Managing risk is key to Allan Gray's success

Big improvements in the risk-adjusted performance of its funds, particularly its offshore funds, enabled Allan Gray to climb back up to the top of the pile of South African unit trust fund managers and scoop the Raging Bull Award for the South African Management Company of 2016.

The award was made at the Raging Bull Awards ceremony in Johannesburg this week.

The event was hosted by Personal Finance in association with its data providers, ProfileData and PlexCrown Fund Ratings.

The Raging Bull for the management company of the year is based on an average PlexCrown rating determined from the ratings the manager achieves across its range of qualifying funds.

A fund can be rated from one to five PlexCrowns, with a rating of five indicating that the fund has consistently achieved top performance over periods of three and five years without taking too much risk.

At the end of 2015, Allan Gray was third among South African managers that qualify for a rating in the PlexCrown survey of managers. None of its funds had a rating of five PlexCrowns, while its global funds, which are managed by its offshore partner, Orbis, had ratings of three, two and one.

Its Optimal Fund, which has a low exposure to equities and aims always to deliver positive returns, had a low score of two PlexCrowns.

But Allan Gray’s funds made a comeback last year, and the manager rose to first place in the rankings of managers at the end of the first quarter of 2016.

At the end of last year, Allan Gray’s global equity and global multi-asset funds, the Allan Gray-Orbis Global Equity Fund and the Allan Gray Orbis Global Fund of Funds, had both achieved ratings of five PlexCrowns, according to Ryk de Klerk, a director of PlexCrown Fund Ratings.

In addition, the rating of Allan Gray’s popular multi-asset Balanced Fund improved from four PlexCrowns at the end of 2015 to five PlexCrowns at the end of December last year.

Allan Gray’s Equity Fund, Bond Fund and multi-asset low-equity Stable Fund achieved above-average ratings of four PlexCrowns, De Klerk says.

The lowest ratings the manager achieved for the quarter to the end of December 2016 was for its multi-asset low-equity funds that have a positive return focus, the Global and South African Optimal funds. Both scored average ratings of three PlexCrowns each, De Klerk says.

In determining the overall rating, the individual fund ratings are averaged in one of four sectors in line with the assets invested in each fund. The averages for the

four broad sectors are, in turn, averaged in line with a predetermined rating to determine the manager’s rank among all qualifying managers. The highest overall rating for the quarter at the end of the year determines the winner of the Raging Bull Award for the Manager of the Year.

Allan Gray’s overall rating to the end of the year was 4.393 out of five.

Runner-up PSG

PSG’s ratings improved dramatically between the end of 2015 and the end of 2016, resulting in it coming second in the management company rankings and beating Nedgroup Investments, which won the Raging Bull for South African Management Company of 2015.

PSG achieved an overall rating of 4.276 PlexCrowns for the quarter to the end of December last year.

PSG’s Wealth funds have been excluded from the ratings from September last year, because they are available to the public only through a PSG adviser. This had a positive and a negative effect on PSG’s overall rating.

Last year, when the Wealth funds were included, the manager was ranked seventh among all the qualifying management companies on the basis of the performance of its 12 funds. These funds achieved ratings of three or four PlexCrowns, De Klerk says.

For the fourth quarter last year, PSG was rated on only seven funds, four of which achieved the highest rating of five PlexCrowns: the Equity Fund, the Balanced Fund (multi-asset high-equity sub-category), the Flexible Fund (multi-asset flexible) and the Stable Fund (multi-asset low equity).

PSG’s Diversified Income Fund achieved four PlexCrowns, and two funds achieved average and below-average ratings of three and two PlexCrowns, De Klerk says.

Nedgroup falls to third

Over the past year, Nedgroup Investments has fallen from number one to number three in the PlexCrown survey of management companies. It collected the certificate for third-best domestic management company at the awards ceremony.

The manager achieved an overall rating of 3.739 PlexCrowns, compared with its overall rating of 3.999 PlexCrowns last year.

Last year, the manager had 18 funds with five that achieved the highest rating of five PlexCrowns, and 61 percent of its qualifying funds achieved an above-average rating of four or five PlexCrowns.

For the fourth quarter of 2016, it had 20 funds that qualified for individual PlexCrown ratings, and nine of them achieved five PlexCrowns. Sixty-five percent achieved a rating of four or five PlexCrowns.

The nine that led on their risk-adjusted returns are:

• The Nedgroup Global Flexible Fund, which won a Raging Bull Award for risk-adjusted performance and a certificate for straight performance in its sub-category;

• The Financials Fund (certificate winner);

• The NGI Private Wealth Fund, which won a Raging Bull Award for its risk-adjusted performance over five years to the end of December;

• The Entrepreneur Fund (an equity fund focusing on smaller companies);

• The Investments Core Diversified Fund (a multi-asset high-equity fund that makes use of index-tracking investments);

• The Flexible Income Fund;

• The Core Guarded Fund (a multi-asset low-equity fund that uses index-tracking investments);

• The Opportunity Fund (a multi-asset medium-equity fund and winner of two certificates ); and

• The Bravata Worldwide Flexible Fund.

HOW THE COMPANIES OF THE YEAR ARE DETERMINED

South African companies

Of the basket of unit trust funds a company manages, PlexCrown Fund Ratings assigns each qualifying fund a score based on between three and five measures (depending on the sub-category) of risk-adjusted performance over three and five years. 

The size of a fund relative to the combined size of all the company’s rated funds in a broad asset class or major unit trust category is used to calculate the fund’s effective weight in the asset class or category. The individual fund’s effective weight is then applied to its rating. 

The company’s rating for the asset class or major category is calculated using the weighted ratings of the company’s funds in that category. 

Fixed weightings based on overall industry size are then applied to each of the four 

broad unit trust sectors or asset classes: the South African equity and real estate weight is set at 25 percent, South African 

interest-bearing (including multi-asset income) at 25 percent, South African multi-asset (excluding multi-asset income) at 35 percent, and rand-denominated global and worldwide at 15 percent.

Offshore companies

The returns of FSB-approved offshore funds are measured in United States dollars. The hurdle rate used to determine risk-adjusted returns is the US three-month Treasury Bill rate. 

To qualify for an overall rating, a management company must have at least one fund in the global equity general or global asset allocation (flexible and prudential combined) categories and at least three rated funds.