Current context
Global equities continued displaying strong positive momentum since markets reached a low in March 2020. By the end of the first quarter of 2021, the MSCI World Index had recovered 79% from its March 2020 low and returned 5% during the quarter under review (in US dollar, including dividends). Some of the factors contributing to the sharp recovery are continued record central bank liquidity injections, accelerating global vaccine rollouts, a gradual re-opening of economies and speculative behaviour in pockets of the market. After a strong start to the year during which emerging market equities rose 12% by mid-February, the MSCI Emerging Markets Index delivered a total return of 2.2% for the quarter. South African equities were the standout performers in emerging markets during thequarter, with the JSE All Share Index (ALSI) finally breaking through the pre-pandemic record-high set in 2018. It delivered its strongestfirst quarter performance in 15 years, posting a quarterly total return of 13.2% in rand and 12.5% in US dollar. Rising inflation expectations saw global bonds sell off during the quarter (from arguably elevated levels), with the US 10-year bond yield
rising from 0.9% in December 2020 to above 1.7% at the end of the first quarter.

Our perspective
Different parts of the market continue to dominate performance. The initial sharp recovery after the March 2020 crash was largely driven by technology and staples companies that received a boost from pandemic-driven demand and ‘work-from-home’ arrangements. However, markets have recently seen a major rotation away from what had previously worked (mostly growth stocks) into investments that have notperformed well to date, and which were harder hit by the pandemic. These include value funds, cheap and smaller companies, emerging markets, contrarian investment strategies and companies positively correlated to rising rates and global reflation in particular.We have previously written about the large valuation divergences evident across markets as a result of the extraordinary levels of crowding into past winners and the capitulation out of what had not worked, and we have advocated for different positioning to the consensus view. The key question on many investors’ minds, given this sharp recent rotation, is: where to from here? It is hard to deny that index levels are high and given the valuation backdrop across many major markets, prudent future return expectationsfrom major indices should be relatively low. While PSG Asset Management is macro aware, we are bottom-up investors and tend to favour
opportunities in less popular areas. Given the uncertainty about the ultimate impact of the pandemic on many economies and industries,and the potential path of inflation and interest rates, pockets of the market still provide highly fertile conditions to construct a portfolio of
mispriced securities.

Portfolio performance and positioning
Many companies held in the fund enjoyed a very healthy price recovery since November 2020, but it is important to point out the inherently low base we are coming off and the preference for uncrowded positioning in most of the fund’s holdings. Additionally, the fund’s equity holdings can be characterised as follows:• Businesses with a sound inherent quality that the market is overlooking or under-appreciating. • Well positioned for strong growth in profits, cash flow and dividends (initially via post-pandemic recovery and thereafter a result
of their strong market positions).• Generating high levels of free cash flow that can be used for payment of dividends or pay-down of debt, which in the case of leveraged companies serves as a powerful tool to transfer value from debt to equity holders. • Being at valuation levels that are extremely attractive in relation to future earnings power and which provide a healthy buffer against adverse macro outcomes.

During the quarter, the fund exited its holdings of DuPont, Compass Group and Amadeus IT after a significant rise in share prices above our estimates of intrinsic value. Improving agricultural and fertiliser market fundamentals resulted in a strong price appreciation of longer
held conviction positions and we reduced the fund’s holdings in The Mosaic Company and ICL Group considerably as a result. Furthermore,following substantial price increases and as a consequence narrower margins of safety, we reduced US outlet center operator Tanger
Factory Outlets, department store chain Nordstrom and UK-listed but Asia focused Prudential Plc, which was the fund’s largest position at the beginning of the quarter. These sales allowed us to recycle capital into new opportunities in the global energy space and add to
existing positions in Philip Morris International Inc, M&G Plc and Centene Corporation.
Over the quarter the PSG Global Equity Feeder Fund returned 15.50% versus the benchmark return of 5.48%. The contributors over thisperiod were financials (4.84%), industrials (2.64%) and other (2.26%). The contributors are the same as that of the main fund (PSG Global Equity Sub-Fund). The fund is suitable for investors with an investment term of 7 years and longer. Over the short-term returns can be volatile and for this reason it is important to measure fund returns over the relevant investment term. Since inception the fund produced an annual return of 11.57% versus the benchmark return of 18.78%.