December 2018 Quarterly Comment Cordatus Worldwide Flexible Prescient Fund ( CWWF )

Transcription

1 December 2018 Quarterly Comment Cordatus Worldwide Flexible Prescient Fund ( CWWF ) The rolling quarter ending December 2018 was a very trying period for investors, with SA risk assets once again declining during the period. Geopolitical events, led largely by the USA (increased trade tensions with China, coupled with rising interest rates), Europe (softening economic conditions, nationalistic resurgence, stubborn Italians, broken Brits and revolting Frenchmen) left uncertainty at elevated levels. Argentina and Turkey led capital outflows from Emerging Markets and weak SA fundamentals had not shown any sign of meaningful reversal in the lead up to the end of Capital markets remain vulnerable to even minor disruptive events and adverse news-flow. Table 1: Total return of selected indices (all in ZAR) to 31 December 2018 Qtr % 1 Yr % 2 Yr %* 3 Yr %* 5 Yr %* SA Equity (J203T) SA Property (J253T) SA Bonds (ALBI) SA Preference Shares (J251T) SA Cash (Call Deposit) SA Cons Inflation (CPI) ** MSCI World NR USD EPRA/NAREIT Property TR USD Citi WGBI USD BofAML USD Libor TR USD US BLS CPI USD ** * Returns are annualised / Source: Morningstar Direct ** Inflation lags by 1 month due to data availability Table 2: ZAR movement against selected currencies to 31 December 2018 Rate Qtr % 1 Yr % 2 Yr %* 3 Yr %* 5 Yr %* USD EUR GBP AUD * Returns are annualised / Source: Iress

2 The FTSE/JSE All Share Index (J203T) fell 4.9% over the quarter, with resource-related (Resi10 Index -5.0%) counters performing marginally better than Industrial stocks (Indi25 Index -6.8%), leaving Financials (Fini15 Index -0.4%) the only source of support in an otherwise dismal period. Fixed-income assets fared much better, with SA bonds (ALBI) rising 2.7%, SA listed preference shares (J251T) returned a positive 4.1% and SA cash (STeFI) returned 1.6% during the period. SA listed property stocks (J253T) continued to struggle, ending the quarter 4.0% lower. Table 3: How the CWWF is positioned at 31 December 2018 CWWF Allocation Strategic Allocation Fund Variance Offshore Equity SA Equity Offshore Property Offshore Bonds Offshore Cash SA Cash Offshore Other * SA Other * Offshore exposure % * Other includes Private Equity, Preference Shares, Hedged Instruments, Hedge Funds, etc Table 4: Returns (%) for the quarter on the CWWF CWWF (A1) Benchmark (CPI+5%) Return Variance October November December Quarter Portfolio actions during the quarter o Cash holdings within the Fund have remained at +/- 12% over the course of the quarter as selective stock rotation took place. This cash cushion provided a considerable degree of protection during the recent market downturn. Sales: Take place when the current price has exceeded the calculated Fair Value of the stock by a material margin (i.e. the margin of safety has been completely eroded) and/or stock specific issues come into play Share Domicile Sale Reasoning AIG USA Increasingly unpredictable weather patterns Compass Minerals USA Increasingly unpredictable weather patterns China Mobile CN Regulatory intervention Imperial Brands UK Regulatory environment Page 2 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018

3 Purchases: Take place when the current price offers a margin of safety relative to the calculated Fair Value of the stock / specific corporate activity. Share Domicile Purchase Reasoning GEA Group EU Food processing, safety & efficiency BMW EU Attractive pricing, yield, electric & sustainability focus Mosaic USA Food production inputs - potash NetEase CN Attractive pricing, E-sports and gaming exposure Capital One Financial USA Attractive pricing Telefonica EU Attractive pricing Facebook USA Attractive pricing given network effect & underlyings Anixter International USA Attractive pricing, diversified industrial exposure CVS Health USA Attractive pricing Contributions from stocks to the quarterly return of -8.8% (top 5 & bottom 5) o The top 5 contributors to the overall Fund return where Starbucks, Firstrand Pref, Telefonica, Pfizer and Investec Pref. While the top 5 positions that detracted from overall quarterly performance were Cognizant, Blackstone, KKR, Amazon and British American Tobacco Quarterly Return Contribution BTI AMZN KKR BX CTSH INPR PFE TEF FSRP SBUX Page 3 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018

4 A longer-term view Chart 1: Cumulative return of the CWWF & benchmark (indexed to 100 at inception) Key takeaway: The ZAR injects a material amount of volatility into the return series of the CWWF. We do not employ a hedging strategy around the ZAR. The primary focus of the manager is to select those shares with the best relative valuation. Since inception, the CWWF has returned a compound annual growth rate of 10.9%. Chart 2: CWWF returns in USD & US CPI+5% Key takeaway: The CWWF, given the focus on offshore equities over the longer-term, is frequently compared (by investors) to a suitable real-return objective in USD, namely US CPI+5% per annum. Since inception, the CWWF has returned a compound annual growth rate of 5.4% in USD. 165 US CPI+5% CORD A1 [USD] START Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Page 4 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018

5 Risk report Chart 3: CWWF risk-reward scatterplot (monthly data since inception) Key takeaway: The relationship between the risk taken & return generated on the CWWF is within acceptable parameters. Chart 4: CWWF drawdown (monthly data since inception) Key takeaway: The drawdown on the CWWF is within acceptable limits given the exposure to risk assets and currency fluctuations. Page 5 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018

