Prospects for Sanlam Investment Managers looking up?

One of the most discerning features in the unit trust industry this year has been Sanlam Investment Management's (SIM) comeback on the performance tables, writes free lance writer Leon Kok

Several years ago it amounted to a very sorry story, but it would seem that at last its reinvention of itself is beginning to materialise. A lot of the downside had to do with the bigger picture, namely the death in 2002 of chairman Marinus Daling after an 18-month battle with cancer, the short-lived tenure of a relatively inexperienced CE, Leon Vermaak, and then his replacement by Johann van Zyl. Vermaak and Van Zyl's tenures also had to be bridged over a considerable period by finance director, Flip Meyer.

The turn arguably came when Van Zyl realized that there had to be a significant shake-up in a host of areas. He inherited poor fund performances, profit margins lower than those of competitors, and a failure to close old issues such as the role of Gensec and Sanlam's relationship with Absa.

Van Zyl also lacked experience in the life assurance industry, having previously been Vice-Chancellor at Pretoria University. But there was no doubt that he was a man of ability. He had a doctorate in agriculture, spent a year and a half as a visiting professor at the University of Michigan, turned his Pretoria University department around, and then successfully transformed the university.

Sanlam's business has undergone a significant restructuring with a renewed focus on capital efficiency, and the share outperformed the sector for a considerable period. The firm approach taken furthermore by management to improve the investment process has paid considerable dividends and appears to have filtered its way to improved cash flows.

Two breaks for SIM in particular were the appointment of industry heavyweights Johan van der Merwe as head, and the appointment of George Howard as chief investment officer. Van Zyl had moved from Investec, and Howard from OMAM. Between them, they made other impressive appointments such as Omri Thomas, the head of equity research, from OMAM; Kokkie Kooyman, the financial services expert from Coronation; and Fred White, the head of resources, from Investec.

Howard, who sadly died earlier this year, introduced a consistent philosophy called 'pragmatic value' and he reinvigorated a research culture with continuous coverage of the top 70 stocks. The four sector teams - financial, industrial, resources and small caps - are all responsible for picking shares in their sectors. There are then three model portfolio groups, for equity, bonds and asset allocation responsible for putting together the generalist portfolios.

The net result of all this is that the Sanlam Value Fund is ranked second over all periods between six months and three years; the Small Cap Fund is ranked first over both 12 months and three years; the Industrial and Financial funds are ranked first over 12 months; and the General Equity Fund is ranked 13th out of 46 over 12 months.

Admittedly, a good number of other SIM funds have yet to bring spectacular value to the party. The fixed interest investments, for example, are not particularly attractive and the rand-denominated offshore funds seem to be a bit off colour. The exception, perhaps, is the Bond Fund that's ranked 4th out of 18 in its category.

Chatting to the Value Fund portfolio manager, Omri Thomas, recently, he remarked: "You can describe my style as aggressive yet defensive. This might sound contradictory, but if I'm convinced that a stock offers clear value and it's trading below its intrinsic value, I take large positions on it. That way I ensure that the risk of underperformance is limited".

Thomas believes that equities remain the preferred asset class and will continue to outperform bonds and cash. "There is still value to be had, and a value fund is the best vehicle to realize that value. It's a proven strategy and is also defensive. Besides, in a year in which returns will be low and there is the risk of downward adjustment, I'd rather be invested in a value fund than a general equity fund".

Turning to small cap funds, Small Cap Fund manager, Ricco Fredrich, says, "It's a great disappointment that many investors haven't benefited from the best run that we've had in small caps in a long time. Shortly after taking over the Small Cap Fund in 2001 someone asked me when the performance of the asset class would turn around? My response was that it already had. While hindsight is a perfect science, had I known of the returns that were in the offing, I'd have shouted from the rooftops".

Friedrich warns that now's not the time to chase those historic returns in the belief that they'll be repeated over the next three years. "The extraordinary returns from small caps came about due to their very attractive valuations at the time and the favourable economic environment that followed. Those opportunities don't come very often".

Leon Kok writes for publications in the United Kingdom, the United States and Switzerland, in addition to local periodicals such as Finance Week. He writes in his personal capacity and views and comments should not be considered to be advice. If you are unsure which unit trusts to invest in please consult a financial advisor.