ALPHAWEALTH PRIME SMALL & MID CAP FUND COMMENTARY OCTOBER 2018 1 October 2018 AlphaWealth (Pty) Ltd. Reg. No.: 2004/026495. An authorised financial services provider - FSP Licence No. 13808. www.alphawealth.co.za
Valuation Metric ALPHAWEALTH PRIME SMALL & MID CAP FUND INVESTOR UPDATE SEPTEMBER 2018. 2 INTRODUCTION: GREAT RELATIVE MONTH AlphaWealth Prime Small & Mid Cap (AWSM) Fund outperformed its benchmark by +3.1% during September 2018. Unfortunately, its benchmark slipped -4.5% this month, thus AWSM Fund inched downwards by -1.4%. This is a continuation of this year s trend as the AWSM Fund remains slightly down (negative nominal performance) but well ahead of its collapsing benchmark (strongly positive relative performance). It is worth noting that the JSE-listed Small Cap Index is currently trading at a Price-to-Book of one standard deviation below its average valuation (see our May investor letter). This is the same valuation level that it fell to during the Credit Crisis. Likewise, global equity markets and global small cap indices continue to hit highs and, in fact, are one standard deviations above many of their long-term valuation averages. In other words, our local small cap market is two standard deviations cheaper than its global peers valuations. One standard deviation is a big deal but two standard deviations can be classified as Black Swan. There are plenty of arguments about how our local (small cap) market has gotten this cheap but, in our opinion, these valuations levels and the opportunities that they provide just simply cannot be ignored. While none of this means that our small cap market (and the AWSM Fund) will suddenly bounce tomorrow, it certainly does means that when the smallest whiff of positivity or growth creeps back into our market, we can expect material upside. Until then, we keep doubling down on quality while seeking out growth. Because, value without growth is not value. Thus, besides all the statistics in the world, the businesses we have invested into need to be growing. VALUE + GROWTH = RETURNS Put simply, value without growth is not value. And growth without value is just asking for trouble. This is very important to understand, so let s break it into two parts: value and growth. Value: AWSM Fund s valuation makes it cheap Figure 1 reveals how cheap AWSM Fund is relative to its benchmark, the Top 40 and, indeed, the entire JSE. This is value. Figure 1: AWSM Fund s Valuation Metrics 25.0 20.0 15.0 10.0 5.0 - Price Earnings (x) Price-to-Book (x) AWSM Fund 12.9 1.1 Benchmark 24.5 1.4 All Share Index 17.3 1.9 Top 40 16.6 2.2 Sources: Bloomberg & AlphaWealth
ALPHAWEALTH PRIME SMALL & MID CAP FUND INVESTOR UPDATE SEPTEMBER 2018. 3 Growth: AWSM Fund s earnings keep growing Table 1 illustrates how the businesses AWSM Fund is invested in are performing. Most earnings figures are IFRS HEPS but some are adjusted for accounting and/or corporate action non-operational noise. Hopefully Table 1 illustrates to you that the businesses that AWSM Fund is invested in are growing, despite the recent recession. It is also notable that not even one of our companies reported a loss in this table and, in fact, only 3 out of 17 companies reported earnings that went backwards at all. The clear majority of our companies grew their profits. This is growth. Table 1: AWSM Fund s Underlying Company Earnings* Growth (12m-rolling) Company held in AWSM Fund s portfolio Earnings* Wescoal Holdings Ltd 311.00% Sabvest Ltd 195.80% Sirius Real Estate Ltd 31.20% Adcock Ingram Holdings Ltd 26.00% Santova Logistics Ltd 15.00% CSG Holdings Ltd 13.00% AdaptIT Holdings Ltd 11.00% Stor-Age Property REIT Ltd 11.00% ADvTech Ltd (Median) 9.00% Calgro M3 Holdings Ltd 7.00% Clientele Ltd 6.00% Hosken Consolidated Investments Ltd 2.80% Coronation Fund Managers Ltd 1.00% Datatec Ltd* -* Master Drilling Group Ltd -4.50% Metrofile Holdings Ltd -8.20% Rolfes Technology Holdings Ltd -32.00% AWSM Fund s Average Growth in Earnings 35.0% y/y AWSM Fund s Median Growth in Earnings 9.0% y/y Sources: Various company reports, Iress, Bloomberg, & AlphaWealth workings; * Best representation of earnings including HEP &, Adjusted HEPS/EPS. Datatec s earnings are simply too noisy to reflect anything. Thus, we have taken them out of this context as they are deeply misleading, and, in fact, they are likely the reason for the value inherent in DTC s share price at these levels (the market tends to be lazy and leaves lots of value on the table with these sorts of things). Returns: The conclusion of value and growth In the absence of growth, value could easily be a value trap. In the absence of value, growth could easily be (more than) priced in. Either one in the absence of the other limits the attractiveness of an investment. Conversely, the combination of both growth and value in AWSM Fund s underlying portfolio implies exciting long-term returns. And, at the end of the day, that is our objective: generating great returns for our investors. CONCLUSION: QUALITY, VALUE & CONCENTRATION Finally, the usual reminder that our investment approach in the AWSM Fund is: Quality: Above all else, we try to find good-quality, fast-growing, listed small cap businesses. Value: We invest in the cheapest of these, though limit our investments to different industries and/or geographies to maximize diversification. Concentration: Finally, we limit the number of stocks we hold to only the very best fifteen to twenty positions.
ALPHAWEALTH PRIME SMALL & MID CAP FUND INVESTOR UPDATE SEPTEMBER 2018. 4 Being both fund manager and co-investor in the AWSM Fund, I remain positive about our selected investment methodology, our execution of this methodology and AWSM Fund s prospects. As always, the rest is just time, patience & compounding. Kind regards Keith McLachlan CA (SA) Fund Manager AlphaWealth Prime Small & Mid Cap Fund
ALPHAWEALTH PRIME SMALL & MID CAP FUND INVESTOR UPDATE SEPTEMBER 2018. 5 Disclaimer: Collective Investment Schemes in Securities are generally medium to long-term investments. Different classes of units apply to these portfolios and are subject to different fees and charges. A schedule of fees and charges and maximum commissions is available on request from the Company. Commission and incentives may be paid and if so, would be included in the overall costs. The price of a participatory interest is a marked-to-market value. Forward pricing is used. The purpose of the money market yield is to indicate to investors a compounded annual return for all money market portfolios on a comparable basis. The yield calculation is not used for income distribution purposes. A forward-looking yield is used. This means that the last seven days yield (less the service charges, including VAT) is taken and is annualised for the next 12 month period, assuming the income returns are reinvested. Yields for money market funds are published daily. The value of participatory interests may go down as well as up. Past performance is not necessarily an indication of future performance. Performance numbers and graphs are sourced from Global Independent Administrators (Pty) Ltd are calculated on a NAV to NAV basis and do not take initial fees into account. The Company does not provide any guarantee either with respect to the capital or the return of the portfolios. Income is re-invested on the reinvestment date. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Dealing prices are calculated on a net asset value and auditor s fees, bank charges and trustee fees are levied against the portfolios. The total return to the investor is made up of interest received and any gain or loss made on any particular instrument. This will have the effect of increasing or decreasing the daily yield but in case of abnormal losses it can have the effect of reducing the capital value of the portfolio. Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures where a process of ring-fencing of withdrawal instructions and managed pay-outs over time may be followed. CIS are traded at ruling prices and can engage in borrowing and scrip lending. The manager may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. Prime Collective Investment Schemes Management Company (RF) (Pty) Ltd is a registered Collective Investment Scheme Manager in terms of Section 5 of the Collective Investment Schemes Control Act and is a wholly owned subsidiary of Prime Financial Services (Pty) Ltd, a member of ASISA. 0105942100.