Why RSMR Rate this Fund

• Experienced management team who have generated strong risk adjusted returns over their tenure

• Supported by the well-resourced Value Investment Team at Ninety One

• Disciplined investment framework which has been tried and tested over the long term

Fund Process

The team are seeking out of favour companies, which may either by cyclical or idiosyncratic. Idea generation comes from three main sources – a quantitative screen that filters for underperformance and cheapness, specific special situation searches, and brokers/other sources. The quantitative screen monitors approximately 5,800 companies which have a market cap over USD$1bn and it also includes companies which are not included in the index. It screens for all those stocks that have fallen by 50% or more relative to the index and then it sorts these underperformers by EV/EBT quartiles for non-financials and P/B for financials. EV/EBIT is a preferred measure to take account of the capital structure. Both metrics are measured relative to the market and by how much the current rating deviates from its 10-year median and only stocks that have 50% upside on a mean reversion basis are considered for the next stage of detailed due diligence. For specific special situation searches, the team are seeking spin-offs, post-bankruptcy and recapitalisation opportunities and they will use brokers and other information sources. This tends to narrow the universe down to approximately 450 companies.

Following the initial screening process, the managers conduct an overview of the listing to identify value traps which may be companies with structural problems, balance sheet issues, poor governance, or they may have been assessed previously with the analyst taking a negative view. The team will then decide which companies to conduct further work on. They will keep a watchlist of around 20 – 30 companies which is circulated among the team on a monthly basis, and an analyst is free to pick any idea from it. On average, there will be around 3-4 new stock ideas per month. The analyst will conduct an assessment of the fundamentals of the business, its current valuation and industry analysis. The main purpose of this analysis is to determine an approximate level of normalised profitability which they think the company can generate. The weight assigned to a position at purchase is either 1.5%, 3% or 4.5% depending on the perceived trade-off of downside versus upside for the stock. The maximum absolute position size is 10%, although this would only be reached if a stock does particularly well relative to the rest of the portfolio. A review price is set for all stocks which is calculated as a multiple of normalised operating profitability. When holdings reach this review price, this is taken as an opportunity to revisit the assumptions made in the original analysis, and either sell the shares or set a new review price. The sell discipline kicks in when a holding reaches fair value, when a better opportunity is found or when the team believe there is a mistake in the investment thesis.

Evaluation

Since the managers took over, the fund has had a UK-bias and has been susceptible to big cyclical swings in the market on both the upside and the downside. Therefore, given the contrarian nature of the fund, investment returns can come at the price of higher volatility.

Application

This is a contrarian, deep value fund which can be used as a satellite holding within a diversified global equity portfolio.

Our Opinion

Ninety One have a well-established team dedicated to value strategies. The team implement the same philosophy and process across all their strategies, which focuses on substantial upside on a mean reversion basis for companies. Since the current managers took over the fund, it has been one of the strongest performers among its deep-value peer group, due to strong stock selection. Overall, this fund offers a differentiated source of returns within global equites.