For the past 22 years, the Foord Equity Fund has served as a foundational element in South Africa’s Equity – General unit trust landscape. Effective from 1 October 2024, the fund has transitioned to the newly established SA Equity – General sector, which is specifically intended for equity funds that focus exclusively on South African stocks.
This article delves into the reasoning behind this transition, as well as a review of the Foord Equity Fund’s investment objectives and accomplishments.
Fund Classification
The Foord Equity Fund was launched in 2002 and initially entered the well-known Domestic Equity – General unit trust category. This was at a time when exchange controls were just beginning to be relaxed, making JSE-listed equity funds particularly attractive to investors. Most funds focused their investments on local shares, largely ignoring international listings.
Over time, the government progressively eased exchange controls for institutional investors, including those managing unit trust portfolios. Nowadays, unit trust schemes can allocate up to 45% of their assets internationally. Fund managers can choose from portfolios that are entirely South African, those with up to 45% allocated abroad, and others that may invest entirely overseas, provided the overall offshore allocation does not exceed 45%.
In the years that followed, approximately half of the funds within the Equity – General sector gradually introduced international stocks into their portfolios. This has created a diverse array of funds with differing levels of foreign investment, complicating meaningful comparisons. Consequently, the need for distinguishing between funds with foreign investments and those without in the Equity – General sector became apparent.
While many of our competitors are expanding into hybrid SA-foreign equity funds, Foord has chosen to retain a SA-only strategy for several compelling reasons.
Firstly, we aim to provide a focused, single-asset class fund that investors can utilize as a core part of their portfolios. For those wishing to develop a hybrid strategy, we already offer a global equity product. Additionally, our other offerings, such as the Foord Balanced Fund, can invest up to 45% internationally, while the Foord Flexible Fund is suited for investors looking for broader geographical discretion.
Most crucially, we strive to uphold our exceptional track record.
Investment Objective
The Foord Equity Fund has a comprehensive investment mandate to allocate capital to shares and listed property counters on South African exchanges. It benchmarks itself against the FTSE/JSE Capped All Share Index, which limits the weight of its constituents to a maximum of 10% to avoid excessive concentration.
The fund aims to surpass this benchmark after fees over extended periods. By achieving this, we intend to provide investors with substantial returns that outpace inflation.
To effectively outperform the benchmark, divergence is essential, a process that occurs naturally as we filter out numerous companies based on quality standards. We may also prioritize smaller or mid-cap stocks with greater emphasis than the index when we identify promising growth opportunities and attractive valuations.
Paul Cluer, director of Foord Asset Management. Image: Supplied
Strategy
To exceed the benchmark, it is essential to be aware of it; nonetheless, we do not restrict ourselves to it—a practice referred to as ‘benchmark hugging’ in the industry. Instead, fund managers project expected returns based on historical performance, current valuations, and anticipated economic indicators over the medium term.
They aim to significantly outperform these predictions without undue concern for the weightings of individual shares relative to the benchmark. This approach informs portfolio construction while simultaneously safeguarding against the persistent risks of permanent capital loss by focusing on high-quality underlying companies and diversifying risks across various economic factors.
The initial holdings of the portfolio will predominantly consist of shares that meet our top-down (macro views) and bottom-up (fundamental analysis) criteria. Portfolio managers actively search for specific opportunities that can prosper even in difficult market environments.
The current size of the Foord Equity Fund stands at approximately R4 billion. Thus, any listed share with a market capitalization above R2 billion can have a significant impact on the overall portfolio’s performance. This permits the fund to diverge more from the benchmark than larger competitors typically can. We believe it has considerable growth potential before returns begin to diminish.
Performance
Our strategy of not being tethered to the benchmark means that the fund’s performance will inherently vary relative to it. This variation is anticipated and normal. Typically, the fund may underperform during periods marked by strong trends, such as a resources boom, when the benchmark is heavily weighted, or in a booming market where lower-quality stocks are gaining.
Conversely, it often shines during market downturns or prolonged sideways trends—known as stock-picker’s markets—where the focus on quality becomes more critical.
Data reflects this perspective: the Foord Equity Fund has consistently outperformed its benchmark in 71% of months when the benchmark was in the red. Overall, we expect to outperform the unbalanced benchmark over rolling three- to five-year periods, with reduced volatility and enhanced downside protection.
Over its 22-year history, the fund has recorded an annualized return of 14.1% after fees and expenses, compared to the benchmark’s 13.8% per annum. During this same period, inflation has averaged just 5.3%, delivering substantial real returns for long-term investors.
An investment of R100,000 at the fund’s inception would have grown to R1.9 million today. In the past three years, the fund has achieved an impressive 14.6% annual return for investors, compared to the benchmark’s 10.5%, with a 5.1% advantage over the benchmark in the last 12 months.
We are confident that the benchmark is surmountable over the long term. Our investment team dedicates significant effort towards this specific goal. Our investment process is well-defined, well-resourced, and, in our view, replicable.
We request our investors to possess the patience and time necessary to reap the benefits of long-term investing.
Paul Cluer is the director of Foord Asset Management.
This article is brought to you by Foord Asset Management.
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