Nedgroup Investments Stable comment - Sep 08 - Fund Manager Comment29 Oct 2008
Global equity markets plunged as the unprecedented credit crises escalated, while some financial institutions - mainly banks - were either nationalised, allowed to go bankrupt or forcibly merged with stronger competitors. In this environment, government bonds did well due to their "safe haven" status, despite Central Bank inflation concerns. Corporate debt yields rose sharply, indicating the extent of the credit squeeze.
SA asset classes were unable to escape the global turmoil and deteriorating sentiment, despite a much stronger bank system due to the limitations brought about by exchange controls. Resources was by far the worst performing sector due to lower prices for commodities on weaker demand brought about by prospects for a weak global economy. The local currency weakened as investors moved away from currencies correlated to global growth, and a general flight to safety.
The bear market in global and local equity markets continued, resulting in more favourable valuations. In the short term, still lower prices may follow, but these lower prices present good entry point for long-term holders of shares, especially in good quality companies with positive earnings growth prospects where prices have declined as well.
The current share portfolio has a focus on quality. Historically, during periods of sustained share price declines, a basket of quality companies has protected clients against sharp share price corrections, and we are of the opinion that the same will hold true in the current environment. Companies with robust business models and superior management will enable them to deal with the current volatile environment. Quality companies should lead during the next leg up in markets, but investors need to accumulate at these discount prices.
We will, however, continue to hold a large holding in liquid assets, not only for portfolio protection purposes, but also to take advantage of better opportunities in future.
Despite the recent decline in the valuation of the rand, the outlook remains negative given the flight from emerging markets and commodity currencies. Furthermore, the still large current account deficit and low levels of direct investment, leaves the currency exposed to further declines over the short term.
Nedgroup Investments Stable comment - Jun 08 - Fund Manager Comment22 Aug 2008
The allocation to risky assets remains fairly low in the Nedgroup Investments Stable Fund, despite a period where SA equity ex-resources and listed property, has declined significantly in value. Globally, the sentiment remains negative and bank shares have not yet recovered, despite raising significant amounts of capital through rights issues so far this year. This decline in risk appetite is weighing on risky SA assets. Shares of resource companies have continued to appreciate though, as raw commodity prices - oil in particular - reached new highs during the quarter.
Our bottom-up share selection process, and our focus on long-term earnings potential, has led us to identify companies in the non-resource sectors that show potential for exceptional growth, with a high degree of earnings certainty. This should provide some defensive characteristics to investors who are concerned about continued share price volatility. Shorter term, it is extremely difficult to predict the likely direction of the market, and it may well be that these shares continue to underperform the market, or even decline further.
The portfolio has a significant amount of cash invested for periods ranging from a week to one year. In the current environment, a risk free return of 13.5% is very appealing. In addition, the allocation to foreign assets should provide further protection against further rand weakness and related inflationary pressures.
Nedgroup Investments Stable comment - Mar 08 - Fund Manager Comment04 Jun 2008
The rise of the JSE ALSI for Q1 2008 is overshadowed by gains of 18% for the resource sector. In contrast, shares in the industrial and financial sectors declined by -6.4% and -12.8% respectively. Rising commodity prices, together with a weaker rand is extremely beneficial to the earnings growth prospects of companies exposed to natural resources. Unfortunately, these factors lead to higher input and import costs.
The result of a weaker rand and rising input costs is higher inflation, lower real disposable income, and higher debt service cost. These factors have led to a re-rating of consumer related shares, especially those linked to discretionary spending or credit purchases, and financial shares. Banks in particular, have been at the mercy of global market sentiment, and were sold in sympathy with international banks, despite thus far escaping with relative dignity from the global credit crises.
We have communicated our intention to keep the number of shares in the portfolio limited, and will focus on a small selection of high quality, high conviction ideas. The neutral weighting to equity is arguably higher than the current allocation, and we will use market weakness to add to this weight. The current share selection is focused on high quality companies, trading at very attractive multiples, and includes BVT, BIL, SOL, REM and RMH to name a few.
SA Bonds had a dismal quarter, as higher inflation risks, and an increase in global risk premia resulted in higher yields. Despite a rise in yields, bonds continue to trade at expensive levels, and cash is the preferred interest bearing asset class currently.