Benguela Global- Quality, valuation focus delivers turnaround for this global equity PM
Benguela Global Fund Managers believe investors need a margin of safety when going into quality.
Benguela Global Fund Managers puts the outperformance of its $51m (R941m) Benguela Global Equity fund over the last year down to sticking to its philosophy.
‘There are two elements to our philosophy: quality and valuation. The fund’s recent performance was driven by stock selection,’ Benguela chief investment officer (CIO) Zwelakhe Mnguni told Citywire South Africa during an interview.
‘It would be a mistake to go blindly into quality. You also need a margin of safety in case you are wrong with your quality assessment,’ he added.
The Benguela Global Equity fund is also available in South Africa through the R60m Benguela Global Equity 27Four feeder fund. The firm also has a South African equity unit trust and a total AUM of R7.2bn.
Over the year ended June 2023, the feeder fund returned 30.8%, according to Morningstar. The category average for funds in the Asisa global equity category over this period was 29%.
‘Meta Platforms and Kinsale Insurance were significant contributors. The tech sector boosted the performance of the fund. Copart, which is a parts distributor, was up over 40%. A Mexican airports company also did well in the past few months,’ Mnguni (pictured below) said.
‘The portfolio has avoided the large-cap tech stocks. Instead, we selected the smaller tech stocks,’ he added.
Since its inception in February 2020 until the end of May 2023, the Benguela Global Equity 27Four feeder fund has underperformed and returned an annualised 11.4% in rands compared to 14.3% for its benchmark.
Mnguni said the fund’s long-term underperformance was due to the portfolio holding of healthcare stocks that lost out on elective surgeries during Covid-19. As part of Benguela’s investment process, it assesses stocks using its Benguela quality score, which comprises five factors:
- Business risk
- Financial risk.
- Capital allocation.
- Stock valuation relative to its historical multiples.
‘We rely less on what management tells us and assess the execution directly from the numbers,’ Mnguni said.
‘We screen for companies that closely align with what we seek. Things like low business risk, low financial risk, ESG factors, and within those companies, we will then identify promising companies,’ he added.
Benguela has a lot of automation built into its business.
‘We run stocks through an automated valuation model, which indicates whether the company is attractive,’ he said.
Once Benguela believes a stock has potential, they allocate it to an investment analyst, who compiles a detailed report, model and presentation.
‘The analyst then takes it to the Benguela investment committee, where the stock gets debated extensively. The investment committee then votes on that stock, and if it receives enough votes, it enters the Benguela ranking table,’ Mnguni said.
The Benguela portfolio managers make allocation decisions based on that table.
The Benguela Global Equity fund currently holds 74 stocks, and the portfolio typically ranges between 60 to 80 holdings.
Mnguni said the fund’s best call was not to sell out of Meta when its share price declined sharply.
‘There was a lot of panic over the metaverse. But Meta later rebounded,’ he added.
Avoided Nvidia and Telsa
Some of the fund’s worst decisions involved avoiding buying Nvidia and Telsa shares.
‘A key factor we missed was that Tesla was an innovator. The lesson was that when a company innovates, it may suffer from low cashflows when growth is extremely high,’ Mnguni said.
‘A key takeaway is that just looking at free cash flows on a standalone basis will probably not yield good results,’ he added.
The portfolio managers of the Benguela Global Equity fund have invested about 90% of the fund’s assets in development market equity and 10% in emerging market shares.
‘The fund does have a developed market focus, which is a function of our bottom-up process,’ Mnguni said.
The fund’s top regional exposures are the US, Europe, Japan, Australia, Canada, and the UK.
Mnguni said the fund’s sector allocation was ‘extremely important’.
The fund’s portfolio managers have allocated about 31% of the fund’s assets to the information technology sector. Other significant sectors are financials, industrials, consumer discretionary and healthcare.
‘We pay attention to the active bets. We don’t go beyond 5% over or underweight in a particular element of the portfolio,’ he added.
Significant US exposure
The fund has significant exposure to the US. Its top ten holdings are all US stocks and the asset manager has allocated almost 56% to the region.
‘The US market looks expensive on paper, but only the top 100 have extreme valuations,’ Mnguni said.
The fund has a low total investment charge of 96 basis points. Mnguni attributed this to the fact that the fund only trades a little, and its yearly turnover is about 25%, equating to a four-year holding period.
Regarding risk management, Mnguni said Benguela constantly monitored the portfolio’s risk.
Mnguni said if Benguela picked up governance issues at a company like strange, related party transactions, the asset manager would exit its holding in that share.
‘When there is a fraud, we’ll react immediately,’ he added.