Opportunity Fund – Seeking Opportunities

By Nedgroup Investments

Omri Thomas from Abax Investments, portfolio manager of the Nedgroup Investments Opportunity Fund, provides an overview of the Fund’s performance drivers in 2020 and where the team is now seeking and finding opportunities to help the Fund meet its objective of CPI plus 5% in 2021 and beyond.

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Performance overview
The performance of -2.7% over the last year was disappointing even though longer-term performance is still good at 5.9% over 7 years. The top performing position over the 3-month period was the Eurostoxx 50 exchange traded notes, which contributed 0.92% in aggregate. The Rand’s strength impacted the Fund’s offshore assets’ performance, with the USD being the top detractor at -1.90% for the period. Over the last 12 months, the Abax Global Equity Fund was the top contributor returning 2.68% with SASOL being the biggest detractor at -3.61% for the period.

Fair values of asset classes
Globally, there are not many returns to be had and yields are extremely low. In South Africa, we still have asset classes that offer real returns and have categorised most of our SA asset classes in the cheap bucket. We’ve moved SA and emerging market equities to the fair bucket because a large part of our market is trading extremely cheaply while the rest is trading more expensively. Despite the attractive, high bond yields, we are very concerned about South Africa’s fiscal position and think that bond yields will remain high. Most of the developed market assets are in the expensive bucket.

Asset allocation
Equities are now 38.3% of the portfolio, which is a 5% increase from our previous position off the back of the performance of our equity portfolio as well as additions to equities from the sell-off we saw at the start of the quarter. We increased our SA property allocation to 8.2% with the Fund benefitting from the property rally towards the end of 2020. We increased convertible bonds from 6.8% to 9.1% of the portfolio through the addition of a new SAPPI convertible bond. In the space of six weeks, SAPPI has rallied from R25 to R40 with the Fund a beneficiary of that strength. Our property and equity purchases were funded through SA Cash, which is now down to 10.2% of the portfolio.

Our top equity position is the Royal Bafokeng Platinum Convertible Bond at 5.5%. We’ve retained this stock as it’s the platinum company that has lagged the most relative to other platinum companies and is starting to become cash flow positive. They’re also increasing the UG2 portion of the PG metals they mine, which consists of a lot more rhodium, which is extremely highly priced right now and is very positive for them. We think there’s a good chance they will be looking to buy back this convertible bond within the next year at a premium. Our second biggest position is Naspers, a long-term Fund favourite at 4.1%, followed by British American Tobacco at 3.8%. It didn’t perform that well last year, but should be the foundation stock of any portfolio.

Offshore equity exposure
The Fund has a 5% allocation to Eurostoxx notes, with this index having done very well. Even if the index remains where it is, it will still give us handsome returns. We’ve retained a decent holding in the Abax Global Equity Fund at 5.1%. With our derivative and currency overlays, our FX exposure is close to the maximum at 33%, given our concerns about the fiscal outlook for South Africa and the subsequent impact on the currency.

Opportunities
The first opportunity is our biggest position, namely the Royal Bafokeng convertible bond. We have valued it at R188 per convertible and it’s currently trading at R175, so we think there’s still quite a big discount to fair value for this bond.

The second biggest holding in the Fund and the second opportunity is Naspers, which is trading at a discount to net asset value of -48.7%. It’s trading at a significant discount to just its see-through holding in Tencent, which has been the case for a long time. In December, management indicated that they will buy back both Prosus and Naspers shares. They have authorisation to buy back 12 million Prosus and 17 million Naspers shares. We expect them to continue with the buy backs this year, which will hopefully result in the discount closing.

British American Tobacco is the third opportunity where there has been a good, consistent upwards trajectory in dividend payments, giving investors a dividend yield of almost 8%. In a yield starved world, where you are getting 8% in pounds, you’d have to look far to find a better investment.

In closing
While global markets look expensive, we continue to find selective value in South Africa. Banks have had a bit of a rally, but are still at relatively low levels despite having good capital levels and healthy provisions. The SA hybrids, such as Royal Bafokeng and SAPPI, continue to offer attractive risk return pay-off profiles. Investment holding companies are still trading at big discounts to net asset values, such as Naspers, PSG and African Rainbow Capital. We’ve got maximum offshore exposure because of our concerns around the SA fiscal position and think that the investment note basket offers a very attractive risk/return pay-out profile. We continue to be cautious on the domestic economy and our bond duration remains low despite attractive yields We don’t think inflation is a short-term risk, but given the amount of global monetary stimulus, it must remain a left-field risk down the line and for that reason we have increased our exposure to local and global inflation-linked bonds. We believe the portfolio offers a good mix of growth and yielding assets, providing the portfolio with an attractive risk/return profile. The yield of the Fund is at 4%, which should provide a floor to the returns.