MONTHLY MUSINGS FROM COUNTERPOINT ASSET MANAGEMENT July The dominant monthly theme:

Transcription

1 MONTHLY MUSINGS FROM COUNTERPOINT ASSET MANAGEMENT July 2015 The dominant monthly theme: Undoubtedly the main theme for July was the precipitous fall in the commodity complex, the implications of which were felt around the world in terms of various affected currencies and stock market performances. Below is a medium term chart of the CRB Futures Commodity Index which is a broad basket of commodities including oil, precious & base metals. It highlights the commodity rout as the Index is back to levels last seen at the nadir of the great financial crash. This resulted in some sharp falls in the JSE basic materials (resources) sector, notably industrial metals (Kumba) of -18.4%, gold and platinum of -21.9% and % respectively. Interestingly, the general mining sector (Anglos and Billiton) escaped relatively lightly declining only -5.6% for the month! Despite Naspers also having a negative month, the overall JSE All Share Index actually increased by 0.5% for July. This was largely thanks to amongst others, British American Tobacco, SAB, First Rand and Richemont. The impact of the commodity rout can be seen across the Emerging Market universe with the relationship between stocks and commodities well highlighted in the graph from the Economist shown below. What is a feature of this chart is how poorly the Emerging Market stock universe has done relative to the Developed World over this period. The decline in the prices of the commodity basket has undoubtedly been a major contributor to this poor outcome for Emerging Market equities. 1

2 The impact was also felt in the currency markets where the table below shows the percentage decline of a select few currencies against the USD from the beginning of the year. Note the meaningful depreciation of the commodity producing countries such as Brazil, Canada, New Zealand, Australia, Russia and of course SA. Currency depreciation of various countries against the USD (year to date) 2

3 The above charts do not, in our opinion, complete the picture without having a look at the world s risk free rate, i.e. the USA 10 year bond. It can be seen that it is still broadly near its low levels of nearly 50 years of data. We have been repeatedly pointing out the fact that global developed market bond yields are at historic lows but the USA is worth stressing, as its central bank has long ceased its QE program, and on the contrary is looking to raise interest rates for the first time since However, the rates at the longer end remain stubbornly low. The question is why? Putting the commodity cycle, poor EM currency performance and low bond yields into the mix it is hard to argue for a robust global economic outlook. We remain concerned about this as a potential realistic outcome and remain wary about rosy growth forecasts for the years ahead. With respect to the commodity cycle there is also the supply side that needs to be taken into account before we would be comfortable to start building meaningful positions. In other words, we need evidence that discipline is returning to the production of many of the commodities. Summary conclusion: A low growth, low inflation world, is our base case. In this environment we will most likely stick to the philosophy of not attempting to time cycles but to seek out companies that can still increase top and bottom line growth over the difficult period that potentially lies ahead. 3

4 MONTHLY FUND COMMENTARY July 2015 Counterpoint MET Enhanced Income Fund Size of fund at 31 st July 2015: R225m Note: This fund is classified in the SA Multi Asset Income group. We have thoroughly checked all the respected funds in this universe and have come to the conclusion that it is a free for all category with 10% allowed in direct equities, further allocations in property, off-shore securities etc. There are also pure inflation-linked funds included in this group, as well as pure preference share funds. In light of this, we stress that our fund is a pure SA only fund as this was requested by the LISPS. This has had implications for our thinking and positioning as many of the competitors have material allocations offshore. The South African Bond market as measured by the All Bond Index produced a 1.0% return for July. Cash returned 0.5% with the Preference share index lagging at 0.2%. The Inflation Linked Bond Index was the strongest performing asset class in this universe returning 2.0% for the month. The main headline news during the month was the decision by the South African Reserve Bank to raise the repo rate by 25 basis points. This was largely discounted by market participants as can be evidenced by the non-event in the action of the entire yield curve. It was not a straight forward decision by the committee, as from a growth or demand point of view there was absolutely no reason to raise rates. However, the crucial point is they have to manage inflationary expectations and that is why the decision was made. We believe that it was the right decision as all a Central Bank has is credibility and by not doing so would have gone some way to denting that important aspect. The fund is largely exposed to shorter dated bonds in the fixed interest component, with no exposure to the 12+ area of the index. The fund remains light in inflation-linked bonds given the break-even rates remaining in favour of nominal bonds. We are constantly looking for entry levels into the longer end of the yield curve should opportunities present themselves. 4

