The JSE All Share Index posted a total return of 2.6% in August. In comparison, the Nedgroup Investments Rainmaker Fund increased by 2.0%. Our holdings in Anglo American (+11.3%), MTN (+11.2%) and FirstRand (+7.3%) enhanced the Fund’s performance while our holdings in Steinhoff (-4.8%), Sasol (-1.3%) and British American Tobacco (-1.0%) detracted from performance.

Shares of Steinhoff fell sharply after concerns resurfaced regarding accounting and tax irregularities in one of Steinhoff’s German subsidiaries. The article which was published in a German journal did not contain any new evidence of wrongdoing or litigation beyond what has already been publicly disclosed since December 2015. Steinhoff continues to refute these allegations, is engaged in legal proceedings with the counter-parties and has made what they consider to be full and appropriate financial provision for these matters. They continue to engage with the German revenue authorities to settle the tax related matter and have recently indicated this may be imminently concluded. Unfortunately, as a consequence of these unresolved matters, sentiment towards the company has and is likely to continue to suffer. The share price is pricing in a material corporate governance discount.

The timing of this latest controversy is also unfortunate as it coincides with the separate listing of Steinhoff Africa Retail (STAR), Steinhoff’s African-focussed retail businesses. Pepkor is the main asset which continues to show exciting growth and profit margin expansion which should produce a premium rating for STAR within the general retail sector. Importantly, the listing will provide increased visibility and valuation see-through which should be positive for the valuation of Steinhoff – as parent company to STAR - which will retain an 80% shareholding.

Serious political and governance issues continue to hold back the South African economy. Despite GDP growth accelerating to an annualised 2.5% in the second quarter of 2017, economic growth is still too weak to reduce unemployment and improve business confidence. South African business confidence fell to a 32-year low in August 2017. The index compiled by the South African Chamber of Commerce and Industry fell to 89.6 from 95.3 in July - this is the lowest level since August 1985, the month then-President PW Botha gave his infamous -Rubicon- speech. Given benign inflation it creates scope for the SARB to cut interest rates further, but the interest rate cycle is expected to be too shallow to meaningfully boost economic growth amid other headwinds. We therefore remain cautious about interest-rate sensitive equities; as such the fund has select domestic consumer exposure.

We remain focused on equity selection and believe that the diversified portfolio structure, built around a core of the highest quality companies will prove resilient. The Nedgroup Investments Rainmaker Fund currently trades on a forward rolling Price/Earnings (P/E) ratio of 15.2x and a dividend yield of 2.8%.

Abax Investments

The JSE All Share Index recorded a gain of 1.0% in December and 2.6% for the 2016 calendar year. For the month of December, Financials gained 3.5%and Industrials +1.8%. Resources lagged in December (-3.6%) but still ended the year well ahead of the other major sectors in performance terms.

Our holdings in Steinhoff (+12.3%), Barclays Africa (+7.2%) and FirstRand (+5.3%) enhanced the Fund's performance in December while our holdings in BHP Billiton (-6.5%), Mondi (-2.2%) and British American Tobacco (-0.4%) detracted from performance.

Market volatility, low economic growth as well as local and global political uncertainty (Brexit / US elections) made 2016 a challenging year. In 2017, we can expect more of the same but amid the volatility, there are signs of some stability and better growth for the year ahead. For example, GDP growth in South Africa is forecast to pick up from an estimated +0.5% in 2016 to 1.3% in 2017, the political landscape appears to be gradually turning for the better, and commodity prices have lifted materially (most notably coal and iron ore). However, while the local economy is in the process of bottoming, it is likely to remain in a low-growth trap in the absence of necessary reforms.

Looking abroad, investors seem focused on the positive ramifications of a Donald Trump US presidency, but the year ahead is full of uncertainty-with changes in store for fiscal, monetary, regulatory and trade policies. In Europe there is a growing rise in anti-establishment parties and populism which may result in surprising election outcomes (Netherlands, France and Germany) and in turn policy direction.

The Nedgroup Investments Rainmaker Fund's under-performance during 2016 was principally driven by two factors:
Underweight resources - Despite eroding fundamentals, commodity prices rebounded sharply during 2016. This in turn lifted the resources sector (+34.2% in 2016), to which the Fund had limited exposure. While we guard against complacency and prejudice, we under-estimated the extent and sustainability of the recovery in commodity prices. In some cases, share prices are discounting far higher commodity prices than current spot prices (valuation is unattractive), and we have concerns around the sustainability of demand from China which in turn could drive commodity and share prices lower (China consumes well in excess of 50% of global iron ore, nickel, copper, aluminium and other commodities).Currently, the Fund's preferred commodity exposure is via BHP Billiton and Mondi.
Overweight industrial rand hedges - While we had considered the rand to be under-valued in January 2016 shortly after the dismissal of Nhlanhla Nene as the finance minister and consequently reduced the extent of the rand hedge position, we did not anticipate the extent of recovery that occurred during the balance of 2016. The rand ended the year 30% stronger versus the British pound and 18% versus the US dollar than it was in January 2016. This has proved to be a major headwind to many of our large industrial rand hedge positions - notably British American Tobacco, Mediclinic and Steinhoff. The Fund retains this exposure as the long-term growth prospects for all of these businesses remain as compelling and their valuations are now back in even more attractive territory.

We are preparing for another challenging year, thus we remind investors of our long-term approach of investing in defensive, economically-robust businesses, at reasonable prices, run by competent management teams and which we believe will produce consistent compounding growth in profits and dividends. Our portfolio positioning contains a balance between holdings in stable, long-term growth businesses that are globally diversified and not reliant on the performance of the domestic economy (Naspers, BAT, Mediclinic, Mondi and Steinhoff), and attractively priced businesses exposed to the local economy that are well managed and will survive in a worst case scenario but flourish should any improvement materialise (FirstRand, Absa, AVI and Tiger Brands).

The Nedgroup Investments Rainmaker Fund currently trades on a forward rolling Price/Earnings (P/E) ratio of 14.3x and a dividend yield of 4.0%.