HEAD-TO-HEAD: Investec vs Natixis

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Both the Investec and Natixis funds take a bottom-up approach to investing and have concentrated portfolios of around 35 stocks as of the end of April, according to their fund factsheets.

Their benchmark indices are different, with the Investec fund following the MSCI AC World Index and the Natixis fund following the MSCI World Index.

The MSCI AC World Index measures the equity market performance of developed and emerging markets, while the MSCI World Index measures the equity market performance of developed markets.

However, both funds stray from the sector or geographical allocation of their benchmarks and have a high active share of about 90%, Morningstar data shows.

What makes the two funds distinct is their investment strategies. For example, the way each manager screens the universe of stocks for investments.

Peter Brunt, senior analyst at Morningstar, believes Investec’s screening process is strict, according to the firm’s report on the fund.

The Investec fund first excludes companies that are capitalised below $3bn, that have poor liquidity and with a business that is too capital intensive, according to Brunt.

After the initial screening, around 800 stocks are ranked monthly based on their return on capital, profit growth, free cash flow conversion and valuation, which leaves the fund with 100 names. The top 100 names are subject to the team’s research, which focuses on fundamentals. Meeting company management is also key to the fund’s assessment.

According to Brunt, Investec’s fund has a quality-bias, which means a tilt toward companies with a sustainable competitive advantage.

By comparison, the Natixis fund prefers companies with clear growth prospects trading at steep discounts to the team’s estimate of intrinsic value, Jeffrey Schumacher, an associate director at Morningstar, said in a separate report. Valuation techniques can include sum-of-parts analysis, private-market acquisition price estimation and discounted cash flow analysis.

“Because position sizes are determined in part by the size of the valuation gap the managers perceive, individual holdings can be sizable too,” he said. According to him, combined with the managers’ bottom-up approach, the portfolio has little resemblance to the MSCI World Index.

Given the differences in the two funds’ investment approach, there are huge differences in their sector allocation.

Source: Morningstar

According to Brunt, because of Investec’s strict investment criteria as well as the strong cyclical nature of some industries, the fund does not have any holdings in energy, materials, utilities and telecoms.

Brunt noted that the portfolio manager of the Investec fund, Clyde Rossouw, does not see sector concentration as a risk, but rather, risk is primarily the permanent loss of capital and higher levels of volatility.

“He has been happy to let consumer staples exposure reach nearly 70% in the past,” Brunt said, adding that at the end of December 12, the fund was invested in just four sectors.

For the Natixis fund, the sector allocations show a tendency to be more value-oriented, according to Schumacher.

“Healthcare and consumer defensive companies are lightly representative,” he said. “Real estate stocks aren’t in the fund at all.”

Although categorised as global equity funds, Investec is invested only in developed markets. Natixis’ product, however, has taken on emerging markets exposure.

Source: Morningstar

Both funds also have the majority of assets allocated to the US.

Source: Morningstar

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