Daniel is a portfolio manager at Ninety One and a member of the SA Equities & Multi-Asset team. He has portfolio management responsibility for the South African Resources Strategy as well as the Small Cap Strategy and is responsible for the analysis of South African precious metals shares. He joined the firm in September 1997 as a portfolio administrator, before moving to the research department in 1999 as an investment analyst in the resources sector. Daniel graduated from the University of Cape Town with a Bachelor of Business Science (Hons) degree in Economics and is a CFA Charterholder.
Investec Commodity comment - Jun 13
Market review South African equities ended almost unchanged in the second quarter, but volatility was high during this period. The sector laggards remain mostly confined to resource stocks with gold (-33.5%), platinum (-23.9%), coal (-10%) and diversified miners (-10.8%) all experiencing double-digit losses in rands. Year to date, the resources sector is trailing the overall market by 19.4 percentage points. Industrial stocks mostly held their ground over the quarter and defensive stocks, on average, achieved strong absolute returns. Financials lagged, with banks down 6.2% and life insurers flat for the quarter after a particularly weak June.
Portfolio review The Investec Commodity Fund outperformed its benchmark over the quarter. During the second quarter, data was mixed. Data pointing to a recovering US economy was quickly replaced by fears around quantitative easing (QE) tapering. China's economic growth data also slowed, with the market's fears compounded by a cash squeeze on their interbank market. Gold miners bore the brunt of the sell-off. The gold price had its worst quarter in a century, losing more than 23% over the review period. The platinum miners fared only slightly better, with weak global sentiment and the threat of mining strikes putting pressure on the platinum price. Oil & Gas was the best performing resources sector, with the weaker rand supporting Sasol, offsetting a slightly weaker oil price. The rand weakened 6.4% against the dollar, continuing from a depreciation of 9% in the last quarter. For local miners, the rand weakness is a definite short-term tailwind. Our primary concern is that the instability in the mining sector is a key driver of the rand sell-off. Mathematically, earnings go up on a weaker rand, but the risk to deliver is higher. The weaker rand also creates opportunities for unions to push for bigger pay rises. These moves suited our portfolio positioning. The portfolio's holdings outperformed the benchmark, and our overweight positions in Mondi and Sasol outperformed Gold Fields, Harmony and Impala Platinum, to which we remain underweight.
Portfolio activity The major trades for the quarter involved shifting the portfolio further towards rand hedges with less exposure to large local labour forces. The largest trade for the month involved selling Anglo American to a larger underweight position and using the cash to bring Kumba Iron Ore to an overweight position. We believe that Anglo American faces further earnings downgrades due to lower coal, copper and platinum prices. Continued disappointments at its Minas Rio iron ore project and metallurgical coal's soaring costs are also eroding the company's profitability. On the other hand, it's no longer prudent being underweight Kumba Iron Ore, in light of its underperformance year to date. Kumba Iron Ore is discounting iron ore falling back to $80 per ton, which we think is unlikely. We no longer see downgrade risks to Kumba Iron Ore's earnings, and yield support exists at these levels (9% dividend yield at spot). Lastly, Kumba Iron Ore matches our broader portfolio thesis of preferring rand hedges less exposed to local underground labour. The company does not have wage negotiations this year. Wage cost as a percentage of total costs is small so the company can sustain higher wage increases, and its employees are well paid and benefit from company profitability. We moderated our gold price view further and reduced earnings expectations for gold shares. We are now significantly below consensus, despite basing our expectations on a weaker rand. We consequently sold DRDGOLD completely. We retain our overweight position in BHP Billiton. The company's production growth forecasts for 2013 (copper, iron ore and oil) are favourable and its higher margins should command a ratings premium. Most importantly, it has only 6% South African exposure and is already a very generous employer when it comes to wages paid. Finally, we remain overweight Sasol. We believe Sasol's earning will be upgraded by the market if the following occurs: current oil prices and the rand stay as they are, the expected volume growth from improving Synfuels is realised, Oryx remains strong and chemical prices recover.
Portfolio positioning Most mined commodities faced severe headwinds in recent months as global growth decelerated. Concerns over the strength of fundamentals were exacerbated by supply expansions. We expect individual supply factors to be the key driver of commodity preference in 2013: * Increased supply will weigh on iron ore and, to a lesser extent, copper. * Price weakness caused by exchange traded fund redemptions will likely convince many investors that the existential risks to the financial system have been largely reduced, which will place gold under further pressure. * In contrast, we expect Brent oil to continue to move within the range seen over the past couple of years because of the continuous supply issues outside of the US. * We continue to expect supply problems and closures to support both platinum and palladium prices.
In light of the current South African mining labour situation, we prefer non-mining rand hedges. Sasol, Kumba Iron Ore and the paper shares (Mondi and Sappi) are geared to a weaker rand and have excellent labour relations. Our preferred South African-listed miner is BHP Billiton, with only 6% exposure to South Africa. Our preferred local gold share, AngloGold, has only 33% of its production in South Africa (unlike our least preferred, Harmony, with 94%). We continue to position the portfolio based on our earnings forecasts, relative to consensus expectations. This is in accordance with our commodity price views and company modelling work, which pre-empted these market revisions.
The Ninety One Commodity Fund aims to grow capital over the long term. The objective is to achieve returns well in excess of the benchmark, measured over three year periods. The fund invests in listed companies that are involved in mining, minerals, energy, natural resources and other commodities. The fund aims to take advantage of changing commodity cycles by investing in a range of resources such as gold, platinum, iron, steel, coal, oil and pulp. The investment team uses Ninety One's proprietary research platform. The fund favours equities that have a history of value creation, demonstrate strong and improving operating performance, are attractively valued relative to this performance and are increasingly drawing investors' attention. Fund features o A specialist equity fund for investors who want to benefit from South Africa's mineral and commodity wealth o Uses the Investec proprietary research model to assist in the screening and the selection of companies o Expected to outperform the broader stock market over the long term o Provides portfolio diversification o More volatile than a general equity fund