NAV on 2019/09/16
|NAV on 2019/09/13
|52 week high on 2019/04/29
|52 week low on 2019/07/01
|Total Expense Ratio on 2019/06/30
|Total Expense Ratio (performance fee) on 2019/06/30
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 - Jun 19
The stock market returned 3.9% during the second quarter with the Optimal Fund returning -3.3%. The Fund’s overall net equity position was reduced by almost 10% over the quarter on the back of a strong equity market.
The second quarter was good for investors that owned resource shares, but unfortunately the Fund is underweight in these - on top of this, a significant proportion of our resource exposure underperformed. The Fund was overweight British American Tobacco, Glencore and KAP during this period.
Investing in resource companies can be a wild ride for investors since almost all of the variables required to value a company are in flux: Commodity prices respond to short-term changes in supply and demand, natural disasters or labour commotions can disrupt mines, and company management needs to respond to all these factors by allocating capital. It does not help that the geology of a mine is hard to understand from the outside, and this can have a significant impact on unit costs.
Our approach to valuing resource companies is to focus on long-term expectations for commodity prices, normalised unit costs, as well as the skill of management in deploying the cash generated. This approach has led us to own multinational miner Glencore and pulp and paper producer Sappi, and avoid BHP Billiton and Anglo American. This is because a normal commodity price assumption leads to a more attractive free cash flow yield for Glencore and Sappi and at the margin, capital at these companies is being deployed sensibly.
Short-term changes in commodity prices have, however, gone in the opposite direction to our long-term expectations, with a weaker coal/copper/paper price hurting Glencore/Sappi, while a stronger iron ore price as a result of the January tailings dam failure in Brazil and cyclones in Australia between September 2018 and May 2019, helped Anglo American and BHP Billiton. Risks to an iron ore price from this level include increased supply (the return on a new iron ore mine is very attractive), capacity coming back in Brazil and Australia, and a decrease in demand from China (steel demand seems high compared to other countries, and iron ore is likely to be substituted by scrap steel over time). Glencore and Sappi seem attractive despite their commodity prices being lower than our longterm assumptions.
During the quarter, we purchased Reinet and sold African Rainbow Minerals.
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.