Nedgroup Investments Opportunity comment - Aug 17 - Fund Manager Comment22 Sep 2017
The Nedgroup Investments Opportunity Fund produced a return of 0.3% net of fees for August 2017, which was slightly below the peer group average of 0.7%. Performance was aided by our large position in Naspers, as well as smaller holdings in African Rainbow Minerals, Exxaro and Impala Platinum which ran up strongly. A recent addition - MTN - which we believe is now attractively priced relative to long-term prospects, also contributed. The banks (Barclays Africa and FirstRand) added to performance and remain well priced and supported by high dividend yields, even though near-term prospects remain lacklustre.
Intu, Steinhoff and US dollar cash hindered performance. We remain comfortable with all of these holdings and make the following observations:
In retrospect it seems we were early on Intu. We bought the stock post the Brexit fallout, based on its attractive initial yield (4.5% in British pounds), a pound that we considered too weak, and an attractive discount to NAV. On all of these measures, the share is even more attractive now, but its upside seems limited in the short term by the uncertainties around Brexit and a stagnant environment more generally for UK property. By making sensible assumptions on distribution growth, rand/pound depreciation and an appropriate discount to NAV, our expected three-year return for Intu (in rands) is 13% p.a. (with a bear case of 8% p.a. and bull case of over 20% p.a.).
Steinhoff was (once again!) the centre of attention for allegedly overstating revenues in Germany, as well as the impending Steinhoff Retail Africa (STAR) listing. The share offers some of the best upside according to our ranking table, although we acknowledge that risks remain elevated. We tactically added to our position when the share price fell 10% toward the end of the month.
Our US dollar cash exposure earns us close to zero, but plays a very important role in portfolio construction. It is one of the few truly risk-off assets that is not over-valued in an absolute sense (such as US Treasuries), and should help protect capital in a negative market environment (which we have not seen for a long time!). Year-to-date, the US dollar has weakened versus the other major currencies, and looks quite attractive on a relative basis.
We made small allocations to five-year corporate inflation linked bonds with a 3.4% real yield, as real yields have moved up dramatically over the past while. We also made a small allocation to the long end of the yield curve, were we are able to lock-in close to double-digit yields.
The level of equity exposure remained broadly constant over the course of the month. The net effective exposure of 58% at 31 August 2017 is a function of:
- Physical equity exposure (57%);
- Plus option/future strategies (could increase or decrease net exposure ¡V currently decreasing effective equity exposure by 4%);
- Plus convertibles exposure (this is not the same as actual convertible holdings ¡V currently adding about 5% to effective equity exposure).
Nedgroup Investments Opportunity comment - Dec 16 - Fund Manager Comment15 Mar 2017
Abax Investments
The Nedgroup Investments Opportunity Fund delivered a return of 9.6%- for the 2016 calendar year, well ahead of the peer group average return of 1.6%.
The year was characterised by a number of unexpected macro events both locally and abroad causing stressful dislocations in markets but also a number of opportunities for investors, some of which we thankfully managed to take advantage of. The largest contributors to performance over the course of the year were:
" Active asset allocation: total equity allocation (local and offshore) varied from below 50% to around 60% over the year. We have ended the year with close to a 60% allocation to equity (the mandated maximum). We also have an allocation of 7% to domestic property (down from 10% at the start of the year). Furthermore, the makeup shifted from being primarily domestic counters to an allocation including UK property stocks which fell sharply post the unexpected 'leave' vote in the Brexit referendum.
- Stock selection: a large allocation to financial and banking stocks, which performed strongly, combined with avoiding a few(not all!) of the landmines such as Richemont, SAB, Sasol and UK property stocks (the latter two have subsequently been bought) aided performance. Our allocation to British American Tobacco, Mediclinic, Old Mutual and gold stocks were among the largest detractors.
- Active duration management: the Fund's duration varied from a relatively high 2.3 at the beginning of the year to levels close to zero later in the year as we tactically adjusted our position to exploit markets' reaction to news-flow during the year
- Fixed income selection: our allocations to an offshore, dollar-denominated Eskom bond and an Old Mutual sterling denominated bond contributed handsomely to total returns as the yields on these two instruments compressed over the year.
- Currency protection strategies: toward the end of 2015, we initiated a currency protection structure to protect a portion of the Fund's offshore exposure from a strengthening rand which benefited the Fund during 2016.
- Single stock protection strategies: we overlaid protection strategies on a number of individual counters including Anglos, Naspers, Steinhoff, FirstRand and MTN. Overall, these structures added value by removing some of the downside we otherwise would have been exposed to.
- Structured EuroStoxx notes: these positions provide geared exposure (in rands) to the change in the level of the EuroStoxx index. Two of these notes (c. 5% of the fund) are currently at an interesting juncture: they expire in just two years and the index is fast approaching the point where any further uplift will result in significantly geared exposure to such a move. These instruments returned low double digit returns in rands for the year (versus the underlying EuroStoxx index of -15% in rands).
It is likely - if 2016 is anything to go by - that 2017 will be another interesting year for financial markets. Although we cannot say with any degree of certainty what will unfold, we will continue to follow our tried and tested process of buying good businesses at good prices, seeking asymmetrical pay-offs and being prepared to be active in order to take advantage of opportunities should they arise.
The net effective exposure of 56% at 31 December 2016 is a function of:
- Physical equity exposure (55%);
- Plus option/future strategies (could increase or decrease net exposure - currently neutral);
- Plus convertibles exposure (differs from physical convertible holdings - currently adding about 1% to effective equity exposure) - Net return for the Nedgroup Investments Opportunity Fund, A class. Source: Morningstar (monthly data series)