Hugh Broadhurst, the portfolio manager of Coronation Asset Management, is Personal Finance/Plexus Fund Manager of the month for January 1998.
Personal particulars of Hugh Broadhurst
Portfolio Manager, Coronation Asset Management
CA (SA), CFA
Momentum
Old Mutual Financial Services
Married, with two children
Sting
Spinach
Reading, squash and tennis
Stinginess
Random Walk Down Wall Street by Burton Malkiel
He has been managing the Sage Financial Services Fund with distinction for the past three years. (Coronation took over the management of the Sage unit trusts early in 1995.)
Broadhurst has also been named the 1997 overall winner of the Personal Finance/Association of Unit Trusts Raging Bull Award for the best performance over the three-year period ended December 31 1997.
The objective of the fund is to provide a specialised investment opportunity through a diversified and professionally managed portfolio, focused exclusively in the financial services industry.
Broadhurst states that "the fund's returns should be lower than for some of the higher-risk specialised portfolios, but consistently steady growth with fewer fluctuations should be evident".
Despite this guarded investment objective, the fund has held its own among the front-running unit trusts.
For each of the one-, two- and three-year periods ended February 13 1998, Sage Financial Services claimed the first place in the overall performance tables (according to Moneymate). The gross return over the three-year period was 41,3 percent a year.
Broadhurst not only beat most of the field, but also outperformed the JSE Financial Index (the fund's performance benchmark), as illustrated by the accompanying graph.
Admittedly the fund finds itself in a booming sector, but a number of actions have resulted in Broadhurst achieving superior performance.
Although his investment style is stock picking, Broadhurst took into account the prospects of specific industries or sub-sectors. This has yielded rich rewards as a result of an overweight position in banks at the expense of insurance companies.
"Insurers face a hostile environment with poor investment returns, demands for transparency, higher regulation and the relative impoverishment of traditional high-income markets," explains Broadhurst.
"Banks, on the other hand, face a favourable environment with falling inflation and improving efficiencies from technology."
An overweight position in niche banks (BoE, Coronation and Investec), which are well-positioned for empowerment and corporate restructuring activity, is also being maintained.
The investment mandate of Sage Financial Services allows a maximum of 15 percent in cash. With an average cash component of about 10 percent, Broadhurst has almost fully capitalised on the strong growth in the financial services industry.
He is predominantly a value-orientated investor, seeking to add value to unitholders' funds by selecting undervalued equities and by actively managing the fund's cash exposure.
In the process of identifying suitable shares, a bottom-up approach is used which emphasises rigid fundamental company analysis. This encompasses industry and competitor analysis, regular management visits, financial statement and ratio analysis and international comparative evaluations.
Factors such as strong management, long-term value, adaptability (political, economic and industry) and sustainability of products weigh heavily in Broadhurst's selection process.
"In forming an investment opinion, I subscribe to the principle that portfolio risk is reduced by research rather than by diversification through holding a greater number of shares in the portfolio."
The portfolio has a relatively small number of 26 shares, with the 10 largest investments making up 67,3 percent of the portfolio. The fund's volatility is relatively high as there is no diversification across sectors.
Portfolio turnover for 1997 was quite high at 83,4 percent (calculated as total purchases and sales divided by the market value of the portfolio). The reason for the high level of activity, however, is largely the fourfold increase in the size of the fund. This has resulted in a tendency to retain shares and redirect the cash flow.
The fund has increased in size from R65 million at the start of Broadhurst's tenure in April 1995 to more than R1,1 billion.