock has been undervalued and not very well known. The company is far too small by market cap to be a "house view" stock. This company is still a relatively small player within the steel industry (being its core activities) hence it is firmly within it's growth phase. Robust sectors of SA economy like the motor industry, construction and housing have underpinned strong demand for the company's manufactured products.

Equinox: You have increased your holdings in Brancorp Holdings, a company that distributes branded consumer goods consistently over the year to the current level of 3.98%. Could you tell us why you like this company?

Sher: I have liked Brandcorp because the stock has been, in my view, undervalued with respect to its earnings prospects. I have been attracted to this company because of the easy to understand business model, cash generative features and low gearing position. The buoyant consumer cycle has driven strong demand for the company's distributed products.

Equinox: Our records show that your top ten investments, including cash, constitute only 39.08% of your portfolio. This figure indicates that you have a relatively wide spread of small investments. Do you think that this is an appropriate investment philosophy for a small cap fund, or does this figure reflect your personal investment philosophy?

Sher: I am of the opinion that in a small cap portfolio one should have a wide spread of investments so as to achieve diversification. Thus the answer to your question is that yes it is appropriate in a small cap fund and yes it reflects my personal investment philosophy.

Equinox: A superficial analysis of your portfolio suggests that the Stanlib investment process gives you a wider degree of investment freedom than some of the other big asset management companies. We note for example that your fund is the only Stanlib fund to be invested in Argent, but it is also the only Stanlib fund invested in Gold Reef Casino Resorts, one of two Stanlib Funds invested in Brandcorp. Please comment.

Sher: I can't answer for other asset management companies and their process but I can say that I do have a wide degree of freedom in selecting companies I wish to invest in. I believe that one cannot be too prescriptive when it comes to small caps in as much as small cap companies may grow into large cap companies one day. I have spoken previously regarding the investment process I follow

Equinox: Could you make some general comments on how you expect the small cap sector to perform next year?

Sher: Generally we do not make predictions about how a sector will perform into the future. Suffice it to say that going into 2005, I will continue to try to identify and invest in stocks that have sound growth prospects, are attractively priced and offer reasonable dividend yields.