Page 169 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Fund Manager Interviews

that this strategy of holding a more diversified portfolio results in lower single stock risk, and
whilst there may be periods of underperformance when the large cap stocks rally, we firmly believe
in efficient risk management on an absolute basis.
Philosophically, we believe that the first line of risk management is the portfolio manager,

with regard to the security selection and portfolio construction.
Risk of permanent loss of capital (company bankruptcy or recapitalisation) is minimized by
engraining it in our investment process through the methodologies we use to select securities
from a bottom-up perspective. Our bottom-up analysis results in a bias towards quality
companies, we favour industry leading companies when selecting securities to be included in
the fund. Companies that are subject to these risks typically find themselves in weak
competitive position in industries where economic conditions are adverse. Based on our
investment philosophy and resulting investment process these companies are rarely
considered eligible for inclusion in our fund.
The second line of risk management relates to exposure limits. In the case of the Fairtree
Equity Prescient Fund, an explicit tracking error limit does not exist, as the portfolio
construction is benchmark agnostic. Single stock positions are limited, and gross sector
exposure is also limited to ensure sufficient diversification.
The internal risk monitoring procedure has been built on the back of the Bloomberg risk analytic

tool, which enables a real-time view of risk for the portfolio manager and the risk manager.
Please comment on the year ahead and, if possible, estimate the performance of your fund
over 2 or 3 years. What are your targets and objectives for the year ahead?
Focus will remain on maximising total returns for the client. The fund's objective is to offer
medium to long-term capital growth. The fund aims to actively invest in equities with a level of
capital appreciation and income potential and to outperform its benchmark, the FTSE/JSE Capped
Shareholder Weighted All Share Total Return Index (CAPPED SWIX) over the long term.
We believe that we have a process which aims to deliver returns in most market conditions,
and to accrete alpha over time. Our track record is evidence of this – we have consistently delivered
alpha each year, and no single year stands out as one where we had outsized outperformance due
to our diversification and measured risk-taking appetite.
Our strategy should perform fairly consistently across most market conditions. In theory the
strategy should perform better over a 2 to 3-year period when a certain trend is evident. The
strategy is invested in highly liquid counters and should perform better than average when
liquidity becomes a problem. Due to our flexibility the fund should be able to benefit from
opportunities given during periods of heightened market volatility.
Are equity markets in general overpriced? Do you anticipate a significant correction or will
the bull run continue?
Developed Market valuations look stretched, trading on a forward Price/Earnings ratio of 19x
versus a 15-year average of 14.5x. It can be justified by the rosy global growth outlook, given the
significant level of fiscal and monetary stimulus that have been pumped into economies. Cost of
capital is low given the US bond yield trading below 1.4%, so equities look attractive on a relative
basis to other asset classes. Given the accommodative policies, it is difficult to see the bull market
ending in the foreseeable future. Healthy pullbacks are likely, however, and it is difficult to see
medium term market returns coming close to matching the last decade’s double-digit levels, given
the valuation starting point.
Emerging Market valuations appear more attractive. The current 13x forward P/E is much
closer to its 15-year average of 11x. Emerging Markets have derated significantly on the back of the
Chinese regulatory clampdown. Within Emerging Markets, South Africa screens very cheap, which
implies that the growth concerns are priced in.
Could you identify three shares that fall within your universe that you think will perform well
in the medium term?
South African equities
Naspers and Prosus have been under pressure this year as the complicated deal structure the
group announced was not liked by the market, then their biggest single investment, Tencent, faced

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts