Sifting for Gems whilst avoiding the Value Mirage

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Despite our more prudent approach which results in us being on average 75% invested in equities was are currently the number one fund on the Domestic Flexible Allocation Section and number thirteen out of all funds rendering a 32.4% annualised return over a 3 year period (University of Pretoria Unit Trust Survey). The share selection together with a prudent cash level given the turbulent market conditions has rendered a comparatively healthy return.

Sifting for Gems whilst Avoiding the Value Mirage

As a fund management team we remain concerned that some of the market risk factors are not out of the system. The initial concern of the markets has been the meltdown in the banking system but indications are that this has now largely passed. The secondary effects of the shakeout however still remain in the markets. These include a greatly reduced availability of credit and a USA economy sliding into recession.

Locally our current account deficit will ensure a weak currency thereby increasing inflationary pressures which will make it difficult for the Reserve Bank to reduce interest rates. The local economy will remain under pressure and we are therefore attracted to resource companies and companies benefiting from the weak rand. In addition to this we have retained the maximum allowed foreign exposure. During the 2008 year we have felt that the risks in the world economy made it prudent to have a high cash component in the fund.

Our style is attracted to value but we are concerned that a lot of industries have been operating in a zone of sustained super-profitability not seen since the 1960’s. It thus becomes difficult to understand what normalized earnings are. Value disappears fast when company earnings slide. The next quarter is a time for hard work, as managers must sift between the great investments that are available, well below their intrinsic worth, and mirage-like value traps.

Risk/Return- How do we measure up?

The first quarter of 2008 was not a good time for equity markets, South Africa included.

Sifting for Gems whilst avoiding the Value Mirage
During this time of market turmoil the fund reached a new high of 2510.19 cents. The graph below clearly captures what we are attempting to with the Rezco Value Trend Fund.

Sifting for Gems whilst avoiding the Value Mirage risk return

This graph sourced from Micropal (S&P) reflects all Unit Trusts with a three year record.
The vertical axis = annual return
The horizontal axis = shows risk (as measured by standard deviation).
The red dot is the Rezco Value Trend Fund. As can be seen we have achieved a return of 32.39% per annum over three years, this is in the best 3% of all the 415 funds measured. Our risk or volatility is however the lowest or best out of the top 50 funds measured.

We believe that the job of the fund manager is one of continually balancing risk and reward and thereby not only growing but protecting investor capital.