Fund Name Changed - Official Announcement25 Aug 2016
The SIM General Equity Fund will change it's name to Sanlam Investment Management General Equity Fund, effective from 25 August 2016
SIM General Equity comment - Mar 16 - Fund Manager Comment02 Jun 2016
Market review
This quarter saw a sharp rebound of the JSE, with a total return of 6% for the Swix, led by a snapback of beaten-up resources stocks, which were up 18%! This has been a global phenomenon led by emerging market bonds (up 11%). SA government bonds were up almost 12% in dollars, followed by a partial recovery of emerging market currencies and equities. Once again we see the phenomenon whereby extreme risk aversion is followed by a normalisation in prices, but in order to benefit from this one needs to remain stoic when the chips are down and focus on valuation first and foremost. In this commentary we examine the fundamental drivers of this rebound, which are: - A recovery in commodity prices, especially the gold price, which is up 16%, and the Brent oil price, which is up 4% this quarter but up 31% from the January lows!
- A more dovish tone by Janet Yellen and further central bank intervention, especially on the part of the Chinese and European central banks;
- Resilient institutional flows in most emerging markets (offsetting outflows from retail investors).
Investors who were bearish equities and within this asset class, resources stocks, had to cover shorts and bid prices higher in a desperate attempt not to miss out on this rally, causing extreme levels of volatility. Explaining the level of intraday volatility to our clients has become a futile exercise with the market overshooting on any piece of news flow - a typical indicator of the heightened levels of uncertainty. We witnessed the iron ore price spike 20% in one day and oil, a commodity with immense liquidity and traded globally, spiking 11% intraday in February. The recovery of prices has seen a number of stocks double this quarter.
The resources rally can be attributed to the fact that the US dollar appears to have topped out after rallying for close to five years, which means that commodity prices have started to recover from their lows. In addition, it looks as if there was a surge of demand for iron ore (up 60% since the December lows before pulling back) and other key industrial metals ahead of the Chinese New Year. As for oil, the gradual reduction of shale production provided some support despite the inability of Opec to agree on supply cuts.
But globally, we still face many headwinds:
- Global industrial production remains under pressure with emerging market economies at seven-year lows and activity remaining below trend. China first quarter growth in production has been weak and GDP growth is at 25-year lows.
- Most commodity markets are in surplus with the oil market still requiring supply discipline to balance wavering demand with US stock piles at the highest level since 1930, leading to the price hitting 12-year lows in February.
- Despite setting a 6.5%-7% GDP growth target for 2016, hard landing risks remain for China.
South Africa faces some further specific issues, namely stagflation and a potential credit downgrade with policy makers scrambling to re-establish credibility after the December cabinet reshuffle. This has undermined consumer confidence, which is at 15-year lows and the current account deficit at 5% of GDP is taking longer than expected to respond to the weak rand. South Africans are also bracing themselves for the impact of the crippling drought, which will require close to 0.5% of GDP in maize imports and will catapult food inflation into the double digits. The key issue now remains when Moody's, which has South Africa's sovereign rating two notches above junk, will downgrade us by one notch in line with the other rating agencies. The current economic and political uncertainty has certainly fuelled some capital allocation decisions from corporate South Africa. We have seen a continuous trickle of offshore expansions, focused mainly on developed markets.
What did we do last quarter?
The FTSE/JSE All Share Index returned 3.9% for the quarter, with the resources sector's gain of 18% leading the way up. During the period, the fund performed marginally ahead of its benchmark, and it remains ranked in the second quartile of an increasingly competitive space. The excellent long-term track record of the fund remains intact. The fact that the fund ranks amongst the best performing equity funds over the last 10 years means that it is ideally placed to create wealth for investors over the long term.
What added to, and what detracted from performance?
Amongst the top holdings, Steinhoff International delivered a very credible 23.4% return for the quarter. The company has made a cash offer to acquire Darty Plc for £673m. Darty operates some 400 stores across France, Belgium and the Netherlands and sells household goods. We see this acquisition as a good fit with Conforama (Steinhoff's existing European retailing platform) and as such, the transaction should in due course be a source of further value creation within the company. Standard Bank was another stock that added to performance. The price rose 16.7% in the quarter on the back of a rebound in earnings driven by the non-recurrence of losses associated with trading in China. Post the share price rally, the stock remains attractively priced with its price-to-book value of 1.3x being below its long-term average.
Mondi suffered a decline of some 7.5% in the period despite posting full year earnings growth of 25%. This detracted from the performance of the fund. There is some concern in the market regarding the Kraftliner market. New Kraftliner capacity additions were announced, but these additions will be required to meet the growing demand for the product, which only forms a small component of Mondi's earnings. The concern is likely to be transient, whilst structurally the fundamental outlook for the company remains sound.
Also, amongst the detractors from performance was Naspers, the fund's largest holding. During the quarter the share price declined by 2.8%. This was due to a combination of a strengthening rand and some concerns with the developing internet assets within Naspers taking longer to monetise. This was exacerbated by recent comments from management that the video assets outside South Africa are struggling due to a combination of a weak consumer environment and rising content costs in dollars. In spite of this, the company's main associate, Tencent, continued to perform well. Tencent is the largest e-commerce player in Asia and is listed in Shanghai.
