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TABLE OF CONTENTS
TABLE OF CONTENTS ... 2
INTRODUCTION ... 3
THE ARYSTEQ DNA ... 4
LIQUIDITY ... 4
QUALITY ... 4
MARGIN OF SAFETY ... 6
THE LONG TERM ... 6
OUR INVESTMENT STRATEGY ... 8
OUR INVESTMENT PROCESS ... 9
VALUATION ... 9
PORTFOLIO CONSTRUCTION ... 10
TRADING TACTICS ... 10
OUR PRODUCTS ... 12
ARYSTEQ MONEY MARKET FUND ... 12
ARYSTEQ BALANCED FUND ... 12
ARYSTEQ REAL RETURN FUND ... 12
ARYSTEQ GLOBAL OPPORTUNITIES FUND ... 12
SEGREGATED PORTFOLIOS ... 13
POOLED PORTFOLIOS ... 13
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INTRODUCTION
Arysteq Asset Management (Proprietary) Limited (“Arysteq”) is the largest independent wholly owned Namibian asset management company. We are registered with NAMFISA and our investment management license number is 25/12/86. Arysteq is a wholly owned subsidiary of Lexus Securities (Proprietary) Limited, a diversified financial services group that is entirely owned, managed and staffed by Namibians. Arysteq has one majority owned subsidiary, Arysteq Unit Trust Management Limited in which our unit trust scheme is housed. Its unit trust scheme license number is 25/9/5/26. Born out of the desire to better our clients’ financial future by changing the way they invest, Arysteq challenges their needs with unconventional expertise.
By being nimble in numbers, fast on delivery, and progressive in our thinking, as our clients climb the financial ladder, we too will become victorious in leading the future of asset management.
The purpose of this owner’s manual is to give you some valuable insight into the specific approach we undertake when making investment decisions and constructing portfolios. If our investment ethos speaks to your investment style, we look forward to a long and prosperous relationship with you as our client.
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THE ARYSTEQ DNA
Arysteq is an active fundamental driven asset management company. We believe that markets are neither 100% efficient, nor 100% inefficient. Our view is that the South African market is sufficiently inefficient that we can generate above average risk adjusted returns for our clients. While we do not believe developed markets are as inefficient, we equally believe that we can generate above average risk adjusted returns for our clients in those markets. We have identified our edge in investing and that allows us to outperform in the market over long periods of time. Public data suggests that between 2/3rds and 3/4ths of funds globally underperform their respective benchmarks. This further emphasizes the need for an investment philosophy. Understanding what to screen and include in our watchlist, when to buy, when to sell and perhaps more importantly what our asset allocation is or to term it “what our position size should be” are some of the most widely debated and reviewed considerations to find the holy grail in investing.
Our investment philosophy, which we call “The Arysteq DNA” gives us an edge that is centered around four key factors or pillars, namely:
1. Liquidity; 2. Quality;
3. Margin of Safety; and 4. The Long-term.
LIQUIDITY
Liquidity is one of the largest risks we manage. We would never want to be too large an investor in an instrument or in an instrument where the spread on getting out is too large. We do not like waiting for our money when we want to sell! We therefore only focus on large market capitalization stocks with sufficient daily traded volume in any jurisdiction.
When it comes to bonds, we consider our ability to sell quickly if the need arises without having to reduce the price to a significant degree. We have found that the Namibian government bond market is oversubscribed majority of the time at the moment , making liquidity less of a challenge. It is for this reason that we would only look at corporate bonds after careful consideration of the impact this would have on the overall liquidity of the portfolio.
QUALITY
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COMPANIES WITH THE ABILITY TO MAINTAIN A DOMINANT MARKET SHARE Companies with the ability to maintain a dominant market share have the advantage of being able to consistently grow their earnings. Strong brands have, over time, proven to weather most storms. A dominant market share pairs well with increased economies of scale, thereby allowing companies to attract significantly greater margins on their products and services.
COMPANIES WITH A STRONG MANAGEMENT TRACK RECORD
Being long term investors requires that we have full faith in the ability of management to deliver on their promises and successfully manage the companies we are invested in. We do this through a continuous review of the companies we are invested in to ensure we are comfortable with the management team and their track record. We thoroughly review and benchmark management incentives at each AGM to assess comparability across each company’s respective peer group.
