In September 2020, offshore equity was introduced as a component of the Nedgroup Investments Rainmaker Fund. This move was seen to be beneficial to the underlying investors and necessary given the narrowing of the SA listed investable universe. The global component of the Fund will be managed in a holistic manner alongside the SA equity holdings. Steve Minnaar from Abax Investments, Portfolio Manager for the Nedgroup Investments Rainmaker Fund, provides an update on the evolution of the Fund during 2020 and the team’s views on local versus offshore companies. Will local trump global and is local still lekker?
The rationale for adding offshore to the Fund
The offshore component enabled us to diversify the underlying economic activity, currency, region and sector investing. If you had taken a simple 70:30 combination of the Abax SA Equity Fund and the Abax Global Fund, you would have been better off to the tune of about 24% had you just been invested in SA stocks over the last five years. Over this period, the Rand has only depreciated by 10%, so it’s not just the Rand, but the ability to invest in a far more diversified opportunity set. Since 1 September, in the short term, SA equities actually outperformed global and outperformed what the Global Fund would have done in Rands. Having said that, adding an offshore component was absolutely the right thing to do.
Reducing the SA portion of the Fund
To move funds offshore we had to sell some of our SA equity. We did not try to get 30% offshore all at once, despite the pressure of the October Medium Term Budget Policy speech. We gradually moved about 15% offshore at an average of R16.40/$. We currently have 18% offshore and can move the balance as and when we see the Rand as being overvalued. Our changes to the SA portion of the portfolio included reducing gold, Sasol, MTN, Vodacom, Mondi, Imperial and KAP. We consolidated our banking exposure into First Rand, Standard Bank and Capitec with mixed success and sold our smaller positions in Life Healthcare, Growthpoint, Old Mutual, Pepkor, etc. The one sector where we added was the platinum miners, which in hindsight was a very good decision. We kept our exposure to Naspers and Prosus. Indirect exposure to Tencent is still our top position.
The offshore components
We tried to find quality businesses with good cash flows and good balance sheets, looking at what different business drivers we would now have exposure to. It’s very important to look at the risk diversification that underlies what you own. While we live in an uncertain world, we know that China is growing. China is also the largest e-commerce and fintech market in the world and still investing heavily in infrastructure. So, we wanted to own Alibaba and Anhui Conch, the biggest cement producer and importantly with an ungeared balance sheet. Given the global growth in e-commerce, fintech, social media, gaming and streaming, we purchased VISA, Amazon and Google. Microsoft, Amazon, Alibaba and Tencent represent more than 80% of the global cloud market.
There is also global demand for device memory with Samsung Electronics a good pick as they make most of their money from memory chips and are also gaining from the Huawei restrictions. Samsung is up over 67% since we added it to the Fund. There is a strong US consumer trend for a DIY lifestyle, which has seen us make purchases in Tractor Supply (peri-urban lifestyle), Trex (composite decking) and Autozone (vehicle repair). Given the growing European/global consumer athleisure and luxury market, we also bought Adidas, Puma and Moncler (growing innovative luxury clothing). Global healthcare is the last sector with purchases of Thermo Fisher who provide the nuts and bolts for this sector.
Portfolio positioning – is local still lekker?
Over and above the pandemic, we still have concerns about the SA economy. The balance sheet is being stretched with the interest bill consuming more and more revenue and the tax base being eroded. The SA economy is not growing fast enough and the investable SA equity market is shrinking to 80-100 stocks only. The silver lining, however, is that SA still has a competent financial sector, strong miners, good low-cost retailers, some quality small caps, liquid currency, a reasonable treasury and Naspers. Emerging markets are expected to outperform developed markets over the next couple of years. The SA component of Rainmaker is skewed towards quality offshore earners and we remain confident that you need to have a more diversified fund with exposure to global profit drivers.
SA listed shares have significant offshore (related) earnings already despite the diversity of business drivers being somewhat narrow. Adding direct offshore capacity to the Fund greatly increases diversity, reduces risk and adds to profit growth and value accretion potential. There is currently more opportunity to grow quality companies offshore.