Foord Balanced Fund: Tough times demand an experienced fund manager

FUND FOCUS

David Foord 

Foord Balanced Fund
Price:	R27.39
Inception:	31 Aug 2002
Domestic Asset Allocation Prudential Variable Equity
Fund Size:	R 3,511.4m
Price Performance
12 months:	11.29%
24 months:	11.68%
More Details...

Barry Shamley, fund manager of the Equinox Managed Portfolios recently invested part of the Equinox Prudential Portfolio into the Foord Balanced Fund. We put some questions to Foord Asset Management on the management of the fund.

Please give an explanation of the thought process that led to the choice of the top five equity investments in the Foord Balanced Fund: BHP Billiton, RMB Holdings (interesting choice?), Absa, (two/ three banks in the top five?), Massmart (relatively unusual as a top pick?) and Standard Bank.

Despite the meltdown in global financial shares at Foord Asset Management we have confidence in SA banks because they have negligible exposure to overseas sub-prime mortgages.  In addition, no major SA bank has ever approached the South African Reserve Bank for assistance and they have managed to maintain or even grow a very good return on equity by pricing appropriately for risk rather than leveraging up.

In addition bad debts should peak between financial year 2008 and financial year 2009 which will benefit earnings thereafter. Although Dec 2008 earnings are likely to be disappointing  we expect a resumption of moderate earnings growth to Dec 2009 followed by a much better Dec 2010. Bank valuations are supported by high dividend yields vs. bond yields and they should benefit from a decreasing interest rate cycle

Another important aspect of the heavy weighting in these three banks is the negative investment in Nedbank (under capitalized in local context) and Investec (poorer earnings visibility and higher international exposure) and minimal exposure to the insurance sector.

With respect to Massmart and Billition, we place significant emphasis on owning companies with talented management teams, business models that are hard to replicate and that operate in industries that should excel in most economic environments.  

We believe both Massmart and Billiton possess these attributes. Massmart's cash based, high volume, low margin business should actually benefit in tougher times whilst Billiton's position as the largest, lowest cost and most financially sound of the global resource companies makes them better able to weather the current downturn.

Please could you tell us how the 18% foreign component of the fund is invested?

The Balanced Fund's foreign component is invested in the Foord International Trust. The largest equity investments in this fund are Nestle, Syngenta, Vodafone, Diageo and LVMH. This sector of the portfolio has done well recently, equities in continental Europe rose recently in response to massive government measures  to  boost  spending  and  credit  markets  -after  an  unprecedentedly adverse year as excessive financial leverage was unwound.

Foord Asset Management has a reputation as a good asset allocator. Do you expect that the Balanced Fund (with its mandated that allows significant moves into cash) might be a better choice during 2009 even for more agressive investors? In other words, is equity going to continue to underperform during 2009?

Foord Asset Management is not really in the business of making such projections. Frankly we don't know what 2009 will bring. 

However, we do know that the South African market has priced in a lot of the bad news.  Despite much better fundamentals in the South African economy and far superior quality of earnings, our share market has exhibited very similar patterns when compared to global markets.  Sometime in 2009 the South African equity market should start to price in a recovery in earnings mainly due to recovering consumer spending and local manufacturing due to lower interest rates, lower inflation and still positive real wage growth, but also as global growth recovery leads to increase in demand for commodities.  Having said that, it will be hard to see our market rally if global markets have another down year.

Please could you explain the Foord Balanced Fund's current sector allocation/weighting and the reasoning behind it.

It is difficult to answer this question while there is still so much volatility. The asset allocation of the fund will continue to be managed actively while volatility in financial markets persists.

In our view equity markets are likely to remain in a bear market trend in the longer term, although uncertainty will result in continued volatility - with reductions in exposure following price rises and additional purchases following significant declines in equity prices (buy into dips and sell into rallies).

With respect to the cash in the portfolio, diminishing cash returns due to lower interest rates reduces the attractiveness of cash as an asset class, the current uncertainty and volatility in equity markets still warrants a sizable cash allocation in the portfolio.

In our view yields on SA bonds remain unattractive, hence our zero weighting. On the other hand, we are looking to increase exposure to listed property, in particular Liberty International, which is attractively priced.  Local listed property yields attractive relative to government bonds, and distribution growth is likely to remain attractive during forecast period.

We intend to maintain current allocation to foreign assets, including the allocation to the UK and the US.

Could you give us some insight into your general outlook on the market and expectations for the next 2-3 years, where we are in the cycle and how long the slowdown will last?

The United States index the Standard and Poors' (S&P) is currently trading on a price / earnings ratio (PE) of 20 times historical earnings.  This is expensive for the market given the outlook for another poor year for corporate earnings. 

If US earnings disappoint in the PE may come down in the future, dragging the SA market down.  Obviously the objective is to protect against large index declines by selecting quality companies on attractive valuations.  On a three year view our market looks cheap.  We don't know when the market will start to discount future earnings rises and its therefore better to be in early, in quality with a 3 - 5 year investment horizon.  You have to be in it to win it.