OASIS CRESCENT MANAGEMENT COMPANY LTD.

Transcription

1 OASIS CRESCENT MANAGEMENT COMPANY LTD. FUNDFACTS March 2003 GLOBAL ECONOMY The world economy has suffered from a general slowdown in the last few years, which has been magnified by several high profile global events, from September th through to the second Iraq war. Yet despite all this, it has held up remarkably well. Leading indicators suggest the possibility of a double dip recession exists, but most of these reflected fears of a protracted and unsuccessful war in Iraq, an outcome that can now be discounted. Whilst the double dip risk is therefore overdone, the years of 4-5% growth, particularly in the US, are unlikely to return for some time. Fears of consumer debt having risen too fast have some truth to them but the consumer market will not collapse if interest rates rise. Unemployment remains low and manageable, despite having risen in the last three years. In fact, by historical standards, current unemployment in the US and Europe is well below average. As consumers consolidate, governments are increasingly coming to the fore with increased spending and large tax cuts that will underpin a recovery. Government debt in most developed countries has declined over the last decade through fiscal discipline and current deficits can be accommodated. The corporate sector is also starting to look promising. Recent difficulties have led to serious reform that has seen consolidation and lower debt levels. This leaves the sector in a far better position to profit from an economic recovery. Japan remains the only major source of worry as reform measures have yet to be implemented a decade after their worries commenced. The world s dependence on the US for economic growth is starting to weaken as China rises to prominence. The Chinese economy has experienced blistering growth averaging over 8% a year for the past decade. It has been almost immune to the slowdown in the rest of the world over the last two years and has fast become the biggest market for several commodities. Whilst the size of the Chinese economy is still small relative to those of the US and Japan, it will exert an increasing influence as it continues to grow and redirect trade and investment flows. In fact, emerging markets on the whole are looking very attractive, with the current SARS epidemic being the only major concern. SOUTH AFRICAN ECONOMY Given the background of a weak global economy, South Africa has done fantastically well. Trade figures benefited hugely from a weak Rand last year, with strong exports and relatively expensive (in Rand terms) imports helping boosting domestic producers. This position will likely be reversed this year as the Rand has recovered all of the value it lost during the second half of 200. The strong Rand, however, will have many benefits. Fuel prices have already started declining and imports are competitive for the first time in several years. This will put heavy downward pressure on inflation, which will benefit poor South Africans tremendously. Wheat and maize prices, whose rise last year hurt poor consumers badly, are already down to half their highest levels last year and it is a matter of time till some of this feeds through onto supermarket shelves. A strong and stable currency is also, in many respects, an indication of the strength of the South African economy. A shift towards more positive sentiment, particularly from international investors, could see substantial foreign direct investment. This would go a long way to reducing the high unemployment level, which would in turn lower income inequality and crime. The latest budget was welcomed in most quarters, as it entrenched the move towards a fair and efficient taxation system, with spending prioritised towards areas key for economic growth. Increased welfare, health, education and development spending will have a material impact on the condition of poor South Africans in the next few years. Additionally, lower income taxes, by being skewed towards low to middle-income households, will see much spending power released into the local economy. 20th Floor, Safmarine House, 22 Riebeek Street P.O. Box 27 Cape Town 8000 South Africa Tel: Fax: info@oasiscrescent.com