5 Pref Shares 7.8% FRN % CILI % Enhanced Income Fund CILI % SA Property 2.3% Bonds % Bonds % Bonds % Bonds % Cash 6.9% FRN % FRN % FRN % 5

6 Counterpoint MET Value Fund Size of fund at 31 st July 2015: R166m The fund followed the previous month up with a further positive month when measured against its benchmark, the SWIX All Share Index, adding 71bpts. This was again followed up by beating the peer group average by a handsome margin. July saw a volatile month with the main feature being the carnage in the resource area and in particular the precious metal sector. The fund s main performance came from largely avoiding the precious metals and having some reasonable exposure to the large cap dependable compounders. We had a quiet month with respect to any meaningful portfolio changes other than the sale of some MTN s which reduced the exposure to zero. We believe that the market is overvaluing the growth risk return trade off in the non-sa businesses, particularly in Nigeria. In addition, voice revenue in SA is under serious pressure and is in decline. Therefore we would prefer to sit on the side lines until more compelling value is offered. Our top value contributors over the month were our holdings in the mid-cap area; viz, JSE, Brait, Spur and Transaction Capital. These shares collectively added 97 bpts to the benchmark. British American Tobacco, after releasing a solid set of results during the month had a very positive month which also added to our outperformance. In terms of the main value detractors, by not owning Richemont cost the fund. In addition owning the lowest cost platinum producer RBPlats also detracted value as did our holdings in Santam and Life Healthcare and Trencor. The sum total of these shares amounted to a negative contribution of 72 bpts. Other additions of positive contributions and negative detractors were spread throughout the rest of the fund. We believe that we are beginning to see the first signs of our stock picking ability as we are resolutely sticking to our focus of a 5 year time horizon per company which we believe values the growth component more appropriately. 6

7 Value Fund - Subsector AA Materials 2.5% SA Property 6.9% Cash 8.6% Industrials 10.8% Health Care 5.9% Consumer Discretionary 23.3% Financials 25.9% Energy 2.6% Consumer Staples 13.4% 7

8 MET High Yield Fund Size of fund at 31 st July 2015: R78m Current DY%: 4.04%; SWIX All Share Index DY%: 3.0% Note that this fund should be measured in terms of its objective and not the general equity peer group or a fixed benchmark index. A key metric that we believe is important to place emphasis on is the expected future dividend stream of each company rather than to manage the capital value of each share. In other words, despite a great company being possibly expensive in the short term we should focus more on the future dividends that it can generate rather than to sell the share and lose out on the expected income. Given the emphasis on dividends and dividend growth via a disciplined dividend discount model, the fund will naturally be shy of the high flying industrial global consumer shares such as Naspers, SAB, Richemont, and Aspen due to their low yields while also avoiding most resources shares as dividends are hard, if not impossible to predict. The fund again performed well for the month of July handsomely outperforming the Satrix Dividend Plus Index by 4.7% over the month. We think that this is a more appropriate benchmark for this fund to use as to compare it to the SWIX All Share is not relevant as the objectives are entirely different. Our top six shares in the portfolio produced a mainly positive outcome for the month. The star performer for the month was the JSE share which produced a stunning 14.7% for the month. First Rand and Spur were up 2.7% and 1.5% respectively. Woolworths and Bidvest were largely flat. The only negative performer for the month was Holdsport which declined -2.1%. There were no trades in the fund during the month. 8

9 High Yield Fund - Sub-sector AA Materials 1.7% Pref Shares 4.5% Telecomms 2.1% Cash 1.6% Consumer Discretionary 16.9% Int Equity 18.0% Consumer Staples 12.9% Int Cash 8.8% Energy 0.0% Industrials 10.1% Health Care 3.6% Financials 19.9% 9

