Iain Power, the CIO at Truffle Asset Management, provides an overview of the Nedgroup Investments Balanced Fund for the last quarter.
There’s a lot of data that suggests that the global economy is in an uneven recovery mode with economic activity starting to resume. Policymakers have done ‘whatever it takes’ to mitigate the damage of the pandemic in the form of massive fiscal and monetary stimulus, resulting in significant expansion in central bank balance sheets across the world as they continue to buy fixed income and equity instruments in the market.
We’ve been surprised at the speed of the recovery in asset prices. Given the extent to which the global economy is starting to recover, it does increase the risk of a policy error, so the chances of bubbles is rising. We believe the second half of the year is likely to see some volatility given the second wave of infections as the northern hemisphere winter approaches, and the likelihood of infections increasing as economies open up. From an emerging market perspective, not all are equal. LATAM, sub-Saharan Africa, especially South Africa, are in a worse position than other EMs given their fiscal positions, and only a vaccine will provide certainty of a recovery. We expect a much higher probability of the rest of the world recovering faster to pre-COVID levels than South Africa.
The US equity market has had a significant rally off its lows but remains expensively priced and we are therefore underweight US stocks in our offshore component. We expect to benefit from the recovery through global cyclicals rather than SA consumer cyclicals. The global sectors that should do well for us, and where we’ve been focusing some of our capital allocation, include materials (diversified miners, gold, PGMs), energy (Sasol, BP, Petrobas), financials (Wells Fargo, Santander, Lloyds, Ping An), healthcare (Cigna, Abbvie) and technology (Netease, Naspers, Baidu, Vivendi).
The SA equity market, excluding the globally-focused stocks, looks optically cheap but earnings will take years to get back to pre-COVID levels. South Africa needs decisive fiscal intervention to stave off a debt and financial crisis. COVID has increased our debt to GDP to unsustainable levels. If we don’t accelerate the proposed fiscal interventions, we will be facing a debt crisis in the next two years.
The Fund has done well and delivered top decile performance over many years, including the last twelve months which was a particularly difficult period, delivering a return of 10.2% versus the ASISA Category Average of 1%. While the longer-term returns are not what we’re used to in terms of double digit returns, we have generated returns to at least match inflation over the last couple of years. It has been a difficult time for SA risk assets to the extent that the ASISA Category Average over 3 and 5 years has not managed to generate a 4% return.
The Fund is well positioned in terms of the opportunities that we’ve identified. We are nimble and small and able to take advantage of volatility, one thing we think we’re going to see a lot of and which for us equals alpha opportunities. As an example, when Capitec was sold down 60% over two days, we were able to deploy almost 1.5% of the Fund’s capital in an afternoon and two weeks later the stock was back up 60%-70%.
Sibanye (3.2% weight) was the top contributor at 3% over the 1-year period followed by Naspers (3.8% weight) at 2.6% and British American Tobacco (4.0% weight) at 2.6%. The fourth biggest contributor was our FirstRand Dollar-denominated bond (5.5% weight) giving us a yield of 6.7% in US Dollars when we purchased it.
The detractors are mostly locally facing businesses as you’d expect. We’ve chosen to hold some of our domestic exposure through the big banks, which are solid businesses trading at discounts to their NAVs. Notwithstanding their price underperformance, we continue to hold Absa, RECM and Calibre, FirstRand, Standard Bank and Old Mutual as a call option on either a vaccine or an improvement in the South African underlying economic fundamentals.
The Fund has a net equity exposure of about 62% when considering the S&P 500 hedges that are in place. The foreign equity sits at about 20%, and we remain overweight global cyclicals for the reasons mentioned earlier. From a local equity perspective, 13% is invested in foreign JSE-listed companies such as Naspers, British American Tobacco and Prosus, and 19% in Mining and Resources. 10% of the portfolio is in domestic Industrials, companies that we believe will be able to take market share in a shrinking economy. Our total SA facing exposure is around 17% and some of these holdings are second derivative Rand hedge stocks.
The fund currently has around 11% in domestic bonds, focusing on the shorter end of the curve in terms of low duration. We’ve added some Property which now sits at 4% of the fund. Although we are not bullish about this sector given the negative fundamentals, there were some decent companies trading at bargain basement prices. Given our locally listed offshore earners, the Funds’ total offshore exposure is closer to 64%. With a domestic cash position of 6%, there is value to having liquidity in your portfolio given the high levels of uncertainty both here and globally so you can change as the facts change.