Old Mutual Investors comment - Sep 13 - Fund Manager Comment23 Dec 2013
Global markets continued to move higher in the current environment of exceptionally easy liquidity. Our view that the global economy would continue to improve has been consistent for some time. However, we have also maintained that the outlook for industrial commodities would be tempered by the significant investment in mining capex of the last few years. This high level of supply, coupled with a moderate global growth outlook, continues to reinforce our cautious view on mining shares. Valuations remain unappealing unless much higher commodity prices are factored into forecasts; this is unlikely given the structural issues. We remain unconvinced that the recent bounce in prices from a low is sustainable.
Of course, to us as South African investors, the miners become more appealing relative to SA Inc. shares presuming that industrial commodity prices have bottomed and the currency remains weak. For that reason the fund has some exposure to the mining sector via the large diversified miners, Anglo American and Billiton. An environment of rising bond yields, which we expect to continue over the medium term, should also favour the mining shares over the local consumer shares. Our preferred investment within the broader resources sector remains Sasol where the dynamics of the oil market remain more appealing. Gold remains unattractive to us although we may on occasion consider trading opportunities.
Cyclical shares which are not directly linked to the industrial commodities market remain an important component of the Investors' Fund. The appeal of these shares such as Richemont, Datatec, Mondi, Steinhoff and Naspers is further enhanced by the protection they provide to a weak rand. The rand remains a structurally weak currency in our view, given the large current account deficit and the large component of foreign portfolio investments financing this shortfall. The risk of foreigners withdrawing flows as the global and investment cycle continues to mature is high. While these shares have delivered exceptional returns to unit holders, valuations remain reasonable. Further currency protection is provided by the fund's holdings in British American Tobacco, SA Breweries and Trencor.
We expect conditions for the South African consumer to worsen over the next 12 months and, coupled with unappealing valuations and downside forecast risks, our exposure to consumer shares remains very low. Life assurance and banks hold more relative appeal for us. Old Mutual, Sanlam and FirstRand have served the fund well over the last few years.
Old Mutual Investors comment - Jun 13 - Fund Manager Comment12 Sep 2013
Our long-held fund positioning has worked particularly well for us over the last six months as the rand weakened materially and China failed to fuel the commodity markets. Furthermore, the fund's very low exposure to SA consumer shares in favour of the rand hedges and global cyclicals, drove performance as consumer shares continued to underperform.
Among the major contributors to fund performance during the quarter were Old Mutual, Naspers, British American Tobacco, Remgro, Datatec and Richemont, as well as largely avoiding the poorly performing platinum shares and a very low exposure to gold. These shares and sector positions were the main contributors to the fund's 12-month performance as well.
During the 12-month period we significantly reduced our exposure to gold, which had been around 3.5%, compared to the current weight of around 0.5%, managing to largely avoid the "bursting" of the gold bubble.
Despite its recent weakness, we continue to view the rand as a fundamentally weak currency. The current account deficit runs at around R200 billion per annum, which needs to be financed by capital inflows, most of which are short-term portfolio flows. Of concern is that these portfolio flows are currently running at around R70 billion on a rolling 12-month basis. It is therefore difficult to see a case for a stronger move in the rand in the short term against a background of worsening terms of trade.
Although the rand has been the weakest of the emerging market currencies over the past two years, a number of others have recently come under pressure, including the Indian rupee, Turkish lire and Brazilian real. This is part of a broader decline in confidence in emerging market economies after the boom of recent years.
Domestic bond yields have also risen sharply in these economies, and SA has not been immune, with the 10-year bond yield rising from a multi-decade low of just above 6% to as high as 8%. In this environment we remain biased towards shares which provide some currency protection, while at the same time being unimpressed with the valuations of SA consumer and selected industrial shares.
However, metal-based commodity shares are not the place we choose to seek currency protection. Dollar commodity prices are a large influence on the performance of these companies and in an environment of sub-par global and Chinese growth, and a strong dollar, we prefer shares that are tied to an improving global cycle but not linked to base metals.
Overall, while the FTSE/JSE All Share Index trades at expensive multiples, we remain positive on the outlook for equities relative to bonds and cash based on a supportive global environment of low interest rates.
Old Mutual Investors comment - Mar 13 - Fund Manager Comment05 Jun 2013
In the first quarter of 2013 the FTSE/JSE All Share Index (ALSI) delivered a total return of 2.5%. However, owing to exchange rate weakness, it declined by 6.7% in US$ terms and was one of the worst performers in the emerging markets group. At a sectoral level, the best performers were paper, beverages and chemicals while the worst were gold, platinum and industrial metals. There was also quite a sharp pull -back in the previously high-flying retail sectors.
After a strong start early in the year many high-beta resources stocks gave up ground. This favoured the positioning of the fund given our low exposure to gold, platinum and diversified miners, and our overweight position in Sasol. We continue to keep a close watch on these sectors given that at some point declines may be overdone. However, our view is that there needs to be a significant acceleration in global demand before these stocks can be supported by firm commodity prices. Looking across the global economic spectrum, China appears to be picking up steam again and Japan is looking buoyant. The US economy had a strong quarter, but is likely to pause mid-year as the effect of fiscal restraints kick in. The Eurozone is showing faint signs of life but remains in recession. All told, global growth is still some way off the pace we think necessary to raise commodity prices. By the same token, sub-par global growth will encourage central banks in developed countries to continue with very easy monetary policies, which should support risk assets. Thus we favour equities as an asset class, but are wary of the high-beta resources plays.
In South Africa, the rand remains fundamentally weak. The current account deficit is running at a rate in excess of R200bn p.a., leaving it vulnerable to variable foreign portfolio flows into local equity and bond markets. The rand's recent fall may be somewhat overdone but with the beleaguered mining sector making up the majority of South Africa's exports, long-term weakness is likely to continue.
Our low exposure to the consumer sector proved to be correct given the pullback we saw in these overvalued shares. We maintain a cautious approach to this sector given a tougher outlook for the South African consumer. We continue to prefer appropriately valued, high quality shares at the core of our portfolios, e.g. British American Tobacco (BAT), SABMiller, Old Mutual, Naspers, Bidvest and Remgro.