Since its inception in 2011, the Nedgroup Investments Balanced Fund has had annualised returns of 11.5% and we’re confident that this stellar performance will continue in 2021. Iain Power, the CIO of Truffle Asset Management and Portfolio Manager of the Nedgroup Investments Balanced Fund since inception, takes stock of the main contributors to performance in 2020, the current investment environment and how that translates into the portfolio’s positioning.
The Fund has done very well, ranking as the best balanced fund in its category since inception. It delivered 11.5% return for 2020 compared to the sector, which delivered less than half this return at 5.6%. The top 5 contributors in 2020 were Naspers (2.5%), Sibanye Stillwater Limited (2.3%), African Rainbow Minerals (1.8%) and Impala Platinum (1%). We bought Impala Platinum at R18 a share and today it trades at R219 a share. The valuations and free cash flow yields from these businesses are still very attractive and we think that while the shape of these returns will move to double digit dividend yields, we will still get capital appreciation. From a detractor point of view, even though we sold most of our gold positions, AngloGold was a detractor (-1.7%) as was Absa (-1.4%), Netcare (-0.6%), New Gold Platinum ETF (-0.5%) and Sberbank of Russia (-0.5%) although the latter subsequently recovered in January.
Factors supporting equity markets
Equity markets have been relatively buoyant. One of the structural issues behind them was the unprecedented amount of fiscal stimulus to support the economy and replace income of people affected by COVID-19. Furthermore, we have very dovish central bank policy, more so from the US who are moving towards a framework of higher inflation and no expectation of the Fed Fund Rate moving up into 2023. This is very positive. Short-term inflation expectations remain pretty low, creating a ‘goldilocks’ environment for risk assets.
There has been a very powerful earnings recovery given the collapse in the earnings base of many companies due to COVID and share prices have rallied in anticipation of this recovery. At the end of 2020, we were expecting a vaccination-led rally and were positioned for that from an asset allocation perspective, which is now starting to roll out. As long as this process continues, there is confidence of a return to a normal growth environment for the rest of the world in H2 of 2021 and in H1 of 2022. China has been amazing in the way they have dealt with COVID and has been a massive beneficiary for many of the resource-producing countries like South Africa who has benefitted from their powerful investment demand. This has pulled up commodity prices and helped many of our resource shares to hit new highs with the Fund having significant positions in these shares.
Top 10 holdings
We have a bigger value and emerging market bias to the portfolio at the moment. The top holding is the MSCI iShares Emerging Market Value ETF at 6.5%. We switched most of the straight emerging market exposure into the Value ETF. We’ve mostly exited our US exposure. Naspers, Impala Platinum, African Rainbow Minerals, Sibanye Stillwater and Northam Platinum are all in the top 10. Vivendi is a high quality business that has benefitted from disintermediation from a technology point of view and has done particularly well. Our Japanese ETF has also performed well. We’ve taken positions in companies exposed to a cyclical economic recovery, which is expected to gather momentum in H2 2021 as the vaccine rollout becomes more entrenched and life goes back to normal.
In terms of our equity exposure in the portfolio, we have been quite cautious on SA Inc over the last 3 years, picking up many of the structural issues and concerns in terms of South Africa’s lower GDP per capita growth and how we’re dislocated from the rest of the world. Much of our capital has been put into local stocks and bigger foreign companies which are exposed to the global economy, which has benefitted the portfolio. We are underweight banks and insurers and have been cautious with the property sector over the last 3 years. We took advantage of some stocks that benefitted from COVID, such as our big position in Hyprop, which we bought at R18 a share and which has almost doubled. We took similar positions in NEPI Rockcastle and Vukile, all of which have rallied strongly. We remain underweight in SA industrials, retail and telcos and prefer many of the mining cyclical sectors.
Foreign and dual listed is now underweight following our exit from Richemont, which did well for the fund. We recycled that capital into cheaper opportunities. Gold is largely neutral. We have a small overweight position in SASOL. We invested in SASOL during the COVID crisis at R40 a share, which is now up 4 or 5 times and has contributed nicely to our alpha. We have been in PGM shares with significant weights for the last 3 years. They’ve done nicely and we’ve taken slight profits in the sector and remain heavily invested. Diversified miners have also done well and we have recently taken a bit of profit. Valuations are still fair and we expect decent dividends. Free cashflow yields are also still attractive in that sector. Sappi is a small cyclical holding, which has rallied, up approximately 100% from the bottom. Within the SA equity carve-out the portfolio is positioned in favour of global economically cyclical companies. We are underweight in many of the SA Inc names and using that capital to invest in offshore or resource companies.
We maintain overweight positions in the resource sector. We think global Rand hedge stocks offer good value. Many of the SA focused stocks have recovered, but there are still selective opportunities. However, we have taken profits in some of the SA opportunities we bought during COVID because we are concerned about the long-term position and ability of SA companies to grow. The SA Inc opportunities will depend on decisive government action, but COVID is going to saddle SA’s economy with a significant amount of debt. We are cautious on the property sector, but there are some selective stock opportunities. Volatility is expected to remain high. We’ve managed this quite well, taking some profits and rolling in some hedges given the strong returns over the last 4 months. We remain positive on risk assets going into 2021.
The fund has got almost 70% of its capital invested in companies with offshore earnings or offshore names. Some of the SA Inc names are also second level Rand hedges. We have a very well diversified portfolio with 24% foreign equity, with most of that switched in favour of cyclically exposed companies which have value tilt. Foreign JSE listed companies make up 9% and mining and resources dominating at 27% of the fund.
In the last week, some domestic hedges have been rolled in to lock in fantastic gains that we’ve had over the last 4 months. Domestic fixed income is at 13%. While the yield curve is very steep and there is not much return on offer at the short end of the curve, we are finding better value in the 5-10 year space and are very hesitant of going out longer duration because of SA’s precarious fiscal position. We are fairly positive on risk assets, but a lot more positive on those businesses exposed to the global economy. We have a bigger emerging market and value tilt to the portfolio compared to what we’ve had over the past couple of years, which we expect to deliver decent returns for clients.