Laurium, 1 Feb 2016

Top performance comes from skill

The Laurium Flexible Prescient Fund is celebrating its three year anniversary with a chart topping performance. The Fund’s three years of good returns have been achieved by good asset allocation, good stock picking and a strong research process.

Want to achieve good investment returns? Returns that beat inflation and the markets? Just ask the fund managers of the Laurium Flexible Prescient Fund, the fund that’s just achieved a three year return of 21.4% per annum (79% since inception), and beaten its peers, almost all other funds and industry benchmarks.*

Launched three years ago, the Laurium Flexible Prescient Fund has achieved these returns in difficult markets, and attracted sizeable inflows reaching assets under management of over R1.6bn. The key to its good performance: good stock-picking based on strong fundamental analysis by an experienced team. Good stock picking that has seen the fund holding the strong performers – and avoid most of the poor performers.

The local market has delivered good returns for investors. For the three years to end January 2016, the All Share Index returned 31.5% (12% per annum). That’s a pretty decent return – so why haven’t all investments replicated it? “It was important to get the big stocks right,” says Murray Winckler, Laurium Capital co-founder and manager of the Laurium Flexible Prescient Fund with Gavin Vorwerg.

“Much of the ALSI’s performance comes from a few big shares, like Naspers and SAB Miller,” Mr Winckler observes. “If you strip those out of the index, the 2015 performance of the JSE All Share Index was negative. The Fund held Naspers, and SAB Miller was included in the portfolio after we analysed the merger deal.”

And on the flipside – not having exposure to the big stocks that were poor performers has boosted returns. Shares like MTN in 2015, which was a massive underperformer, and Anglo American. “We had little exposure to resource counters in the Fund.”

It’s easy to see why these were good decisions in hindsight – but how were the good calls made? According to Mr Winckler, good stock picking comes down to the process and the team. “Our core competency at Laurium has always been around fundamental analysis, and financial analysis.” The team completes research and follows the process in a consistent manner.

The team at Laurium has a wide range of experience, with both Mr Winckler and Mr Vorwerg having spent more than 15 years in investment banking. Working with special structures and book builds has given them an edge when it comes to opportunistic trades, and cross border trades – to the benefit of the fund and its investors.

The Fund has a flexible mandate – and although equities have been the biggest asset class in the Fund the holding in this asset class can be reduced should circumstances favour a low equity allocation.

“When we started the fund we believed equities were the place to be,” said Mr Winckler. At inception the Fund held close to 80% equities and this holding has been higher. This call has benefitted investors – but it hasn’t been a permanent allocation, and if the team is worried about markets the equity allocation can move down – and has been as low as 58%.

This is what investors are looking for in a flexible fund – not just a pure asset allocation fund with defined holdings for each asset class, nor a pure equity fund – rather a fund that has the ability to move between different kinds of investments in search of good returns. A flexible fund should fully benefit from whichever asset class offers the best opportunities.

Most recently, Laurium have been looking at local bonds, and last year the Fund purchased its first bond (15 year bond with a yield of 10.5%). The Fund also has an offshore component.

The ability to allocate across the investment spectrum can add more risk – but high equity funds are also higher risk, and they don’t have flexibility to move between investment classes.

Risk is something the team at Laurium is focused on. Apart from diversification, risk can be managed by avoiding large drawdowns. Mr Winckler and the team analyse drawdowns on a monthly basis and aim to minimise these. As an example -over its first three years, the ALSI had a drawdown of 32% in the down months, versus the 2.8% drawdown of the Fund. January 2016 wasn’t a good month for markets – the Fund’s drawdown was half the drawdown of the ALSI*.

“It’s very pleasing to be at the top,” says Mr Winckler. “The Fund’s first year was really good, with the high equity allocation, and although last year was pretty tough – the fund achieved a net return of 16.2% versus the 5.1%* of the ALSI.” The Fund is in a competitive category, and to be top over three years is a significant achievement for the Fund and Laurium Capital.

Although luck does play a part in any investment - the skill and hard work of the team has been the main performance contributor. Monthly performance attributions show how the individual holdings added to - or detracted from – returns. And the good news for investors – “the longer you do it, the more you move from luck to skill,” says Mr Winckler.

But it’s also hard to be at the top – and as Mr Winckler says, “you are only as good as your next year.”

What is the team expecting from the next eleven months given the rough start to the year? “More pedestrian returns than in the past, for the next five years,” comments Mr Winckler, “closer to the 3-5% real and not the 10% real we have been seeing.” The big concern in the markets is - is this a pullback in a bull market or is there significant downside to come? The team at Laurium is watching closely – being in the more bullish camp and looking for any buying opportunities that may present.


Source: Performance data from Profile Media