Plexus gears up for growth
The world has emerged from one of the most severe financial crises ever and the global economic recovery is continuing to gain traction, albeit at a somewhat subdued rate, says Paul Stewart, managing director of Plexus Asset Management.
“While the rebound in equity prices since the March 2009 lows has surprised even the more positive market participants, a number of risks could still derail the recovery in the medium term. These include the sovereign debt problems in Europe and elsewhere, the continued poor improvement in US employment numbers and the housing market, as well as rising energy and food prices that will ultimately lead to higher inflation and less money in consumers’ pockets,” says Stewart.
“While it may look like we are out of the woods for now, it is premature to throw caution to the wind,” he says. Investors should not stray from their long-term investment strategies. At the same time they should go back to the basics and focus on quality investments with good risk management,” he says.
According to Stewart, Plexus has put much effort into sourcing and developing high-quality investment solutions for clients. One such example is the licensing agreement concluded with California-based investment house Research Affiliates, which has enabled Plexus to bring the innovative indexing methodology known as RAFI® to the South African market.
“Indices created using the RAFI® methodology are relatively new in South Africa, but internationally assets of over US$43 billion are managed in accordance with this methodology,” says Stewart. “The RAFI® methodology uses fundamental accounting measures of company size (including sales, cash flow, book price and dividends) rather than market capitalisation in index construction.”
As Research Affiliates started to understand the dynamics of the methodology, they realised additional outperformance of cap-weighted indices could be generated by introducing active screens. These include screening for quality of earnings and risk of financial distress.
“The enhanced RAFI® indices (eRAFITM) that are exclusive to Plexus, were thus created and are the crown jewels,” says Stewart. “The eRAFITM methodology provides all the benefits of traditional market cap-weighted indices, including diversification, liquidity, low turnover and competitive fees, while generating incrementally higher returns with lower volatility than comparable market cap-weighted indices.”
The performance of the eRAFI™ portfolios has been pleasing to date. “The South African overall eRAFI™ portfolios have demonstrated top-quartile peer group returns versus the domestic general equity fund category over almost all time periods since inception in August 2007 ,” says Stewart.
According to Stewart this is especially impressive since the strong momentum in the local equity market in the last quarter of 2010 did not represent conditions that are typically good for eRAFI™ index funds.
“eRAFI™ index funds avoid the inherent valuation bias of market cap-weighted index funds and therefore do not participate in every market bubble. The converse is also true as eRAFI™ index funds do not plunge with every market correction to the same extent as market cap-weighted index funds.
“Currently eRAFI™ is showing a large relative discount to the FTSE/JSE All Share Index on a price/sales, price/book, PE and dividend yield basis. This suggests that a strong value cycle awaits within the next 12 to 24 months,” says Stewart.
Plexus entered another relationship last year through its distribution arrangement with PIMCO, one of the world’s largest and most prestigious fixed-income investment houses.
“PIMCO is a top-quality business that has delivered consistently great returns for its investors for many years,” says Stewart. He adds, “We are proud to be assisting PIMCO in servicing its client base in South Africa, and extending its exposure to qualifying clients who buy into our strategy of sticking to top quality.”
In line with this strategy, Plexus has resumed its private client advisory and investment business.
“For the past few years we have focused on research and the sourcing of niche investment solutions such as eRAFITM. As these are now in place, we are actively and aggressively rebuilding our once successful financial advisory service for individual clients. We have structured this business to comply with FAIS regulations, especially the recently promulgated Conflict of Interest regulations,” says Stewart.
The new company, Plexus Wealth Management, will offer services that include investment and retirement planning, risk cover and business insurance. Services that will be outsourced include wills, estate planning, administration of estates, creation and changing of trusts, tax advice and medical schemes.
“To deliver top-quality, professional financial planning service we have contracted two experienced independent financial advisers, namely Philip Knibbs and Jaco Gouws,” says Stewart. “In addition to his significant experience, Knibbs is a qualified Certified Financial Planner (CFP) and a registered Chartered Financial Analyst (CFA), while Gouws has both an honours and master’s degree in Business Administration from the University of Stellenbosch Graduate School of Business.”
“I believe 2011 and beyond will be excellent years for Plexus. We have spent a significant amount of management time restructuring and streamlining our business since early 2009, and we now have several top-quality, high-growth businesses that we are confident will yield great results going forward,” concludes Stewart.
