September 4th marked our fund’s 2-year anniversary, so this is an opportune moment to briefly pause and reflect.

Since fund inception, being September 4th, 2017, the total return (including dividends) of the JSE AllShare Index is a negative 2%. That doesn’t look too bad, but it hides the fact that the total return of the average JSE listed company is a negative 21%.

The average share price of relatively smaller sized companies and property stocks are down 33%, which we think qualifies in the ‘serious decline’ category. As an aside, so much for property being a safe haven.

Please brace yourself, because here is a scary fact. Of the 290 JSE listed equities & property stocks combined, 112 of them are down by more than 30%, at an average decline of 54%! That deserves an exclamation mark.

The biggest winners in the SA market over this timeframe have been few and far between and are highly concentrated in a few industries like platinum, iron ore, gold and unsecured lending. With the exception of gold, these industries are highly vulnerable to the increased risks of a global economic recession. Despite the hype, the objective truth is that platinum is not a precious metal.

It may not (yet) be reflected in the index itself, but this has been a tough market environment that rivals our own experiences in the market downturns of 1998, 2003, 2008 and 2015. We are therefore pleased and proud that our fund has in the first instance largely protected your capital. Simultaneously, we have slowly but surely become more fully invested in quality businesses, led by great people, at incredibly attractive price levels far below their real world business values. We achieved this without excessively trading in and out of assets; our annualised fund turnover over the first two years came in under 10% p.a.

We have owned a number of our fund holdings since inception and nothing pleases us more than receiving our dividends from them in cash every 6 months. It serves as a terrific regular reminder that we do not just own pieces of paper, but real businesses in the real world with thousands of real people creating value for their customers and thereby for us, daily.

Looking deep in the mirror at ourselves and our firm, we can confidently state that we have done exactly what we promised all our investors at the outset.

Our work continues…

The Fund aims to provide investors with long-term investment returns after costs at or above its benchmark of the South Africa inflation rate plus 5%. The Fund complies with Regulation 28 of the Pension Funds Act and may invest up to maximums of 75% in equities and 25% in offshore assets. The Fund will invest in a diversified range of equities, investment grade bonds, property and cash, but may also invest in preference shares, currencies and commodities when sensible opportunities present themselves. The flexibility of this mandate empowers the fund managers to be more fully invested when a diversfied selection of good assets are cheap and to be positioned defensively when good assets are very expensive or highly concentrated in a single sector. The Fund is most suited to investors with an investment horizon of five to ten years seeking a combination of principal preservation, income generation and long-term capital growth.

Moody’s sent a team to review and update their view on South Africa during the last week of the month. The rating agency decided not to take any action. They appear to be providing a window for a Ramaphosa-led ANC government to evidence their political commitment to much-needed structural reforms after the national elections in May. It is a reprieve which keeps the country’s sovereign credit rating at investment grade with stable outlook - for now. Moody’s are effectively deferring judgement until the next review in November 2019.

As custodians of clients’ life savings, we have a responsibility to review the companies we choose to invest in on a more regular basis than rating agencies. We reviewed all of the fund holdings during the first quarter of the year and specifically looked for leading indicators of distress or anything that could potentially derail the underlying investment theses. Confidence levels increased in companies like MTN and Sasol, while a combination of excessively leveraged balance sheets, industry structure and management
concerns resulted in us exiting positions in Tongaat Hulett, Mediclinic and British American Tobacco.

Risk management is an explicit part of our investment approach. What often goes unseen is the companies we choose to not invest in. We have deliberately avoided putting money to work in companies like PPC, Brait, Aspen and Nampak, despite what appears to
be relatively attractive prices. These companies have taken on high levels of debt at the top of the economic cycle to fund aggressive acquisitions and projects in complex operating environments. The fund has also maintained a relatively small position in listed property, which is substantially cheaper than what it was a year ago, but continues to trade at prices which understate the risks at the broader industry level.

Our work continues...