2 GLOBAL MARKETS International markets are still struggling to find their bottom. Despite three years of falling prices to work out the excesses of the late 990s financial bubble, equity prices continue to drop (see graphs below) A variety of factors have caused this. The most glaring of these is the sheer level of overvaluation of equities during the late 990s. To some extent, however, international equity markets have broadly been returning to realistic valuation levels so this can explain some of the weakness of the recent past. More thorough inspection shows that there has been a broad-based flight away from equities towards other asset classes, particularly through forced selling in falling markets by life assurers and insurers in an attempt to comply with the laws on capital adequacy in the countries they operate. This has seen the market significantly overshoot on the downside, just as it did on the upside. There are several reasons for investors to be very interested in equities. Valuation levels have been mentioned, but the main reason is that recessions can be tremendously cleansing experiences. The cleanup that followed the emerging market crisis of 997/8 is the most recent example of this. Asian markets were in a far worse position then compared to where developed markets are now. Yet the impetus of reform then saw a broad recovery that will be repeated now in developed markets. Much of this reform has been underway for some time now, with company debt levels having declined substantially and cash holdings recovered along with operating cash flows. Control over management has tightened and their remuneration has returned to realistic levels. This should see more prudent use of stock options, which themselves are increasingly being accounted for as part of a broad based reform of accounting practices. Other asset classes offer little reason to contradict this viewpoint. Low interest rates in the developed world mean that money market yields are ridiculously low, whilst bonds are expensive by most measures. Property offers the only attractive returns of the low-risk asset classes, but these returns pale in comparison to the potential returns of equities. SOUTH AFRICAN MARKET The factors that will determine the performance of the local market are quite different from those of international ones. The amount of money that has left the country illegally that qualifies for the amnesty announced may well be above the R80bn estimate being punted in the media. Should a sizeable proportion be repatriated, there will be large new flows into equities that will underpin both share prices and the current level of the Rand. The effect of the strengthened Rand on the earnings of exporters will be substantial. In the short-term, export-oriented industrial and mining companies will suffer. Given this environment, fund managers who have diversified well and are not heavily exposed to Rand-sensitive companies will perform best. With such a tough market forecast, the importance of stockpicking and downside protection cannot be overemphasised. Other sectors of the local market, however, offer tremendous value. The domestic economy will benefit substantially from the income tax cuts. Lower fuel costs, declining inflation, falling interest rates and heavy spending by government on infrastructure and welfare will all contribute to this. For this reason, we could be considered as being at the bottom of the economic and earnings cycle. The returns offered by companies that are able to take advantage of this market will be well above average. The property market is expected benefit from a decline in interest rates and may well hold up better than other asset classes. The strong Rand, however, will see a fall off in interest by foreigners that will affect the physical property market. Bond yields are already low by historical standards and money market yields are declining as an interest rate cut by the reserve bank looms. The outlook for these asset classes suggests that equities should remain the preferred choice for investors seeking good long-term returns. 2

3 OASIS CRESCENT EQUITY FUND The Oasis Crescent Equity Fund invests along strict ethical guidelines, which are in accordance with those laid down by the Dow Jones Islamic Market Index, the most recognised international index of shariah-compliant companies. Despite extremely tough markets in the year thus far, it has continued to outperform both its competitors and the market as a whole. It remains the number one performing general equity unit trust since inception and has been awarded several prestigious accolades to recognise this. Amongst these are the AUT Raging Bull and the S&P Micropal awards for the best performing general equity unit trust over three years using various risk-adjusted measures of performance. Split By Theme Sectoral Split R 408 m Since Since Performance (%) 3 Months 6 Months Year 2 Years 3 Years Inception Inception (Ann) (Cum) Oasis Crescent Equity Fund JSE (ALSI) Ave General Equity UT Inflation OASIS GENERAL EQUITY FUND The Oasis General Equity Fund has a broad mandate that does not exclude it from investing in certain industries for ethical reasons. The financial exposure, in particular, will help the fund s performance in the near future. Like its shariahcompliant counterpart, the fund is the number one ranking general equity unit trust since it was launched. Sectoral Split Split by theme Performance (%) 3 Months 6 Months Year Since Inception(Ann) Since Inception(Cum) Oasis General Equity Fund Ave General Equity Fund Inflation R 80m 3

4 OASIS PROPERTY EQUITY FUND The Oasis investment philosophy of protection of investor s capital is carried through into the Oasis Property Equity Fund. As a result, the fund invests only in high quality listed property domestically and diversifies through different property types. To obtain exposure to property types that are not well represented in South Africa the fund also invests offshore. Despite this offshore exposure and the strong Rand, the fund is still ranked number one in its category since inception with an average annual return of 2%. Sectoral Split R 226m Since Since Performance (%) 3 Months 6 Months Year 2 Years Inception Inception (Ann) (Cum) Oasis Property Equity Fund Ave Property Fund Inflation OASIS BALANCED FUND The Oasis Balanced Fund invests along prudential guidelines that follow those of pension funds, which set a limit on the maximum amount of equity exposure a fund can have. It does, however, have a higher equity exposure than other funds in its category, as over the long term equity returns will be higher than those of asset classes. As a result of tough equity markets this year, the fund has slightly under-performed its peer group although it remains the number one ranked prudential fund since its inception. Sectoral Split R 227m Since Since Performance (%) 3 Months 6 Months Year Inception Inception (Ann) (Cum) Oasis Balanced Fund Ave Prudential Fund Inflation

