Leader of the Growth Funds

FUND FOCUS

Neil Brown 

Nedgroup Investments Growth Fund (A)
Price:	R16.26
Inception:	01 Nov 2003
Domestic Equity Growth
Fund Size:	R 1,238.9m
Price Performance
12 months:	4.38%
24 months:	28.57%
More Details...

The Nedbank Growth Fund, currently the leading fund in the Growth sector with an annual performance of 47.43% (04/11) has assets under management of R872 million. Liz Still, Editor of EQUINOX.co.za spoke to the fund manager Neil Brown of Old Mutual Asset Management (OMAM), who has managed the fund since April 2001.

Equinox: Your CV reflects the turbulence of the asset management industry in South Africa over the last few years. You started off in 1990 at Syfrets Private Bank, moved to Syfrets Managed Assets, then to NIB Asset Management, following the merger with UAL and, when FTNIB was closed by Nedcor, moved to Quaystone. When Quaystone was closed in mid 2004 you moved to your present position at Old Mutual Asset Managers (OMAM). This unsettling work environment must have had positives and negatives.

Neil Brown: Well I have never actually resigned from any of the companies you mention above, I have always been retrenched when they were closed. It is unsettling as you spend the last three or so months of employment lining up the next employer rather than managing money and analyzing companies. On the positive side, moving from one company to another does expose you to fresh intellect, ideas and investment processes, which is always challenging & interesting.

Equinox: You would have worked with quite a range of investment professionals. Who do you think has had most influence on the way you manage money?

Neil Brown: The most influential must be Tim Allsop, who I worked with for about five years at NIB. I also learned a lot from mining fund manager Pete Major while I was at NIB. The most influential team was probably the founding team of Coronation, (led by Leon Campher, Tony Gibson, Hugh Broadhurst, Thys du Toit and Matt Brenzel) who I had exposure to through shared meetings and so on while I was a private client fund manager with Syfrets Private Bank.

Equinox: Some multi-managers claim that research supports the theory that certain personality types are predisposed to managing certain types of shares in particular environments. Due to your success in the Growth sector, so they theory goes, you would be less well emotionally equipped to manage a value fund in a value environment. What do you think of this theory?

Neil Brown: Not much. This is partly because I do not differentiate between value and growth shares. A lot of the multi-manager analysis theory comes from the US, maybe their markets can justify the distinction.

Equinox: You work for Old Mutual Asset Managers, but manage the Nedbank Growth Fund. Are you guided / influenced / prescribed to in your choice of underlying investments by the recommended list from Old Mutual Asset Managers?

Neil Brown: I would be foolish not to draw from OMAM's considerable experience and superb expertise, particularly in areas which are not my core focus. My special niche is the mid to small cap sector, (as you know, I co-manage the Old Mutual Small Companies fund with my colleague Brian Pyle), and I rely on the OMAM team for good ideas in the Top 40.

I generally invest in about 15 to 20 Top 40 stocks and trade them quite aggressively, as they are so liquid, easy to get in and out of. I value the opinions of my OMAM colleagues for their views on whether or not these companies are offering value.

Equinox: Your fund is quite a nice size (R872 million) while some of the other Nedbank Funds with top quartile performance, the Nedbank Entrepreneur Fund for example, is much smaller. Do you think your association with OMAM helps with the marketing of the fund?

Neil Brown: OMAM does not have a Growth fund in the Growth sector, which I suppose could be a factor, but I think that the size of the fund is primarily a function of the performance of the fund and Nedbank's marketing efforts.

Equinox: There is a fair overlap between your choice of underlying holdings and Anthony Sedgwick's, who is based at Polaris and is the manager of the Nedbank Entrepreneur Fund. Do you ever get together and swap notes with other Nedbank Best of Breed Fund Managers?

Neil Brown: Yes and no. Part of the overlap you mention is probably due to the fact that I co-managed the Nedbank Entrepreneur Fund until I joined OMAM in June 2004, whereafter I have co-managed the Old Mutual Small Companies Fund. Anthony and I are ex colleagues & friends and we do see each other. I also go on fairly regular Nedbank roadshows with people like him, Tim Allsop, Piet Viljoen and Walter Aylett, all of whom are Nedbank 'Best of Breed' managers. It is inevitable that you talk about the markets and it is interesting to hear about the themes that other fund managers are picking up. It is important and also refreshing to challenge the existing OMAM equity market views.

