13818

2017/11/22 00:00:00

The fund had a good third quarter, returning 9% compared to the benchmark return of 8.4%. The long-term track record remains compelling, with the fund meaningfully outperforming its benchmark over a 10 and 15-year period.
Our large holdings in Exxaro, Naspers, Anglo American and Mondi continue to perform strongly and have been the major contributors to the fund’s outperformance this quarter. The original investment cases for these specific holdings are playing out. They all remain top holdings as valuations are still supportive, but we have used share price strength to reduce the respective position sizes. We used proceeds from the sales mentioned above to increase our holding in British American Tobacco (BTI). The share has underperformed the market on a relative basis over the last year. In addition, the Food and Drug Administration’s (FDA) announcement of a new tobacco regulatory framework in the US caused further consternation and share price pressure. The US makes up approximately 40% of BTI’s earnings, but the FDA is an important regulator and a global standard setter. The new FDA framework will look at regulations to potentially reduce nicotine levels in combustible cigarettes to non-addictive levels. We think the regulatory process will take a long time and that there will be a phased approach to reducing nicotine levels. The body also announced their commitment to encouraging innovations in tobacco products that are less harmful and addictive. We think this will present an opportunity for the tobacco companies to grow next generation products (ecigarettes and tobacco heating products) that are less harmful for smokers. The global growth in these new products will result in a profound change in the tobacco industry, which has traditionally been accustomed to volume decline. BTI has put a lot of investment behind developing these new products and stands to benefit from this growth. At these levels, the share price reflects all the risks and none of the potential growth opportunities.
We have also increased our investment in Sasol. The company’s $11 billion Lake Charles Chemical project on the US Gulf Coast will be starting up in the next 18 months. As the capital spend on this project tapers off and the plant ramps up, Sasol will start to generate significant amounts of cash. This will support de-gearing of the balance sheet, which together with some normalisation of the oil price should produce decent earnings growth.
Domestically, we are seeing some good investment opportunities in defensive, high-quality businesses whose share prices have de-rated significantly. We have added to positions like Aspen, Netcare and Spar. These businesses are well managed, cash generative and should be fairly resilient in tough economic conditions. We have also initiated a position in Distell. This business owns good brands in cider, spirits and wine. We think the company can produce midteens earnings growth over the next three years from a combination of cost cutting, volume growth in South Africa and Africa and some select expansion investment. The business has also managed to attract former SAB management talent. We think the combination of powerful brands, experienced management and reasonable valuation is very attractive. While the global and macroeconomic headlines continue to be noisy, we concentrate on applying our long-term focus to help us identify solid investment opportunities. This patience and discipline is often rewarded and will continue to allow us to deliver good alpha for clients in the future.
Portfolio managers Neville Chester and Pallavi Ambekar as at 30 September 2017