Investor's Notebook: RECM an acquired taste
It looks like a cautionary tale for anyone planning to switch fund managers. Nedgroup Investments put up with deep-value manager RECM running its Managed Fund unsuccessfully for more than five years before moving it to Truffle, a much more pragmatic mainstream outfit, back in December. Yet over the past six months RECM Balanced, which is run in the same way RECM used to run the fund for Nedgroup, was top of the high equity multi-asset category, with a 14.5% return. The Nedgroup Managed Fund under Truffle’s stewardship was 148th out of 213, with a return of 4.9%.
One of the reasons Nedgroup did not part company with RECM during its years of underperformance was that there was a good chance that deep-value shares would bounce back and it would then look silly — but unfortunately it switched just before the biggest rebound in value shares for decades. RECM chairman Piet Viljoen says that with hindsight his team made it easy for Nedgroup to sack it. It took too extreme a view too early.
A year ago the fund could have been mistaken for a resources fund, with a few exceptions in it, such as HCI, the dominant shareholder in Tsogo Sun, and Iliad Africa, a home-improvement chain that is now deep in the bowels of Steinhoff. Even RECM’s most bizarre pick, Discovery, as hard-charging a growth business as any on the JSE, had gone. RECM has proved it can pick good industrial businesses through its joint venture RECM & Calibre, which invests in businesses such as the Dis-Chem pharmacy chain and Goldrush, an alternative gambling business. RECM & Calibre is the only share that is still in the top 10 of the Nedgroup Managed Fund under Truffle’s stewardship.
I got to know Viljoen in his Investec days and he used to own some of the higher p:e shares of the late 1990s, such as soft-drink bottler ABI and Afrox, the private hospital and industrial gases group.
Nobody talked about quality in those days, but he was pioneering the style his successor, Clyde Rossouw, has perfected with such success in today’s Investec Opportunity Fund. Viljoen was known as a blunt speaker. I was invited to the morning meeting once and I remember him saying, "When are we getting rid of this Primedia rubbish?" He was also a perennial bear, much to the frustration of Investec’s well-staffed marketing team.
Viljoen built RECM into a large manager in its first decade, up to 2013. He says that since then RECM went through a near-death experience, as its large institutional investors left it. It shrunk from two floors to one at its office block in Claremont, Cape Town, which is now SA’s leading asset management node. Paradoxically, it is the retail investors that have been most loyal. RECM still has R1.25bn in its global flexible fund and R2.3bn in its dollar-based global fund. At least RECM Equity no longer looks like a closet resources fund. It has chunky holdings in Standard Bank and Nedbank, as well as construction share Wilson Bayly Holmes. RECM is also snooping around Metair, Hudaco and Invicta. Nonetheless, RECM remains an acquired taste. It seems to go against the herd for the sake of it.
Truffle is a much more suitable manager for Nedgroup, and I expect it to enjoy a wider following. Truffle’s most experienced portfolio manager, Charles Booth, if not a classic value disciple, is certainly conservative and valuation based. Truffle might have underperformed RECM at an awkward time, when it had just taken over the Nedgroup fund, but it extracted much more return out of the previous five years. The Truffle team has the experience to take on the fund and to navigate it through the tough years ahead.