Launched: May 1998
James Frater, managing director
Returns! A small manager is able to invest in a much wider universe of shares that includes mid- and small-cap shares. There are more opportunities. In addition, we invest alongside our clients and so there is an alignment of goals. Our reputation and wealth is aligned with those of our clients.
We can't move jobs like a portfolio manager of a large fund who under-performs significantly. We can manage sharia-compliant funds and we engage in shareholder activism, something that big companies find difficult because there are potential conflicts of interest. An asset manager that is part of a big group cannot, for example, comment on the salaries that the bosses in the group earn.
We have R7 billion under management of which R2 billion is in unit trusts and the rest in retirement funds. We manage 20 retirement funds and four unit trust funds.
Yes, as we develop expertise in different areas, we will launch new funds.
We set up in 1998 and have survived two big nasties in the market since then. The most important thing to ensure a manager's survival is that it has a proven investment philosophy that works.
It is not enough to have a track record with another company, because operating in an environment where you have a large research team and other people doing client service, and so on, is very different to operating on your own. How you manage the other processes is also important. A manager must have a relevant product range, it must interact with its client base and reach critical mass of assets under management. Small managers also need to reduce their dependence on key men.
Yes, it is profitable.
We do not charge performance fees on the unit trust funds we manage, only on some of the institutional funds. The annual management fee on the Flexible and Earth Equity funds is 1.71 percent (including VAT) and on the Real Income fund, the fee is 1.36 percent.
We are a long-term, active manager, with a contrarian style (opposite to the prevailing wisdom, for example, selling when other investors are optimistic about the market). We are bottom-up stock pickers and invest based on the fundamentals of the securities in which we invest. (Bottom-up stockpickers invest in securities that they believe offer an opportunity to make money and when there are no more opportunities, they turn to other asset classes, such as cash. The opposite approach, where decisions about how much to allocate to different asset classes are taken first, is referred to as a top-down approach.)
All three Fraters funds are available from Frater Unit Trust Management Company. The minimum investments are:
- The Earth Equity Fund (general equity): R250 a month or a R2 500 lump sum.
- The Real Income Fund (fixed interest varied specialist): R1 000 a month or a R10 000 lump sum.
- The Flexible Fund (asset allocation flexible): R1 000 a month or a R10 000 lump sum.
Launched: July 1, 2003
Anthony Sedgwick, director
There are three key things:
- The speed with which we can react to changing market conditions.
- The total and utter commitment to the investment process. We spend 99 percent of our time focussed on the investment process. We don't have meetings, spend time on the road or working on developing the business. We are very lucky our business has grown. Anyone who comes along wanting to invest is fantastic, but we spend our time looking after our clients, not looking for them.
- We look after our clients like gold. If an investor has a query, they will get a satisfactory answer in a few hours. Obviously, we can't do that forever, but at the moment we still can.
Our total assets under management is R13 billion. We have R8.8 billion in unit trust funds and the rest is in institutional funds. We manage two unit trust funds, two institutional funds, the Polaris Equity Fund and the Polaris Hedge Fund, and five segregated retirement funds.
Yes.
We are very lucky in that since our launch we have operated in a very benign market - an incredibly strong bull market that has delivered phenomenal returns. But our investment philosophy and approach has been successful for the past 10 years and we continue to apply it. In addition, we are not in the business of providing a full spectrum of alternatives. We only manage domestic equities. We have a very low equity base, we only employ five people and do not have lots of salaries to pay or a high rent. The business is profitable and could still be so at a fraction of the size. As a result, we believe it could weather a bear market. The business is not infinitely scalable upwards, but it could scale down. We have no outside shareholders and consequently there is no external pressure to aggressively grow the business from a funds-under-management or profitability perspective.
Yes, it has been since the first month. We managed R2 billion from the start in taking on Rainmaker, Prime Select and one institutional client.
We charge an annual management fee of 1.02 percent (including VAT), or 0.5 percent plus 15 percent of the out-performance of the benchmark over the period the client wants. The annual management fee on the Nedbank Rainmaker and Nedbank Entrepreneur funds is 1.71 percent (including VAT), and there are no performance fees on these unit trust funds.
The company employs a diligent and active management style. We believe one of the keys to success in fund management is focus.
We manage only domestic South African equity portfolios. We do not purport to offer any management expertise in the areas of bonds, derivatives, balanced portfolios or foreign investments. We are bottom-up stockpickers and we look for cheap shares with good growth prospects.
We look for undervalued shares outside of the top 40 shares. We prefer to invest in established companies with good growth prospects, competent management, a good balance sheet and generous dividend payments. The weight of that company in any index or held by our competitors is irrelevant.
You can invest in the Nedbank Rainmaker and Nedbank Entrepreneur funds through Nedgroup Investments. The minimum amounts are:
- Nedbank Rainmaker: R300 a month or a lump sum of R5 000.
- Nedbank Entrepreneur: R500 a month or a lump sum of R10 000.
Launched: April 2003
Rory Maguire, chief operating officer
Possibly our biggest differentiator is our investment experience - Piet Viljoen has been in investments since the eighties. Some large managers are not even 15 years old yet, with portfolio managers who are probably only five to 10 years out of university. It's their obsession with asset gathering - and all advertising that accompanies it - that would have you believe otherwise.
