The fund had a good relative quarter, delivering a return of -1.9% relative to the benchmark return of -5.1%. This saw the year-to-date return move to 7.7%, which is 2.3% ahead of the fund’s benchmark and, pleasingly, ahead of most of the fund’s competitors. It has continued to be an exceptionally difficult market, and the ability to deliver a meaningful positive return this year is a gratifying outcome.

The big contributor to this quarter has been our exposure to platinum through Northam Platinum. The listed platinum miner delivered a return in excess of 40% as the price of the overall platinum group metals’ (PGMs) basket rose, and the company showed improving results and strong cash generation. The progress on Booysendal - its new, low-cost, mechanised mine - continues to be in line with project and budget, and this is gaining further recognition in the market. The fundamentals driving the higher prices in the PGM markets are firmly in place, as continued demand from automobile manufacturers due to tightening emissions standards meets declining supply from an industry that has not invested in new mines for close on a decade.

Our holding in Distell, the African cider, wine and spirits producer, also delivered a positive return this quarter, as their results showcased a business that has managed to maintain market share and revenue growth in a tough environment and opened up operating margins through significant efficiency programmes. This should continue into the period ahead and will be further boosted from initiatives into Africa, where its products are gaining much traction and new routes to market take hold.

After a number of disappointing results periods, Woolworths came through with a much-improved performance as their South African (SA) clothing business showed signs of a turnaround. While the Australian operations remain weak, the improved results from SA clothing and continued strong performance from SA food saw the share price move up strongly as the market repriced expectations for the group going forward. With Australia likely to show much stronger earnings over the next few years as significant one-off’s drop out of the base, the expectation now is for strong earnings growth from the group in the years ahead.

A big contributor to the fund’s relative performance this quarter (and this year) was virtually no exposure to Sasol. After a series of disappointing updates about their giant Lake Charles Chemicals Project (LCCP) this year, the company managed to further disappoint the market with a weak trading update, followed a month later by a delay in the production of their results due to auditor concerns around controls at the LCCP. This delay was extended further and, as it stands, we have yet to see Sasol’s June year-end results. These are all concerning issues; however, the market has now taken an extremely dim view on the group and its management, with the share price down over 40% since the beginning of the year. At these levels, despite the challenges the group faces, we think the share offers sufficient margin of safety to own a position and we have built a position in Sasol in the fund.

On the disappointing side, most exposure to SA-facing companies struggled in the quarter. The sentiment locally remains poor, and the brutally tough economic environment means there is very little revenue growth to be had for purely SA companies. Foreign investors have generally been sellers, putting more pressure on the share prices of most domestic stocks. While the banks we own all showed decent earnings numbers for the half year, they have all sold down further as concerns over the general outlook for SA, and worries over potential debt downgrades, has weighed on sentiment.

The much-hyped Naspers/Prosus unbundling occurred towards the end of the quarter and has proved to be a damp squib. The reduced discount that Prosus trades at relative to its underlying holdings has been replaced by a larger discount at the Naspers level and, on the whole, shareholders are no better off currently than where they started at. Tencent, the key driver of the group’s performance, has also underperformed this quarter, putting additional pressure on the share price. Ultimately, it is likely that the discount will narrow, and we do expect management to take further actions to reduce the discount at which the overall group trades.

Global macro conditions remain fragile as trade wars and extreme political events remain prevalent. Locally, the gloom that has descended on the domestic economy looks unlikely to lighten and the Medium-Term Budget Policy Statement that will be delivered at the end of October is unlikely to bring any cheer. However, it is in this tough environment where active management can add significant value and we remain excited about the positions in the fund and the potential for great long-term returns from these levels.

2018 was one of the toughest years in recent memory. Pleasingly, 2019 has got off to a very good start, with the fund returning 10.2% for the quarter against a benchmark return of 6.8%. The longer-term performance of the fund remains compelling, delivering alpha of 3.8% per annum since inception. Performance over the quarter was driven by a combination of a strong mining sector, our selection of rand hedges and being underweight domestic-facing South African stocks.

All mining companies have now reported their annual or interim results for the period to end-December 2018. These results were characterised by a strong performance from bulk metals (iron ore, coking coal, thermal coal and manganese). The theme of strong cash flow, deleveraging and capital returns to shareholders continues. Shares reacted positively to results announcements and a strong commodity price environment, driven by tight supply-demand balances and an abatement of US-China trade war fears.

