Four factors that work for Investec

Investec Asset Management has expanded its four factor process and achieved strong performance with its recent launches. But other funds have underperformed. Simon Hildrey reports.

It should not be surprising, given its roots in South Africa, that Investec Asset Management has benefited from the commodities boom.

Investec’s Global Gold fund is in the first quartile in the specialist sector over one year to November 26, 2007, according to Morningstar. David Aird, managing director of Investec Asset Management, says its commodity hedge fund has delivered 40% this year. “As a South African company, we have a lot of experience of managing commodities,” says Aird. “We manage $6 billion (£2.9 billion) in commodities from London and Cape Town. We are looking at how we can expand our commodities offering.”

The Global Energy fund, managed by Tim Guinness, has profited from the rise in prices in this sector as well: it is in the first quartile over one year.

Investec has also enjoyed good performance from some other recent fund launches. Philip Whittome has been managing an offshore Japan fund for more than 10 years. Investec did not launch an onshore version until April 2006, says Aird, because of a lack of demand, but it is in the first quartile over one year to November 26. “This appeals to investors because it is a core Japan fund,” he adds
The Investec Emerging Markets Debt fund was also launched last year and is in the first quartile over the past 12 months. The fund is managed by Peter Eerdmans, who is based in South Africa.

In July last year Daniel Hanbury left Investec for River & Mercantile. Over three years his UK Alpha and UK Smaller Companies funds were in the first quartile. Over one year they are both in the second quartile. Philip Rodrigs replaced Hanbury on the UK Smaller Companies fund and Ken Hsia took over the UK Alpha fund. Another change was the replacement of Albert Morillo of BlackRock at the end of 2006 as manager of the Investec European fund. The fund management came back in-house to be run by Ben Williams and Nigel Hankin, using the four-factor process. Over the past year the fund is in the second quartile.

The four-factor process uses a quantitative screening that enables Investec to monitor all the stocks in their universes. The four factors are valuation, dynamics, technicals and strategy. The strategy factor is evaluating whether companies achieve a greater return in capital than the cost of capital.

Each stock gains a score of between four and 16. Investec then conducts a fundamental analysis of stocks with the highest scores. If stocks suffer a fall in their scores they are reviewed. Investec evaluates the fastest rising companies as well as those with the highest scores.

The Investec Global Extension fund, managed by James Hand, was launched this summer and also uses the four- factor approach. It is not a 130/30 fund because the proportion of long-to-short positions can range from 110/10 to 150/50, depending on market conditions. Aird says the fund uses qualitative factors rather than being exclusively focused on the quantitative approach adopted by some 130/30 funds.

In 2000, Investec introduced the four-factor investment process into its UK and Global Free Enterprise funds. The process has since spread across many of the investment desks at Investec. It has been adopted by the Global Equity, Asia ex Japan, European and Japan funds and now has $11 billion under management.

“Over five years the Global Free Enterprise fund has out-performed the MSCI World index by an annualised 9% and the Global Equity fund has beaten the index by an annualised 4%,” says Aird.

Bambos Hambi, head of multi-management at Gartmore, highlights in particular the performance of the Asia ex Japan fund, which is in the first quartile over one year and second quartile over three years. It was created two years ago out of the Hong Kong and China fund.

Not all the funds at Investec use the four-factor process. One that does not is the Investec American fund, whose management is outsourced to Thornburg Investment Management, based in New Mexico. The fund is in the first quartile over three years and third quartile over one year. Two years ago Thornburg promoted Connor Browne and Edward Maran to be co-fund managers with Bill Fries.

Hambi says he held the American fund in his multi- manager funds before he joined Gartmore. “We became concerned about the performance when Fries was the only named manager,” Hambi says. “He was also managing a global fund and we were wary about whether he was being distracted. Since Browne and Maran have been added as named managers, the performance has improved.”

Another manager who does not use the four-factor process is Alastair Mundy. His Cautious Managed fund has underperformed – it is in the fourth quartile over one year and third quartile over three years. His UK Special Situations fund is in the fourth quartile over both one and three years.
“Alastair has contrarian views,” says Aird. “He has clear views but they are offside at the moment. Most contrarian managers are finding themselves offside. Alastair is underweight mining stocks and has good exposure to retailers. He went early in moving from small and mid- cap stocks to mega cap stocks.”

Investec’s fund performance is mixed. Over one year to November 26 it had six funds out of 24 in the first quartile, while eight funds were in the second quartile, according to Morningstar. This means 58% of Investec’s funds were in the first and second quartiles and 42% were in the third and fourth quartiles.

Intriguingly, the percentage split is exactly the same over three years. Eight out of 19 funds were in the third and fourth quartiles while 11 were in the first and second quartiles. No one can accuse Investec of not being consistent.

But Mark Dampier, head of research at Hargreaves Lansdown, points out that the Global Energy and Global Gold funds have outperformed the Specialist sector partly because their underlying markets have performed well.

Darius McDermott, managing director of Chelsea Financial Services, says the two funds favoured by Chelsea are the American and Global Energy funds. “We are also monitoring the Japan fund although it is not on the buy list yet.”
Aird says Investec is looking for improved performance from the British equity and fixed income funds excluding the high yield and emerging market debt funds. He says: “We have the teams, processes and risk management systems in place. We just need to tighten the process up and wait for the performance to improve.”

He is bullish about sales. Investec’s retail onshore fund range has about £5 billion under management compared with £3.2 billion in July 2006. It has $60 billion under management globally, half of it managed out of London. “I believe we have established Investec as a leading asset manager in the UK market,” says Aird. “In the third quarter of 2007 we were ranked eighth in the industry for retail gross sales. We were ranked 10th for retail net sales. Over the past two years we have consistently ranked in the top 10 for net sales.”

Investec divides the market into five distribution channels: general practitioner advisers; strategic partners, including 22 life companies, fund supermarkets, national and network advisers; advisory and discretionary wealth managers; family offices; and institutional investors.

Aird says life companies and platforms comprise 40% of its fund sales and will increase their share of sales. “We have worked hard at ensuring the growth in these channels does not lead to disintermediation,” he says
Investec has made it into the top 10 despite not having a property or equity income fund. Aird says Investec will not launch a property fund and plays down the prospect of an equity income fund.

“We have shown an asset manager does not need funds in every sector to be in the top 10 for sales,” says Aird. “There is a demand for yield but we believe there are other ways this can be achieved. An example is multi-asset funds.”
Yet Dampier says Investec’s British offering should be strengthened. “Managers in the UK market need to have a core of strong-performing UK funds,” he says. “I do not feel Investec has any must-buy funds, even though we like them as a group.”

Aird argues that Investec has continued to grow despite not having the star fund manager culture seen at other asset managers. He says: “Our aim is to build a sustainable business. We believe in stars, but teams of star professionals. A long-term business cannot be developed on the back of a few individuals. We have a team-based approach with named managers for each fund.”

Investec’s approach has worked with its more recent fund launches. It now needs to ensure the same can be said of some of its older funds.

Best and worst funds
The best and worst funds for each group profiled in the Focus are now shown on a relative rather than absolute basis. Previously, the best and worst funds have been defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.