Page 176 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 9

Please comment on your investment year (July 2023 – June 2024) from a fund manager’s
point of view.
We are proud to have continued outperforming the markets over the twelve months to June
2024, returning 20.65% net of all fees versus the markets 10.05% gain. This outperformance was
driven by our domestically focussed “SA Inc” exposures, as well as being able to avoid names that
we shorted in our hedge fund, like Pick n Pay prior to its shock R4 billion rights-
offering. Individual contributors included Sun International, which reported excellent cash flow
generation and high growth from its online business, Outsurance, which gained on strong results,
and Fortress REIT, where we were involved with other shareholders to push management to
unlock value by repurchasing its B shares using its listed Nepi investment.
In terms of risk management, what methods or strategies are you able to use to protect your
clients’ investments?
We invest in stocks based on intensive fundamental research, where we focus not only on the
upside potential, but also spend a lot of time thinking about the downside risk in a bear case
scenario. It follows that we are very focussed on investment risk on a stock specific basis, but in
addition we also employ internal risk limits with regards to position sizing, factor risk exposures
and liquidity risk. Finally, we have a macro-economic analyst that supplements our bottom up
research process with a top down risk overlay, adjusting our sectoral exposure as needed.
Please comment on the year ahead and, if possible, estimate the performance of your fund
over 2 or 3 years. What are your targets and objectives for the year ahead?
Our aim with our long only SA fund is to outperform the JSE Swix over time, but also to
provide something different to investors. Our SA long only fund is essentially the long book of our
award winning SA hedge fund, and as such it is a best ideas portfolio constructed without any
reference to the benchmark. As a result, the fund has an extremely high active share (i.e., stocks
not in the benchmark), and a correlation to the market of just over 50%. We believe this is an
excellent investment option for an investor that gains their exposure to market beta cheaply (via
an index fund or ETF), and then wants to pursue alpha through a truly active manager.
Are equity markets in general overpriced? Do you anticipate a significant correction or will
the bull-run continue?
We think that South African and Emerging Markets equities in general are still very
undervalued, trading at a close to four decade low versus US stocks. In South Africa in particular, if
a genie told us in January that not only would the lights stay on for five months in a row, but that
the DA would form a coalition with the ANC, we would have expected the local market to be up
much more than it currently is.

Could you identify three shares that fall within your universe that you think will perform well
in the medium term?
Southern Sun is the largest hotel operator in South Africa, which owns and/or manages a
portfolio of 95 hotels with a total of 17 000 rooms, holding a strong position in key nodes –
most prominently in Cape Town. The shares trade at a single-digit multiple of operating
earnings, and a fraction of replacement cost, while continuing to benefit from the
normalisation and structural growth of tourism. The company has recently been one of the
biggest buyers of its own shares.
Premier Group is the most profitable milling and baking business in the country, after a
decade of capex spend ahead of peers that has result in higher efficiency and substantial
market share gains in its core bread business. The business currently holds a leading bread
market share in coastal regions, which it intends to replicate with new bakeries being opened
inland over the next two years. A key advantage is its strong distribution network into the
informal segment, currently three-quarters of sales, which provides a robust platform for
adding new FMCG categories. The shares are very attractive at their current valuation of a
mid-single digit multiple of forward operating earnings.

174 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts