NEDGROUP INVESTMENTS RAINMAKER FUND Quarter Four, 2017 For the period ended 31 December 2017
NEDGROUP INVESTMENTS RAINMAKER FUND MARKET AND FUND PERFORMANCE REVIEW 2017 drew to a dramatic close in South Africa and for the funds under our management given the Steinhoff debacle and conclusion of the ANC elective conference. For the year, the JSE All Share Index gained +21%. The market was led by Industrials (+22.5%) and Financials (+20.6%), with Resources (+17.9%) lagging. The dispersion in sector performance was high, with Consumer Services (+52.7%) and Financials (+20.6%) significantly outperforming Technology (-33.6%) and Healthcare (-9.0%). As a consequence, our holdings in Naspers (+71.8%) and FirstRand (+31.3%) enhanced the funds performance, however our holdings in Steinhoff (-92.9%) and Mediclinic (-17.6%) detracted. Our performance for 2017 was as follows: 2017 Return Nedgroup Investments Rainmaker Fund - Net return 16.5% JSE Capped Shareholder Weighted Index 16.4% JSE All Share Index 21.0% Peer Group Average 12.8% In comparison to these various benchmarks, inflation and our peer group of investment managers, 2017 can be considered a reasonable year. The performance of our client portfolios had been steady and satisfactory for almost all of 2017, but disappointingly we gave back part of our relative performance in the closing weeks of the year. This was driven by several factors to which we have responded as follows. ANC leadership election results in substantial strength in the rand: Although the NEC appears to be split between the two rival camps, the peaceful and orderly election of Cyril Ramaphosa as the new leader of the ANC is certainly a very positive outcome for our country, our democracy and the prospects over the course of the next few years for domestic, business-friendly economic growth. His manifesto calls for improved education, large increases in infrastructural development, ameliorating the running of state-owned enterprises, bringing about a more conducive relationship of co-operation between private business and government and above all, fighting corruption and state capture. At R12.40/USD in early 2018, the rand is now substantially stronger than the R14.00 it was BEFORE Nhlanhla Nene was fired as Finance Minister in December 2015! In mid-2017 we were anticipating that Jacob Zuma would resort to more aggressive political manipulation to remain in effective control of the ANC and a corrupt outcome to the ANC elective conference was more probable. As a consequence, our portfolios were heavily biased towards rand hedges notably core positions in Naspers and British American Tobacco. This strategy worked well for most of the year. However, in early November it became gradually clearer to us that the Cyril Ramaphosa campaign was gaining momentum and the ANC elective process was progressing in a reasonably orderly manner. At this point, we rotated our clients portfolios away from rand hedges and towards a broader domestic exposure. This was achieved by adding substantially to our already overweight position in banks and also to SA oriented retail stocks including Truworths, Mr Price, Massmart and Shoprite. Page 2
In total we rotated about 10% of the portfolio from rand hedges to banks and retailers. This nimble and timeous adjustment added to our client returns in late 2017. Despite the strong move we have already seen, we anticipate there will be more to come once investors return to their desks in January and we have therefore retained the vast majority of these positions. Under the circumstances of the strong rand, some of our rand hedge positions have lagged substantially in the short-term and we are adding selectively to these notably Sasol and Mondi. The Naspers Capital Markets Day in New York: Following the publication of their interim financial results, Naspers held an Investor Day in New York on 12th December 2017 for international investors in order to showcase the company, its many underlying businesses and their growth prospects and to answer investor questions. This is the first time the company has undertaken an exercise of this scale, and we held our very heavy position going into this event in the confidence the management team would do a convincing job of marketing the firm as an investment prospect to a new and large investor pool. While the operational team did an excellent job of explaining the major underlying businesses and the stage of their development and future prospects, disappointingly the finance director demolished their hard efforts through a vague response to the final question of the day regarding the likelihood of any change to the firm s corporate structure which could help unlock the trapped valuation discount inherent in the stock s valuation. This response was especially disappointing to us in the context of the tremendous effort we have taken during 2017 to engage with the Naspers board to address this issue in the interests of all stakeholders in the firm. Their dogmatic determination not to do so is frustrating and we will renew the vigour of our engagement with them in 2018 on this matter. Following the event, we concluded any narrowing in the Net Asset Value discount in the short term remains unlikely and as a consequence, although we retain a very large position in the firm as we believe it is a unique growth asset in the context of the SA market, the position has been substantially reduced to about 15% of the fund. Steinhoff: On Wednesday 6 December 2017, Steinhoff announced the resignation of Markus Jooste as CEO as well as the need for an independent investigation into accounting irregularities. On the back of the uncertainty and potential accounting restatements, the share price has come under significant pressure. Our position in this company and failure as an investment team to pre-emptively discover its weaknesses and thereby avoid the collapse in the share price, is undoubtedly the most disappointing investment position in the history of our firm. It has been a painful lesson which we feel alongside our clients as fellow investors in the affected funds. While we work tirelessly to understand every company we invest in as well as we can within the constraints of publicly available information, no position is without risk. This is important to appreciate. As fund managers we always operate with incomplete information as we are limited to what has been publicly disclosed. Although we were aware of the negative rumours circulating regarding Steinhoff, these were conjecture and the source was always questionable. Our research and engagements with more credible and informed views on these matters, which were external to the company, could also not substantiate these rumours. The lesson learnt and adaptation made is that when rumours begin to circulate, regardless of the veracity, the risk increases and must be factored into our valuation. In addition, it is concerning that audited financial statements, regardless of the firm that prepared them, are no longer documents that can be completely relied upon for accuracy. Page 3
The ultimate outcome for Steinhoff remains very uncertain, and our immediate concern is the underlying businesses ability to continue to source lines of credit to keep trading. The market is currently suggesting only a small likelihood of it remaining solvent. In the absence of any clarity regarding the full extent of the firm s debt burden we have elected to continue to hold the share, although it is now a fairly immaterial position at 0.35% of the fund. We expect the situation to remain very fluid and will respond appropriately as soon as additional information comes to light. Despite this setback we are encouraged that we still managed to deliver satisfactory investment performance for the year, and will encourage investors to evaluate our track record on a medium to long-term basis. OUTLOOK As we begin 2018, we remain cautiously optimistic on the prospects for domestic growth and are positioned appropriately for the constructive changes we anticipate Cyril Ramaphosa will be able to effect, and the elimination of the corruption plagued circumstances we currently find ourselves in. For the first time in many years we have definite progress, but are mindful that he has an enormous task to undo the damage that has been done in the last 10 years and this should not be underestimated. The portfolio currently trades on a forward rolling Price/Earnings (P/E) ratio of 14.9x and a dividend yield of 2.8%. Page 4
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 021 401 2002. 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: 0860 123 263 (RSA only) Tel: +27 21 416 6011 (Outside RSA) Fax: 0861 119 733 (RSA only) Email: info@nedgroupinvestments.co.za For further information on the fund please visit: www.nedgroupinvestments.co.za 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