Old Mutual Investors comment - Dec 15 - Fund Manager Comment01 Mar 2016
The South African equity market increased marginally in the fourth quarter of 2015, with the FTSE/JSE Shareholder Weighted All Share (SWIX) Index total return recording a 1.3% rise. The industrial sector advanced 6.6%, while financials and resources fell 3.3% and 19.2%, respectively. During the quarter, the rand exchange rate again fell sharply against the US dollar, weakening by 10.4%.
Of the major equity sectors, media (+22.3%), beverages (+20.4%) and tobacco (+14.8%) recorded the largest positive returns in the quarter. The largest negative performances came from industrial metals (-38.3%), general mining (-23.0%) and platinum (-22.9%).
In South Africa, the quarter was marked by a selloff in the rand, equities and bonds in response to the decision in December by President Zuma to replace Finance Minister Nene with the inexperienced David van Rooyen, without consulting the Cabinet. Although he revoked this decision a few days later and reappointed ex-Finance Minister Pravin Gordhan, markets did not recover much lost ground. In November, the South African Reserve Bank (SARB) hiked the repo rate by 25 basis points (bps) to 6.25%, in order to pre-empt the widely expected move by the US Federal Reserve to hike rates in December. During the quarter both S&P and Moody’s placed their SA sovereign ratings on negative outlook.
The South African equity market finished 2015 with marginally positive returns, with the SWIX recording a 3.6% total return. Within the SWIX, the resources sector was down 37% for the year, on the back of lower commodity prices. The industrial sector was up 15.3%, while banks struggled at -12.5%, given higher interest rates and ratings concerns. For the year, the rand fell 25.2% against the US dollar.
On the global front in the fourth quarter, the MSCI World Equity Index was up 5.1% in US dollar terms and the MSCI Emerging Markets Index up 0.7%. In the US, the Federal Reserve Board (the Fed) duly hiked the federal funds rate by 25bps in December. During the quarter, US jobs and housing data were buoyant and consumer confidence rebounded, while inflation remained subdued. Manufacturing PMIs were weaker than expected.
China’s policymakers emphasised more proactive fiscal and monetary policy to support new sources of growth. M1 and M2 money supplies accelerated, while fixed investment, retail sales, PMIs and CPI inflation all picked up slightly. In Europe, the European Central Bank (ECB) cut its official deposit rate again and extended its quantitative easing (QE) programme by six months. Economic activity remained buoyant through the quarter.
For 2015, the MSCI World Equity Index was down 1.8% in US dollar terms. The MSCI Emerging Markets Index saw another year of underperformance with the index down 14.6%, the worst year since 2011.
Old Mutual Investors’ Fund’s defensiveness again resulted in the fund holding up well relative to the market and peers during the quarter. This positioning stems from our ongoing caution towards the rand, against a background of weak fundamentals, including our bearish view on commodities. During the quarter, we continued to look for opportunities to reinforce the focus in the fund.
Within the banking sector, the remaining position in Standard Bank was sold and the proceeds invested in FirstRand where we prefer its more resilient earnings relative to its peers, sustainably higher return on equity (ROE), provisions against bad debts and robust capital levels. Positions in the financial services sector were added - specifically Transaction Capital, with operations in asset-backed lending and specialist risk services. It exhibits high growth and less cyclical earnings versus a conventional bank, and at an attractive valuation. Sanlam was reduced due to earnings pressure from lower equity market returns and the slowdown of its emerging market operations.
The fund’s exposure to the poor performing mining sector remained low after further reducing positions during the quarter. BHP Billiton was reduced to fund increased holdings in Sasol and AngloGold.
During the quarter, the fund’s remaining holding in MTN was sold. We further reduced the already low shareholding in MTN during the year. The announced material fine in Nigeria raised country and currency risk as well as uncertainty as to MTN’s future free cash flow levels, prompting our decision to exit the share in its entirety. Being underweight to MTN has been a significant contributor to performance, with the share down 36% for the year.
Old Mutual Investors’ Fund continues to maintain a low exposure to mining shares within a global growth environment that remains unsupportive of higher commodity prices. Ultimately, improving supply fundamentals will add support to the sector, but the near-term outlook remains strained. In our view, the mining shares remain value traps for now. Rand-hedge defensive shares, such as British American Tobacco, remain appealing for their quality in a volatile and an uncertain global growth environment. The rand, together with other emerging market currencies, is expected to remain weak relative to the US dollar, despite its apparent "cheapness". This supports our bottomup view favouring the rand hedges and other global cyclicals. We expect the South African fundamentals to continue to deteriorate in the current global context.
Performance contributors for the quarter included the low exposure relative to the benchmark to poor performing MTN, which declined by 25.3%, as well as underweight positions in the resources and property sectors. Main detractors to performance were SA banks (-12.8%), which struggled given higher interest rate and credit rating agencies concerns. General retail detracted, with the position in Foschini underperforming in the quarter, although the fund’s exposure to consumer shares remains low.
The Old Mutual Investors’ Fund remains in the top quartile in the general equity category over one, two, three and five years.