10 A general note on the Balanced Funds: The Cautious, Moderate and the Balanced Plus Funds are managed on a disciplined approach utilizing the Value Fund as the equity building block and the Enhanced Income Fund as the fixed income building block. The crucial difference between the 3 funds is the exposure to equities and, to a certain extent, the long end of the yield curve. The Cautious Fund will have, as a target, 36% exposure to equities, the Moderate Fund 52.25%, and the Balanced Plus Fund, 67.5%. As the two main building blocks have already been commentated upon all that remains is for the asset allocation to be discussed. Note also that the asset allocation decisions are the same for all three funds. In other words, should we want to be say, 10% less than the target weighting to equities we will apply that to all 3 funds. So the Cautious will be set at 26%, the Moderate at 42.5% and the Balanced Plus at 57.5%. Therefore we need to only have one commentary for all three balanced funds. MET Cautious Fund Size of fund at 31 st July 2015: R396m For the month of July the overall investment environment swung sharply to concerns of an economic growth slowdown in China, particularly fixed investment growth, which of course is very resource hungry. Clearly the market did not like what it believed to be a new weak trend and sold commodities down significantly. As mentioned above this was highlighted by the MSCI World Index ($) producing a solid 1.8% while the MSCI Emerging Index ($) declined sharply by -6.9%. Note that the World Index is essentially the Developed Market Index. In summary then, from an asset allocation point of view, in the international equities arena it was DM over EM. Within domestic equities it was all about avoiding resources. Locally, fixed income was a nonevent but interestingly local property had a great month producing 5.1%. Looking more closely at the outcome for July and taking an overall attribution (using the Cautious Fund as the yardstick) into account, the numbers are made up as follows: Upfront it is important to note that we have set a demanding internal benchmark for the 3 balanced funds and it was satisfactory that all 3 funds were in line with their respective benchmarks over the month. This translated into above the respective peer group performance. The highlight over the month was the alpha added in the international equity fund. The Fund outperformed the MSCI World Index by 0.9% which when added to the positive June is a very pleasing start to our global equity track record. Note that since inception (2 nd June) the Counterpoint Global Equity Fund has returned, net of all costs 1.03%, vs the MSCI World of -0.68% delivering an alpha of 1.71%. In summary then, we are pleased with our internal focus and success for July as we were in line with the demanding benchmarks which, gratifyingly, also translated into a decent outperformance of the respective peer groups. 10

11 Cautious Fund SA Property 4.5% Pref Shares 2.1% Bonds 12.8% SA Net Equity 17.4% Cash 8.5% Int Equity 13.2% FRNs 22.5% Int Cash 9.2% Int Bonds 3.9% ILBs 4.1% Commodities 2.0% 11

12 MET Moderate Fund Size of fund at 31 st July 2015: R105m Commentary same as above Moderate Fund SA Property 4.4% Pref Shares 1.6% Bonds 9.5% Cash 9.4% SA Net Equity 27.9% FRNs 16.9% Int Equity 17.2% Int Cash 5.7% Int Bonds 2.4% ILBs 3.2% Commodities 2.0% 12

13 MET Balanced Plus Fund Size of fund at 31 st July 2015: R413m Commentary same as above Balanced Plus SA Property 5.1% Pref Shares 1.6% Bonds 5.6% Cash 7.2% FRNs 12.5% SA Net Equity 37.4% Commodities 2.0% ILBs 2.1% Int Bonds 0.9% Int Cash 5.3% Int Equity 20.3% 13

