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Seed Weekly - The Seed Equity Fund

This week I will be focusing on our youngest fund in our range namely the Seed Equity fund. This is a low cost equity fund managed by Seed, under advice from Prof Paul van Rensburg of Salient Quants. The fund aims to provide investors with returns in excess of the JSE ALSI Total Return (J203T)

Our current fund range is depicted below:


Investment Styles

The major equity investment styles can be broken down into Active versus Passive Management, Value versus Growth, and Large Cap versus Small Cap.

Active versus Passive: Actively managed funds typically have portfolio managers constantly seeking superior returns with for example expert research analysts and big support teams. Trading in the funds can happen on an ongoing basis and investors usually pay more for these funds compared to passively managed funds. On the other hand empirical research shows that over the long run, many passively managed funds generate better returns for their investors compared to similar actively managed funds – with the added bonus of the much lower cost.

Value versus Growth (Momentum): The value investment style is focused on buying the best quality companies for the lowest price possible. Companies in favour would be companies with low price to earnings ratios, high dividend yields and low price to sales ratios. A momentum style would be investing in companies which are growing quickly and typically reinvesting most or all of their earnings to fuel continued growth. These companies typically have lower dividend yields with high earnings growth and high profit margins.

Large Cap versus Small Cap: This is purely a measurement of the size of the company as calculated by its market capitalization. Small Caps generally have greater earnings potential but typically also more risk.

Where does Seed Equity fit in?

According to international research by BCA (The Bank Credit Analyst) if one is looking for solid consistent returns then style diversification is important. The Seed Equity fund makes use of “Smart Alpha” techniques and remains style neutral between value and momentum.

Because the fund has a systematic investment process, we have accurate data since January 2003 and actual portfolio data since 2009. The results below reflect the comparison of the fund’s maximum underperformance and the number of months it spent in drawdown versus a range of well-known funds with a similar history.

All of the funds in this study have outperformed the ALSI since this inception date, but many investors have had to sustain a significant period of underperformance – in some cases up to 10 years.

Ideally a fund also aims to outperform the market on a consistent basis. This is especially important for unit trusts because investors are investing at various stages and therefore each has their own return experience.

From the table above it is evident that the Value and Momentum building blocks individually go through periods of underperformance that are just as long as some of the other active managers. However when blended together the Seed Equity fund has a materially shorter period of ‘longest period of underperformance’ because of the fund’s style diversification.

Performance

In a similar way, the graphs below reflect the separate building blocks and then a composite of a 50/50 blend.

When combined at equal weights it is clear to see on the graph below, that the return profile is smoothed out and in fact the combined styles have achieved a higher cumulative outperformance.

Compared to its peers the fund is relatively young but the two separate strategies do have an actual 5 year track record. The fund has a two year track record and the end of April 2015 the fund returned 19.5% for the 1 year and was ranked 34 out of 132 funds in its category.

In the coming weeks when we will introduce you to our other two funds namely the Seed Absolute and Seed Flexible Funds.

Kind regards,

Renier Hugo

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 19 May 2015- 13:04



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