Investment Manager Commentary
Aylett & Co

May has been a somewhat uneventful month; nothing of any significance has come onto our radar. The usual concerns about debt downgrades, Brexit discussions and the never-ending story of a sick Europe continues. Every now and again the markets preoccupy themselves with the potential rise in rates in the United States and the next headline that either supports a rate hike or not.

It became clear to me on a recent trip to Asia that the major issue facing capital allocators is the very low cost of money and too much production capacity. There appears to be very little evidence of rational behaviour in industries where competition is intense. As an example, a company such as Uber was able to raise three billion US dollars from the Saudi government despite the fact that its oil revenues are decreasing.

Our approach is to accept that we don’t know how these matters will affect us and rather focus on companies whose valuations are not onerous, where the future over the next ten years appears to be clear and the managers of these companies have an ability to deal with the unknown and any curved balls that might get thrown at them.

We continue to exit small positions that have made us money but are no longer meaningful to the overall performance of the Nedgroup Investments Bravata Worldwide Flexible Fund. The fund has brought rands back to South Africa and is starting to find some value in South African stocks which are unappreciated by the market.

In previous commentary we expressed our intention to bring money back to South Africa to invest in securities where our risk is low. Furthermore, we commented on the opportunity of investing in commodities and certain local shares.

To this end, we are in the process of reducing our offshore exposure from 80% to 75% as at the start of February. We also reported in the past that the repatriation of offshore investments comprises two components: the level of the rand on transfer and, once transferred, the investments made with those proceeds. When we moved money out of South Africa, we were able to take cash out at about R6.50 to the dollar and invested as the opportunities arose. As we sold the investments, we left the proceeds in cash (mainly USD). The rand has subsequently weakened to R16 to the dollar. The opposite now holds true; we return some forex profits back to South Africa with the view of ultimately investing in local assets.

Local interest rates are rising and are high relative to US dollar, euro and British pound rates. We can currently earn 8.50% on a one-year Negotiable Certificate Of Deposit (NCD) in South Africa. In addition, commodity counters have gotten very cheap and we have added at a measured pace to our RB Platinum, Anglos, Billiton and South32 holdings. Banking shares have also fallen below our appraisal of intrinsic value and we have added to our positions into further weakness. The Nedgroup Investments Bravata Worldwide Flexible Fund now has 13% equity exposure to South African shares.

In conclusion, we do not know where the bottom will be for many of the counters we have bought. My suspicion is that we still have a way to go before we will get a magnificent buying opportunity. As I write this commentary the market cannot get enough platinum and commodity related shares. Once again, Mr Market astounds us with his manic behaviour; and, once again, makes the case for rational fund management.