But you must remember that there is massive duplication between all the funds that are mandated to invest in the small to mid cap range, and the key differentiators are not so much the actual shares you may or may not invest in, but the timing, (when you get in and out) weighting (how much of your portfolio that you commit to a particular share) and price that you choose to get in and out. Fund managers keep these strategies close to their chests.

Equinox: Please explain your mandate. In your view, which shares would fall outside your mandate?

Neil Brown: I don't invest in international shares, only domestic shares. Other than that I am permitted to invest in all sectors and shares on the JSE.

Equinox: Please tell us how you go about selecting shares.

Neil Brown: I have a two phase process. In the first place I look for companies which have a return on equity which is greater than their cost of capital, consistent earnings and dividend growth rates relative to the All Share Index, good cash flow and companies with quality (not necessarily "growth") business models and management. They should also have a high margin of safety in their valuations.

Secondly, I divide the portfolio between the best Top 40 shares and mid & small cap shares and the fund always holds between 28-40 shares. I trade the Top 40's more aggressively, as I mentioned before, and tend to go for good quality mid & small caps that are well researched by OMAM. At the moment I have 16 large caps and the balance of the portfolio, 20 investments, is in mid & small caps.

I like to end up with a portfolio of between 28 and 40 shares and I keep an eye on the weighted fund market cap of the fund. At the moment it is around R39 billion and I keep an eye on this to ensure that I don't end up with a permanent mid & small cap bias. Weightings generally range from 1.5% to 5%, with a maximum exposure of 2% of the portfolio to the higher risk companies. At the moment I have a range of fairly evenly weighted shares in the portfolio, the highest is 3.4%. I don't like to have investments that are less than 1.5% in the portfolio, as I feel that exposure to a company at levels less than 1.5% could result in the fund losing focus.

Equinox: What ratios/ figures/ indicators of your fund or the underlying holdings (besides the changing prices of the shares) do you monitor most closely?

Neil Brown: The rolling Price/Earnings ratio of the fund relative to the Industrial & All Share indices, the weighted fund rolling 12 month forward earnings per share growth and the weighted fund rolling dividend yield.

Equinox: A Growth fund is, by definition, one of the more risky types of unit trusts. Never the less it is interesting to note that according to MSCI Barra Stats the total risk of your fund (beta + Active Risk) is 12.80%, while the average risk of unit trusts in the general equity sector in the same period is 12.56%. We would have expected a wider margin.

Neil Brown: I don't manage the fund with the reduction of risk as a primary goal, but now and again I look at statistics that show my fund has a volatility level, as per Micropal, which is well below the average of the General Equity sector, which as you say, should be less 'risky' than a Growth fund.

Equinox: It would appear that your nearest competitor has had his performance stunted due to fairly high cash holdings. This usually happens when fund managers can't find any companies they like at good prices. You have also had inflows; how have you dealt with this problem?

Neil Brown: I would agree that the shares on the JSE are not cheap any more, but on the other hand, cash does not really do much for an equity mandated portfolio. Over the last few months I have invested new cash into some of the better quality and more liquid Top 40's offering value, such as Remgro, Richemont, Tiger Brands & PPC, while also buying into Truworths & Combined Motor Holdings.

Equinox: Why do you like your top four companies, Standard Bank, Absa Group, Astral Foods and Italtile?

Neil Brown: Standard Bank: Standard Bank has a strong management team, a solid business model and we believe that it offers good value at current levels.

Absa: Absa is cheap relative to its peers on a forward P/E basis. We think that the Barclays deal will improve the company focus. Local investors haven't totally forgiven Absa for past mistakes, the Unifer deal and the micro lending story but we think that Absa have moved on and that the relatively low price is not justified.

Astral: Astral is a very well run chicken and animal feeds company. It is well placed to benefit from the retail boom, chicken is the cheapest & fastest growing form of protein and as a population we are spending more on protein. Astral has benefited from the decreasing maize price and they have been enjoying higher than normal profit margins.

Italtile: My OMAM colleague Brian Pyle is the expert on Italtile. It was first listed on the JSE in about 1988 and is the leading South African retailer of imported and local ceramic tiles, sanitary ware and bathroom accessories. Italtile trades through two branded national retail chains, CTM and Italtile. The group is also amongst the largest purchasers of ceramic tiles in the world. Headline earnings have grown in the region of 35% over the last seven years. Italtile and Ceramic (SA tile manufacturer) are good 'vertically aligned', but "arms length" businesses, with a common major shareholder, Mr Ravazzotti. Italtile is very well placed to benefit from the current building and retail boom.