COMPANIES WITH THE ABILITY TO SUSTAIN THEIR DIVIDEND AND DIVIDEND GROWTH
As an investor you are probably most concerned with the return on your investment and of your capital, and so are we. Companies with the ability to sustainably grow their dividends over time are considered the Ferraris of the investment world. Dividends have an exponential impact on the total return on investments, even more so when these dividends are constantly reinvested. Unless the company can effectively reinvest profits in the business and continue on a sustainable growth path, we prefer companies with a sustainable dividend policy as we are conscious that many management teams are poor asset allocators.
It must be said that we are invested in companies that don’t have a very attractive payout ratio or don’t pay any dividends at all. These companies have managed to effectively reinvest profits in the business in a sustainable manner over time. We are therefore comfortable in keeping these positions in our client portfolios as long as we continue to see effective capital allocation over the years, with an attractive return on investment.
COMPANIES WITH A COMPETITIVE ADVANTAGE IN THEIR RESPECTIVE INDUSTRIES
We look for companies that are set apart from the rest of the crowd. With an ever-changing way of doing business, company’s need to be at the forefront of their respective industries. Technological developments have been the driving force in maintaining a competitive edge and companies have had to adapt or die. Being a market leader allows companies to have stronger pricing power which in the end, results in higher margins.
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company’s ability to continue generating and growing sustainable profits. Maintaining a dominant market share and strong pricing power can only be achieved with minimum threats of new entrants. We look for companies with oligopolistic characteristics, where there is limited competition and the market is shared by a select few that have managed to penetrate the industry.
These characteristics define the distinct advantages we look for in companies compared to their competitors. This ‘moat’ provides ultimate protection to a company’s market share and profitability.
COMPANIES THAT HAVE A STRONG CREDIT HISTORY
We are equally concerned with a company’s ability to meet their obligations as and when they fall due to ensure that the businesses we invest in, are and remain going concerns. Strong credit histories determine how easily and cost effectively a company can continue to grow the business. We do not invest in companies with unmanageably high debt ratios and opt to stay well clear of overcapitalized business models.
In summary, ultimately for any investment/instrument to be added to our watchlist it has to pass the “quality test”. A company/issuer passes the quality test if we are satisfied that the above matters discussed are to the satisfaction of the Arysteq Investment Team. This watchlist is reviewed at each Investment Committee. Once an instrument reaches our watchlist we don’t necessary buy. First, we have to be comfortable that there is a reasonable margin of safety in the price.
MARGIN OF SAFETY
Margin of safety provides us with a safety buffer. We like to buy when an instrument is cheaper than its historical average or when that same instrument is cheaper than its peers or the market, or a combination of the above. The sweet spot is when an instrument is cheaper than its own historical average, its peers in its sector and the market. Under such a rare circumstance we hope that we have cash to start buying. It is also worth noting that we are not necessarily bargain hunters. You will not find us at pawn shops and second-hand car dealerships! We are willing to pay up for superior performance and returns if it remains within a reasonable margin of safety, because quality shields us from failure.
When it comes to bonds, we are as concerned with the margin of safety as we would be for equities. Our view on the market’s interest rate outlook plays a significant role in determining whether a specific bond’s margin of safety is adequate. Investing in local government bonds as an example gives us greater comfort around the issuer’s ability to repay these bonds upon maturity.
THE LONG TERM
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typically lasts between 7 – 9 years. A heuristic generally used for long-term in the market especially as it pertains to comparing asset managers is 5 years.
We like to look at long-term as truly long-term, meaning that when we buy big, our preference is that we would not ever want to sell. Only matters pertaining to quality would ever reverse that decision for us as fundamentals change to negative. There are numerous instruments in existing portfolios that we have been holding for more than 18 years and never sold on behalf of clients. We can therefore apply a widely used term to define our long-term approach, “buy and hold”, assuming the fundamentals remain in place.
