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Beware of putting your money into big funds – Piet Viljoen

Counterpoint Asset Management executive director, Piet Viljoen, has warned that following the crowd by investing in a large fund can be a costly mistake.

Viljoen is the portfolio manager of the Counterpoint SCI Value Fund, which showed 26% growth over the last three years.

The fund consists mainly of South African equities (95.3%), with 4% cash and 0.7% South African property.

Its top holdings include Exxaro, Anglo American, Sibanye-Stilwater, Goldfields, Sasol, British American Tobacco, Absa, Discovery, Sanlam, and Glencore Xstrata.

It has significantly outperformed the JSE All Share Index over the last five years, which has made it a favourite among investors.

Commenting on the strong performance, Viljoen said the Counterpoint team is not smarter than their competition, has better access to corporate information, or makes better forecasts.

What differentiates them are two structural factors:

  • The Counterpoint SCI Value Fund is smaller than many big brand competitors.
  • The Fund is managed in a non-index-aware fashion.

“Our investment process, which emphasizes risk management in a sensible, rational way, also contributes to our success over time,” said Viljoen.

The Fund’s smaller size allows Counterpoint to invest across the spectrum of company sizes on the JSE.

“South Africa has many really good, listed businesses that no one has heard of because they are so small,” he said.

Stockbrokers are not incentivized to cover them as they don’t generate sufficient brokerage, and institutions don’t own them because there is no coverage.

“Also, institutions are just too big to own them. It creates fertile hunting grounds for smaller funds to find and own great businesses,” he said.

Some gems include CMH, Afrimat, Lewis Stores, Hudaco, Clientele, Metrofile, Transaction Capital, HCI and Sabvest.

“Owning shares of these businesses has added tremendous value to unitholders of the Counterpoint SCI Value Fund – value that is not accessible to the large institutions.”

Managing the Fund in a non-index-aware fashion further means Counterpoint does not have to invest in overvalued heavyweights.

They also do not have to weigh stocks in relation to their weights in the index.

“This has saved us from investing in value traps like the confusing Naspers/Prosus nexus and some historically patently absurd situations like Steinhoff, EOH, Tongaat, Brait, and Sasol while it was misallocating capital on a grand scale,” Viljoen said.

Warning about big funds

Speaking to Biznews, Viljoen said they would cap the Counterpoint SCI Value Fund when it gets too big to ensure they do not lose their advantage of running a small fund.

The fund size is currently R741 million. Viljoen said the Fund can still grow substantially, but when it gets to R1.5 billion to R2 billion, they will put on the breaks.

“Size is the enemy of performance. The top performing funds are the smaller funds. The big funds all underperformed the benchmark consistently,” he said.

Viljoen highlighted that most large asset managers do not care too much about performance because they make more money the larger the Fund is.

“You have a perverse incentive where the fund manager makes a lot of money, and the investor doesn’t,” he said.

“The asset management industry is rife with this conflict and is not always managed very well.”

Viljoen said investors should be wary when asset managers gloat about the size of assets under management.

“The problem is that people are herd animals who feel safe in big herds. People, therefore, feel safe when investing with a big fund manager,” he said.

However, with investing, people’s animal instincts are the enemy of good performance.

“When stock prices go down, your first instinct is to flee. That’s your animal instinct kicking in, and that’s not always the right thing to do in investing.”

“Herding is another animal instinct we have as human beings. That is also not a great thing to do in investing.”

Counterpoint SCI Value Fund details

Counterpoint SCI Value Fund
Portfolio Manager Piet Viljoen
Benchmark FTSE/JSE ALSI
Fund Size R741 million
Minimum Lump Sum Investment R10,000
Minimum Monthly Investment R500
 
Annualised Performance (%)
Time Fund Benchmark
1 Year 31.3 11.0
3 Years 26.1 13.0
5 Years 17.2 9.8
10 Years 13.7 11.6

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