The Counterpoint SCI Global Equity Feeder Fund will change it's name to Merchant West SCI Global Equity Feeder Fund, effective from 13 March 2023

Performance Review
The Fund gained 7.2% in rand terms (13.6% in US dollars) over the quarter, outperforming its benchmark, the MSCI World Index, which gained 3.9% in rands (9.8% in US$) over the period. The MSCI Emerging Markets Index rose 3.8% in rands (9.7% in US$) over the period. The Counterpoint SCI Global Equity Feeder Fund invests solely in the US dollar-denominated Counterpoint Global Equity Fund. As such, the commentary below relates to the underlying Counterpoint Global Equity Fund USD, and all returns below are quoted in US dollars. Global markets rallied during the quarter on the back of an apparent peaking of inflation and a potentially easing rate hiking cycle. Market returns were driven by the Financials (+16%), Healthcare (+13%) and Industrials (+18%) sectors over the quarter, while returns were dragged down by the Consumer Discretionary sector (-2%), largely as a result weakness in Tesla (-53%) and Amazon (-26%), neither of which the Fund owns. Fund returns were positively driven by its holdings in the Financials (+12%), Consumer Staples (+14%) and Consumer Discretionary (+24%) sectors.

The Fund’s Financial sector exposure is mainly by way of holdings in ‘Investment Companies’ (such as Berkshire Hathaway, Investor AB, Brookfield, etc.) which rose 14% as a group. The Fund’s 6.3% weight in Tobacco stocks also aided performance, rising 19% over the quarter. Exposure to the Communication Services sector (-7%) proved to be a drag on returns, mainly due to holdings in Meta Platforms and Alphabet. Major stock specific contributors to performance included Energy company Hess Corp. (+30.5%), pharmaceutical giant NovoNordisk (+35.8%) and largest fund holding Berkshire Hathaway (+15.7%). The major stock specific detractors were Meta Platforms (-11.3%) and Alphabet (-7.8%).

Management Actions
Notable actions during the quarter included increasing positions in Microsoft, Visa and Admiral Group, high-quality businesses that we believe provide the prospect of attractive long-term returns at current prices. We reduced our exposure to Meta Platforms from 2.6% to 1.2% at the quarter end due to competitive headwinds in their core advertising business as well as increased concern around the scale and prospect for reasonable returns on their investments in the metaverse. We marginally trimmed exposure to various Energy, Resources and Consumer Staples stocks over the period, after strong rises in prices.

Portfolio Strategy
To slow the pace of rapidly rising consumer prices, central banks throughout the world started raising interest rates at the beginning of 2022. A combination of supply chain bottlenecks, increased geopolitical tensions and an energy crisis in Europe pushed global consumer price inflation to multi-decade highs, forcing central banks to respond. The US Federal Reserve has been very aggressive in its efforts to curb inflation, raising official interest rates by 425 basis points in 2022. In the fourth quarter, the Federal Open Market Committee met twice to set policy rates, raising the Federal Funds rate by 75 basis points following the conclusion of their November meeting, before slowing the pace of rate hikes to 50 basis points at their December meeting.

Interest rates are expected to rise further globally, although there is growing evidence that consumer inflation has peaked and is expected to moderate to much lower levels by the end of 2023. There is the prospect of a global recession in 2023, fuelled by high inflation, the resulting sharp rise in interest rates, and various confidence sapping events such as the war in Ukraine and its attendant supply and price effects on energy and other commodities. The UK has already posted negative GDP growth for Q3 2022. China’s economy is likely to buck the global trend and grow faster in 2023 as the country emerges from very strict COVID restrictions, as well as implementing stimulatory government spending measures coupled with an accommodative monetary policy. Despite these actions, high debt levels, a weak property sector and government regulatory moves still pose serious risks to the Chinese growth and investment outlook.

Against this global backdrop, the MSCI World lost 18% of its value and the MSCI Emerging Markets Index fell 20% in 2022. Looking forward, the potential for a global recession, resultant disappointing earnings growth, high inflation, tightening monetary conditions and the effects of the ongoing Russia-Ukraine war pose the greatest risks to global markets. However, any recession is forecast to be short and mild, there are signs that inflation is calming, and the global rate hiking cycle is nearing its peak. Notwithstanding, inflation remains elevated and the growth outlook weak.

Cognisant of the myriad risks facing markets, we seek to invest in companies possessing strong pricing power, sustainable margins and resilient growth prospects, that also trade at reasonable valuations. We also look to invest in companies with predictable cash flows and strong business models. These criteria we believe provide the Fund with the ability to endure challenging economic times. Endurance is at the core of our approach to investing.

Accordingly, we hold a material weight in defensive staples, such as Tobacco stocks, which possess both pricing power and resilient demand for their products. We also look to effectively diversify the portfolio, limiting exposure to any one sector or industry driver. As an example, we have a 5.8% exposure to well run businesses in the Energy sector. This position served as a powerful diversifier in 2022 (rising 77%), as the Energy sector often performs well during inflationary periods, when most other sectors tend to struggle. More broadly, increasing interest rates, weakening growth and pressured margins have served to compress equity valuations globally, which along with rising geopolitical risks has caused markets to derate significantly.

The broad selloff in global equities has provided an expanded menu of opportunities to purchase high-quality stocks at reasonable prices, illustrated by us steadily building positions in Microsoft and Visa over the second half of 2022.

The opportunity to purchase strong businesses, with attractive long-term growth prospects, at significantly reduced valuations, causes us to be prudently optimistic as regards to prospective investment returns. We remain alert to future opportunities; however, selectivity is key. We look to focus on specific opportunities that meet our strict investment criteria, requiring a significant margin for risk in prices paid for securities.

We employ a highly selective approach to stock picking that takes external and macroeconomic risks into account. As always, our focus is on owning the best companies at the best prices possible, in whichever sector they may reside. We seek to hold such businesses for appreciable periods to capture the full benefit of compounding. Ours is a risk-controlled, stock-picking approach, balancing upside and downside risks. This approach has served us well during the current period of market weakness and we believe equips us well to take advantage of attractive long-term investment opportunities as and when they present themselves.