Making each stock count – Q&A with Patrice Rassou

Patrice Rassou, head of Equities at SIM.

Patrice Rassou, head of Equities at SIM, was one of the panel speakers at the Glacier Investment Summit in Clarens on 28 February. Patrice is also the portfolio manager of the SIM Top Choice Equity Fund. In this Q&A he discusses the traits of this high-conviction fund. He answers some of the questions delegates had around high-conviction investing, such as, how many shares are enough?

Q: Does a concentrated portfolio necessarily mean less diversification?

A: The SIM Top Choice Equity Fund chooses approximately 20 stocks across both large and small caps. Why 20? Research shows that from the first share in a portfolio each additional share decreases the risk in the portfolio as it benefits from the added diversification. But after 20, the diversification benefits of adding more stocks become marginal.

Q: What is the ideal amount of holdings that you would like to have?

A: The optimal number of stocks in terms of risk seems to be around 20 and that is our preferred number of stocks in the SIM Top Choice Equity Fund.

Q: Do higher conviction portfolios imply less dependence on the benchmark?

A: This unconstrained fund is by definition no benchmark-hugger and investors can therefore not anchor their return expectations to the performance of the FTSE/JSE Shareweighted Index (SWIX). The increased active risk is accompanied by the potential to earn higher long-term returns, though. The SIM Top Choice Equity Fund requires a longer-term horizon, in that it maintains exposure to some stocks that are occasionally out of favour, but which are likely to outperform the market in the longer term.

Q: Does size have an impact in terms of how concentrated the SIM Top Choice Equity Fund can be?

A: With the fund being just over R1 billion, it is considerably smaller than some of the competitors in the category, allowing far greater flexibility with regards to tradeability and also allowing mid and smaller cap stocks to be potential investments. We were, for instance, able to build a position in Dischem, which was in very high demand upon listing and which has doubled in price since then.

Q: How are the stocks within the SIM Top Choice Equity Fund chosen?

A:The fund represents the best ideas of the general equity and sector specialists at SIM. We scan the universe of some 250 large and small caps and select around twenty of the best ideas which are likely to outperform the market over the long term by leveraging a team of analysts who are experts in their field. In other words, the SIM Top Choice Equity Fund offers the insights of both generalist and sector specialists. It is an aggressive stock-picker made up of the very best ideas of the equity portfolio managers at SIM. The objective of a concentrated fund such as this is to ensure that the superior stock picking skills of our skilled portfolio managers come to the fore, providing investors with more opportunity to outperform the stock market over the long term.

Q: What are the main differences between the SIM Top Choice Equity Fund and the SIM General Equity Fund?

A: The SIM Top Choice Equity Fund is a purely domestic fund that aggressively represents our best ideas. While performance could be volatile over the short term, we believe that over the long term, i.e. five years and longer, the risk-adjusted return will be compelling for the patient investor. On the other hand, the SIM General Equity Fund is more benchmark-cognisant and seeks to reflect the house view by taking a large number of smaller bets against the benchmark, which should lead to less volality but also a commensurately lower risk-adjusted return. In addition, the SIM General Equity Fund has the ability to invest offshore.