The Fund returned -8.0% for the quarter, resulting in a return of -0.2% over the last year. Its preference for local equities over global over the 12-month period has contributed to performance. The Fund has performed well against its peer group over all meaningful time periods.

The first half of the year saw broad weakness across asset classes. Markets faced numerous headwinds, including surging inflation, rising rates (after more than a decade of easy money), war between Russia and Ukraine and slowing growth in China. These factors combined to increase the risk of a global recession.

The MSCI World Index declined -16.2% for the quarter (dragging 12-month returns down to -14.3%). The MSCI Emerging Markets (EM) Net Index declined -11.4%, resulting in a year-to-date decline of -25.3%. Having started the year with very low exposure to global equities on valuation concerns, we have since been adding steadily to the Fund's holdings in response to these price moves. China fell -13.5% as an extended lockdown in Shanghai undermined the country's economic growth. China stuck doggedly to its zero- Covid policy despite the near-term economic cost. Ineffective vaccines, low vaccination levels in the elderly population (relative to developed economies) and very low community transmission mean herd immunity is low. Given these headwinds, it is unclear whether attempts to stimulate growth will succeed. Russia remained a global pariah given ongoing military hostility in Ukraine. Western allies are broadly united in their opposition to Russian aggression. Energy commodities remain elevated due to trapped Russian supply and limited investment into new sources of production for several years given decarbonisation commitments. For the year to date (YTD), the prices of oil (+47.6% YTD), gas (+45.4% YTD) and coal (+127.6% YTD) have all risen meaningfully.

Inflation continued to surprise to the upside as surging energy prices have exacerbated already high inflation. US inflation hit 8.6% during the quarter. Central banks have responded to inflation with widespread rate hikes. Whether inflation can be contained will depend on the willingness of central banks to hike rates sufficiently to properly dampen demand and slow growth. The Bloomberg Barclays Global Aggregate Bond Index declined -8.3% in US dollars. Despite the significant sell-off in global bonds, we feel yields remain insufficient to compensate for the associated risks. These risks include high inflation and slowing global growth, but also highly indebted sovereign balance sheets. The Fund continues to have no exposure to global sovereign bonds.

South Africa’s (SA) economy has benefited from a strong commodity cycle over the last few years. This has supported better than expected growth and helped to stabilise the debt burden. The Fund has retained its meaningful exposure to local bonds where we believe their attractive yields (in both nominal and real terms) embed a significant risk premium. The JSE All Bond Index delivered a return of -3.7% for the quarter.

While the commodity cycle has supported the economy in the last few years, we remain concerned about SA’s ability to deliver sufficient economic growth in the long term. A decade of mismanagement has undermined infrastructure, with power and rail capacity in particular constraining the economy. Load shedding has run at record highs YTD as Eskom struggles to generate sufficient power to keep the lights on. At these levels, economic growth will be constrained. Other frustrations include poor educational outcomes (which are failing to produce the skills needed to support a productive labour force) and ineffective policy. A year of campaigning ahead of the ANC’s December elective conference will limit any appetite for reform.

The FTSE/JSE Capped SWIX Index declined during the quarter (-10.6%), giving up firstquarter gains to deliver -4.6% YTD. SA remains one of the better performing markets in 2022, with USD returns (-10.2% for the FTSE/JSE All Share Index) ahead of the MSCI World Index (-20.5%) YTD. Given low starting valuations, we now see SA equities as extremely cheap, with broad value across the resource, domestic and global stocks listed on the JSE. For the quarter, resources returned -20.7%, financials -15.8% and industrials -3.0%.
Major industrial constituents Naspers (+ 42.3%) and Prosus (+32.6%) were up strongly. The market responded positively to the Naspers/Prosus announcement regarding their intention to commence an open-ended buyback programme of Naspers and Prosus shares funded by selling down the stake in Tencent. Coronation had previously urged the board and management to consider these actions given the very beneficial impact on net asset value per share. The meaningful discount at which NPN and PRX trade to their underlying Tencent investment means that at a per share level, exposure to Tencent is in fact increased through this buyback. Since the announcement, the discount has narrowed considerably in recognition of both the value that this transaction would create and the positive message it sends about management’s commitment to narrowing the discount as well as their intention to optimise capital allocation. The portfolio continues to hold a number of global businesses listed in SA that we believe offer considerable value. Examples include British American Tobacco, Bidcorp, Quilter and Richemont. The Richemont position has been built over the last few quarters as luxury companies have derated. We believe the prospects for this high-quality business remain strong. Richemont has a portfolio of desirable luxury brands across the jewellery and watch sector, with branded jewellery expected to continue growing strongly as it takes market share.

Domestic stocks continue to offer attractive stock picking opportunities with their low starting expectations and undemanding valuations (with many trading on high dividend yields too). During the quarter, Remgro made an offer for MediClinic. The JSE has seen several buyouts by international bidders in the last few years, underlining the value on offer.

