Anthony Sedgwick of Abax Investments, Fund Manager of the Nedgroup Investments Rainmaker Fund provides an overview of the Fund’s performance for the last quarter and positioning going forward
South African Equity Market
As we are all aware, the South African equity market has been a very unexciting place to be invested for some time now, especially given the 30% drop in the JSE post COVID-19. Although we have also seen a recovery since then, for the past few months we have effectively been moving sideways. There has also been a massive divergence in relative sector performance year-to-date. The resource sector has been a standout (up 11.9% year to date) and really the only sector where there have been any decent returns to be earned.
The industrial sector is barely up (4.3% year-to-date) largely due to the Naspers weighting. Financials meanwhile, have been very weak and property was the standout underperformer, down 46% year-to-date. Unfortunately, mid-and small caps have also been a very neglected sector and big underperformers for the year to date.
Rainmaker – performance drivers year-to-date
Naspers/Prosus now makes up about 21% of the portfolio and has been a strong performer. This is not a position we take lightly. We are very aware of the size of this holding and we give this a huge amount of consideration all the time. The rationale for this holding is driven by the prospects for Tencent. Unfortunately, the market is still not prepared to attribute any value to the rump of the portfolio of assets that are held although there have been some encouraging signs of late that management are prioritising and committed to taking further action to try and unlock that discount.
British American Tobacco (BAT) and Reinet, off a low point in Q4 2018 for tobacco which went through some significant challenges, have staged a recovery. We have had substantial exposure to the resource sector, primarily through Anglo-American and BHP Billiton which make up 10% of the portfolio. We have preferred diversified miners to the direct mining producers, which we are always circumspect about due the amount of risk they are exposed to. However, we do not simply dismiss this sector due to the risks that direct miners are exposed to and, for the last six months, we have had the largest exposure to direct mining producers in South African that we have had in the past 20 years.
We have had almost no exposure to the property sector apart from a very minor (<1%) holding in Growthpoint which has been reasonably defensive. We have not had any holdings in any of the other stocks in the sector and any point in the last 10 years and that has been a good thing for us.
We have also had no exposure to the discretionary consumer retail businesses which we believe continue to feel will face tremendous headwinds notwithstanding the short-term assistance they will get from the emergency social grant which Cyril Ramaphosa announced recently.
Unfortunately, we did not get it all right. Some of the positions that detracted from performance have been on the banks side. We had a relatively big exposure to banks at the end of Q1 of this year, prior to the COVID-19 crisis. At that point, we thought valuations had got to an attractive level and we were expecting gradual economic growth for South Africa. Clearly the pandemic rendered those growth prospects impossible. As such, we reacted very quickly and reduced our banking exposure substantially and focused it purely on the high-quality names we have confidence in. However, the entire sector has been hard hit and has not yet staged a recovery, so we are still feeling the effects of that.
We also had some Sasol exposure which we bought based on our analysis that the firm was through the worst of the difficulties of the Lake Charles installation. Unfortunately, even though the project was 90% complete there have still been further mismanagement issues which affected the Sasol stock and detracted from performance particularly in Q1 of this year.
As a domestic equity Fund, we have to build a diversified portfolio and we have been in more defensive stocks like KAP and Bidvest. However, with the entire sector being hard hit, there have been few places to hide.
The outlook for South Africa - where are we headed?
For the prospects for domestic equity to become more exciting to us there are some key issue to be addressed: The debt levels of South Africa are unsustainable and must be reduced; political uncertainty and corruption needs to be taken in hand to create economic certainty; broad-based and accelerating economic growth needs to become a reality and; there needs to be an increase in capital investment and improved business confidence which will in turn support employment growth and consumer confidence.
While we have seen a slight improvement on various issues since the election of Ramaphosa, the progress has been extremely slow and prior to COVID-19 in 2020, we were seeing mixed signals but nothing to get excited about. The COVID pandemic has only made all of these issues worse.
We therefore continue to err on the side of caution in this regard.
Rainmaker – portfolio changes
Since 1 September 2020 the Fund mandate changed to allow 30% of the Fund to be allocated offshore which we are delighted about. We have invested been heavily in our global equity capability for the last seven years, we have built a track record at a global equity fund that we are very proud of and are working hard at maintaining.
The performance of the Rainmaker Fund relative to other general equity funds has been hugely frustrating for us in that the vast majority of those funds have been able to avail themselves to the offshore allocation while we have been tied to South African equity. The obvious question is – are we making this change too late? We certainly don’t think so given our outlook for the SA economy and we have also been able to take full advantage of the rand over the last six weeks.
How do we manage it?
It’s not just 70% Rainmaker and 30% Abax Global Equity Fund and we don’t want to use the offshore allocation to buy rand-hedges that we can get in South Africa already (Naspers and BAT).
This allocation allows investors direct exposure to our best international ideas including Amazon, Alibaba, Anhui Conch, Samsung, Moncler, Visa, Thermo Fisher to name a few. The money to achieve this was gained by reducing our exposure to banks, retailers and industrial holding companies - and generally across all local holdings. Our holding in Naspers and BAT has stayed the same and we still have a very big exposure to the South African basic materials sector (23%) which we expect to benefit substantially from a weakening rand and still stronger commodity prices.
Looking at the top 10 holdings in the Fund from July to October, one key difference is that now there is a direct name – Alibaba, which has come into the top 10. Cumulatively, all the platinum stocks make up approximately 7.4% of the portfolio, while the exposure to First Rand, Standard Bank and Sanlam are all substantially lower.
We look forward to updating investors on the performance of some of these international names and the Fund in general in future quarterly updates.