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OUR INVESTMENT STRATEGY
Our investment strategy pays close attention to valuation but places equal emphasis on the financial strength and demonstrated profitability of the companies we invest in. Our discipline requires a record of market leadership, diversity of the products, services and geographies, sustainability of the brand, consistent earnings growth, above average return on equity, financial strength, and exemplary management. Over the years we have developed our own proprietary-built filters and screens that enables us to minimize the stocks we choose to invest in from the 400+ stocks on the JSE to just under 80 and from 2,500 globally to approximately 100. We place emphasis on the fact that we do not invest in hundreds of companies but rather choose to focus on a small selection of stocks with high conviction that add value for our clients. Similarly, when it comes to money market and fixed income securities we are as concerned with the issuers ability to repay the principal amount when maturity is reached. We ensure a sufficient margin of safety and pay close attention to the liquidity of the instruments we are invested in.
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OUR INVESTMENT PROCESS
At Arysteq we do not trade through the cycle, but rather overweight the cheaper high-quality stocks and underweight the dearer high-high-quality stocks on our watchlist. In this process we will make active calls and companies that do not screen favourably in our quality review process will not even get the favour of our portfolio managers in our portfolios. To put this bluntly, instruments that fail the quality test does not get onto our watchlist and consequently will have a 0% allocation in our portfolios. We believe that the above system allows us to follow a defensive and risk-based approach first, by avoiding the companies that have a higher risk of going entirely out of business or that will consistently have suboptimal returns on equity and value accretive gains. It is important for our investments to have a reasonable margin of safety.
VALUATION
We make use of fundamental analysis to determine the intrinsic value of the companies we invest in. We look at the specific factors that impact a security’s value which in turn determines whether a company is under- or overvalued. We only apply this fundamental analysis to the stocks that meet our high-quality screens as mentioned earlier.
Part of our approach involves the calculation and interpretation of key ratios such as Price to Earnings, Dividend Yield and Return on Equity. We assess these metrics through continuous review in relation to its peer group, the overall market and long-term average. As mentioned previously, we build our own in-house valuation models, and this forms the basis for our investment decisions. Through our fundamental analysis, we are able to identify buying opportunities when the market and/or stocks are considered cheap and screen well in terms of value. And while we prefer not to sell, there are certainly times when we will adjust our position due to changes in the fundamentals of a company or its industry resulting in it no longer aligning with the ‘Arysteq DNA’. We may also sell to adjust our asset allocation in line with our strategic asset allocation.
It must be said that we never try to time the market but rather focus on our time in the market. There are certainly times when we experience extreme market volatility and prefer to remain painstakingly closely aligned to our investment philosophy. This will sometimes mean that we don’t react by trading, but rather continue to monitor our portfolios and test them against our market views. This has helped us navigate through market turmoil in the past.
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PORTFOLIO CONSTRUCTION
Our portfolio construction process involves rigorous discussions at our weekly morning meetings and quarterly investment committee meetings. Each fund has a detailed Investment Policy Statement (“IPS”) that documents how we have applied our investment philosophy. The specifics around the fund’s strategic asset allocation, respective benchmarks, trading tactics and use of derivatives and hedges are all included in the IPS. It is worth mentioning that our funds may take derivative positions, but only as a portfolio management decision to hedge portfolio exposures or to apply the most cost-effective rebalancing of the asset allocation. This allows us to actively monitor and adhere to predetermined guidelines in our portfolio management process. Diversification is key when it comes to investments. At Arysteq, we not only diversify client portfolio risk, but ensure diversification across underlying company geographies and varying products as well. A well-diversified portfolio is better positioned to handle extreme market volatilities and results in better overall returns in the long run. We maintain diversification in our clients’ portfolios through weekly reviews of client portfolios and trades. Our strategy involves a consistent rebalancing towards our strategic asset allocation whilst remaining cognizant of the market forces at play. Environmental, Social and Governance (ESG) considerations has become increasingly important over the last number of years. Investors are becoming more concerned with the ESG impacts that businesses have in their respective industries. ESG considerations form an integral part of our screening process and continues to weigh heavily on our investment decisions. Our approach follows a diligent review of factors that continue to weigh on investors’ decisions at AGM’s. We maintain strict guidelines in our proxy voting principles which allow us to have an unbiased view on matters such as executive pay, appointment of directors and the assessment of the powers vested in them.