Our emphasis within the portfolio has been on finding businesses that can prosper even in a low growth economy. Examples of these include RMI and Transaction Capital (TCP). RMI’s core holding is OUTsurance, which offers strong growth prospects, particularly in Australia, and can pay out the bulk of its earnings while growing. With regards to TCP, we expect the WeBuyCars business to continue to gain market share given its convenient and trusted consumer offer. Management is working hard to build a new technology-led platform in the TCRS business to service global clients.

The financials index returned -15.8% for the quarter. YTD trading by the banks (+7%) has shown an ongoing recovery with advances growth across the corporate and retail sectors and low to mid-cycle credit losses thus far. The rate hiking cycle will deliver endowment benefit for the banks. Strong corporate and household balance sheets are expected to withstand the level of rate hikes forecast without any blow out in credit losses. The Fund has moderate exposure to the banks via FirstRand, Standard Bank and Nedbank. Insurers (-23.1% for the quarter and -10.3% YTD) have seen more challenging trading as the businesses face low growth and competitive pricing in risk at the same time as Covid-related mortalities have inflated claims.

The resource sector declined -20.7% as metal prices broadly retreated off their March highs. European countries have committed to reducing their reliance on Russian energy supply. This is supportive of longer-term goals to decarbonise, but the transition period will be challenging requiring increased supply of oil, gas and coal from other parts of the world. Fossil fuels have already faced several years of low investment given decarbonisation goals. Attracting capital to fund new production is difficult unless there is a willingness to commit to longer offtake periods. Near-term decarbonisation targets are already wavering in Europe. Constrained supply and growing demand are expected to keep energy markets tight.

While resource holdings were reduced during recent strength, the portfolio continues to hold positions in diversified miners such as Glencore and Anglo American. Both offer attractive free cash flow streams even at more normal commodity prices. Energy producers such as Exxaro and Sasol also offer attractive free cash flows given the tightness in near-term markets and are expected to return a significant portion of their market capitalisation in the form of dividends in the coming years.

The Fund remains underweight the platinum group metals miners. While near-term cash flows are expected to be strong, longer-term demand is expected to be undermined by a shift to electric vehicles. Governments (particularly European) are expected to accelerate the adoption of battery electric vehicles given recent events as they strive to increase energy independence and reduce reliance on Russian oil and palladium.

The portfolio has moderate property exposure, preferring to use its risk budget in equities and bonds. While the sector performed strongly during 2021, it is still negative (-9.2% p.a.) over three years. Holdings are predominantly in the A shares, with some exposure to logistics assets. The medium-term outlook remains subdued as a weak economy and a structural shift in demand from increasing digital engagement and workfrom- home trends undermine rental tension.

As always, our commitment to long-term investing and disciplined valuation-based approach remains the bedrock of our investment process. While headwinds exist in both global markets and the domestic economy, we believe growth assets are well priced for the risks and offer attractive returns off these low starting prices.

The Fund returned -1.3% for the quarter, resulting in a return of 10.1% over the last year. The Fund’s significant exposure to local equity has contributed to performance over the year. The Fund has performed well against its peer group over all meaningful time periods.

Russia’s unexpected invasion of Ukraine weighed heavily on markets during the quarter. Commodity prices soared, given Russia’s role as a meaningful commodity producer. Expectations for global growth slowed, given rising energy prices, rising interest rates and slowing growth in China.

The MSCI World Index declined -5% for the quarter (dragging 12-month returns down to 10%). The MSCI Emerging Markets [EM] Index declined -7%, with China falling -14%. Given the size of the Chinese economy, a serious slowdown remains a risk to the global economy. China’s zero-Covid policy is becoming impossible to sustain, with ongoing lockdowns undermining growth. China’s geopolitical ambitions and its association with Russia damaged sentiment further. The MSCI removed Russia from the EM Index, writing its value down to near zero (-100%). South Africa (SA) performed well, with currency strength (ZARUSD +9%) boosting US dollar returns to 16% (as measured by the FTSE/JSE Capped SWIX in US dollars). The Fund has trimmed its overweight position in local equities to buy global equities, reducing a previously underweight position.

Events in Russia further exacerbated the trend of rising inflation, with a dramatic impact on energy costs (brent crude +39% for the quarter and +70% over 12 months) and food expected to put consumer disposable income under pressure. Rising inflation has resulted in a round of interest rate hikes by central banks as seen in the US and UK (and SA) during March. The Fund remains cautious on global bonds given rising inflation, slowing global growth and insufficient yields. The Bloomberg Barclays Global Aggregate Bond Index declined -6% in US dollars.

Higher commodity prices are benefiting the domestic economy as the additional revenues help to stabilise the debt burden. This improvement was reflected in Moody’s upgrade in its outlook for SA debt from negative to stable. The Fund has retained its meaningful exposure to local bonds which offer attractive yields, both in absolute terms and relative to alternatives such as cash. The JSE All Bond Index delivered a return of 1.9% for the quarter.

