A specialist portfolio aiming at high income and capital growth normally associated with an investment structure of a regulated retirement fund.

Exposure limits as per the ASISA Fund Classification Standard, Regulation 28 and supplemental deed constraints.

The manager will not be permitted to invest on behalf of the Nedgroup Investments Managed Fund in offshore investments.

Investment Manager Commentary
Truffle Asset Management

Global currencies slumped against the US dollar in May after signs that the US Federal Reserve may raise interest rates in the second half of the year. This saw US equity markets rally on the back of prospects of stronger economic growth. On the other hand, emerging market equities and currencies came under severe pressure with the rand being particularly badly hit, selling off 9.8% for the month. The weak rand exchange rate pushed up the rand hedge heavy industrial sector, which in turn propelled the All Share Index 1.8% higher. SA resources shares gave up ground for the first time this year, falling by 3.8%, after the stronger US dollar put pressure on commodity prices. The rand hedge light, mid and small cap sectors came under pressure, declining 5.7% and 3.6% respectively. Bond yields sold off on the back of the weaker rand exchange rate, which saw the All Bond Index give up 1.5% for the month. Year to date the listed property sector has led the performance pack with a return of 8.4%, closely followed by the All Share Index at 7.6% and the All Bond Index at 6.9%.
Notable share price increases for the month included Sappi, which released a strong set of results and saw its share price rise 20% in May. Naspers increased 18% over the month on the back of a stellar first quarter result from Tencent. British American Tobacco, Reinet and Redefine International all benefitted from the weaker currency, adding 11%, 11% and 10% for the month respectively. The fund holds material positions in the above shares and benefitted accordingly.

We have for some time been warning of the potential for earnings’ disappointments from corporate South Africa, particularly in light of the very weak economic environment. We felt the market was overly optimistic towards both earnings growth expectations and ratings, resulting in unattractive valuations for many shares.

In the month of May we saw our view start to unfold, with multiple profit warnings and poor trading updates issued by numerous companies, but especially those companies exposed to the local economy;
- Mpact warned that earnings are expected to decline by at least 20% this year, which saw the share price fall 25% for the month. It is interesting to note that the market was looking for earnings to grow by 15% for the current year!
- PPC fell 35% after warning that earnings are expected to decline by between 10% and 20%, and that a rights’ issue was needed to shore up their balance sheet. The market was looking for flat earnings growth for the current year.
- MTN released a poor business update for the first four months of 2016 and the share price declined 18% for the month.
- Nampak also recently released results well below market expectations and fell 15% for the month.

The Nedgroup Investments Managed Fund has no exposure to any of the above shares.
We continue to try and identify opportunities which are mispriced by the market but, importantly, have a significant margin of safety. This ultimately protects the fund from significant capital destruction in the event of a large drawdown in the market.

The month of January saw global equity markets come under severe pressure with significant declines across all major indices. This weakness fed through into the FTSE JSE All Share Index which at one point was down almost 9% but managed to claw back some of its losses finally ending down 3% for the month.

From a sector perspective gold and platinum bounced hard after posting significant declines in 2015 delivering returns for the month of 34.9% and 17.7% respectively. In contrast the industrial metals and general mining sectors declined by 15.6% and 11.0% respectively on the back of balance sheet and cash flow concerns as well as a weak demand outlook for commodities. The financial and industrial sectors also lost ground; posting negative returns of 2.9% and 3.3% respectively. The property sector which has been fairly resilient over the last year gave up 4.5% as fundamentals continue to deteriorate.

Decisive action by the South African Reserve Bank in raising interest rates by 50bps helped stabilise the currency which in turn saw bond yields decline leaving the All Bond Index as the best performing asset class for the month gaining 4.6%.

We have been cautioning for some time that the current valuation levels of our local market are not sustainable. A significantly slower domestic and global growth outlook means we can expect company earnings downgrades in the year ahead. This together with current high market ratings means that markets could effectively move sideways or down until such time as earnings catch up with valuations.

The re-alignment of the Nedgroup Investments Managed Fund with the Truffle Balanced Fund continued during the month of January. There is still approximately 10% of domestic equity in legacy positions that are still in transition phase largely as a result of liquidity reasons. One exception to this is the holding in the UBS Naspers Rump note which effectively gives the holder of the note exposure to all the assets in Naspers excluding its holding in Tencent.

The current implied value of the rump note hit an all-time low in January. This was largely a result of the Naspers share price not rising in line with the increase in the US dollar price of Tencent over the last few months as our currency weakened. The graph below illustrates the extent of the dislocation.