Investing in 2013: Abax Investments

Abax Investments is an owner-managed company that focuses exclusively on investment management. Africa Outlook talks to Anthony Sedgwick, one of the firm's founding members, about its history, investment approach and the booming retail space.

By Ian Armitage

As an investor you'll naturally wonder 'are my savings and investments working as hard as they could?'

The start of a new year is always a good time to evaluate your portfolios and make any changes you think necessary, but with so many available options where do you start?

Noone can know for certain what future investment returns will be, and in 2012 there were many winners and losers.

As far as winners goes, it was those to opted to invest in retail, in pan-African supermarket chains in particular, and also banks and insurance companies or products.

As one analyst told South Africa Magazine Africa is "currently under-banked" adding that "investors who find it tough to decide whether growth or value will dominate in 2013 may find asset allocation funds the way to go."

2012 was a miserable year to be invested in South African-listed mining stocks, the gold industry in particular.

The JSE's best performing 'gold sector' stock was DRDGold – and they stopped mining gold in favour of retreating tailings, or dumps.

It grew 43 percent in value during 2012.

Of gold miners proper, Gold Fields was the best performer losing only 16.5 percent

It seems resources weren't the way to go.

Indeed, Robert Scharar, fund manager at the Commonwealth Africa Fund, recently told CNBC that investors who view Africa solely as a natural resources are "missing the picture".

"There are great opportunities because of an emerging middle class, an increase in education and more transparent governments," he said.

Scharar was positive about Africa and indeed South Africa's investment potential despite the outbreak of violence, which saw 44 killed at a Lonmin mine in August, and deteriorating labor relations across the country.

Abax Investments is a specialist South African investment manager.

According to Anthony Sedgwick the business, which he has helped build, has "particular expertise in active share selection" and ensures "investment focus" by remaining small, to the extent that new business is capped to a degree - a business that isn't growing stagnates, he admits - and client relationships are the "number one priority".

Mr Sedgwick and two colleagues, Tim Allsop and Marius van Rooyen, founded Abax in 2003.

At the firm's inception, it had three clients and three portfolio managers with R2 billion assets under management.

"We came from a big institutional fund management background," Sedgwick says. "We learnt a lot through that process but we felt that a smaller, more nimble organisation, less mired in administrative red tape and complicated processes, had a much better chance of succeeding than the kind that we had worked in historically. That's not to say that they are wrong and we're right, but we felt that our way of doing things is a bit closer to what is going on, day-to-day."

That focus remains.

"Although we have now grown to a size of approximately 50 clients, seven fund managers, two investment analysts and R60 billion funds under management, we still consider ourselves relatively small and nimble in comparison to our much larger competitors. It is a very jealously guarded principle of the organisation, but, in business, it's a difficult thing to manage. You don't want to become a victim of your own success, yet at the same time you don't want to become a completely unambitious organisation that is intent on hiding behind big brick walls. It's something that we're intensely aware of and manage on an ongoing basis. We also believe that if an organisation isn't growing and going forward as a business then it is stagnating. That said, we're very protective of the kind of organisation that we are, and we work very hard to remain true to our founding principles - to be a small focused team of experienced fund managers whose interests are completely aligned with those of its clients with a manageable number of client relationships and basically trying to put the team in the best position to generate future performance.

"Historic performance is one thing. We're completely fixated on delivering future performance, that's all we really care about. We have to create an environment that gives our investment team the best chance to succeed."

Active managers like Abax are currently doing well and returns are coming in.

The industry is very healthy.

Glenn Silverman, CIO of Investment Solutions, recently told ABN that South African fund managers were "in good shape, brimming with ideas and new products", explaining that "the boom market over the last decade has helped."

He said the number of players operating in this space has increased. But there was still "massive growth".

Retail in particular is "getting significant inflows", he said.

"There are many different models, but the man in the street has a lot of money and is investing it," Silverman explained.

Abax offers investment vehicles in the retail space through it's long-standing partnership with Nedgroup Investments and direct client relationships in the institutional savings space.

More recently, it has ventured into multi-asset class offerings.

Within the absolute return space, Abax offers various hedge funds.

"We compete with large South African institutions but we have the benefit in that, as a relatively smaller firm, we are more nimble and we can access a deeper universe of investment opportunity," Sedgwick says. "We work very hard to try and exploit that relative benefit. We don't necessarily have to take very long-term, views in our portfolio positioning, although our general approach is as long-term investors looking to build a core portfolio of companies that we think are long-term winners and that offer reasonable value. At the margin we also look to add value in the short-term by taking advantage of shorter term market aberrations where there is particular volatility in a stock."

Despite the local economy "chugging along" Abax continues to grow.

"The South African economy is growing slowly and we expect that to continue," says Sedgwick. "It is hamstrung by a variety of constraints and consequently is not creating any employment, which it desperately needs to do. There are some reasonable opportunities for growth but one has to be very selective and within our market there is massive diversity of investment opportunity from banks to infrastructure development, retailers to mining. Some are exploiting growth opportunities in Africa. It is about picking the right stock, which is what we work hard to do.

"Our research processes are based around trying to forecast what the level of profitability for the companies in our investment universe is going to do and we work tremendously hard every day to try and get that right. Our business is about generating investment performance, without that you don't have an investment business, so we look to do that as consistently as possible. We encourage clients to look at the medium- to long-term track record because we can, and have in the past - and no doubt will in the future - get it wrong. But hopefully for relatively short periods."

Abax's strength is that it has a "strong" investment team in terms of industry and share-selection experience.

"We have managed to build wonderful loyalty with the clients we have and are attracting a lot of interest," says Sedgwick. "Some clients have been with us since the firm's inception. We look to build relationships with clients but we realise that in our industry it is about the clients' confidence in your ability to deliver investment performance and I know that we have one of the best, if not the best, investment teams in the country.

"Historically we only managed domestic equity portfolios but in 2011 started managing balanced portfolios, which includes fixed interest assets," he continues. "We had a very competent young man join our team and he has been with us about a year now and we see that as an interesting space and believe that we have a great offering and can take substantial assets in that space, which doesn't compromise our capacity in the equity space at all. Our investment decisions can be translated quickly and efficiently through to the investment portfolios. There are no time lags between identification of investment opportunities and implementation."

One challenge facing the industry is regulation.

"While we recognise the need for effective regulation, governance and oversight of the financial services industry, this needs to be balanced with the pragmatism of effective business to minimise unnecessary red tape that adds no value, investor protection or benefit," Sedgwick concludes. "As the power of regulators and compliance officials has risen in recent years this balance has unfortunately moved too far into the realm of officious interference which also unnecessarily burdens business with extra costs and effectively builds higher barriers to entry for small business to the industry."

What the future will hold for fund managers is unclear.

Image: Thinkstock



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