Sanlam Small Cap comment - Sep 07 - Fund Manager Comment26 Oct 2007
The third Quarter of 2007 was an extremely volatile one for the JSE and the small-cap stocks. After an extremely turbulent July and August on account of global sub-prime fears and possible contagion effects across all global credit and financial markets, all was forgiven in August and September. The markets continued their strong upward trajectory and finished the quarter up strongly.
The Sanlam Small Cap Fund remains very focused on the following:
o Gross fixed capital formation: From recruitment companies and industrial distributors to construction.
o Companies that can grow their earnings through the cycle, i.e. more defensive companies.
o Gaming and leisure.
o Information technology.
o A significant direct offshore component (invested in high-growth, attractively priced equities).
Although we remain positive on the economy as a whole, we remain wary of certain sectors. The Sanlam Small Cap Fund has no exposure to credit retailers as we continue to believe that the South African consumer will continue to come under pressure.
Given our value bias we maintain that the fund may not fully participate in strong upward markets but is very well shielded from weak markets.
Going forward we believe the fund is well positioned to take advantage of the growth sectors in the economy. We have a fully resourced, dedicated small- and mid-cap team that is focused on bottom-up stock picking.
Sanlam Small Cap comment - Jun 07 - Fund Manager Comment19 Sep 2007
The second quarter of 2007 was a fairly volatile one in terms of market movements. We believe that this is an indication that market valuations as a whole are high relative to history. The average PE of the market is about 16 versus the long-term average of approximately 14. The market volatility is also a function of growing unease about the short- to medium-term prospects for earnings growth. Interest rates have moved up, the consumer is under pressure, and there are a number of red flags for the local economy, including inflation, economic growth and current account problems.
We believe that there is currently a significant move away from the demand side of the economy (driven primarily by the consumer) to the supply side of the economy (driven by unprecedented public and private gross fixed capital expenditure). Over the past few quarters we have significantly repositioned our portfolio to take advantage of this.
Approximately 25% of the portfolio is directly or indirectly exposed to infrastructure. Nevertheless we remain very cautious of the "traditional infrastructure plays" the valuations of which more than reflect even the most bullish scenarios. Stocks here include AECI, Rare, Sanyati, Hudaco and the entire IT sector.
We continue to remain invested in the game and leisure sector (exposure is over 10%) due to the exceptional growth prospects (young industry, lots of new capacity, degearing and tourism exposure). We believe this is a premium sector that trades at fair to low valuations. Stocks here include Tourvest, Gold Reef, Sun International, Cullinan and Phumelela.
Agriculture is developing into an important theme (current exposure is over 6% and growing) This sector has been under pressure for years. Thanks to the extremely high maize, wheat, soya and virtually every other food commodity price, we feel the sector will undergo a dramatic transformation. As many of the commodities are being directed into ethanol fuel production we believe the high prices are sustainable. Here we are building stakes in Afgri and Zeder
We are participating in the listings boom. However, we have been conservative in our approach. We have walked away from a number of opportunities that have not met our investment criteria. Although we see strong fundamentals for some of the new companies, our feet remain firmly in value territory.
We are building up our offshore exposure as local valuations trend higher than global averages. Our offshore exposure is predominately invested in Our Global Best Ideas Fund, the performance of which has been exceptional in dollar terms.
Although the "easy money" in small caps has been made we continue to be confident that the local economy is positioned for strong growth over the next five years. This is underpinned by substantial investment spend. In this scenario small caps that are leveraged to local growth are a must-have in any portfolio. However, many significant risks remain and our focus, as always, is the avoidance of permanent capital loss.
We remain confident that the team is well positioned to take advantage of the great investment opportunities that present themselves on the JSE.
Sanlam Small Cap comment - Mar 07 - Fund Manager Comment08 May 2007
The Sanlam Small Cap Fund continued to perform well in the first quarter of 2007, substantially beating the JSE Small Cap and All Share indices. The key contributing factors were the continued strong local economic growth, the fairly stable rand, still relatively low interest rates and a healthy consumer sector.
There are signs of a slowdown in the consumer sector and we remain cautious. Revenue growth and margin expansion have been unsustainably high and will normalise over the next few years. Although a slowdown in consumer growth would normally be associated with a general slowdown in the economy, we firmly believe that the rise in infrastructure spend, both private and public, will underpin continued strong economic growth.
We are taking advantage of this structural shift by increasing our exposure to companies leveraged to the infrastructure boom. However, we are very aware that the valuations of the obvious contenders (for example the construction companies) have more than taken this positive environment into account. We therefore have focused the portfolio on companies that take advantage of the positive environment in less obvious ways, for example the industrial distributors and the IT sector.
There is no doubt that there are sectors of the JSE that are fundamentally overvalued. In line with our value bias we are staying well clear of these.
However, we are continuing to find value in the following sectors:
- High-quality companies that can grow their earnings and intrinsic value through the cycle.
- Turnaround opportunities and previously neglected sectors.
- Non-resource rand-hedge stocks
We remain confident that our in-depth bottom-up stock selection will continue to outperform the market over the long term.
Sanlam Small Cap comment - Dec 06 - Fund Manager Comment27 Feb 2007
The small cap sector had a fantastic run during the final quarter of 2006. The JSE Small Cap Index returned over 19% for the quarter versus the All Share Index's performance of 11%. I am pleased to report that Sanlam Small Cap Fund returned a staggering 48% for the year! 2006 was the fourth year of the phenomenal small cap bull run. The Small Cap Fund has delivered an accumulated return of over 420% since the beginning of 2003 (43% compound annual growth over 4 years).
This has been a function of a number of key drivers:
- The extremely low base due to the emerging-market crises, the weak currency and anaemic local growth of the previous years.
- The strengthening rand and concomitant low inflation and interest rate environment, driving local consumer demand.
- The strong global economy and exceptional commodity bull run. 2007 sees the risks to capital appreciation rise:
- The valuation base is now extremely high and small cap ratings discount versus large capitalisation stocks has now all but disappeared.
- The currency is vulnerable due to the large current account deficit and risks to a global commodity price slowdown.
Nevertheless the local economy remains strong driven by healthy consumer demand and massive infrastructure development projects. Therefore, despite the risks we still see sound earnings growth from companies that are geared to the local economy.
However, valuations and earnings growth expectations are unrealistically high.
We remain extremely cautious and are focusing our research efforts on the following:
High-quality companies that can grow earnings through the cycle.
- Turnaround stories.
- Non-commodity rand hedge stocks.
- An increased offshore component (currently at over 8%).
I am confident that our in-depth bottom-up research will continue to find exceptional investment opportunities even in the current environment.