6 Chart 5: CWWF multi-period rolling return distribution Key takeaway: The measurement period over which Cordatus evaluates the performance of any investment portfolio is that which is best aligned with the underlying assets that comprise the portfolio and the benchmark, which ultimately guides the asset selection process. The CWWF consists primarily of longer-duration assets (e.g. equities & property) as the benchmark (SA consumer inflation + 5% per annum) ultimately requires such investments to generate the required returns over time. The recommended investment time horizon over which to evaluate such a portfolio is rolling 5-year periods (i.e. the performance achieved by the portfolio for the 5-years ending at your reporting period). With the portfolio holding a material weighting in risk assets, the short-term volatility experienced by the portfolio can be quite disconcerting for investors with a shorter period mind set. The chart below shows the variability of returns achieved within the CWWF over various rolling periods. The higher number on the chart at each evaluation date (1, 3 & 5 years ending December 2018) indicates the best historical rolling return figure, whereas the lower number indicates the worst rolling return figure. The middle number serves as the average rolling return for the period. So, for the 1-year period ending December 2018, we see that all the 1-year periods in the past of this portfolio of assets has ranged from +29.4% to -7.4%, over rolling 3-year periods returns have ranged from +15.3% to +2.1%, while over rolling 5-year periods the range is from +13.5% to +8.2%. The average return of the portfolio is indicated as a point which lies between these two points for each period. For investors holding a position in the CWWF we would guide you towards the rolling 5-year period, which aligns with the risk profile of the portfolio. If you find that difficult to do when markets are gyrating and news flow is directing social discourse, note that the average 1-year return over the 55 periods we evaluated is 10.4% per annum, while over the 5-year periods it is 11.2%. Using the 5-year period as your guide, you have a period over which short-term market gyrations and emotive news flow is filtered by time and provides a more meaningful picture of the driver of your long-term wealth creation objectives Rolling return % yr 3 yr 5 yr Page 6 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018

7 The operating environment DOMESTIC ASSETS Fixed Income & Property SA s prospects remain at the mercy of the US monetary policy, emerging market flows, credit rating decisions, global trade activity, SOE capital demands and heightened political rhetoric (both home and abroad). The SA Reserve Bank is understandably treading carefully at this time given relatively contained inflation expectations and having crawled out of a recession while global growth prospects show some signs of softening. We thus expect interest rates to be held at current levels for most of Listed domestic property fundamentals have remained weak as low economic growth and growing unemployment continues to place pressure on domestic demand. Weak property fundamentals, supported by lower expected M&A activity, oversupply and lower earnings expectations does not bode well for the sector in the shortterm and we remain underweight the asset class. Listed Preference Shares remain a material component of our holdings within the fixed-income sector. While liquidity has tightened somewhat over the past quarter, the after-tax yield remains compelling and capital values have held up well over the past quarter. Currency High nominal (and real) interest rates in SA allow investors to reap an attractive yield without taking on material capital volatility (bonds & property). We remain overweight cash, preference shares and lowduration bonds The ZAR continues to remain volatile within a correction phase which started in September 2017, when it cost R15,70 per USD. The relatively open and liquid ZAR was -1.4% weaker against the USD / 0.6% stronger against the GBP, during the quarter. We see this as a short-term event and that some ZAR strength could still be expected as this correction phase comes to a conclusion. Faltering global growth, heightened event risk and policy missteps all have the potential to exacerbate market volatility and redirect capital flows towards safer havens. Equity With sentiment low and growth wanting, a focus on SA listed counters able to produce the required operational efficiencies and introduce additional growth vectors is our core focus. Any positive change in the current political, economic, sentiment, capital flow or trade conditions prevailing is likely to reward resilient SA Inc companies. That said; we expect that global capital flows into emerging markets will be more selective in 2019, shunning those economies with weak economic fundamentals and heightened political risks. SA, as a result, remains vulnerable in the short-term. Page 7 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018

8 OFFSHORE ASSETS Fixed Income & Property The narrative and actions around US rates remains influential across all asset classes and geographies, with emerging markets displaying high USD external debt profiles feeling the effects more acutely. We currently remain underweight global bonds, expecting yields to settle at higher levels in line with the US rate normalisation process. We do however anticipate that yield increases will be contained in due course as USA politics temper Trump enthusiasms, Europe maintains the status quo and Japan remains active QE participants. Currency The support for the USD from higher US interest rates is coming to an end and as such, we expect the USD strength of 2018 to wane; providing a measure of support for the ZAR, JPY, GBP and EUR. Developed market equities (MSCI World Index) fell 13.4% over the past quarter in USD terms, with global listed property declining 4.8%. Emerging markets fared better than developed alternatives, ending the quarter 7.5% lower. The FTSE/JSE All Share Index declined by 6.4% in USD terms Equity While relatively strong earnings growth, capital being returned to investors and economic growth is still expected from developed market equities (primarily the USA) over the next year, policy uncertainty (trade, fiscal & monetary), equity valuations and uncertainty surrounding the longevity of the current economic cycle lead us to position towards a neutral (from overweight) stance on global equity. Regards, Craig, Rolfe, Kim and Jonathan Website: Twitter: Facebook: Cordatus Capital DISCLAIMER Cordatus Capital (Pty) Ltd is an authorised Financial Services Provider [FSP # 21263]. The content of this document and any information provided may be of a general nature and may not be based on any analysis of the investment objectives, financial situation or particular needs of the client (as defined in the Financial Advisory Intermediary Services Act). As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate considering the client s own objectives and particular needs. Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith. The products discussed in this document, may or may not, be regulated by the FSCA. Page 8 of 8 Cordatus Worldwide Flexible Fund - Quarterly Comment December 2018