Aeon Active Equity Prescient Comment - Sep 19
The Aeon Active Equity Prescient Fund (CIS) underperformed its benchmark by 78 bps on a net return basis for the third quarter of 2019 and is outperforming its benchmark by 61 bps for the year-to-date.
An overweight position in British American Tobacco and an underweight position in Shoprite were the main positive contributors to return for the third quarter of 2019. Overweight positions in Discovery and Mpact were the main detractors. The benchmark equity index was down 4.31% for the third quarter of 2019.
The strongest sector for the quarter ended September was Consumer Goods led by British American Tobacco, AB Inbev and Pioneer Foods as markets benefited from a more positive global macro environment, a Fed rate cut and prospects of better US-China trade relations. Banks was the weakest sector for the quarter, led by Standard Bank, First Rand and ABSA after rating agencies Moody’s and Fitch reported a dim credit view on Eskom and South African sovereign debt and outlook. The quarter ended September was negative overall for equity markets due to global tension enhanced by a multitude of domestic events.
Globally, a low interest rate environment and accommodative central bank policies have continued to struc-turally drive markets. The uncertainty and volatility caused by geopolitical instability has continued to im-pede market returns. US-China trade concerns remain firmly in investor minds amid a slowing Chinese econo-my and increases in trade tariffs by both countries. Talks between the US, China, EU and others are ongoing, however, sentiment was somewhat hindered by the ongoing protests in Hong Kong and the drone attacks on a Saudi oil production facility. Investors remain quite agnostic as a complete deal is unlikely to be reached soon. On a more positive note, the Fed announced a second 25bps cut for 2019 and the ECB did not disap-point investors either with their expected stimulus measures, decreasing rates to -0.5% and resuming QE at a monthly pace of €20bn. Importantly, the Fed did highlight that further rate cuts would be unlikely given the strength of the US labour market. A dovish stance from the Fed has generally been supportive of markets, however, comments from Jerome Powell regarding the Fed not continuing to act as an appropriate support to sustain economic expansions have raised doubt in some investor’s minds. In the UK, Investors are keeping an eye on Boris Johnson’s 31 October Brexit deadline, which took a slight knock as the UK supreme court ruled against Johnson’s suspension of parliament. Emerging market economies have been shaped by these global events.
Locally, the domestic environment was unfavourable due to the state of the local economy. Sentiment has turned more negative as continuous political infighting, severe economic growth obstacles, highly indebted parastatals and a potential downgrade remain apparent. Looming government regulation such as the land expropriation bill, debt relief bill and NHI bill heightened investor concerns. This led to an exodus of foreign capital, which is of concern. South Africa’s lack of fiscal options may weigh on investment in the short term with little room by the government to manoeuvre. One positive has been Finance minister Tito Mboweni’s economic plan which was well received by business.
In company news, all eyes were firmly on the corporate action which saw Naspers separately list its interna-tional assets (including Tencent, Delivery Hero, OLX and Mail.ru) on Wednesday 11 September into a new company, Prosus. This is one of the largest corporate actions of its kind in the world, with far-reaching ef-fects for both local and global investors. Prosus is Europe’s largest internet consumer company and the addi-tion to Amsterdam’s Euronext makes it the third largest company on the exchange. The significance of this is that many passive investors and index trackers may be forced to purchase Prosus or increase their allocation to the company which could result in a narrowing of the discount to the underlying investee companies.
Looking forward, growth expectations set for the local economy seem to reside on global growth and renewed efforts by the newly elected officials. Globally, inflation and GDP growth will be key to try gauge the timing and level of monetary policies. Potential capital controls imposed by the US on Chinese companies could dampen global sentiment, however, we have seen opportunities surface, albeit with good reasons and will monitor each individual investment case on independent merit. Astute stock picking with our Growth at Rea-sonable Price (GARP) philosophy that delivers superior value through the cycle and a focus on companies whose cash flows support earnings should stand us in good stead moving forward.
The Aeon Active Equity Prescient Fund will aim to deliver medium to long-term capital growth over time. The Fund will invest in a diversified range of equities across all economic groups and industry sectors as well as across a range of large, mid and small cap shares. The Fund is permitted to invest in listed and unlisted financial instruments in line with the conditions as determined by legislation from time to time. The Fund will predominately invest in South African markets but is however permitted to include investments in offshore jurisdictions subject to the investment conditions determined by legislation from time to time.
The Fund may apart from assets in liquid form also include participatory interests or any other form of participation in portfolios of collective investment schemes or other similar schemes. Where the aforementioned schemes are operated in territories other than in South Africa, participatory interests or any other form of participation in these schemes will be included in the portfolio only where the regulatory environment is to the satisfaction of the manager and trustee and is of a sufficient standard to provide investor protection at least equivalent to that in South Africa.
Nothing in the supplemental deed shall preclude the manager from varying the ratios of securities, to maximise capital growth and investment potential in changing economic environments or market conditions or to meet the requirements, if applicable, of any exchange formally recognised in terms of legislation and from retaining cash or placing cash on deposit in terms of the Deed and any Supplemental Deeds thereto; provided that the manager shall ensure that the aggregate value of the assets comprising the portfolio shall consist of securities of the aggregate value required from time to time by the Act.
The Trustee shall ensure that the investment policy set out in this supplemental deed, the Deed and in all Supplemental Deeds thereto is carried out.
For the purpose of this portfolio, the manager in consultation with the Investment Manager shall reserve the right to close the portfolio to new investors on a date determined by the manager. This will be done in order to be able to manage the portfolio in accordance with its mandate. The manager may, once a portfolio has been closed, open that portfolio again to new investors on a date determined by the manager.