Now is a Good time to invest in KMB FoF or KMF FoF

Even better than KFHF, one of the best  fund of hedge funds in South Africa

 

1.      One could not really describe our two Unit Trust Fund of Funds performances as spectacular over the past 3 years, although if you look at the long term, they are still two of the best funds in South Africa to have been invested in (see factsheets attached or visit Kanaan Trust Website). You may recall that KMB & KMF FoF (Kanaan Met Balanced) used to be called XMF & XMF FoF (Xhilarator Multi-SABalanced and Xhilarator Multi-SA Flexible). Before 2003 these funds were called KMB Wrap and KMF Wrap.

 

2.      The FSB requires that every time a new entity starts to manage Unit Trust funds, the fund name must change. As far as the above mentioned funds are concerned, the entity changed three times, although the manager, Andre Delport and his support personnel have not changed. They have been managing these funds since the inception of the funds during 1995. Xhilarator Asset Managers approached Kanaan Trust during 2003 to market the Kanaan funds via Xhilarator Pty. Ltd, taking into account that Andre Delport and his support personnel would continue to manage these funds.

 

3.      The attached factsheets of the two Fund of Funds show the inception date in Par 7 as 16 February 2005, although these predecessor funds started during 1995. During 1995 the funds were wrap funds, as the total assets were less than R100 million. We still manage a small amount within the mentioned two wrap funds in order to preserve the excellent long term track-record, as we are not allowed to use these track-records on the factsheets of the Fund of Funds, even though we manage these funds in exactly the same manner, with exactly the same composition of underlying funds. It is important for us to preserve these performance records of the past 18 years, as not many funds exist or have good performance records over such a long period. It gives the prospect broker or client better insight into how the fund manager performed during various market conditions, for example the 1998 Far East Pacific Crash, the 2000 IT Bubble Crash, the 2001 South African currency crash and the 2008 Credit Crunch Crash.

 

4.      It is relatively easy to outperform your competitors during a Bull Market, but it is not always so easy to continue outperforming everyone during a market crash. Over the past 20 years we have seen many boutique funds, as well as institutional funds that suddenly underperformed during a crash, because they have not taken cognisance of an overvalued market. We are not aware of a single one that did not either close down or cap their funds for new business and start new funds under new names, during the next Bull-run. We believe that investments in Unit Trusts should intend to fund intermediate or retirement capital requirements. In other words, it should always be for the long term. Shortterm investments should either be invested in the money market or in a properly managed Fund of Hedge Funds, like our KFHF (Kanaan Fund of Hedge Funds) where expected corrections and market crashes can be hedged. Hedge Funds are unfortunately structured for high net worth individuals where the minimum initial investment in the case of most hedge funds is R1 million and R100 000 in the case of KFHF.

 

5.     Funds outperform even hedge funds during a Bull market.

 

We have selected well managed, properly diversified hedge funds with various strategies for our KFHF. Since inception on 1 June 2005 and through the 2008 crash, the CAR (Compound Annualised Nett of Cost Return) of the fund is now 17.33% and the fund has never had a negative year (see factsheets attached or visit Kanaan Trust website). However, a properly managed hedge fund would never return much more than 20% per annum, even during a Bull market, where a macro top-down managed unit trust fund of funds, can easily return more than 30% per annum, which was the case with our KMB and KMF Fund of Funds. According to Par 8 of the attached factsheet of KMF Wrap you will see that the fund returned 53% for 1998, 27% for 2004%, 28% for 2006, etc. The major difference between the Wrap Funds and the Fund of Funds is that the Fund of Funds are more cost effective and will perform at least 1%/yr better every year. Visit our website for KMF FoF and KMB FoF factsheets.

 

6.     Why did the Funds underperform since 2008?

 

The funds have underperform because we were well aware of the fact that brokers who invested the man in the street, as well as clients in pension funds, would get hurt if the funds followed a bottom-up strategy, where the fund managers do not try to time the market and under circumstances of a crash and advise clients to buy and hold. How can a pensioner receiving income from a living annuity, buy and hold? They have no other option but to continue drawing their income. Good growth funds, which are usually amongst the top ten over the long term follow, a bottom-up strategy without exception, where they do not try to time the markets (in other words, they do not try to switch out before a market crash). These funds have had big negative returns of more than -30% for a period of more than a year during the 1998 crash and more than -40% with the IT Bubble Crash of 2000 and more than -20% during the 2001 South African currency crash. The winners always came back tremendously, maintaining CAR’s of more than 20% per annum, but is not the case for pensioners in these funds, drawing income from these growth funds during periods of crashes. Why not? A client who draws 8% income per annum via his annuity and invested in a fund that crashed with 32% during 2008, would have crashed with more than 40% and the year thereafter he would have taken more than 10% income per annum from his investment, because during 2008 his capital, relative to the amount he was taking per month, would have reduced and would accordingly have increased the percentage he has taken from his living annuity. This would happen time and again when the popular growth funds crash, as they did during the previous crashes and eventually, would deplete the clients capital completely.

 

7.     How have the Kanaan Funds prevented clients from wiping out their capital?

 

When you look at Par 7 of the attached fund factsheet of KMF Wrap, you will notice that the dark-blue graph, representing KMF, was switched out during 1998 when the JSE crashed, as well as during 2000 and 2001. The fund did not switch out in time during 2008, but where the JSE returned -33%, the KMF Wrap funds lost only -18%. The attached factsheet of KMF FoF, Par 8, shows that by the end of 2008 the fund returned -16%, much better relative to the -33% of the JSE and growth funds. When you look at KMF Wrap you will see that according to Par 7, the fund has been performing much better than the JSE over the long term and according to Par 6 the fund is still ranked as the number one fund over the 15 and 16 years period and number 3 and number 5 over the 14 and 13 years respectively.

 

8.     Why did the Funds underperform over the past few years, since 2010?

 

If quantitative easing of the first world countries would not have had the desired effect, as many economists have been predicting, the fund managers would have had to expose clients to a crash even bigger than that of 2008 and therefore the fund managers decided to rather be exposed to inflation linked bonds. Inflation linked bonds were much safer than equities and gave relatively good returns during 2011 and 2012.

 

9.     Why is it a good time to invest in KMF and KMB?

 

Over the past three years, since 2010, we have had a situation where the quantitative easing distorted the normal rhythm of the macroeconomic cycle, which has made it very difficult and almost impossible to decide whether we have been in a Bull market or not. We are now seeing the first signs of growth in the biggest economy in the world and  first world capital is flowing out of emerging markets to first world countries. This has encouraged the fund managers of Kanaan Trust to switch KMF and KMB 25% (the maximum allowed) into first world countries offshore, as well as 70% of KMF and 50% of KMB to “protected” growth funds, where a limited amount of hedging is allowed. It is usually good to invest in good quality undervalued shares, therefore we believe now is a good time to invest in the quality undervalued Kanaan funds, which should again, over the long and short term, be amongst the top Fund of Funds in South Africa.

 

Andre Delport. B.Iuris(UP) CEO, Head Fund Manager

Kanaan Trust