NAV on 2019/11/20
|NAV on 2019/11/19
|52 week high on 2019/04/29
|52 week low on 2019/07/01
|Total Expense Ratio on 2019/09/30
|Total Expense Ratio (performance fee) on 2019/09/30
Allan Gray Unit Trust Management (RF) Pty Limited
South African--Multi Asset--Low Equity
Daily interest rate as supplied by FirstRand Bank Ltd.
Allan Gray Optimal comment - Sep 19
During the quarter the Fund returned 3.8% and the stock market returned -4.6%, in line with the Fund’s objective to generate returns that are not correlated with the stock market.
Some of our clients have asked about the Fund’s current holding in Capitec, which is expensive on a price-to-earnings (PE) and price-to-book (PB) multiple.
We first bought Capitec during the turmoil at African Bank in May 2014. African Bank tricked itself into curatorship by aggressively avoiding accounting for bad debts. The difference in accounting conservatism, which accounted for bad debts after a client missed a single repayment, hid Capitec’s cost advantage, and industry concern around African Bank caused the market to offer Capitec at an attractive price.
Since then, Capitec has further improved its competitive position relative to the big four banks. Pre-tax profit as a percentage of loans outstanding increased by five percentage points since 2014. If this had been achieved by charging higher interest rates in the absence of a significant competitor, one could argue it would not be sustainable. The inverse is true, since the average interest rate charged actually reduced by five percentage points. This was achieved to a large extent by a virtuous cycle of gaining transactional clients’ trust, scalable costs and reinvesting reduced cost per client into reduced prices. The average cost per client is slightly lower than it was in 2013 in nominal terms, compared to a 37% increase in consumer prices, despite the service offering expanding into credit cards, funeral policies and digital banking.
Since May 2014, Capitec has returned close to 532% to shareholders (41% p.a.) in total return, but the PE ratio increased from 13 in May 2014 to 23 on expected profits to February 2020. The PE multiple is admittedly high for a bank and we have decreased our holding into higher valuations (from 4.2% at the peak to 2.2%), but at the same time the PE ratio by itself does not tell the full story. The current efficiency in the business helps the company to convert a large percentage of its earnings to cash and gives it the option to further reduce prices and improve service to grow the size of its customer base, especially in transactional banking where, despite all its success, the company still only enjoys a 10% revenue market share today.
During the quarter we switched Prosus and RMB Holdings into Naspers and FirstRand, respectively. We also added to Sasol and Sibanye-Stillwater, while selling African Phoenix and Woolworths.
Commentary contributed by Ruan Stander
The Fund invests mainly in selected shares and it uses exchange-traded derivative contracts on stock market indices to substantially reduce its net equity exposure to within a range of 0-20%. As a result, the Fund's return depends on the level of short-term interest rates (implicit in the pricing of the sold futures contracts) and the performance of the Fund's selected shares relative to the stock market index. The Fund's return is therefore unlikely to be correlated with equity market returns. In addition, a portion of the Fund is typically invested in cash and margin deposits.