5 OASIS CRESCENT INTERNATIONAL FUND OF FUNDS The Crescent International Fund of Funds is a Rand based fund that invests in offshore (dollar based) equities. By doing so, it offers South African investors a way to diversify their investments. There are, however, two dynamics that affect the performance of the fund; the returns on international markets (in Dollars) and the Rand s performance against the US Dollar and other hard currencies. In the last year both of these have worked against South African investors as the Rand has gained strongly against international currencies and international markets have been very tough. Despite this, the fund has lost only 2% since inception, outperforming other funds in its category substantially to remain the number one foreign general equity fund in South Africa. Geographical Split Split By Theme Since Since Performance (%) 3 Months 6 Months Year Inception Inception (Ann) (Cum) Oasis Crescent Int l FoF Ave Foreign Equity General Fund Inflation R 77m OASIS BOND FUND The Oasis Bond Fund forms part of the range of products aimed allowing investors to diversify their exposure by asset class. The aim of the fund is to invest in high quality government and corporate debt that will provide a reliable income stream over time. Principal to this is the selection of instruments where the possibility of default is extremely low in order to protect investors capital. OASIS MONEY MARKET FUND The Oasis Money Market fund invests in fixed deposits and negotiable money market instruments with various local institutions. The fund aims to provide a steady income stream that at least matches inflation so the purchasing power of investors capital is preserved. It also ensures that investors are never exposed to financial institutions that may have trouble repaying debts by only selecting institutions with impeccable credentials and credit ratings. Monthly Yield (%) Sep 2002 Dec 2002 Mar 2003 Oasis Money Market Fund R 38m 5

6 Standard & Poor s Fund Awards 2003 Oasis received four globally recognized awards from Standard & Poor s Fund Services and Financial Mail for the impressive performance of its unit trust funds during These accolades included the award as the overall best smaller unit trust management company and many of the fiercely contested awards that were presented to funds in the general equity and balanced fund categories. Despite the fact that the current unit trust assets under management of Oasis total R.7 billion, which satisfies the classification requirements of large groups, the company had not registered funds in each of the eight sectors that are required for such classification. Nevertheless, the company was incredibly pleased to receive the award as the best smaller unit trust management company. With regards to the individual fund awards, the Oasis General Equity Fund, was presented with an award after it was rated as the best performing general equity fund over the last year after it generated a return of 20.4%, whilst the Oasis Crescent Equity Fund was rated as the best performing general equity fund over the last three years after it generated an annualised return of 26.5%. In addition, the Oasis Balanced Fund received the award as the best performing balanced fund during the last year after it generated a return of 63.%. Shaheen Ebrahim (Chairman), Adam Ebrahim (CEO), Nazeem Ebrahim (Marketing Director) Oasis staff at the award function at The Rotunda Best performing Islamic Global Equity Fund in 200 & 2002 The Crescent Global Equity Fund was rated by an international agency as the best performing Islamic global equity fund in 2002, after it received the very same award in the year 200. This consistency of performance is most impressive, especially when one considers that the fund has outperformed its benchmark, the Dow Jones Islamic Index, by 7% in 200, and by 22% in In a global equity market, which has been plagued by significant volatility and severe capital erosion, the Crescent Global Equity Fund has successfully preserved the capital of its investors. Therefore, should the investment environment become more favourable, the Fund will be in a position to increase the wealth of its clients. In addition to the accolade as the best performing Islamic global equity fund, Standard and Poor s Micropol has ranked the Crescent Global Equity Fund 4th out of the 278 global equity funds over the last two years ending March When investing internationally, Oasis is cognisant of the fact that the majority of the fund s investors are South Africans, seeking investment in companies and industries that are not necessarily prevalent in South Africa. In order to serve its investors, the Fund therefore provides effective diversification and avoids over concentration of investment in certain sectors or industries.

