Prof Paul van Rensburg – Equinox Interview

 Kagiso Active Quants Fund: Leading general equity fund over 12 months

The Kagiso Active Quants Fund, classified as a domestic general equity fund, was launched in April 2004. It was the first South African 'quants' fund available to retail investors. The fund manager, Paul van Rensburg bases his stock picking decisions on a statistical model of share returns. Despite good performances from the fund the assets under management of the fund are currently only R10.4 million.

Equinox: Could you tell us a little about your investment experience?

Paul van Rensburg: I started my career working in the quants division at RMB in 1998, and then spent four years as Head of Research at Futuregrowth. I joined Kagiso as Head of Equities in January 2004. Simultaneously, I have had an academic career and am the Professor of Finance at the University of Cape Town. Indeed, my many years of academic research underlies the quantitative multifactor stock pricking model that I use.

Equinox: Could you tell us more about Kagiso Asset Management?

Paul van Rensburg: Until fairly recently Kagiso Asset Management was jointly owned by Coronation Fund Managers and the Kagiso Group. Within the last three months things have changed and the Kagiso Trust owns 70% of the company, with the staff owning the balance. We are an empowered company with 90% black shareholders. We have R4.3 billion under management, most of which is institutional money. We have made no serious efforts to target or advertise to retail investors.

Equinox: What is the mandate and benchmark of your fund?

Paul van Rensburg: The benchmark that the fund tries to outperform is the average performance of general equity funds over a rolling 12 month period. We use equally weighted average holdings in the other general equity sector as a starting point for the construction of our portfolio and take active positions around that. Clearly, the fund is not a passive quants fund and we aim to covert our view, if correct, to moving up the performance rankings within the General Equity sector.

Equinox: Do you use the average positions of the general equity unit trusts as the starting point of some of your institutional funds as well?

Paul van Rensburg: On the institutional side each client typically specifies their own benchmark and we try to outperform whatever they choose. No other funds use this particular benchmark.

Equinox: Your fund is currently the top performing general equity fund over a 12 month period while competitor quants funds in the general equity sector are, according to our records, placed 25th, 34th and 35th over the same time period. Could you explain why you think your fund has achieved this performance?

Paul van Rensburg: I would attribute our success to good stockpicking. Regarding our 'competitors', I am not sure but I would guess that they are either passively managed quants funds, or have recently changed their mandates and do not have a full 12 month performance history of active management. A passive fund aims to track an index, where a fund like ours that is actively managed aims to outperform an index. We see our real competitors as the top performing active managers.

Equinox: Could you clarify exactly what you mean by tracking error?

Paul van Rensburg: Tracking error is the standard deviation of the difference in returns between your fund and its benchmark. Tracker funds, for example, tend to have a very low tracking error while active funds may not even care about any benchmark. However in my case, the investment strategy is different: I hug my chosen index during volatile or unpredictable investing environments and deliberately push it out, take more risk relative to the average general equity fund when we are more confident. For, the last few months (which were like a washing machine) my tracking error has been reduced to 3.5% p.a. and only recently have I started to increase it up to 2004 levels again.

Equinox: How do you look for good share prospects?

Paul van Rensburg: The multifactor quant model predicts the next months' on abroad range of JSE listed shares returns and if something looks good here we take a closer look at it. We have done some recent screening rule research and have filters that alert us to possible opportunities

Equinox: Do you overlay your quants-based stock picking with qualitative information or are you a quants purist?

Paul van Rensburg: We definitely overlay our final decisions with some qualitative insight. The numbers cannot give you an indication of a corporate event, for example. I would say our models are responsible for between 80 and 90% of the tilt of the portfolio with the balance being a qualitative overlay. After managing portfolios such as this for a while you get a feeling about when to bet on your numbers and when to doubt them.

Equinox: Do you generally run a fully invested portfolio?

Paul van Rensburg: Yes. As you know we are allowed 25% of the portfolio in cash but we keep as little cash as possible.

Equinox: Your marketing material says that Kagiso uses 'leading-edge' quantitative investment thinking. Must we assume from this that there are some quantitative methods that have become outdated or unfashionable?

Paul van Rensburg: I wouldn't say that certain quants techniques become outdated, but there are certainly ongoing refinements, improvements and new ideas. However our research is always ongoing – I found out this week that we were lucky enough to win the latest Investment Analysts Journal best paper prize and our research is always in some way relevant to building better models.

Equinox: How would you seek to reduce or minimize negative returns in a falling market?

Paul van Rensburg: We are a general equity fund and we would rise and fall in line with the performance of equities. The fund is not an absolute return fund.

Equinox: Do you think your quants-based portfolio construction methods will hold, or be sustainable if the fund were to grow substantially in size?

Paul van Rensburg: Definitely, although certain small-cap opportunities would unavoidably be lost. As mentioned, our main clientele tends to be larger institutional mandates.

Equinox: Please could you describe the details of your performance fee structure.

Paul van Rensburg: There is an annual service fee of 1.14% (including VAT), and the fund manager earns a performance fee of 15% of the out performance of the fund if the performance of the fund exceeds the benchmark. The annual fee reduces to 0.79% (including VAT) if the fund manager underperforms the benchmark. The performance fee is capped at 2.5%. This means that the total fee will no be greater than 3.5% p.a. (1% base fee +2.5% performance fee) excl VAT.

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