Fund Name: Prudential Equity Fund
Co-Portfolio Manager: Craig Butters
Investonline Views:
Given the funds index-hugging style (3% over/underweight per share and 5% over/underweight per sector) the fund can be described as an enhanced equity index tracker. Key is the fund has outperformed the index by 2.9% over the last 10 years and hence can justify its fees.
The investment mandate is unexciting, which is reflected in its average/pedestrian short to medium term ranking relative to other general equity funds. However, long term (10 yrs ranked 6th out 56 funds) it’s performed well through the different investment cycles.
The fund’s 10 year 2.9% p.a. outperformance demonstrates consistent value-add by a disciplined investment approach from an experienced team of investment professionals.
We recommend this fund to form part of an aggressive investment portfolio as it provides a stable and lower risk balance to an aggressive portfolio.
Fund Description
The Prudential Equity Fund is a 100% local equity fund with a mandate to basically outperform the JSE All Share Index. The fund seeks out “value” stimulators by focusing on high dividend yields, earnings growth and possible market re-ratings of shares.
Key to note is the fund does not take major risks away from the benchmark. Its investment criteria allows positions only 3% over or under weight per share and 5% over or under per equity sector.
Past Performance
Over the last 10 years the fund has produced an annualised return of 13.9%, 2.9% ahead of the benchmark. In the last 12 months the fund is -0.3% down verses the benchmark being up 0.4%. This is largely due to its under-weight position in resources.
Relative to other general equity funds the fund has not ranked well in the short to medium term. In the Morningstar performance rankings, over the last year and three years it’s ranked 81 out of 140 and 41 out of 110 funds respectively. Over ten years it’s ranked a creditable 6 out of 56.
Investment Style
The investment process has a disciplined team approach. It follows fundamental company analysis with an emphasis on cashflows, balance sheets and understanding company dynamics.
Bottom up stock selection is the main driver with a more value styled approach followed in selecting cheaper, higher divided paying quality companies.
It ranks companies based on low price to book ratios, high dividend yields and low P/Es in relation to the company’s return on net assets. It then manages the risk of the position relative to the benchmark.
Their investment criterion allows positions only 3% over or under weight the benchmark per share and 5% over or under the benchmark per sector.
Fund Manager Views
Locally the equity market is fairly valued and the Rand is undervalued. Globally, the US market is not overvalued and China is unlikely to have a hard economic landing (slow-down).
Funds Positioning
Under-weights – Resources, General Retailers, Property, Richemont
Over-weights – Banks, Food Retailers, Sasol and Sappi
Biggest macro risk to the fund
A sharp increase in local interest rates. This would hurt the market generally including the banks and should lead to a likely sector rotation driving up resources.
Flow of Funds
Over the last 12 months there has been an inflow of retail investments and institutional flows are flat.
Is the Fund Manager invested in the fund?
A portion of the fund manager’s bonuses are invested directly into the fund.