NEDGROUP INVESTMENTS VALUE FUND. Quarter Four, 2018

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1 NEDGROUP INVESTMENTS VALUE FUND Quarter Four, 2018 For the period ended 31 December 2018

2 NEDGROUP INVESTMENTS VALUE FUND EXECUTIVE SUMMARY After a blistering 2017 when JSE and global equities surged over 20% and most asset classes delivered double digit returns, 2018 stood in stark contrast. Equity bourses varied from -4.5% in US dollars for the bell weather US markets to -14.2% for emerging markets. Commodity indices were lower and even global bonds showed negative returns. The FTSE/JSE All Share Index fell 8.5% (-21.3% in US dollars) last year with several blue-chip stalwarts suffering heavy losses as the market de-rated companies that have exploited cheap leverage to make acquisitions. Nine Alsi 40 shares declined by more than 30% (of which six fell more than 40%). SA listed property stocks plunged 25.3%. In South Africa, only cash and the All Bond Index (+7.7%) produced real returns. The global economy continued to deliver above trend growth as US corporate earnings were boosted by Trump s early tax cuts. The US Federal Reserve responded by raising interest rates in four quarter-point increments, but tellingly reduced its outlook for the number of hikes anticipated in Major market inflection points are often associated with elevated volatility and increasing concentration of returns in a few counters. This was reflected on the JSE with the FTSE/JSE All Share Index fluctuating more than 5% twelve times during the year while US market returns were initially concentrated in the giant US tech stocks. South Africans welcomed with relief a new political order as President Ramaphosa moved to reverse some of the more insidious decisions made in the final stages of the Zuma era. Despite this positive political catalyst, the country slipped into two quarters of negative GDP growth. Business confidence languished amid political uncertainty while consumer spending was constrained. The rand weakened 13.5% against the US dollar in 2018 on emerging market contagion risk following Turkish and Argentinian disruptions. Trade war escalation further exposed the vulnerability of small, open, twin-deficit economies to exogenous shocks. Severely stretched public finances limit the SA government s ability to meaningfully stimulate growth, making anaemic private sector fixed investment crucial for growth. Q PERFORMANCE COMMENTS Contributors Value Group 0.36% Metair 0.32% Bidvest Group 0.26% Vodacom 0.24% RMB Holdings 0.20% BHP Group 0.18% Detractors CapCo -0.77% Santam -0.88% Richemont -1.02% Sasol -1.82% BAT -2.10% Core portfolio rand hedges Anheuser Busch (-22.1%), British American Tobacco (-28.6%) and CF Richemont (-19.3%) fell sharply despite moderate rand weakness Sasol (-22.4%) fell on the oil price slump Financials were positive including RMB Holdings (+2.1%), PSG (+7.6%), Standard Bank (+2.2%) Capital & Counties (-14.0%) tracked UK stocks lower Other assets contributed positively as Newgold rallied on gold s safe-haven appeal Page 2

3 MARKET OVERVIEW WORLD Despite continued US economic strength, data indicating a slowdown in ex-us economic growth unnerved markets the economic expansion cycle is now decidedly late stage World equity markets sold off sharply in Red October before recovering slightly in November, only to resume an even more broad-based tumble in December slowing growth in China, continued US/China trade conflict and tighter liquidity spurred investors out of risk assets into the safe havens Geopolitical stresses proliferated with the Italian-EU budget stand-off, stalling Brexit negotiations and far right politician Jair Bolsonaro s Brazilian presidential win while US/Sino trade tensions seesawed with conflicting signals from the positive Trump/Xi meeting and provocative Canadian arrest of Huawei s CFO The US Federal Reserve raised its benchmark rate for the fourth time in 2018 and continued its balance sheet normalisation with the ECB starting its own quantitative easing withdrawal programme despite a downward revision to the dot plot, there is a trend of rising interest rates and reduced liquidity US 10-year bond yields started the quarter above 3.0% but declined rapidly as investors fled to safe-haven assets although largely driven by the flight to safety, the flattest US yield curve since 2007 may indicate the market s nervousness that the US economy is nearing the end of the current expansion cycle The oil price fell by more than a third since early October on surging US production and unexpectedly high post-sanctions Iranian production despite OPEC-agreed production cuts in December signalling decelerating demand due to slowing global economic growth Precious metals gold and silver rose sharply as investors sought respite in traditional safe-haven stores of value concurrently rising precious metal prices and US dollar real interest rates supports a bear market thesis The US dollar gained against the euro and pound but was weaker against the yen investors view the relative isolation of the Japanese economy as a refuge during periods of increased market volatility SOUTH AFRICA The economy exited the technical recession, but growth remains challenging as demonstrated by Mboweni s sobering inaugural Medium-Term Budget Policy Statement and Eskom load-shedding despite the new ANC leadership s highvolume public relations efforts, the looming 2019 national elections make meaningful economic reforms improbable in the near term The rand weakened against the US dollar as international investors sold risk assets and sought refuge in traditional safe havens currencies of open economies with large twin deficits and economic growth headwinds remain vulnerable as quantitative tightening drains financial market liquidity The FTSE/JSE Capped All Share Index declined as financials, resources and industrials all ended in negative territory despite rand weakness, several index-heavy non-resource rand-hedge stocks suffered steep sell-offs for idiosyncratic reasons while SA Incorporated companies were mostly lower given the stretched domestic consumer Government bond yields fell on safe-haven buying and the SA All Bond Index posted positive quarterly returns but the listed property sector suffered its fourth quarterly loss to conclude the year as South Africa s worst performing asset class The rand fuel price reached an all-time high as the higher dollar oil price of previous months and weaker rand worked their way through the Basic Fuel Price formula the subsequent oil price collapse will provide a fillip to the economy in January 2019, although rising food prices are likely given the drought conditions in South Africa s grain growing regions SARB raised interest rates in December despite the sharply higher fuel price and pressured consumer but the Monetary Policy Committee was evenly divided, indicating moderating hawkishness INVESTMENT OUTLOOK AND PORTFOLIO CONSTRUCTION World: US-led global expansion is now undoubtedly in its late stage. The era of global protectionism is also firmly in place together with rising EU political and Brexit risks. Global liquidity conditions are tightening with the withdrawal of quantitative easing and rising US short-term interest rates. US bond yields should continue to rise. Commodity weakness (ex-precious metals) is likely to persist on softer global economic growth. South Africa: Tangible economic reform is unlikely before the 2019 elections. The twin-deficit emerging market nations remain vulnerable to set-backs. The lower dollar oil price and steady rand should provide some economic relief domestically. Business investment and consumer spending continue to languish amidst negative economic sentiment. Page 3