In contrast, we do not advertise, nor do we put ourselves in a position to be constrained by our assets under management. We prefer the broadest possible universe and fewer assets also means less clients with closer relationships.
In the long term, delivering superior returns to fewer clients is better than delivering average or index returns to lots of clients.
Our single investment process also represents our best possible effort, consistently applied across all clients. We are not buying one stock for client A from the portfolio of client B.
Our private ownership structure empowers us to make these long-term business decisions, such as limiting assets and focusing our offerings. Being listed or having a greedy shareholder would likely cause us to grow assets and create products - the opposite of what clients would want. So, we cherish our independence greatly. It is a factor that should not be underestimated.
We eat our own cooking. We co-invest both our personal and business savings alongside that of our clients. These are amounts that are material to staff and the business. We define risk the same way our clients do - it is the loss of money. Our process is designed around avoiding losses and when they do happen, keeping them as shallow and the periods as short as possible.
We manage R5.2 billion, with commitments to take us over R6 billion quite soon. This is half way to our cap of R10 billion. Of this total, R830 million is in the RE:CM Core Managed Fund and R160 million is in the RE:CM Core Equity Fund. The remainder is via large corporates with about R1.3 billion sourced from retirement funds.
Our full range of funds (that is three) will be completed with a global fund being launched soon.
The main difference is that the boutiques of old wanted to be big. So they built up big teams and the associated costs. In effect, they replicated the larger businesses, but had no efficiencies of scale because the client numbers weren't there.
By contrast, boutiques like ourselves have no aspirations to become big - and that also goes for our cost base. For example, we employ no sales people, we avoid paying rebates (or kickbacks to, for example, linked investment service providers - or Lisps), and can make use of very strong external administrators that were not there in the past. And this time, it is the other way round - the larger asset managers are copying the boutique business model, by calling themselves "super boutiques". Imitation is the sincerest form of flattery.
Yes. We were profitable six months after launching, which is quite unique - and unexpected. Although there is a difference between being profitable and being confident you can last a sustained bear market and some big client withdrawals. Fortunately, our business is positioned well to accommodate both of these possibilities. Our profits are linked to the clients' requirement for superior returns - only then do we make reasonable profits. We should only eat well when our clients do.
The annual fee on the RE:CM Core Managed Fund is 1.14 percent (including VAT), reduced from 1.71 percent in July last year. The fund grew substantially and then we were able to share the benefits of scale with our clients. We do not think it fair to set our annual fees at a level that is very profitable, because these fees are not linked to returns.
Our performance fee in this fund is rather unique in that it reimburses clients should we under-perform a tough hurdle. Again, this differentiates us from our competitors, but we don't see why, because it is only fair. The hurdle is CPIX plus eight and we take a 20 percent performance fee on returns earned above this hurdle. Should we under-perform this hurdle, investors also enjoy a reduction in fees equal to 20 percent of the amount by which the fund's return is short of the benchmark. In the two years since the fund was launched, RE:CM has earned a R21 million-performance fee. However, we have not yet drawn the fee and will be able to refund it if the fund under-performs its benchmark.
Our philosophy is to provide superior real returns to our clients over the long term with low downside risk. We only allocate our clients' capital to investments that offer good value and have high-quality characteristics. We invest on a bottom-up (or case-by-case) basis and not according to a company's weight in the index. We are also incredibly risk averse. Our process focuses on avoiding losses which works in favour of the power of compounding. The old adage is important: if you lose 80 percent, your capital needs to go up five times to break even again. We never underestimate the power of this equation.
Investors can invest through RE:CM directly. The minimum is R250 000 and there are no upfront fees. Should investors wish to invest less than R250 000, they can invest in the Nedbank Managed Fund, which we manage on the same basis as our own fund (although it does not invest offshore). The minimums for this fund are R300 a month or a R5 000 lump sum.
Launched: July 2005
Walter Aylett, investment manager
First, we are owners of the business and our fortunes are tied directly to the gains our clients make on their assets. Secondly, we have more flexibility and more stocks to invest in. We have a lot more to lose than they do. Our own investments are in the funds our clients invest in. Finally, we are in the business of preserving capital in real terms and not playing the relative game.
We have about R300 million of which R245 million is in the Bravata Fund. Currently, we only do unit trusts, but this may change in due course.
Yes, we are about to launch our own white label domestic equity fund.
Today's institutional investors were boutiques 10 to 15 years ago. Coronation and Investec to name two. We have learnt from their experience and that of those who have failed and we must not make the mistakes they made. In terms of being around in a few years, who knows, but our destinies are tied to the success of the business.
It's early days.
The annual management fee on the Bravata Fund is 1.71 percent (including VAT) and there is also a performance fee of 20 percent of the out-performance of the fund's benchmark. That benchmark is CPIX plus four percent after fees - and there are high watermarks (a high watermark means that no performance fee is applied until previous losses have been regained).
We are buyers of businesses. We do not follow a top-down approach and our style is to use well-tested investment principles that never age. We think investing is most intelligent when it is business-like in its approach.
Investors can invest in the Bravata Fund through Nedgroup Investments. The minimum amount is R1 000 a month or a lump sum of R10 000.
This article was first published in Personal Finance magazine, 2nd Quarter 2006. See what's in our latest issue