TRADING TACTICS
When it comes to trading, we keep an up-to-date trading journal where we document our thought process when making investment decisions. This helps us keep record of prior decisions and avoid making emotional decisions based on a biased approach. We believe in our investment ethos as an active investment manager and over time, we have managed to develop our own trading tactics which guide the investment decisions in our portfolios.
CONFIRMATION BIAS
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RECENCY BIAS
Recency bias results in investors putting too much emphasis on something that has happened most recently. We are continuously engaged with the market to keep abreast of the latest developments within the companies we are invested in and their respective industries. This helps us avoid the pitfalls that comes with putting too much emphasis on events or circumstances which have most recently had an impact on our investments.
ANCHORING BIAS
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OUR PRODUCTS
ARYSTEQ MONEY MARKET FUND
The aim of this fund is to preserve investors capital through investing in high yielding, high quality money market and fixed income securities, while simultaneously providing short term liquidity needs. The fund was launched in December 2018 and is benchmarked against the STeFI Index.
The fund attracts an annual management fee of 0.60% and no performance fees are charged.
ARYSTEQ BALANCED FUND
The aim of this fund is to maximize long-term capital appreciation by investing in a balanced portfolio of Equities, Fixed Income, Property, Commodities and Cash. The fund will have an offshore exposure up to 35% of the portfolio. The fund was launched in August 2019 and is benchmarked against the Median of the Namibian Peer group. The fund attracts an annual management fee of 1.25% and no performance fees are charged.
ARYSTEQ REAL RETURN FUND
The aim of this fund is to preserve the purchasing power of assets by investing in a portfolio of Equities, Fixed Income, Property, Commodities and Cash. The fund will have an offshore exposure up to 35% of the portfolio. The fund was launched in February 2020 and is benchmarked against Namibia Consumer Price Inflation (CPI) + 3%.
The fund attracts an annual management fee of 1.25% and no performance fees are charged.
ARYSTEQ GLOBAL OPPORTUNITIES FUND
The funds aim is to outperform the MSCI World Index to maximise long-term capital appreciation by investing in listed equities in developed markets globally. The investment horizon of this fund is of a long-term nature and in many cases more than 10 years. The fund was launched in December 2020 and is benchmarked against the MSCI World Index.
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SEGREGATED PORTFOLIOS
The aim of these portfolios is to meet the exact needs of our clients and are tailored to meet their specific risk profile and return objective.
These portfolios attract an annual management fee which will be agreed between parties.
POOLED PORTFOLIOS
The aim of these portfolios is to meet specific needs of pooled client funds outside of the unit trust scheme.
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MEET THE TEAM
Andrew Jansen is the Chairperson of Arysteq Asset Management. He is a Chartered Accountant, CFA Charter Holder and obtained his EMBA from the University of Cape Town. Andrew has over 23 years of investment experience. Andrew’s focus at Arysteq is investment strategy and management of equity portfolios.
Purvance Heuer is the Managing Director of Arysteq Asset Management. He is a Chartered Accountant and a CFA Charter Holder. Purvance has over 12 years of investment experience in the industry. Responsible for overall portfolio management and construction.
Dean Isaaks is our Assistant Portfolio Manager at Arysteq Asset Management. He is a Chartered Accountant and studied at the University of Stellenbosch. He completed his articles with KPMG in Cape Town and has over 8 years of financial services experience including the asset management industry. Dean is a CFA level 2 candidate. Colleen Kalimba is a Trainee Research Analyst at Arysteq Asset Management. She obtained her Bachelor of Business Science degree in economics from the University of Cape Town. Colleen is a CFA level 1 candidate.
Elly Shipena is a Trainee Research Analyst at Arysteq Asset Management. He obtained his Bachelor of Commerce honours degree from the University of Stellenbosch. Elly is a CFA level 2 candidate.
Janell Van Wyk is the Business Development Manager at Arysteq Asset Management. She obtained a post-graduate diploma in business administration and an MBA from UNAM Business School. She is the former Executive Director Operations and co-founder of Specialist Administration Services (SAS), with more than 18 years of experience in the financial services industry.
