Old Mutual Investors comment - Sept 18 - Fund Manager Comment13 Dec 2018
The local market was weak during the quarter, with the FTSE/JSE SWIX All Share Index declining by 3.3% in rand terms, while in contrast the MSCI World Index appreciated by 8.5% in rands. The Old Mutual Investors’ Fund does not invest in offshore companies, which has provided a headwind to performance compared with the peers over the quarter and for the year-to-date performance. In rand terms, the FTSE/JSE SWIX All Share Index declined by 7.8% for the nine months to the end of September compared with the strong return of 21% for the MSCI World Index. This reflects both the weakness in the rand and the stronger US dollar performance of developed markets.
During the quarter we maintained a defensive exposure in the fund as we remain cautious on the levels of markets overall and expect emerging markets to continue to lag developed markets. We materially reduced our exposure to SA Inc. shares (i.e. companies generating the majority of their earnings locally), given the lack of value among the consumer shares, in particular, which are operating in a very tough environment. Many of the SA Inc. share prices had risen strongly earlier in the year on the back of continued positive sentiment post the election of Cyril Ramaphosa as ANC president. While the improved sentiment was welcome, the reality was that the economy remained under pressure.
Last quarter we made the point that the valuations on many SA Inc. shares were unsustainable. This quarter, many of those companies reported results to the end of June 2018. Almost without exception, these results confirmed that earnings remain under pressure. Our interactions with management, customers and suppliers would suggest that growth will be difficult to come by for the year ahead. While we also mentioned that we had bought a stake in Shoprite during the previous quarter, we took the decision to sell the entire stake on the back of poor results, which negatively impacted our valuation of the company. The market provided us with the opportunity to sell as the price surprisingly spiked post results. This proved to be opportunistic, as the share price has since fallen significantly.
The environment remains tough and share prices are heavily penalised for any miss on earnings expectations. Fortunately, the defensive structure of the fund, with a bias to shares benefiting from a weaker rand, provided protection to the fund in a weak market. These include outperforming resources shares such as Sasol, BHP Billiton, Mondi, Anglo Platinum and Exxaro, as well as non-resources shares Investec, Santam, Discovery and Bidcorp. The fund continued to benefit from our long-term underweight in MTN, which was down 19% over the quarter as the headlines were dominated by the challenges it faces with the regulators in Nigeria. Our emphasis is on patience and discipline, and mining for opportunities in a weak market.