Nedbank Financials comment - Sep 05 - Fund Manager Comment25 Oct 2005
Against most expectations, the rand strengthened during the quarter (from R6.68 to the US$ to R6.34). At the same time the US Fed continued its program of regular 25 basis point interest rate increases. This caused the US Dow to remain weak (2.9%), but remarkably, emerging markets, including South Africa's JSE, remained very strong (19.2%).
Top performers in the financial sector were Sasfin (42%), Coronation (40%) and Nedbank (25%). Some of the small-caps, particularly PSG, Peregrine and Brait also had strong price moves. The Life Assurers rerated on the back of the strong market (despite the ongoing problems with the Pension Fund Adjudicator), while the Banks also had a good quarter.
The weakest share was Discovery Health, after disappointing results largely due to Destiny Health (its US operation) still being cash flow negative.
We substantially increased the holdings in Liberty and Santam. Both companies are geared to a rising JSE, while Liberty is particularly good value. The purchases were financed through sales of our Nedbank holding and the forced liquidation of Absa (Barclays taking 30% of our holding). In addition, we considerably lightened our holding in Remgro when the discount to the underlying value had closed substantially.
At the end of August we posed the question: 'Are financials a bit frothy now?' and we remain with our answer 'Yes', in the short-term. But, as said previously, while not as good value as at the beginning of the year, they still remain good value for the long-term holder due to:
- The attractive dividend yield.
- The continued strong growth of the South African economy.
- The planned infrastructural projects (Gautrain, 2010 World Cup, etc).
Nedbank Financials comment - Aug 05 - Fund Manager Comment26 Sep 2005
The fund experienced another good month. Come to think of it: even if we do 1% per month, that's 12% p.a. - far better than having your money in a money market account.
This month was 'previous losers month' - almost as if there was rotation out of this year's winners (Standard Bank and Firstrand) into this year's under-performers. The two large banks were down 4%, while the Life Assurers were up in a 3% (Liberty) to 9% (Old Mutual) range.
From a value and fundamental point of view, these price moves make sense. The Life Assurers are trading at 10-15% discounts to embedded value, and we know the strong market is increasing the embedded value almost on a daily basis. So a re-rating of Life Assurers was overdue. It is our opinion that they (especially Liberty Life) will re-rate further. A quality company with such a good track record should not trade at the discount it's currently trading at. Besides, the synergies and positioning in the lower end of the market that will flow from the Capital Alliance deal seem to have been totally ignored by the market. Needless to say, Liberty is now our largest Life Assurance holding (3rd largest overall).
Valuations, while still attractive, are not risk-free 'buy with your eyes closed' anymore. The current interest rate environment and growth momentum needs to be sustained for the current ratings to be maintained. We think the risk is low, but as the prices run up further (as we think they'll do), the risk of a changed environment on the stock market will increase.
Having said that, due to their relative cheapness and high dividend yields, financials should still outperform bonds and other sectors of the JSE in both the positive and negative scenarios.
Nedbank Financial - For domestic equity bulls - Media Comment15 Sep 2005
Kooyman's "other" fund. Over the past 12 months, it has made little difference to be invested in this domestic-only fund or the Sanlam fund, as this one had a better return of just 0,37%. Kooyman has been accumulating Liberty since the share price fell to R56: it now makes up 15% of the fund. It has a 4,6% holding in Old Mutual to give it some international exposure. Brait was sold and Nedbank reduced in August.
Financial Mail - 16 September 2005
Nedbank Financials comment - Jul 05 - Fund Manager Comment07 Sep 2005
The fund experienced an excellent month. It seems as if everything we've been saying for the past 12 months was suddenly recognised by foreign investors - some banks re-rating by more than 10% during the month (Nedbank +14% and Standard Bank +10%), while our very large holding in Remgro also shot up by 11% after the announcement of a special dividend.
One of the main characteristics of a successful investor is patience. Sasfin demonstrated this during the month with a 22% gain after unde-rperforming for a while. Another holding where we have been patiently building a larger and larger exposure is Liberty Life. It looks as if the recent positive trading update has triggered the beginning of the rerating we've been patiently waiting for.
Are financial shares a bit frothy now?
