The STANLIB Systematic Solutions team’s unique combination of accounting and engineering skills provides the necessary flair to approach active equity investing in a completely different way from traditional equity portfolio managers.

Rademeyer Vermaak, Head of STANLIB Systematic Solutions, says that the performance of the STANLIB Enhanced Multi-Style Equity Fund is entirely uncorrelated to its peer group, which makes it an excellent core holding in a portfolio.

The Systematic Solutions team boasts a wide range of backgrounds and skills, with engineers, accountants, mathematicians, CFAs, CAs and Chartered Alternative Investment Analysts. Together, they represent 190 years of experience.

“The majority of SA equity managers have an accountancy background,” Vermaak says. “We build upon accounting fundamentals by applying a disciplined engineering mindset. Accountants have the skills to analyse financial metrics but not to manage the huge amount of data that is now available and extract insights from it, as engineers do.

“The old way of portfolio construction is heuristic, and a bit fuzzy in stock selection and blending. It results in what we believe is a sub-optimally diversified portfolio, prone to management bias, erratic performance and investment decisions that are not always clear and transparent,” Vermaak says.

“Our insights come from company financial statements, not management stories. We follow a detailed, disciplined, data-rich portfolio construction process with robust risk management. You can only manage risk well if you can measure it well. And we follow the same philosophy through good and bad times.”

The process does not pursue one of the traditional style categories of value, quality or growth. Instead, it invests at the intersection of all three, resulting in a blended, well-balanced portfolio supported by a robust risk framework. This process is able to generate a smooth, consistent alpha profile through the cycle, which makes it unnecessary for clients to make timing decisions.

The STANLIB Enhanced Multi-Style Fund has an eight-year track record and has been consistently in the top quartile of the relevant Morningstar category, while in the bottom quartile on costs. The return on equity (ROE) of the Capped Swix benchmark was 11.81% at end-June 2024 while the fund’s return was 18.67%. Over three years, the fund has generated 2.93% of alpha (outperformance against the benchmark) and over five years it has generated 2.18% of alpha.

As an example of the multi-style process, Vermaak cites how the managers reached the decision to overweight AVI and underweight Tiger Brands, two JSE-listed food producers. AVI scores higher on quality and growth but lower on value. Although AVI rates as more expensive than Tiger Brands, the price is justified by its higher ROE and analysts’ greater confidence in its ability to deliver consistent earnings.

The Systematic Solutions team performs the same exercise on every stock in its universe. Although Vermaak says it is broadly concerning that there have been so many delistings from the JSE in recent years, most of those were small, illiquid stocks. The team’s process screens at the outset for liquidity, so its focus is on the JSE’s largest, most liquid stocks.

“It doesn’t matter how many stocks are in the universe – we always know which ones we prefer and which ones we don’t,” Vermaak says.

Under two scenarios, the portfolio will underperform the benchmark, he says. The first when the market behaves in a way that is irrational, e.g. when Covid-19 impacted financial markets in March 2020. “The best thing to do then was to buy US tech stocks, and the second best thing was to do nothing,” he said. “We stuck to our process and had recovered the drawdown within three months.”

The second scenario arises because the team avoids value traps, i.e. cheap companies with low growth prospects. That means it does not hold takeover targets, which can outperform in the event of a bid, for example SA Breweries or Anglo American. Those events can trigger periods of underperformance.

A year ago the STANLIB Systematic Solutions team took over management of the STANLIB Equity Fund on the retirement of the previous manager, Herman van Velze. It has applied its investment philosophy to the 60% of the Equity Fund with domestic exposure. The 40% offshore component uses the STANLIB Global Select Fund, which is sub-managed by J.P. Morgan Asset Management (JPMAM). The Enhanced Multi-Style process harmonises with that of JPMAM. Both managers use bottom-up stock selection and robust risk management (with both stock and sector constraints) to construct portfolios better than the benchmark with no single style bias.

Over the past year, the STANLIB Equity Fund has outperformed its benchmark by 6.3% and is starting to make up its previous underperformance. The rand has been relatively stable against the dollar over the past year so offshore exposure has not made a big difference.

“We believe the STANLIB active equity approach is important because it is disciplined and repeatable, unemotional, unbiased and rational,” Vermaak says. “It is style-diversified and generates alpha throughout the macro cycle.

“We pick stocks that are consistently better than the benchmark and buy them at decent valuations. Our alpha is uncorrelated and we have generated long-term top-quartile performance. The team is leading the way into the future of active equity investing.”