7 OASIS GLOBAL MANAGEMENT COMPANY (GUERNSEY) LTD. FUNDFACTS March 2003 OASIS GLOBAL EQUITY FUND The Oasis Global Equity Fund is a dollardenominated equity fund that invests in equity and property that is listed on international markets. The objective of the fund is to obtain superior returns to the market over the medium to long term. These returns, however, must be obtained at a lower than market risk. The fund sets about achieving its objective by being well diversified. The fund is well diversified between different industries and is not overexposed to any one particular country or geographic region. By diversifying in this manner, the performance of the fund is not dependent on any single economic or financial driver. This lowers the volatility of equity investment. To provide superior returns, the stock picking ability of the Oasis research team is used to identify companies that will provide abovemarket returns over a long holding period. A strong emphasis is placed on a company s cash flow; those with strong cash flow will generally outperform, particularly when markets are tough. The emphasis on capital protection can be seen in the graph below. When markets have been tough, the average global equity fund has been badly hurt, falling by 4.4%. The Oasis Global Equity Fund, however, has limited losses to just 2.3%. When markets have risen, the fund has matched their performance closely. Over a 28-month period this has resulted in substantial outperformance by the global equity fund over both its competitors and the broad market. Since inception in December 2000, the fund is down 9% in total. Whilst the negative return is undesirable, it must be borne in mind that global markets have done terribly during the same period. For example, the MSCI World Index, which is the appropriate benchmark for a global equity fund with a broad equity mandate, was down 38%. The average global equity fund did not do much better than this, falling 34% over the 28 months. The performance of the Oasis Global Equity Fund places it 5th in the rankings of global equity funds since its inception. This is an excellent achievement, particularly since it has performed at this level consistently since it was launched. At US$22m, the fund has good potential to grow and enable it to take advantage of markets as they recover. Split by Sector Split by Region Since Since Performance (%) 3 Months 6 Months Year 2 Years Inception Inception (Ann) (Cum) Oasis Global Equity Fund MSCI World Index Ave Global Equity Fund $ 22m 20th Floor, Safmarine House, 22 Riebeek Street P.O. Box 27 Cape Town 8000 South Africa Tel: Fax: info@oasiscrescent.com

8 OASIS GLOBAL MANAGEMENT COMPANY (GUERNSEY) LTD. FUNDFACTS March 2003 CRESCENT GLOBAL EQUITY FUND The Crescent Global Equity Fund is a dollardenominated fund that invests in equities listed on major stock exchanges worldwide. The fund is managed along strict ethical guidelines that restrict the range of investment that the fund may make. Specifically, the fund is shariah-compliant and has its own board of distinguished individuals whose duty it is to ensure that shariah guidelines are strictly adhered to at all times. The fund can be directly benchmarked against the Dow Jones Islamic Market Index (DJIM), the widest world index of shariah-compliant companies. Importantly, the DJIM has a board of four shariah advisors and three of these also serve on the advisory board of the Crescent Global Equity Fund. The primary characteristic by which the fund can be described is that of diversification. Compared to the DJIM, the fund is well diversified geographically, without the heavy exposure to the US market that characterises many similar funds. Just as importantly, there is also good industry diversification with sufficient exposure to important major industries without heavy exposure to any one particular sector. This is particularly important in shariah-compliant funds where one is excluded from investing in many industries such as financials, liquor and certain entertainment industries. With such a significant portion of the market removed, funds can often be overexposed to risky and poorly performing sectors such as the technology sector. By avoiding this mistake, the Crescent Global Equity Fund has already put itself on a firm footing to outperform its competitors. One of the main contributors to the fund s performance, however, is the stockpicking ability of its manager. The level of value added by this is immense, with the potential to outperform indices and competitors substantially. By focusing on company fundamentals, particularly earnings quality and sustainable cash flows, the best performing stocks can be included and mistakes minimised. The stock selection process is also fundamental in ensuring protection against capital losses. When markets are tough, the fund has limited losses to under 2% a month, compared to the average fund, which fell 4.7% on average. This represents a high level of downside protection. In rising markets, the fund managed to catch more than half the upside. Since markets have been so tough, the fund has managed to outperform the DJIM substantially since launch with a 8% cumulative loss versus a 40% loss for the index. It has also outperformed other global equity funds, where the average fund fell 34% in the 28 months. The net effect of this outperformance is a ranking of th amongst all global equity funds tracked by S&P Micropal. Split by Region Split by Sector Since Since Performance (%) 3 Months 6 Months Year 2 Years Inception Inception (Ann) (Cum) Crescent Global Equity Fund Dow Jones IM Index Ave Global Equity Fund $ m