While domestically there are signs of positive policy reform (the completion of the spectrum auction and Transnet inviting private sector bids to operate freight networks), the local economy remains weak. A decade of mismanagement has undermined infrastructure, with power and rail capacity in particular constraining the economy. These challenges, combined with a poor education system (which undermines labour productivity), continue to pose structural headwinds to growth.

However, given the many global headwinds, SA is relatively well positioned given its commodity basket. This, combined with low starting expectations and undemanding valuations, supported strong returns from SA equities for the quarter, with the FTSE/JSE Capped SWIX Index delivering 7% in rands. The Fund benefited from its overweight position in SA equity.

Quarterly performance across the sectors was divergent, with resources (+19%) and financials (+20%) strongly outperforming industrials (-13%).

The resource sector was up strongly as Russia’s invasion of Ukraine resulted in a risk/scarcity premium being priced in across almost the entire commodity spectrum. Commodity markets were already tight entering 2022, but Russia’s significant role in supplying a number of these markets has created further pressure. Russia is a key producer of palladium (27% of the global total), natural gas (19%), metallurgical coal (17%), crude oil (10%) and thermal coal (9%). Developments in this period will have outsized consequences for energy markets for many years to come.

As would be expected, energy producers benefited sharply during the quarter, with Thungela (+118%), Exxaro (+45%) and Sasol (+37%) all up meaningfully. Holdings in the diversified miners (Glencore +18% for the quarter and Anglo American +22% for the quarter) have contributed strongly to performance over the past few years. While they remain sizeable holdings, position sizes have been cut given the ongoing strength and subsequent reduction in the margin of safety.

The heightened uncertainty during the quarter also buoyed the gold equities and the Fund took the chance to trim these holdings during the period. Goldfields and AngloGold ended the quarter, up 32% and 7% respectively.

The Fund is underweight the platinum group metals miners. While near-term cash flows are expected to be strong, longer-term demand is expected to be undermined by a shift to electric vehicles. Governments (particularly European) are expected to accelerate battery electric vehicles adoption given recent events as they strive to increase energy independence and reduce reliance on Russian oil and palladium.

The financials index returned 20% for the quarter, driven by a strong performance from the banks (+25%) and life insurers (+17%). The four domestic banks that reported during March all showed a strong recovery in pre-provisioning operating profit to a level matching or exceeding their pre-Covid levels. This was aided by a faster-than-expected recovery in the economy and good cost control. Rising interest rates should support future earnings. Holdings in RMI (+73% over 12 months, +16% for the quarter) and Transaction Capital (TCP) (+10%) have contributed to the Fund over their holding period. RMI continued its journey to simplify its structure, unveiling the value inherent in OUTsurance - a fast growing insurer with the ability to pay out the bulk of its earnings. Despite the RMI share price moves (+73% over 12 months, +15.5% for the quarter), it remains an attractive investment. The core OUTsurance asset trades at a low look-through multiple relative to its high-quality nature and strong growth prospects, particularly in Australia. We expect TCP’s WeBuyCars business to continue to gain market share given its convenient and trusted consumer offer.

Industrials declined -13% for the quarter given the decline in its major constituent (Naspers -33% and Prosus -39% for the three-month period). Naspers and Prosus continue to be battered by negative sentiment towards China and the increased intensity of regulatory intervention. Despite the increased risk, we believe the shares are pricing in a conservative outcome. Tencent is a formidable company that generates good free cash flows, has a very engaged user base and is growing businesses across multiple verticals. An investment in Naspers/Prosus offers an extremely discounted entry point to Tencent.

Our portfolio has meaningful exposure to several global businesses listed in SA that we believe offer considerable value. In addition to Naspers/Prosus, examples include British American Tobacco, Bidcorp and Quilter. These counters generally lagged resource/domestic counters during the period as global markets sold off. We used the weakness in its share price to build our holding in Richemont. Richemont has a portfolio of highly desirable luxury brands across the jewellery and watch sector, with branded jewellery expected to continue growing strongly.

In keeping with a trend consistent through 2021, domestic companies continued to report results ahead of our expectations given a more resilient economy and stringent cost-cutting. Our emphasis has been on finding businesses that can prosper even in a low growth economy. For example, a business such as Shoprite has continued to invest behind its franchise and is growing revenues by gaining share in a competitive, low growth economy.
The portfolio has moderate property exposure, preferring to use its risk budget in equities and bonds. While the sector performed strongly during 2021 (+37%) it is still negative (-7% p.a.) over three years. Holdings are predominantly in the A shares, with some exposure to logistics assets. The medium-term outlook remains subdued as a weak economy and a structural shift in demand from increasing digital engagement and work from home trends undermine rental tension.

While headwinds exist in both global markets and the domestic economy, we believe SA assets are well priced for the risks and should offer attractive returns off these low starting prices.