The Sterling Invest Alpha (SIA) Worldwide Prescient Fund is a regulated collective investment scheme (unit trust fund) that is currently accessible via the Sanlam Glacier and Prescient investment platforms.
What is the fund’s objective?
The Sterling Invest Alpha (SIA) Worldwide Prescient Fund is an actively managed unit trust fund (CIS) that aims to create long-term wealth for South African investors, using the Sterling Invest Alpha Process. Its objective is to deliver the best possible long-term return and outperform comparable unit trusts and exchanged traded funds over a rolling 5 year period.
What does the fund invest into?
The Fund will have a significant bias towards listed shares, but can invest in a variety of other assets, including listed property, alternative investments, bonds and cash. The fund will vary exposure to South African, developed and emerging market assets depending on where the most attractive investment opportunities are available. Its exposure will be in a variety of currencies. The fund may use exchange traded funds and other financial instruments to implement specific investment views.
“If you want to have a better performance than the crowd, you must do things differently from the crowd” – John Templeton
There are many ways for investors to achieve stock market exposure. Here are some of the reasons we believe an investment into the Sterling Invest Alpha (SIA) Worldwide Prescient Fund is the ideal way to do so:
Sterling Invest is a, bottom-up, active investment manager with a long-term, valuation and quality driven investment philosophy. We aim to deliver maximum, risk adjusted long-term returns and to outperform comparable unit trusts or exchange traded funds.
We believe the market gives patient investors opportunities to buy shares in quality companies well below their intrinsic values. Our stock selection process helps us look for these companies from around the world, determine their fair value and dispassionately wait for attractive entry points. Upon investment, we patiently hold onto these shares for the long term and watch them grow. We only sell if we believe a company’s share price is materially overvalued or its fundamentals have deteriorated.
Often, the businesses we look to invest into are out of favour due to ephemeral challenges they are facing. At other times, these businesses are too small for their quality and growth potential to be perceived by the broader market and our larger peers. Because we are long term investors, we invest in these companies when they are out of favour or when they are still small at, what we believe are, attractive valuations. We believe the market richly rewards investors like us who exploit this time arbitrage and make these contrarian calls as they transition into consensus.
Our definition of risk is the probability of permanent capital loss from investing in a company. We pay equal attention to avoiding low quality companies as we do in identifying exceptional ones. This does not mean that every high-quality company is a good investment, we are very conscious of price relative to value.
Our portfolio management methodology prescribes fair diversification across businesses, geographies, sectors, themes and stock categorizations. We believe this heterogeneous strategy reduces performance volatility and ultimately, improves long term returns.
All investing starts with finding great ideas. We get ours from:
Circle of competence
Once we have a prospective investment idea, we consider our knowledge of the company and its industry. We will not invest in a company if we believe we do not understand:
Our research methodology entails a systematic and rigorous analysis of a company’s perceived quality and an estimate of its intrinsic fair value.
We conduct both Qualitative & Financial assessments on businesses to assess its quality prior to making any forward-looking financial forecasts used in our fair value calculations. The qualitative assessment looks at the non-financial aspects of the business whilst the financial assessment looks at the historic financial statements and formal reports of a business. The purpose of these assessments are to determine whether a business meets some or all of the characteristics we’re looking for in a quality company. The more characteristics a company meets, the higher our conviction is in investing into it.
In our qualitative assessment, these are some of the attributes we look for in a company:
In our financial assessment, we usually analyse the following historic metrics:
If a company passes through our quality criteria checks, we move on the valuation phase. There are four variables we use in our valuation methodology when analysing a business:
1.Normalised free cash flow during the last 12 months (F)
Free cash flow (FCF) represents the cash profits a company generates after accounting for cash outflows to support existing operations and maintain its capital assets. Free cash flow is either paid out to investors via dividends and share buybacks or is reinvested to grow the business. We estimate to the free cash flow the business is currently generating based on a detailed study of the financial statements
2.Annualized growth in normalised free cash flow over the next 5 years (G)
We then forecast the growth we expect in this free cash flow over the next 5 years which enables us to estimate
3.The expected market multiple in 5 years (M)
We project a free cash flow multiple that we believe the market will assign to the business in 5 years’ time. This assessment takes the following into account:
4.Cumulative distributions/buybacks over the next 5 years (CD)
We estimate the cumulative total of distributions we expect the business to make to investors via dividends, share buy-backs or spinning off of subsidiaries over the coming 5 years
Putting this all together, we estimate a fair value for the business 5 years into the future, using the following formula:
Fair value = (([Fx(1+G)]5 +CD)xM)
This five year forward fair value price is then compared to the current price, which provides us with an upside (or downside) percentage to fair value. We only consider investing if the company’s upside to fair value exceeds a required rate of return over the next five years.
For companies listed in emerging markets or South Africa, we target a minimum absolute return of 15% per annum (double your money over 5 years). For companies listed in developed markets, we target a minimum absolute return of 8% per annum (50% growth in hard currency over 5 years).