Old Mutual Investors comment - Sep 19 - Fund Manager Comment23 Oct 2019
The local market endured a very volatile quarter with the FTSE/JSE Capped Shareholder Weighted All Share Index (SWIX) declining 5.1% during the quarter. This was a noisy “tweet-driven” quarter dominated once again by Trump vs China trade wars as well as South Africa’s worrying fi scal and economic trajectory. Amidst this uncertainty we saw a very strong performance from resources (precious metals), with gold and platinum shares surging in the quarter.
Platinum group metals (PGMs) continued to benefi t from changing, stricter regulations that allowed demand to continue to grow despite falling car sales in most regions. Despite the high profi le of electric vehicles (EVs), the reality is that for the immediate future, the internal combustion engine (ICE) is the only viable choice for mass transportation. To make ICEs as clean as possible, PGMs are necessary as part of the overall engine management system. The gold price continued to react positively to the rising global uncertainty coupled with volatility. Thus, we saw a strong performance in some of our holdings, namely Impala Platinum (+36.6%) and AngloGold (+11.8%).
There were some additions to the fund this quarter, namely MTN, FirstRand and the construction company WBHO (which generated a return of 30% in the quarter). On the sell side of the ledger we reduced our exposure to Anglo American after a strong performance (driven by strong iron ore prices). We also continued to lighten our exposure to Naspers, running into the Prosus unbundling, particularly at points where Tencent’s valuation looked stretched.
We believe the stage is set for a low growth world. Developed economies are struggling with the headwinds of unfavourable demographics driven primarily by an ageing population. Trade wars signal peak globalisation (globalisation has been favourable for global production effi ciency). The reversal of this is unlikely to benefi t global profi ts. We are witnessing increased regulation (look at healthcare, for instance) and see increased pressure on sustainability. All the above provide what we see as structural headwinds for the global profi t cycle.
It is with these global themes in mind that our focus and emphasis is increasingly attuned to identifying and investing client capital in companies that are attractively valued, possess strong free cash fl ow generation (evidenced by dividends or growth) and strong balance sheets (low leverage). We are more cautious in our investment approach given some of the risks on the horizon. The recent underperformance of domestically focused shares has created attractive valuations. Thus, we are identifying more and more great investment opportunities in domestically focused companies.
Mandate Overview26 Aug 2019
The fund aims to offer superior returns over the medium to longer term through investing in a broad spectrum of local instruments.
Mandate Universe26 Aug 2019
Primarily the top 100 JSE listed shares. The fund may also invest in a limited number of overseas shares.
Mandate Limits26 Aug 2019
The fund will hold a minimum equity exposure of at least 75% of the market value of the fund at all times. The fund will seek to limit volatility relative to the JSE All Share index. Up to 15% of the portfolio may be invested in offshore companies.
Old Mutual Investors comment - Jun 19 - Fund Manager Comment16 Aug 2019
The local market maintained the strong start to the year, with the FTSE/JSE Capped Shareholder Weighted All Share Index (SWIX) rising 1.7% during the quarter. Resources ended the quarter up 2%, holding on to the first quarter’s strong gains. Industrials and financials delivered a combined return of 3.5%. Although the US dollar price for platinum was down 2%, resources were supported by the precious metals sector, with palladium and gold dollar prices up 14% and 9% respectively.
The second quarter saw a convincing national election win for the ANC, which could be interpreted as a strong mandate for President Cyril Ramaphosa and thus an investor-friendly outcome. The disruptive load shedding by Eskom seen in quarter one was also not repeated. Against this positive backdrop, banks gained 7% while consumer stocks rose 5%.
There were significant additions to the fund this quarter, namely British American Tobacco (BATS) and Vodacom, which offer attractive dividend yields. Though BATS faces structural headwinds in the traditional tobacco space, we think the downside risks are more than priced in. Meanwhile, we have continued to lighten our exposure to Naspers, particularly at points where Tencent’s valuation looked stretched. Naspers released more information on the listing of assets on the Euronext exchange, which continued to support the value of the ex-Tencent holdings which were once priced at -R500. Our position in Sasol has been reduced in the face of weak polyethylene prices and a strengthening rand.
The holy grail for us are counters where we see evidence of strong cash flows in the form of dividends, share prices reflecting unrealistic expectations, and resilience provided by strong balance sheets. The cherry on top is a positive catalyst on the horizon to unlock value.