The JSE Capped SWIX returned 6.8% in 2019, with the equity component of the Northstar SCI Equity Fund returning 5.18%. For the quarter the benchmark gained 5.28% and the por..olio 3.65%.

Although our chosen equi..es slightly underperformed the benchmark, 2019 was not a disappoin..ng year for the fund with regards to our core competency, stock selec..on. Our research team generated 1% of alpha from this source over the year.

Our philosophy is around owning quality companies that are undervalued. This philosophy tends to deselect resource businesses – as they fail to show persistency of characteris..cs inherent within quality businesses low levels of debt, strong cash genera..on and consistency in producing returns on capital above the cost of that capital. The majority of resource company share prices bo..omed in early 2016, at the ..me, they were producing losses, nega..ve returns on capital and had indebted balance sheets. These companies are the top share price performers of 2019.

Being philosophically underweight resources resulted in a nega..ve alloca..on effect (not being exposed to the top performing sectors of the JSE) for our fund of 2.45% over the past year. To understand this, one needs only look at the performance of the gold and pla..num sectors this year – 108% and 203% respec..vely. Of the top ten share performers on the JSE in 2019, eight were resource stocks. For the next 20 best performing stocks on the JSE for the year, we owned 11 of these.

We appreciate that the underexposure to resources detracted 2.45% for our clients and our strong stock selec..on skills (which added 1.1% of returns) could not fully offset that, implying that the fund underperformed its benchmark last year. However, we stress that although resources have delivered outstanding returns over the past three years of 20.5% annualized against the Capped SWIX of 3.5% annualized, commodi..es have significantly underperformed the general market over longer ..me frames – since the Capped SWIX was created 8 years ago, it has annualized 10.1% versus resources at 3.5%. Added to this, the level of vola..lity in commodity returns are elevated rela..ve to the overall market.

The Northstar SCI Equity fund has 40 equity posi..ons which are trading on a weighted average discount to Northstar’s calculated intrinsic values of 18%. Although tail risks are present on the JSE, 18% is a fair margin of safety and we feel that investors should be well compensated for the rela..vely low risk posi..ons held within the fund.