14 DISCLAIMER Counterpoint Boutique (Pty) Ltd accepts no liability of any sort resulting from reliance being placed upon information contained in this document by any person. Whilst every effort is made to represent accurate financial and technical information on an ongoing basis, inadvertent errors and typographical inaccuracies may occur. Information, laws, rules and regulations may also change from time to time. Information contained is therefore made available without any express or implied representation or warranty whatsoever, and Counterpoint Boutique (Pty) Ltd disclaims liability for any expenses incurred, or any damage, claims or costs sustained by users arising from the reliance being placed on the use of services or any information or representations contained in this document. The materials contained on these pages are provided for general information purposes only. We accept no responsibility for any loss or damage which may arise from reliance on information contained in these pages. The document should not be seen as an offer to purchase any specific product and is not to be construed as advice or guidance in any form whatsoever. Investors are encouraged to obtain independent professional investment advice before investing. Investors should be aware that investing in a financial product entails a level of risk which depends on the nature of the investment. The merits of any investment should be considered together with the investor s specific risk profile and investment objectives. Collective Investment Schemes are generally long term investments. Counterpoint Boutique (Pty) Ltd does not provide any guarantee, either with respect to the capital or the return of a portfolio. Past performance is not necessarily a guide to future performance. Fluctuations in exchange rates and underlying investments may cause the value of international investments or underlying investments, if included in the mandate, to go up or down. Illustrations are not guaranteed but are for illustrative purposes only. Counterpoint Boutique Pty (Ltd) is an Authorised Financial Service Provider (FSP44508). MET Collective Investments and Counterpoint Counterpoint Boutique (Pty) Ltd has signed a discretionary mandate with MET Collective Investments (RF) (Pty) Ltd and is the appointed Investment Manager. MET Collective Investments (RF) (Pty) Ltd is the manager of the Counterpoint MET Collective Investment Schemes (CIS). Collective investment schemes in securities are generally medium- to long-term investments. The value of participatory interests or the investment may go down as well as up. Past performance is not necessarily a guide to future performance. MET Collective Investments (RF) (Pty) Ltd (the manager) does not provide any guarantee, either with respect to the capital or the return of a portfolio. The manager has the right to close certain portfolios to new investors, in order to manage it more efficiently, in accordance with its mandate. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. The collective investment scheme may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. Different classes of participatory interests apply to these portfolios and are subject to different fees and charges. A schedule of fees, charges and maximum commissions is available on request from the manager, or is available on the website. Forward pricing is used. The portfolio valuation time is 08h00 for fund of funds and 15h00 for all other portfolios and the transaction cut-off time is 14h00. Annualised returns are period returns re-scaled to a period of 1 year. This allows investors to compare returns of different assets that they have owned for different lengths of time. Actual annual figures are available to the investor on request. Income distributions, prior to deduction of applicable taxes, are included in the performance calculations. NAV to NAV figures have been used for the performance calculations, as calculated by the manager at the valuation point defined in the deed, over all reporting periods. Investment performance calculations are available for verification upon request by any person. Reinvestment of income is calculated on the actual amount 14

15 distributed per participatory interest, using the ex-dividend date NAV price of the applicable class of the portfolio, irrespective of the actual reinvestment date. The performance is calculated for the portfolio. The individual investor performance may differ, as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Foreign securities within portfolios may have additional material risks, depending on the specific risks affecting that country, such as: potential constraints on liquidity and the repatriation of funds; macroeconomic risks; political risks; foreign exchange risks; tax risks; settlement risks; and potential limitations on the availability of market information. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Investors are reminded that an investment in a currency other than their own may expose them to a foreign exchange risk. Associates of the manager may be invested within certain portfolios and the details thereof are available from the manager. The terms and conditions as well as the minimum disclosure document (MDD) for each fund are available on Counterpoint and MET Collective Investments websites at and Please note, the yield of the Counterpoint MET Enhanced Income Fund is historic and the yield is calculated monthly. Third-party disclosure The manager retains full legal responsibility for the third-party-named portfolio. MMI Holdings Limited is a full member of the Association for Savings and Investment SA. Company details Counterpoint Boutique (Pty) Ltd Registration number 2006/018046/07 FSP number Ground Floor, Tijgerpark 3, Willie Van Schoor Avenue, Tygervalley, CT PO Box 5291, Tygervalley, 7530 Tel Fax Janeth@cpam.co.za 15

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