NAV on 2020/02/14
|NAV on 2020/02/13
|52 week high on 2019/04/29
|52 week low on 2019/07/01
|Total Expense Ratio on 2019/12/31
|Total Expense Ratio (performance fee) on 2019/12/31
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 - Dec 19
The Optimal Fund returned 4% for 2019 compared to 5.8% for its benchmark. The most significant detractors from performance were KAP and Comair, while British American Tobacco and an underweight position in Shoprite were the most significant contributors.
We are excited by some of the opportunities presented by the stock market today and believe the Fund is well positioned to benefit over the long term.
The Fund’s most significant overweight positions are Naspers, British American Tobacco, Reinet and Glencore.
Naspers is trading at an estimated 45% discount to our sum of the parts, despite a proven ability to allocate capital well for shareholders. We sold Prosus shares to buy more Naspers when the discount increased after the Prosus listing, leading to an underweight position in Prosus. British American Tobacco delivered a total return of 36% in 2019 and should trade on a PE ratio of 10x as its results to December 2019 are expected to be strong, confirmed by a recent trading update. This is attractive for a company that is growing fast and converting around 90% of earnings into cash for dividends and debt repayments.
Reinet has allocated capital wisely by buying back around 5% of shares at a significant discount to our estimate of fair value. Its portfolio of companies outside British American Tobacco is doing well, driven by Pension Insurance Corporation. Despite this, the company still trades at an estimated discount to fair value of 40%.
Glencore also allocated capital well in 2019 by buying back 4.6% of their own shares at a discount to our estimate of fair value. At normalised commodity prices, we estimate Glencore should generate 14% of its share price in free cashflow with a significant percentage of this cash coming from its marketing business that is less sensitive to commodity prices.
The Fund’s most significant underweight positions are Anglo American, BHP, Richemont and Prosus.
Anglo and BHP derive a significant portion of their free cashflow from iron ore. The fundamentals of iron ore have held up much better than expected as a result of Chinese stimulus to offset the impact of the trade war, closure of Chinese iron ore production and supply disruptions like the tailings dam disaster in Brazil. However, it is hard to be bullish about the fundamentals of iron ore in the long run. Chinese steel production is not expected to grow materially from a high base, as infrastructure ages and scrap supply becomes a meaningful substitute for mined minerals – if Japan and the US are considered as case studies. Meanwhile, it may be tempting for large producers to increase supply, with prices triple their cost of production. Using a normalised iron ore price, Anglo and BHP are much more expensive than Glencore.
Richemont has done a great job growing its jewellery business to offset the decline of watches. However, it is too expensive for the Fund at a PE ratio of over 20x.
As discussed above, Naspers is a much cheaper entry point than Prosus, given that it trades at a 20% discount to the value of its stake in Prosus.
During the quarter, the Fund purchased Naspers and Nedbank and sold Prosus, Sibanye-Stillwater and Capitec.
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.