Three-year track record: Investec Global Special Situations
22 April 2019
In her new monthly Investment Research column for Professional Paraplanner, Juliet Schooling Latter, research director, FundCalibre, looks at funds that have just passed or are approaching their three-year track record.
This issue she looks at the Investec Global Special Situations fund.
Having joined Investec’s Value team in 2007 and 2011 respectively, Steve Woolley and Alessandro Dicorrado became co-managers of the Investec Global Special Situations fund at the start of January 2016.
Like the more well-known Investec UK Special Situations fund run by Alastair Mundy, it is a high conviction, contrarian value fund focused on buying companies that are cheap and out of favour – run with the same strong, tried-and-tested investment process.
Alessandro and Steve start by screening for cheap, out of favour stocks which have fallen 50% relative to their index. This typically leaves them with a list of around 250 stocks to conduct initial due diligence – a list they then whittled down to create a portfolio that currently consists of 43 stocks. They do this by analysing a number of factors, including why a company’s share price has fallen and what the current market consensus is. They also study the balance sheet and cash flow dynamics. In total, they test each stock against a 30-point check-list.
Despite their value-style being out of favour, the managers have had a mainly positive start to their tenure: they enjoyed the boost the ‘Trump-Tantrum’ gave value stocks in the early part of 2016, and were able to maintain performance when growth stocks bounced back later that year. During their first 12 months in charge, the fund returned 36.81%* compared with the IA Global sector average of 23.33%*, leaving them 12thout of 267 funds.
2017 was another good year with the fund returning just shy of 18%** while their average peer returned a smidgen more than 14%**.
However, last year – specifically the fourth quarter – was a stinker. When global stock markets sold off between October and the end of December, the fund found itself down some 14.57%*** over 2018 compared with a fall of 5.72%*** for the sector.
Why was this? There were a few reasons. The first was that the managers were overweight the UK and emerging markets, which led the falls and fell further than the US, where the managers were underweight. They also had a bias towards medium and smaller companies, which nearly always sell-off more than large caps in a short-term correction.
Importantly for me, the under-performance is easily explained and to be expected from this type of fund. The UK and emerging markets are unloved by global investors and therefore better value. The US, in contrast, was looking fully valued.
And the managers didn’t panic. They held firm and looked for opportunities in companies – many industry leaders at that – that had suddenly got a lot cheaper.
When FundCalibre’s fund research team caught up with the managers in February, they told us that, having started the final quarter of 2018 with more cash than usual (10%), they ended the quarter with almost none (2%), having deployed the money to new opportunities. And what really hurt in the fourth quarter of 2018 has strongly rebounded strongly in 2019.
The managers really like emerging markets – its the third highest regional allocation in the fund behind the US (42.5%^) and the UK (25.4%^). They have 16.9%^ invested in emerging economies – 6.8%^ of which is in Brazilian companies picked up when markets sold-off. Latin America is an area that I really like myself at the moment. Five out of six of the main economies have pro-business leaders, the currencies look cheap and market valuations are attractive.
With just £181m under management, this fund is still very small and undiscovered. Since 1 January 2016 the fund is first quartile, up 51.1%^, while the sector average over the period is 43.63%^^. Given the consistency of performance and the managers remaining calm under pressure, I think it is one to start considering for the value portion of a portfolio.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
*Source: FE Analytics, total returns in sterling, 1 January to 31 December 2016
**Source: FE Analytics, total returns in sterling, 1 January to 31 December 2017
***Source: FE Analytics, total returns in sterling, 1 January to 31 December 2018
^Source: Fund fact sheet, 28 February 2019
^^Source: FE Analytics, 1 January 2019 to 28 March 2019.
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