In the short-term, yes. However, a number of positives will ensure continued high returns on equity and sustain their growth and ratings:
- Thabo Mbeki's commitment to a higher economic growth rate.
- The approved 'Gautrain' project.
- The slowly approaching 2010 Soccer World Cup.
- Continued low inflation (strong rand) and stable interest rates.
Financial sharers' attractive dividend yields and high growth rates should ensure that the financial sector continues to outperform the JSE, and other investment alternatives such as cash and bonds.
Nedbank Financials comment - Jun 05 - Fund Manager Comment12 Aug 2005
The past quarter was characterised by some strong macro trends. The rand weakened (6%), yet despite that, Banks performed well (Stanbic +6%, Firstrand +4% and Absa +12% (on the back of the Barclays offer). This is interesting when compared to the performance of the JSE ALSI (+6%) and the Dow (-2%).
The effects of Old Mutual's bid on Skandia and the pension fund adjudicator on the other Life Insurers, is very evident (Old Mutual -5%, Liberty -6%, Sanlam 1% and Metlife -2%).
Financial services companies, and specifically small-caps, performed exceptionally well: PSG +29%, Peregrine +27%, Investec +10%, African Bank +12%, Brait +15%, Alexander Forbes +13%, Santam +28%, Remgro +11%, Sasfin +7% and Discovery (after the price fall) +7%. Unfortunately, we had little exposure to most of these companies except for Santam, Remgro, Sasfin and Discovery.
While being disappointed at not being invested in these companies, one must bear in mind that some of them are either too illiquid or too expensive to have large exposures to - hence during the periods when they "run" one must be disciplined too not get sucked into the frenzy.
Our view on the sector remains unchanged - lower, stable interest rates have created a higher growth economy, which is a very positive environment for bank shares. Both bank and life insurance shares are still on healthy dividend yields, with good growth prospects and we remain very positive about exposure to the sector.
Nedbank Financials comment - May 05 - Fund Manager Comment13 Jul 2005
The big event during May was the sudden weakness of the rand (almost 12%). Periods of rand weakness are normally associated with underperformance of financial sector shares. Therefore, we are pleased that the fund actually increased in value during the month, largely due to our large holding in Remgro and Firstrand.
We used the weakness of the Santam and Discovery prices to marginally increase our holdings (unfortunately the price jumped before we could increase our holdings further).
Due to the uncertainty regarding the Insurance sector we decreased our exposure to the sector. The sector does represent good value, but poor new business numbers and negative sentiment towards the Life Assurers could erode this.
Results published during the month (ABSA annual results and Firstrand trading update) showed that the economic environment remains "bankfriendly" ie, strong lending growth and low bad debts. We expect this to persist for some time and hence continue to feel that Banking shares represent good value.
Nedbank Financials comment - Apr 05 - Fund Manager Comment14 Jun 2005
With the exception of Absa and Aflife (up 2.5%), financial shares fell by about 2% in April. This was "triggered" by the increased nervousness in the markets about continued increases in US interest rates and the effect thereof on all, but especially emerging markets.
Emerging market currencies were also weak and the South African rand was initially not spared. However, as the month progressed attention was focused on the Barclays-Absa deal and the rand strengthened again.
This highlights the danger of portfolio construction based on unforecastable macro factors such as interest and growth rates, and currency movements.
Our view is that South African financial shares represent excellent value and that investors should rather make investment decisions based on:
- track record of earnings and dividend growth (which in the case of bank shares is excellent)
- their valuations (which again in the case of financials, is attractive)
Finally, I think we should point out that the environment in which they currently operate is extremely favourable.
Nedbank Financials-A Kokkie Kooyman fund for wimps - Media Comment26 May 2005
The fund is run by Sanlam's Kokkie Kooyman, but unlike the counterpart Sanlam fund it does not invest offshore. As a proxy for foreign holdings, Kooyman has invested in Old Mutual and Remgro, but Kooyman says Mutual's surprise takeover bid for Swedish insurer Skandia has hurt. African Life and Alexander Forbes were sold in April and Nedcor was added to the portfolio. Kooyman says he regrets not buying a bigger holding in Investec, which is just 2% of the fund.
