Fairtree Global Equity

Fairtree Global Equity

The fund has been a top quartile performer since it changed its approach at the end of 2019.

For the first three years after its launch in January 2017, the Fairtree Global Equity Prescient fund used a fully quantitative process under the management of Citywire AA-rated Rademeyer Vermaak. However, when Vermaak took up a new position with Stanlib at the end of 2019, Fairtree decided to shift its focus.

Since December 2019, the fund has adopted more of the approach used by Citywire AAA-rated Stephen Brown and AA-rated Cor Booysen in running the firm’s highly successful local equity portfolios, particularly the Fairtree Equity Prescient fund.

‘We still use the quant skills that we have in the team, but we are using completely different metrics,’ said Cornelius Zeeman, who co-manages the Global Equity fund with Andre Malan. ‘They are now aligned to our local investment philosophy focusing on free cash flow generation and earnings growth, and being style agnostic.’

So far, the switch has proved successful. In the 18 months since adopting the new philosophy – from 1 January 2020 to 30 June 2021 – the Fairtree Global Equity Prescient fund has returned a cumulative 38.1%. This is both ahead of its benchmark – the S&P Global 1200 – and comfortably top quartile in the ASISA global equity general category.

According to Morningstar, the average return for funds in this sector over this period is 31.4%.

Flexible screening process

‘We have coded more than 25 metrics that we use for screening stocks, but we also discriminate in terms of which metrics we use and the weights we use in the model for different sectors,’ Zeeman told Citywire South Africa. ‘For example, EV/Ebitda [enterprise value divided by earnings before interest, taxes, depreciation, and amortisation] is very important in capital-intensive sectors like mining and energy. So, it has a high weighting when we look at those types of stocks.’

Another example would be price-to-book, which Fairtree uses as a significant metric when screening banks and property stocks where balance sheets are fairly valued. For tech companies, however, it can be disregarded altogether.

‘Historically, where industry was capital intensive, price-to-book was a very relevant and important metric,’ Zeeman said. ‘But these days you want to invest in companies that are capital light. You can’t penalise a company in the tech sector for having a high price-to-book ratio because it is a reflection that they don’t need to invest a lot of capital to grow.’

Fairtree therefore upweights growth and momentum metrics when looking at the technology sector.

Getting active

Zeeman added that the quantitative tool screens a universe of more than 2,500 global stocks on this basis, and produces a model portfolio of around 150 holdings. This is done within active constraints, that limit overweight or underweight positions to no more than 3% in the portfolio, or 30% of the benchmark weight.

‘We have that on a sector, country and stock level,’ Zeeman said. ‘The idea is to give the investor the same beta profile as the index, but because the benchmark is so fragmented you can still have a portfolio that has similar characteristics to the benchmark, but a high active share. Our active share is 70%, which enables us to deliver alpha even though we still have a very high correlation to the benchmark.’

The fund managers do not, however, simply implement the model portfolio. An expanded global equity team at Fairtree is able to take active views based on both top-down and bottom-up analysis.

‘For example, if the model doesn’t like banking stocks because this is a lower quality, structurally challenged sector, but we feel that inflation is coming and interest rates will rise, then we’ll make a top-down call to own more banks,’ Zeeman said. ‘Or, if based on fundamental bottom-up work, we think that the model doesn’t appreciate Apple, but we understand how powerful the ecosystem is, how sticky the customer is, how it is becoming more a subscription service and that earnings will be less cyclical, then we will own more Apple.’

Being adaptable

Zeeman believes this active intervention has been a key driver of the fund’s recent outperformance.

‘We think it’s very important to be able to adapt,’ he said. ‘The model will have a bias to quality and growth-type companies, so it performed very well post-Covid. But when we had the vaccine announcement in November, we said that the world is going to start to price in a recovery and we need to own more cyclical, lower quality stocks.’

For the year-to-date, the fund has outperformed its benchmark, with a significant contribution from its overweight in cyclical sectors like materials and energy.

The fund has, however, also remained overweight tech and growth stocks. Amazon, Microsoft, Apple, Facebook, Alphabet, Prosus and Tencent are its top holdings.

‘We fund that overweight by being underweight in defensives – consumer staples, food retailers, telcos and pharma stocks,’ Zeeman said.

Hedge fund DNA

As the fund is only R451m Zeeman is also comfortable that he and Malan are able to react quickly if anything should change in their thesis.

‘We focus on big liquid stocks, so the fund is extremely nimble,’ he said. ‘We can easily change our view if the circumstances change. That is inherently part of the process.

‘Our background is in hedge funds, so it’s part of our DNA to be able to react quickly. We also don’t take extremely big bets. We have 150 stocks in the portfolio, and we won’t go to a zero weight in big sectors or stocks. We will still own a little.

‘We think that the fund is diversified enough to withstand any short-term volatility, and over the long term the process should shine through as quality growth stocks reward you over time.’

By Patrick Cairns

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