BATELEUR FLEXIBLE PRESCIENT FUND
- Raging Bull Award for the Best South African Multi-Asset Flexible Fund (risk-adjusted performance over five years to December 31, 2021)
Bateleur Capital is a boutique firm based in Cape Town, founded in 2004. It manages three hedge funds and two unit trust funds under the Prescient licence. Its Flexible Fund, which is free to invest across asset classes in any proportion (the only restriction being its offshore exposure at 30% maximum), delivered annualised performance of 11.52% over five years at a lower level of risk than its competitors.
Personal Finance asked fund manager and Bateleur CEO Kevin Williams about how the fund is managed:
What is your investment philosophy/strategy for the fund regarding asset allocation and stock choice?
The fund is predominantly an equity/cash fund. Asset allocation is determined considering both top-down macro factors (such as the direction of interest rates and quantitative easing) and bottom-up factors (such as equity valuations). For example, if economies are entering a tightening monetary phase and equity valuations are elevated, the fund would generally increase its cash weighting at the expense of equities.
Recently, the fund has also held SA government bonds, as the yield differential between longer-duration bonds and short-term money market rates was unusually high, providing an attractive entry point.
Stock selection is fundamentally driven through Bateleur’s bottom-up research process.
To what do you attribute the fund’s excellent performance over the past five years?
By largely sticking closely to our investment philosophy and process and not being overly influenced by market noise. In addition, the fund held a high cash weighting when Covid lockdowns occurred in early 2020 and equity markets sold-off sharply. We were able to deploy this cash into select equities at attractive valuations during the market correction.
Are there any particular stocks that have stood out for you?
Three areas stand out. First, the platinum group metal companies have enjoyed a strong pricing environment over the past two years due to a tight rhodium and palladium market. The fund held exposure to this sector via Royal Bafokeng Platinum, the subject of a takeover offer at a substantial premium in the last quarter of 2021.
Second, select domestic mid-cap shares. This segment of the equity market has been out of favour for several years and many companies were trading at record low valuations in 2020. During 2021 several of these companies re-rated after proving their resilience against a tough economic backdrop. Mid-cap holdings include recycled paper manufacturer Mpact, consumables importer Hudaco, and mining explosives and chemicals supplier AECI.
Last, the fund’s offshore holdings in Norwegian oil producer Lundin Energy, Swedish oral nicotine business Swedish Match, and US convenience store operator Dollar General were notable contributors to performance over the past three years.
How are you positioning the fund for 2022, taking account of a possible end to the pandemic, inflation and rising interest rates?
The anticipated rising global interest rate environment and ending of quantitative easing are notable headwinds for global equities in 2022, especially given that valuations are currently well above historical averages. As a result, the fund holds less than its maximum allowed exposure to foreign equities – and these stocks are more defensive and less growth oriented than two years ago.
South African equities still trade at a steep discount to historical averages and global equity markets, which provides an element of downside protection. The fund’s domestic holdings are largely stock specific incorporating select mid-caps, healthy weightings in RMI and Remgro, and quality defensives such as Shoprite and Spar. There is no “theme” to these investments. Each holding was acquired following in-depth fundamental analysis at valuations that were considered attractive at the time of entry.
Liquid investments (cash and SA government bonds) currently comprise slightly less than 20% of fund value, emphasising our current more cautious outlook.
PERSONAL FINANCE