The fund appreciated 5.0% in the third quarter of 2019 (Q3-19), taking its year-to-date return to 24.8%, compared with a 12.9% return for the benchmark.

From a stock-specific point of view, the largest contributor over the quarter was Alphabet (share price +22%, 0.6% positive impact within the fund), followed by Blackstone (+18%, 0.5% positive impact) and then British American Tobacco (+14%, 0.4% positive impact). The only material detractor was 58.com (-15%, -0.5% contribution). Over the past five years, the fund has generated a positive return of 10.5% p.a., over 10 years, a return of 14.8% p.a. and since inception just over 20 years ago, 14.6% p.a. (which translates into 2.9% annualised outperformance).

The fund ended the quarter with 72% net equity exposure, slightly down from where it was at the end of June. Of this, approximately 61% of the equity exposure was invested in developed market equities, 34% in emerging market equities and 5% in South African equities.

Our negative view on global bonds remained unchanged as a large portion of developed market sovereign bonds offer negative yields to maturity, with the follow-on effect that most corporate bonds also offer yields which do not compensate you for the risk undertaken. Only 4.5% of the fund is invested in bonds, which is largely made up of a 1.7% position in L Brands (owner of Victoria Secret) corporate bonds and exposure to short-dated US Treasuries (used as an alternative to US dollar cash).

The fund also has circa 5% invested in global property: largely Unibail (European and US retail property) and Vonovia (German residential). Lastly, the fund has a physical gold position of 3.0%. The balance of the fund is invested in cash (largely offshore). As has been the case for many years, the bulk of the fund (over 90%) is invested offshore, with very little exposure to South Africa.

In a volatile and soundbite-driven world, we continue to focus on underlying company fundamentals when looking for investment opportunities whilst avoiding the noise. We continue to find compelling opportunities whilst taking advantage of this short-term volatility. During the quarter we added to 58.com, a dominant online classifieds player in China, (now trading on a 12% free cash flow yield to enterprise value) as macro fears related to China have driven negative short-term price moves, notwithstanding a robust business performance (for the first six months of 2019 revenue grew 21% and earnings before interest and tax [EBIT] by 24%).

Notable new buys during the quarter were Canadian Pacific Railway, Fiserv and Salesforce. Salesforce owns the leading CRM (customer relationship management) software franchise and has continued to gain market share in what is still a very underpenetrated market as many corporates are still at the beginning of their digital transformation journeys. As with most software companies, gross margins are high (>75%), but current EBIT margins are depressed as they aggressively grow revenue (up three times over the past five years and expected to double over the next four years) and acquire customers (which has an initial cost incurred upfront, but then results in a sticky recurring revenue stream over time with limited incremental costs). It is also a business which should prove resilient regardless of the macroeconomic environment as they run mission critical aspects of their customers’ businesses and provide software solutions that often result in either cost savings for their clients or provide revenue optimisation opportunities. We estimate Salesforce’s current lifetime value of customers to be just under $170 billion versus a market cap of $135 billion, which is attractive in our view.

The fund appreciated by 16.9% in the first quarter of 2019 (Q1-19) compared to the 8.1% return of the benchmark. In what were strong global equity markets generally, the fund’s average net equity exposure of circa 70% during the period played a large role in the fund’s returns. From a stock specific point of view, British American Tobacco was the largest contributor (+32% in ZAR, 1.1% positive impact) followed by Airbus (+38%, 0.9% contribution), JD.com (+36%, 0.9% contribution), Philip Morris (+34%, 0.8% contribution) and New Oriental Education (+62%, 0.8% contribution). There were no detractors of more than 0.5%. Over the past five years, the fund has generated a return of 10.7% p.a., over 10 years a return of 16.0% p.a. and since inception almost 20 years ago it has generated a return of 14.3% p.a.

The fund ended the quarter with 74.6% net equity exposure, which was up from the 66.1% at the start of the year, largely due to market moves. Of this, approximately 55% of the equity exposure was invested in developed market equities, 40% in emerging market equities and 5% in South African equities.

The largest new equity buy during the quarter was a 2.0% position in Louis Vuitton Moet Hennessy (LVMH), the largest global luxury goods company and the owner of the Louis Vuitton brand (circa 50% of group profits) and many other global brands including Moët & Chandon, Hennessy, Christian Dior, Fendi, Bulgari and Tag Heuer. Over 40% of sales come from emerging markets and the Chinese consumer alone (purchasing at home as well as while travelling) is responsible for well over 50% of incremental growth.

LVMH has an enviable track record (over the past 20 years earnings per share (EPS) has compounded at circa 12% p.a.) and today is well-placed to be a key beneficiary of the growing emerging market middle and upper class, and the wealth effect. The barriers to entry possessed by the true global luxury brands (Hermes, Louis Vuitton and Gucci) are amongst the highest in any industry in our view: in the case of Louis Vuitton, a 150-year history and investment in the brand for a start. The resilience (of both the topline and profitability) of the Louis Vuitton brand in particular during tough economic periods is also unparalleled: in 2009 (post the GFC) sales of the Fashion and Leather Division (with Louis Vuitton making up the lion’s share of this division) of LVMH grew by 2% and earnings before interest and taxes (EBIT) grew by 3%. In 2002 (post September 11th) the Fashion and Leather Goods Division experienced 16% sales growth (and this after double-digit sales growth in 2001 as well) and 5% EBIT growth. The fund bought LVMH on circa 20 times forward earnings and a 2% dividend yield, which we think is attractive for what we would consider to be one of the best businesses in the world.

Our negative view on global bonds remains largely unchanged, although we did buy short-dated US Treasuries (c. 3% of fund) late last year when US government 10-year bond yields were north of 3%. The fund’s position in L Brands (owner of Victoria’s Secret) corporate bonds remains (1.7% of fund) and is now yielding 6.8% compared to our initial purchase yield of 7.3%. In total, bonds make up 4.7% of the fund. The fund also has circa 4% invested in global property: largely in Unibail (European and US Retail property) and Vonovia (German residential). Lastly, the fund has a physical gold position of 2.5%. The balance of the fund is invested in cash, largely offshore. As has been the case for a number of years, the bulk of the fund (over 90%) is invested offshore, with very little being invested in South Africa.