Secrets to a decade of successful investing

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SIMON BROWN: I’m chatting now with Etienne Roux, equity analyst at Truffle Asset Management, the investment managers on the Amplify SCI Wealth Protector Fund.

Etienne, appreciate the early morning. Just a quick bit of sort of housekeeping to understand the structure. Truffle is essentially a third party that is contracted in to run within the mandate of the Amplify Wealth Protector Fund, and you then sort of make those decisions as to what, where and how to hold.

ETIENNE ROUX: Good morning, Simon. Yes. Thanks for having me. It’s great to be on your show. It’s a good place to start. I think the relationship with Amplify over the 10 years has really been spectacular. It has worked really well for our investors.

So yes, we manage the fund on behalf of Amplify. We let them basically do what they do best, which is the distribution of the fund, and we do what we do best. They’ve really supported Truffle over the 10 years, and they’ve backed us as quite a boutique manager way back, and they’ve given us a lot of confidence in terms of our managing the fund how we think is best.

It has definitely benefited the investor significantly since the inception.

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SIMON BROWN: A 10-year track record, 10.62%. To be clear, a low equity fund. Your benchmark did 7.63% over that period. I was going to ask where does return come from? I imagine it’s all of them – it’s a bit of stock selection, it’s a bit of asset allocation, and it’s perhaps a little bit also of avoiding the losers. It is sort of the whole picture and managing it cautiously, as it talks in the name.

ETIENNE ROUX: Yes, exactly. I think that’s exactly right. So I can’t put it down to one or two specific things, but I think in general, if you think about the philosophy and you think about how we manage this fund, there are three things that stand out that are  quite important to note.

The first thing is, as a house we put a big emphasis on downside protection.

So we’re trying to just think about where the risks are in the portfolio, where we can be wrong – and we’re trying to avoid those kinds of situations where you can lose a lot of money.

That is as a house, but I think specifically in this fund – because it’s a lower equity fund, lower risk fund – we acknowledge that our investors are typically guys who are already retired and don’t want big volatility in their returns.

So there’s an even bigger focus on downside protection, just trying to avoid those situations and those shares where you can lose a lot of money.

One way of doing that is we focus a bit more on this fund on shares with good dividend yields, because that gives you a nice baseline kind of return. And if those shares can just deliver sustainable earnings on top of that, that will get you that CPI-plus-three return at least. That’s the one way.

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The second thing is we’re also quite agile and nimble. We are still a boutique manager. We do change our minds. So we acknowledge that we can be wrong about things and, if we realise that, we try and change the views and change the portfolio as soon as we can. So we don’t try and hold on to losing positions for too long. I think that is also important.

Also in a market like South Africa things are volatile; typically the markets are volatile and even more so in South Africa, given our political situation, given the movement in commodity prices. Things do change. I think it’s important to be agile and nimble in that kind of volatility environment.

And then the third thing is that this fund is managed a bit like a ‘best ideas’ fund. So we don’t just take a [slice] out of our equity fund and put it into this fund. Each share is assessed on its own merits to kind of generate that CPI-plus-three return hurdle at a minimum.

So I think those three things are kind of it. If you think about the philosophy and how we manage the fund, those stand out and that has really worked well over the years.

SIMON BROWN: You talk a lot around agility, and I totally get your point around it. That must surely become more of a challenge. I mean, you are a R10 billion fund now. It’s one thing to be agile with a hundred million. You must be able to scale it to the R10 billion, but that must add some challenge to it.

ETIENNE ROUX: Yes. So look at it; it’s also not just about the size of the business. I think what’s also important to note is that being agile and being nimble are also just a function of making quick decisions.

I think some of the big managers out there, for example, go through a lot of investment committees and decision-making processes before making or implementing certain decisions.

For us it’s about quickly identifying the information, what has changed, what we need to do – and very quickly making those decisions.

So that’s the first kind of thing.

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And then, as a behavioural kind of assessment, it  is just to be aware of thinking about when we are wrong, and being able to acknowledge when we are wrong. I think that’s also very, very important and very difficult for managers to do. It’s very difficult to acknowledge that you’ve been wrong.

So we actively try to do that. And if we identify those situations, we try and change that and make the decisions quickly.

SIMON BROWN: Your sort of asset allocation broadly is 60% at fixed income, 35% equity, 5% property. How much do you deviate from that strategically in terms of generating alpha, or all times sort of creating protection?

ETIENNE ROUX: Yes, I think on equity exposure it’s a maximum of 40% as a rule, as a mandate. Typically probably between 25% and 35% would be a strategic asset allocation on the equity side. But just to give you a sense, I think at the moment we are a little more cautious in terms of where the world is and the risks in the Middle East, and that oil prices and bond yields have spiked.

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We are probably at the lower end of that at the moment. I think we’re taking quite a defensive view – or a more cautious view – where we are at the moment. But between 25% and 35% is probably where this fund has typically been positioned.

SIMON BROWN: Etienne Roux, equity analyst Truffle Asset Management, appreciate the early morning time.

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