Category Investments

Discovery Equity Fund outperforms the general equity funds sector

06 October 2009 Discovery

  •  The Discovery Equity Fund has outperformed the average of all general equity unit trusts by over 14.93% over a one-year period as at 30 September 2009. The fund has also posted a return of 22.52% over the same period
  •  The Discovery Equity Fund has grown to R326 million since inception

The Discovery Equity Fund is the best-performing general equity fund in South Africa over the 12-month time horizon, surpassing the performance of all others of the 102 general equity funds in this category as of 30 September 2009[1].

Sam Houlie, Fund Manager of the Discovery Equity Fund, says: “The greatest returns have come from companies with stretched balance sheets but where operations where good.

“Early last year, the market was obsessed with balance sheets, taking a view that those with weak balance sheets would not survive the downward cycle. This view gained impetus as certain companies reduced or stopped dividends in an effort to repair strained balance sheets.”

The fund had minimal exposure to the Resources sector in much of 2008 and intentionally avoided the fall in resource share valuations between May and November last year, a period during which the JSE Resources Index lost more than two-thirds of its value. Late last year, the fund’s allocation to resources began increasing, which benefited the fund as the index rose 13.26% in the six months to 30 September 2009.

In the Financials sector, the fund has been mostly overweight with a focus on a few select financials, including medium- to long-term investments. The fund started reducing selected industrial stocks in late September and used the proceeds to increase its weighting in Resources.

Says Houlie: “We invest with a 2- to 3-year view. When you reverse engineer it, the market typically gets the next 12 months right. More people focus on the 12-month horizon, so it’s difficult to outperform on a 12-month view. We strive to be different and focus on the period beyond 12 months. However, share prices have been moving very quickly lately and, as a result, we have exited some of our holdings early as prices reached full value. Our perspective is always long-term.”

Houlie says the market is currently running well ahead of the economic cycle, and this is in line with expectations.

“The upwards surge has been quite dramatic; as a result we are becoming increasingly defensive in order to protect capital. We remain fully invested because the risk reward profile of equities remains most attractive relative to other asset classes.”

[1] Sources: Bloomberg, Discovery Invest website, Investec and Fundsdata

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