Investment Manager Commentary
Nedgroup Investment Advisors

"One of the funny things about the stock market is that every time one man buys, another sells, and both think they are astute." - William Feather

The JSE All Share index gained 1.8% in rand terms in May. The best-performing sectors were media (+18.3%), forestry & paper (+13.8%) and beverages (+12.5%). The worst performing sectors were construction & materials (-15.8%), industrial metals (-30.0%) and coal mining (-30.3%). The industrial index (+5.9%) outperformed the resource (-2.7%) and financial (-2.2%) indices. Both small- (-3.6%) and mid caps (-5.7%) underperformed large caps (+3.3%). Listed property closed 3.5% lower, while vanilla- and inflation-linked bonds lost 1.5% and 0.6%, respectively. Cash returned 0.6%. The rand was the worst performing emerging market currency in the month depreciating by 9.4%, 8.5% and 6.8% against the US dollar, pound sterling, and euro respectively in May. The weakness has been attributed to the decline in commodity prices and the prospect that South Africa’s sovereign foreign credit rating could be downgraded to speculative (or junk) status. Rumours of Finance Minister Gordhan’s imminent arrest certainly did not help investor confidence. Over the last year the rand has lost 22.7% against the US dollar, 18.2% against pound sterling and 23.6% against the euro.
The Nedgroup Investments Private Wealth Equity Fund during May 2016 (Equity Fund: 3.62% versus Swix40 benchmark: 3.11%) The fund outperformed its Swix40 benchmark by 0.51% for the month. During the month, the fund participated in the Bidvest Group Limited unbundling by top-slicing its BidCorp position into the short-term euphoria created by the event. Similarly, the fund exploited the technical selling pressure experienced by Bidvest (exfoodservices) by adding to the position on the day of the unbundling.

"Investing is a reductionist art, and he who can boil things down to the essential wins." - Chris Mayer

The JSE All Share index lost 3.0% in rand terms in January. The best performing sectors were Coal Mining (+37.8%), Gold Mining (+34.9%) and Platinum Mining (+17.7%). The worst performing sectors were Automobiles & Parts (-13.4%), Support Services (-14.8%) and Industrial Metals (-15.6%). The Industrials index (-2.6%) again outperformed the Financials (-3.4%) and Resource (-4.5%) indices. Mid-Caps (2.7%) beat Large- (-3.8%) and Small Caps (-4.6%). From a foreigner's perspective the rand declined 2.5% and 2.2%, respectively against the US dollar and euro, respectively, but gained 1.3% against pound sterling. Following the January meeting the statement of the Monetary Policy Committee of the Reserve Bank noted "[s]ince the previous meeting… the inflation outlook has deteriorated significantly, mainly due to exchange rate and food price developments" (over the last 12 months the rand has lost in excess of 20% against the major developed market currencies). The split committee opted for a relatively aggressive interest rate increase of 50bps. Our assessment is that drought induced food inflation is beyond the control of monetary policy and that deteriorating growth restricts the ability to raise prices; no matter the surveyed expectations of inflation.

The Nedgroup Investments Private Wealth Equity Fund during January 2016 (Equity Fund: -3.20% versus SWIX 40 benchmark: -2.97%)

The fund underperformed its SWIX 40 benchmark by 0.23% for the month. Various trades were undertaken during January with a view to reducing the fund's exposure to the SA consumer. The fund exited Truworths and pared back its overweight positions in Curro and Woolworths, all at good prices following the recovery of these shares post the weakness in December. The prospect of higher interest rates and higher taxes in South Africa are likely to create increasing household distress, in our view. The fund took the opportunity provided by the market to add to its existing overweight Information Technology position, by adding to EOH and Adapt IT. A new position in PSG Group was added to the portfolio during the month given the share price weakness witnessed in this counter.

In January the investment management team undertook an exercise where our team of analysts were tasked to uncover potential '10-bagger' candidates on the JSE. Fabled US investor Peter Lynch coined the phrase '10-bagger' to describe stocks that have the potential to appreciate 10 times in starting value. The exercise required a long-term perspective, just the sort of mind-set needed amidst the short-term noise and turbulence prevalent at the start of 2016. Without setting out the detailed analysis involved, the team highlighted two counters which demonstrated the potential to be 10-baggers in the years ahead. Unitholders will be encouraged to learn that software group Adapt IT, which is already a 3% position in the fund, was one of these candidates.

In closing, it is gratifying to note that, as at 31 January 2016 and based on Morningstar data, the fund is the number one ranked fund over the last three, four, five, seven, nine and 10 years. Investing in its truest sense, is a long-term endeavour and by the same token, the measurement of success can only be appropriately calibrated in multi-year terms. While unitholders have enjoyed a stellar period of returns over the last decade, the investment management team will have its work cut out for it to achieve a similar record in the decade ahead.