Financial Mail - 27 May 2005
Nedbank Financials comment - Mar 05 - Fund Manager Comment28 Apr 2005
The quarter was satisfactory considering the volatility in the rand and financial markets. The largest price gainers were Aflife (19%), Metlife (8%) and Alexander Forbes (7%). Old Mutual's price increased by 10% but we had little exposure to this company.
The worst performers were Sanlam (-7%), Standard Bank (-4%) and our small holding in Sasfin (-14%). The rand peeked against US dollar at R5.62 on January 1, and since then weakened by 10%. A similar move occurred amongst most other emerging market currencies, indicating that it was a case of dollar strength rather than rand weakness.
The dollar's strength is due to a knee-jerk reaction of investors switching out of emerging market debt and equities, into "safer" US dollar at higher interest rate levels.
Higher US interest rates have historically negatively impacted US (and global) bank earnings, due to the narrower spread between the long-term rates (which are high as they anticipated the higher inflation) and the short-term rates, which are being increased by the US Federal Reserve.
However, we think this knee-jerk reaction of switching out of emerging markets and out of emerging market (and South African) banks, are wrong for two reasons:
- we think this time IS different; and
- financial shares in South Africa are still very good value.
This time is different because we're negative on the sustainability of US growth (and hence continued interest rate increases), and feel that South Africa in terms of deficits is in better shape than ever (at least since the 60's), and that the South African Reserve Bank will not need to hike interest rates in South Africa to protect us against either inflation or a falling rand.
Hence, as South African financial shares still represent such good value, our advice to investors is to sit through the volatility. Remember - our bank sector is in very good shape, and the current macro-economic environment is very good for banks, so you're ensured of good earnings growth (average 15%). Besides, you're receiving a 5% dividend yield (average) by remaining invested.
Nedbank Financials comment - Dec 04 - Fund Manager Comment21 Feb 2005
The last quarter, and month, of 2004 were very pleasing, to say the least:
The fact that only one share had a negative return during the quarter showed how the whole sector was re-rated. The trigger was the strong rand, which meant that interest rates stayed low. The lower interest rates propelled house prices and domestic consumption, which in turn has meant that South Africa can look forward to GDP growth exceeding 4% in 2005. At the same time, the US$ weakness and prospects of poor US and European growth caused international investors to search for higher growth economies, hence the strong interest in South Africa from international investors.
The above scenario bodes well for 2005 - it means job creation, more local activity and lower bad debts. One cannot help but notice all the building and renovating activities as a sign of new-found confidence in the future.
The fund was, and is, well positioned to benefit from this scenario. The one we missed was Investec. We agree that Investec is a great company and deserves a premium, but we feel it is too expensive relative to the rest of the sector. Other shares where we would have liked more exposure were Sasfin and Discovery Life, but both are very illiquid and besides, Discovery's price is now discounting all the possible good news and more.
Despite the strong price moves, South African financials are not yet expensive as they came off a very undervalued base (in October 2003 they were at 40 year lows). Earnings growth will be strong during 2005.
Nedbank Financials comment - Nov 04 - Fund Manager Comment03 Jan 2005
November 2004 was another excellent month, vindicating our stance during the year that the good performance from January 2004 "was only the beginning". The fund's return during November 2004 is more than the annual return received by investors who kept their money in a savings account!
Best performers were African Bank (22%), Capital Alliance (17%), Standard Bank and Venfin (both 15%). Shares that lagged were: Absa (5%) and Aflife, Santam, Remgro, Metlife and Firstrand (all between 7% - 9%), while Alexander Forbes (where we have a small position) fell by 7%.
We increased our investment in Liberty Life, bringing the portfolio's Life Industry exposure to 38%. The largest exposure is still to the banking sector (47%). Both sectors will benefit from the current economic environment of lower interest rates, stronger economic growth and a stronger JSE (in different ways though).
We are of the opinion that the financial sector, while not as cheap as it was, still represents good value. Risks would be a sudden and sustained rise in interest rates (globally and/or in South Africa) and/or a sudden collapse in the rand. Both of these, however, are unlikely scenarios as long as global growth and inflation remain subdued.