SIM General Equity comment - Dec 15 - Fund Manager Comment16 Mar 2016
Market review
2015 was a year of whiplashes. Growth disappointed, the rand weakened to record lows, volatility spiked, returns were lackluster, growing inequality manifested in student protests, the country shuffled through three finance ministers in the space of a week and teetered on the brink of a sovereign credit downgrade. Globally cash outperformed both stocks and bonds for the first time since 1990. We witnessed many dislocations, such as the unpegging of the Swiss franc from the euro, German bonds yields falling to multi-decade lows, Chinese stocks climbing on a massive roller coaster, Paris and Nigeria coming under terrorist attack, hordes of refugees trying to make their way into Europe to escape the war in the Middle East, VW, the world's largest car company, cheating on emissions tests, the Fed hiking rates for the first time since 2006 and finally SAB being gobbled up by ABI.
On the tenth of December, the JSE banking index collapsed 14% in a day - the biggest daily move since 1994! In midst of the Great Depression, the term 'antipersistasis' was coined - used to described the market's ability to reverse itself. In fact that was true of the JSE when the announcement of Pravin Gordhan's appointment on the weekend led to the JSE clawing back some of its losses within a day, another case of extreme whiplash.
Contagion across emerging markets has led to focus shifting from the Fragile Five to the Troubled Ten - a clear sign that the South African economic woes are more widespread than initially thought. The main culprit however remains the Chinese economy, which continued to slow in the final quarter of the year with GDP dipping below 7% - the lowest growth since 2009. The Chinese Central Bank tried to stimulate the economy, cutting rates six times in 2015. This fed through to commodity prices with copper dropping to six-year lows and oil and nickel to decade lows. In aggregate, mining companies have shed some $500 billion in market cap since the Chinese led downturn in 2011. The entire mining sector listed on the FTSE is now worth less than British American Tobacco at around £60 billion! (Three years ago these mining stocks were valued at 5x the market cap of BAT).
Locally, Cash outperformed SA Equities for the first time since 2011 with local government bonds having an even more torrid time, delivering a negative return for the first time since the Global Financial Crisis in 2009. The rand depreciated by some 25% against the greenback during 2015. The JSE Swix delivered just under 4% in rand in 2015 but in dollar terms the index fell a dismal 23% - with the only other major emerging market worse than us being Brazil. Our market remains bifurcated with resources down by 37% while the Findi posted a decent 12% total return in 2015.
What did we do last quarter?
The equity market came under renewed pressure this quarter with the fund underperforming its benchmark with the value style remaining out of favour. For the year, the fund is in the second quartile of a very competitive category. The fund is among the top performing equity funds for the last decade and it is such consistency which grows wealth over the long term.
We were very selective in participating in certain capital raisings but used the opportunity of a capital raise by Naspers to add to our largest holding at a discount to the ruling market price. Naspers increased its shareholding in its Russian classifieds business to a position of control and will provide access to another large and rapidly growing population group in an emerging economy, adding to dominant positions in other BRIC economies.
What added to, and detracted from, performance
Naspers, our largest holding, rebounded by some 22% in the final quarter of the year aided by good results from its associate Tencent, which is listed in Shanghai. Tencent is now the largest E commerce and internet player in Asia and accounts for most of the Naspers market cap.
Another large holding, British American Tobacco, helped the performance of the fund, delivering a solid 17% total return in the final quarter of the year. The acquisition of SABMiller by AB InBev led to speculation that similar industry consolidation may occur to form a dominant global tobacco player - with BAT and its attractive portfolio of emerging market brands and excellent cash generation offering a convenient parallel to SAB. The hard currency dividend yield from BAT remains a key attraction of the stock.
On the downside, resources stocks remained under pressure. Anglo American plc gapped down 40% during the quarter, with some of its listed subsidiaries also sold off heavily. Amplats was down close to 22% and Kumba was down over 48% as a result disappointing trading updates. The balance sheet of miners are being closely scrutinized and those with a high debt burden are being side-stepped by investors with the market growing increasingly anxious that the announcement that Anglo management would halve the number of assets owned to 20 and shrink its workforce by 80 000 was too little too late in the face of a vicious commodity downcycle. Anglos has shed over $50billion in value over the past years while the company it controlled in 2007, Mondi, has now overtaken it in terms of market cap.
The fund was also impacted by the 25% decline in the MTN share price after the Nigerian telco regulator imposed a record $5bn fine (this is some 1% of Nigeria's GDP!) due to the company's failure to disconnect unregistered sim cards. While the fine was subsequently reduced, MTN decided to challenge the penalty in court and the CEO stepped down. The market has taken a dim view of the happenings in Nigeria, where MTN has its largest number of subscribers at 62m.
Our strategy
Equity markets have experienced the highest level of volatility since the Lehman Brothers collapse seven years ago. The JSE has been caught in the downdraft of the emerging market sell-off with the rand weakening some 25% against the greenback and the SA risk premium increasing due to ill-timed changes to the Minister of Finance in the face of potential sovereign debt downgrades. A good metaphor for our overheated markets was the four capital raisings which were announced at the beginning of December in the space of 24 hours. In 2015 we saw over 20 new listings on the JSE and companies continued their offshore acquisition spree as they search for growth, with scrip dividends an indicator that cash resources are being depleted. This does not bode well for future returns on invested capital.
As value investors, we are tilting the portfolio towards stocks which have pulled back below our estimate of fair value and remain wary of committing your capital to stocks where there is an insufficient margin of safety or where the track record of the company is uncertain. The risk of capital loss is greater than ever and a disciplined approach to investing remains key.