Fund performance summary – Q1 2019
How we were positioned
Our sustained positioning for a risk-on scenario saw our funds benefit from the strong global equity rally witnessed in the first quarter of 2019.
The relatively superior performance our funds generated came primarily as a result of being exposed to the right equity. In short, our exposure to select resource counters, cheap defensive stocks, and direct offshore emerging market shares all paid off during the quarter.
Our bond holdings (both domestic and offshore), simultaneously performed very well during the period. We put this down to falling inflation, and the concomitant resumption of a bond bull market. To be sure, there is definitely an element of economic growth concerns baked into the strong demand for bonds, US Treasuries in particular.
Our offshore allocation remains emerging market heavy, but with an increasing appetite for cheap developed market equity, the likes of the UK and German markets (see Chart 1) screening attractively in this regard.
Changes made during the quarter
The most important change made during the quarter was a reduction in our domestic interest rate sensitive (or SA Inc.) exposure. This was based on their strong rerating early in the quarter to valuation levels we no longer deemed attractive. This decision was also heavily influenced by the poor earnings prospects from many of the businesses geared to the health of our domestic economy. We are increasingly of the opinion that these shares cannot be bought using a buy-and-hold strategy until sustained earnings growth enters the fray.
The proceeds of the aforementioned disposals were recycled into meaningfully cheap defensive counters, namely British American Tobacco and Imperial Brands Tobacco. Impala Platinum also found a home given the structural support we see for the PGM basket and we added to Sasol and BHP. Another noteworthy addition is MTN, included due to the increase in likelihood that dividends will be repatriated from Nigeria, and its attractive valuation.
In our hedge funds we increased our short position in Discovery (see Chart 2) on cash flow concerns, and closed out our short in Astral after a material derating and a view that maize prices looked toppish.
Our thoughts going forward
Our base case is that the US economic slowdown will not be deep enough to derail the multitude of investment opportunities flashing deep valuation colours. That said, stock picking remains vitally important as not all sectors of our market will see that valuation unlock due to tepid earnings growth.
The strong rebound in global equites during the quarter is likely a result of the significant valuation on offer post the severe sell-off at the close of 2018. However, further gains will require a reacceleration in growth from both the European block and China. Under this scenario, the US dollar should exhibit some weakness which remains a central pillar for our prevailing investment positioning.
Chart 1 – A nice bottom in Europe?
There are generally two components to economic activity, services and manufacturing. Services tends to be more stable, and over time they tend to track one another. In red we have the PMI index showing services activity in the EU which has ticked up from depressed levels. Manufacturing (not shown) is yet to turn upwards, but it looks like the equities, as proxied by the German DAX in blue, believe manufacturing will follow suit. The DAX valuation is also attractive, and it was added to our portfolios in Q1 2019.
Chart 2 – Sell Discovery
We materially increased a Discovery short in our hedge funds early in the quarter. As you can see in the above chart, Discovery’s dividend yield is just less than half of what the average company on the JSE is paying. Couple this with their poor cash flow, heavy investment, and rising debt, and we think there is room for a de-rating of the share.