After a long, frustrating period, platinum group metal (PGM) shares have finally begun to rally. We feel this is a vindication of our disciplined, longterm approach to investing, where our aim is to assess information objectively and dispassionately and try to avoid being swayed by the news and sentiment of the day. Post ‘Dieselgate’, negative headlines called for the death of the internal combustion engine and, along with it, platinum demand. PGM prices dropped below marginal costs of production. At the same time, electric vehicle commodities such as lithium and cobalt were rallying strongly (up three times). Tesla’s share price rose seven-fold in the last seven years and its market capitalisation is comparable to traditional automakers such as General Motors (GM) and Ford, despite the fact that the company has struggled to turn a profit and produces only 3% of the vehicles that GM produces. While we are long-term believers in battery electric vehicles, we expect the process to be evolutionary rather than revolutionary. In the medium term, we also expect PGM demand to surprise positively as a consequence of tightening emissions standards globally. In addition to this, material underinvestment in mine supply over the last decade means it will take many years before a sufficient supply can respond to current market deficits. We therefore expect structural PGM market deficits to persist for at least the next decade.

Over and above the resource sector, a number of the fund’s high-conviction ideas contributed meaningfully to returns during the first quarter. These include Naspers, British American Tobacco and Quilter. Firstly, Naspers benefited from a strong recovery in the Tencent share price as sentiment towards China shifted positively on the back of a reduction in trade war fears and a resumption in the licensing approval process of online games by the Chinese authorities. Naspers also surprised the market in March by announcing the offshore listing and part unbundling of its offshore internet portfolio (i.e. Tencent, Mail.ru, OLX, Food Delivery, et al.) in an effort to reduce the discount at which it trades relative to its underlying intrinsic value. While this is certainly no ‘silver bullet’ that will immediately remove the entire discount, we nevertheless view it as a very positive step in the evolution of the group into a global consumer internet powerhouse and will allow it to access a wider investor base.

The British American Tobacco (BTI) share price (+27% for the quarter) recovered strongly during the quarter on the back of good results which allayed market fears around US volume declines, its debt levels and the outlook for its next-generation products. It also appears that the regulatory headwinds faced by the US business are abating and sentiment is finally starting to turn positive on the stock. Even after this short-term price rally, BTI is still trading on only 9.5 times one-year forward earnings and a 7% dividend yield. We still believe this to be very attractive for a stock of this quality and it remains the second biggest position in the fund.
Quilter performed very well over the period. Its maiden full-year results materially exceeded market expectations. Quilter also provided mediumterm guidance on their profit before tax margin aspirations. At 34%, this too exceeded expectations. The long-term outlook for integrated wealth managers with advice forces at scale remains very attractive. The positive outlook is driven by a combination of a decline in advisers post the implementation of the UK’s Retail Distribution Review; pension freedom boosting the demand for advice and opening up the post-retirement market to wealth managers; and a shift away from defined benefit funds to defined contribution funds.

The main disappointment this quarter was Aspen. The company reported its interim results in March which were below market expectations. As a result, the share price sold off aggressively as the market became concerned about the company’s high debt levels and the risk of a covenant breach should Aspen not succeed in concluding the sale of its infant milk business. The poor organic growth performance and working capital management added to investor concerns. The business is currently in a transitory phase as management repositions the portfolio to capitalise on future growth opportunities and we continue to believe that the debt load is manageable. Aspen is currently trading on six times our assessment of normal earnings and we have been adding to our position on the back of share price weakness.

Stocks exposed to the domestic economy came under significant pressure during the quarter as the realities of operating in a ‘no-growth’ environment filtered through into corporate earnings. The quarter kicked off with a string of profit warnings from the domestic retailers and the likes of Mr Price (-23%), Massmart (-22%), Truworths (-18.5%) and Dischem (-16%) all ended the quarter materially lower. Eskom remained in the headlines as it hit Stage 4 load shedding in the middle of March. Years of mismanagement, corruption and underinvestment are finally coming home to roost. Although, for now we appear to have received a temporary reprieve from the worst of load shedding, it has become clear that we are only starting to understand the true extent of the power utility’s problems and that its numerous issues could indeed take years to rectify. Unfortunately, if persistent load shedding becomes the norm over the next few years, the impact on consumer sentiment, business confidence and GDP growth will be devastating. We therefore continue to remain cautious on stocks that are heavily exposed to the domestic economy and our preferred holdings are through high-quality domestic defensive stocks that should weather the challenging environment better than their weaker economically-sensitive peers. With the exception of Shoprite, we have not been adding to our domestic exposure.

We are happy with the portfolio positioning and continue to expect to deliver meaningful outperformance over the long term.