4 Fund construction: Maintain the bias to JSE-listed global businesses, however, the managers have made marginal purchases of better priced domestic consumer shares. Low allocation to cyclical resource companies given the late stage of the economic cycle. The managers continue to avoid vulnerable retail and commercial South African property counters. Financials target weight has been increased slightly. Cash holdings remain elevated for future investment opportunities. CONCLUSION The Nedgroup Investments Value Fund has been cautiously positioned for at least two years. We are often criticised for being early but long experience has shown that it s better to be early than late when the bears are at the door. Caution remains the watchword for 2019, but the portfolio managers are vigilant for quality opportunities that will sustain long-term performance when the bears retreat. RESPONSIBLE INVESTMENT SUMMARY Proxy Voting Summary Q Resolution Type Name Total Count For % Against % Abstain % Adopt Financials 9 100% 0% 0% Auditor/Risk/Social/Ethics 57 91% 9% 0% related Buy Back Shares 14 93% 7% 0% Director Remuneration % 0% 0% Dividend Related 1 100% 0% 0% Issue Shares 11 9% 91% 0% Loan / Financial Assistance 15 40% 60% 0% Other 5 100% 0% 0% Re/Elect Director 65 98% 2% 0% Remuneration Policy 16 25% 75% 0% Share Option Scheme 2 0% 100% 0% Shares under Director Control 4 0% 100% 0% Signature of Documents 3 100% 0% 0% Notable engagements Omnia: Active engagement around management remuneration concerns. Page 4

5 DISCLAIMER WHO WE ARE Nedgroup Collective Investments (RF) Proprietary Limited, is the company that is authorised in terms of the Collective Investment Schemes Control Act to administer the Nedgroup Investments unit trust funds. It is a member of the Association of Savings & Investment South Africa (ASISA). OUR TRUSTEE The Standard Bank of South Africa Limited is the registered trustee. Contact details: Standard Bank, Po Box 54, Cape Town 8000, Trustee-compliance@standardbank.co.za, Tel PERFORMANCE Unit trusts are generally medium to long-term investments. The value of your investment may go down as well as up. Certain unit trust funds may be subject to currency fluctuations due to its international exposure. Past performance is not necessarily a guide to future performance. Nedgroup Investments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which includes the possibility of losing capital. PRICING Funds are valued daily at 15:00. Instructions must reach us before 14:00 (12:00 for Nedgroup Money Market Fund) to ensure same day value. Prices are published daily on our website and in selected major newspapers. FEES Certain Nedgroup Investments unit trust funds apply a performance fee. For the Nedgroup Investments Flexible Income Fund and Nedgroup Investments Stable Fund, it is calculated daily as a percentage (the sharing rate) of total positive performance, with the high watermark principle applying. For the Nedgroup Investments Bravata World Wide Flexible Fund it is calculated monthly as a percentage (the sharing rate) of outperformance relative to the fund s benchmark, with the high watermark principle applying. All performance fees are capped per fund over a rolling 12-month period. A schedule of fees and charges and maximum commissions is available on request from Nedgroup Investments. DISCLAIMER Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Nedgroup Investments has the right to close unit trust funds to new investors in order to manage it more efficiently. For further additional information on the fund, including but not limited to, brochures, application forms and the annual report please contact Nedgroup Investments. NEDGROUP INVESTMENTS CONTACT DETAILS Tel: (RSA only) Tel: (Outside RSA) Fax: (RSA only) info@nedgroupinvestments.co.za For further information on the fund please visit: OUR OFFICES ARE LOCATED AT Nedbank Clocktower, Clocktower Precinct, V&A Waterfront, Cape Town, 8001 WRITE TO US PO Box 1510, Cape Town, 8000 Page 5