By Charl de Villiers, Head of Equities at Ashburton Investments

1 October 2024 marked the third anniversary of our teams’ management of the Ashburton Equity Fund. It is common to celebrate birthdays, anniversaries, and other important milestones with great attention and fanfare, or more recently an extravagant social media post or two. However, the quality of one’s relationships or other important endeavours are not linked to finite dates, events, or social media posts. Rather, the richness of ‘things that matter’ in life are the result of the compounding of long periods of the more mundane but still important daily activities, interspersed with a few notable ‘wins’, as well as the requirement to overcome adversities that inevitably rear their head along the way. While a three-year anniversary is an important milestone, we view our long-term focused investment process and team-based culture through a similar lens.

We are very pleased with our fund’s three-year performance track record. We have managed to deliver 95bps per annum of positive alpha over our benchmark (the FTSE JSE Capped SWIX) for our clients. We have also managed to improve the Fund’s relative three-year peer positioning from the fourth quartile to the first quartile since taking over the reins. Achieving both the objectives we set ourselves when taking over the management of the portfolio, being to provide our clients with positive long-term active real returns and first quartile peer performance. Performance matters.

It is important to point out that we view our portfolio performance as an outcome of our investment process. Day-to-day, we do not focus on either of our long-term performance objectives, rather we prioritise delivering quality consistent ‘mundane’ bottom-up company research and robust debate around portfolio construction and risk management. History shows that if we do these consistently well, long-term positive portfolio performance will follow. We remain completely fixated on our team culture and investment process. While we re-engineered the equity investment process and systems at Ashburton Investments three years ago, our process is based on a tried and tested recipe that our team has used to deliver portfolio performance in line with our above objectives throughout our careers and over several market cycles.  While it may sound trite, having the right people, right culture and a formal systems-based investment process is the cornerstone of our success to-date.

A lot changed in the market over the last three years. COVID imbalances resulted in a supply chain induced commodity price spike and a severe global inflationary pulse. This required a material increase in real interest rates to get back under control. This was the first notable interest rate up cycle markets had seen for many years. Real interest rate increases had the desired effect on demand, and inflation subsided as commodity prices eased. We also saw a bifurcation of global equity returns between developed and emerging markets. Developed market equity returns (particularly the United States) eclipsed emerging markets, driven by a narrow cohort of Artificial Intelligence (AI) beneficiaries, while traditional ‘brick and mortar’ businesses lagged. These market trends required material changes in portfolio construction over the period to deliver positive active portfolio performance.

Regulation 28 of the Pension Funds Act has allowed South African asset managers to materially increase their offshore holdings to a maximum allowable level of 45% of an equity unit trust. Many local managers took advantage of these changes and enjoyed the benefits of the developed market tailwind. Our positive portfolio performance over the last three years was achieved with a very low level of offshore exposure. We feel our teams’ competence and strength resides in South African listed equities. Our investment process dictates that we only invest in assets we feel we know and understand well. As a result, during early 2024 we have positioned our portfolio as a local South African listed equity building block and no longer hold any offshore listed equities. Despite several JSE de-listings over the last few decades, we still feel that we can provide our clients with adequate portfolio diversification. In fact, our smaller portfolio size versus peers is providing us with a competitive advantage in the mid-cap area of the local market where liquidity constraints dictate that we can take more meaningful active positions relative to some of our larger peers. Many of our smaller to mid-sized company holdings have been the driver of our strong portfolio performance over the past three-year period. Despite these wins, we continue to see a richer valuation arbitrage opportunity set in this smaller to mid-sized end of the local equity market.

Given the recent positive structural reforms in South Africa post the recent elections, particularly the willingness of government to partner with the private sector to resolve structural impediments holding back the economy. Potentially opening new growth vectors for corporate South Africa. We feel that our portfolio is ideally positioned to benefit from this emerging theme. Our value proposition should be appealing for investors who are looking for a manager with a proven track record of extracting value from the South African market and who is not materially restricted by liquidity constraints.