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28 Apr 2015


The Foord International Fund (FIF) was launched as a global equity fund in 1997 when South African exchange controls were first relaxed. It was a tumultuous time for global equity markets. Price-earnings multiples (PEs) on the S&P 500 Index in the USA had been rising steadily. PEs on the S&P 500 grew from around 15-times earnings in 1995 to around 20-times earnings when the fund commenced. They headed even higher as investors speculated in the dot-com bubble leading up to the early 2000s.

The father of value of investing, Benjamin Graham, described investing as an operation that "promises safety of principal and an adequate return." He dismissed activities not meeting these requirements as speculative. Given the speculative fever in equity markets and the entrenched Foord investment philosophy of protecting investors from permanent capital losses, the managers changed the fund's investment policy to one of flexible asset allocation.

Tempting as it must have been to ride the equity boom, the change allowed them to diversify the fund's investments out of the overheating equity markets into other asset classes offering better medium-term prospects for capital protection and investment return. Within the reduced equity component, the investment thesis continued to focus on quality companies offering an adequate return, mostly in developed economies.

Investment grade interest bearing assets in excess of 40% of the portfolio were subsequently included in the fund. This development led to underperformance against equity markets in the ensuing 18 months (see graph below: years 1999 and 2000). The strategy was, however, tremendously successful in the medium term when much of the paper profits accumulated in the tech bubble of the late 1990s became worthless in a short space of time.


Having changed the investment policy, the managers set an investment target for absolute returns of 10% per year over investment cycles. With US inflation approaching 4% at the time, this represented a real return target exceeding 5% per annum in US dollars — an onerous objective then and now.

The fund has not quite achieved its target return of 10% per annum in US dollars over its 18-year track record. However, FIF has delivered real returns of approximately 5% per annum in US dollars, recording a net return of 7.2% per annum since inception to 31 March 2015, with a generally lower risk profile relative to the market (US inflation has averaged approximately 2.0% per annum over this time).

An analysis of the fund's rolling 5-year track record shows that the strategy achieved inflation-beating returns over almost all 5-year cycles (see graph below). The two exceptions to this outcome were short lived and followed the 2001/02 and 2008/09 recessions.


Fast forward to 2015: We have seen major changes in global markets and economies. The cost of money is near zero in most developed economies. Despite this, deflationary fears are plentiful. Ten-year government debt is below 2% in the USA, less than 0.5% in Germany and lower in Japan. Many developed market instruments with shorter-dated maturities yield below 0%.

In a world short of yield, it must once again be tempting to seek short-term return at the expense of medium- to long-term capital protection and an "adequate" investment return. The Foord International Fund, however, continues to eschew excessive returns and speculative securities and asset classes — even at the expense of short-term returns as we have seen. This focus will play a big part in distinguishing the fund's future returns from the markets in general, as it has in the past.


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