NAV on 2019/07/19
|NAV on 2019/07/18
|52 week high on 2018/09/03
|52 week low on 2019/01/04
|Total Expense Ratio on 2019/03/31
|Total Expense Ratio (performance fee) on 2019/03/31
Sanlam Collective Investments
Peer Group Average of the General Equity Sector
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Sam has been appointed head of the Unconstrained Strategies team at Momentum Asset Management and brings 16 years' of domestic and global investment experience to the firm. Sam was at Investec Asset Management until September 2011, where he held the positions of director, head of South African equities and portfolio manager in the Global Contrarian team. He started his career in the investment management industry at Allan Gray and moved to Abvest (now ABSA Asset Management), where he fulfilled the roles of portfolio manager, chief investment officer and, ultimately, chief executive officer, before leaving to join Investec Asset Management in early 2006. He headed a team of investment professionals responsible for well over R100 billion in equities across the full spectrum of portfolios, from pure equity to multiasset mandates. He was the lead portfolio manager and key decision maker for close on R40 billion in client assets, including the Investec Global Franchise Fund and Investec Cautious Managed Fund. He also managed the Discovery Equity Fund from its inception in November 2007.
Counterpoint SCI Dividend Equity Fund - Mar 19
Market overview SA equities experienced a strong quarter, in line with global equity markets and reduced risk aversion, after a dismal final quarter of 2018.
In the first quarter, the primary driver of equity returns was increasing risk appetite in response to less restrictive monetary policy and a reduction in fears of a hostile trade war.
In South Africa, market leadership remained narrow, led by Resources stocks and selected sectors within the Industrial complex. Financials struggled with a modest decline of 0.40%.
The All Share Index advanced by 8.0% to reverse the impact of the previous quarter's losses. The advance was not uniform and in terms of broad sectors, SA Financials lagged the most with a modest decline. Small-Caps fell by 3.4% while Mid-Caps bucked the trend with a positive 2.8% over the quarter. In terms of Equity sectors, the top performers were Platinum +49.7%, Tobacco +29.5% and General Mining +22.4%. The worst performers were Pharma -12.7% and Industrials -3.9%.
The quarter was dominated by a positive reversal in sentiment towards risk assets in general and equities more specifically. At the end of November 2018, domestic equity valuations had reverted to more reasonable levels and the sustained recovery over the last four months, augurs well for the rest of 2019.
Domestic Policymakers and leadership have demonstrated a resolve to address the structural impediments in the fiscus and critical institutions. The process is underway and will take time. At the end of the quarter, Moody’s provided a welcome reprieve and additional time for policymakers to set the country on the road to fiscal recovery.
The decline in domestic equity valuations has led to less euphoric expectations and represents an opportunity for investors to participate in the recovery on a more rational basis.
The MSCI World Index advanced by 12.6% in US$ terms. MSCI Emerging Market Index appreciated by 10.0% in US$, over the quarter. Global equity markets surged upward in a synchronised and correlated fashion as the US Fed surprised the markets with an abrupt reversal in policy stance. The Fed’s pivot ushered in a ‘risk-on’ rally and a return to a regime of favouring the search for yield. The abrupt turnaround from Quantitative Tightening to a potential resumption of Quantitative Easing is truly unprecedented and financial markets are currently in the throes of navigating this change in regime. As a consequence, the CBOE Volatility Index (VIX) declined significantly. Volatility has returned to the relatively stable pattern of 2017. The spike in volatility and deep drawdown in December 2018, is now a distant memory. Investor complacency and related euphoria have returned. Developed market equities have rebounded so strongly that we are close to all-time highs.
An additional feature of the quarter was the continued recovery in emerging market securities. The combination of low valuations, high yields and a supportive Fed policy has buoyed EM equities.
Domestic Equity valuations remain attractive relative to long term growth prospects. The Rand is likely to remain range bound and could strengthen steadily, as US bond yields decline and the US Fed continues the current monetary policy path. SA Inc equities are once again offering pockets of value. We continue to believe that we are entering a prolonged period that will suit stock-pickers and active managers.
The probability is high that domestic equities, as an asset class, will muddle through provided that the risk of global contagion remains benign.
For that reason, we remain cautiously optimistic and confident in our stock selection approach and ability.
The Dividend Equity Fund follows a long-term objective based approach. The fund’s primary objective is for total investment returns to exceed SA Inflation + 6% per annum, over the long run (7yrs and longer). Parallel and contributing objectives are for the fund to provide an income yield (after dividend withholding taxes) greater than the FTSE/JSE All Share Index (ALSI); to grow distributions ahead of SA inflation; and to achieve its objectives at a lower level of risk* than the ALSI.
The fund employs a ‘dividend growth plus yield' strategy and targets total returns. Long term views are taken on investments. The fund seeks to hold lucrative investments for extended periods to capture the benefit of compounding.
The strategy seeks to invest in quality businesses exhibiting the following attributes: - Sustainable real growth in future expected earnings and dividends - A track record of predictable cash flow and healthy profit and dividend growth - High prospective returns on capital with conservative use of gearing - Robust business model, customer value offering and competitive strengths - Management who display integrity, stewardship and continuous improvement - Forward dividend yield greater than the ALSI - Price which offers attractive absolute value, at a conservative margin of safety
Given the emphasis on predictable dividend growth the fund is unlikely to hold a significant weighting in Resource shares due to the highly unpredictable nature of future earnings and dividend growth in these businesses. Additionally, due to its yield objective the fund is unlikely to hold significant positions in low yielding stocks.
The fund is mandated to invest up to 30% of the portfolio in offshore investments plus a maximum of 10% in Africa (excluding South Africa) investments. A minimum of 80% of the market value of the fund must be invested in equities.
*risk as measured by standard deviation over a 3-year rolling period
The Fund generated a 4.5% return for the quarter against the fund’s benchmark, being the South African General Equity Peer Group average, which returned 5.8% for the period. Domestic assets contributed 1.6% to returns for the quarter, with offshore assets adding 2.9%. Domestic assets rose 2.2% over the quarter. Key domestic contributors included British American Tobacco, up 29.5%; Anheuser-Busch Inbev, rising 26.7%; and Octodec, up 12.7% for the quarter. Contributing detractors included the JSE Ltd, down 15.6%; and Woolworths, which lost 13.9% over the period.
The fund’s offshore exposure stood at 28.4% at quarter end. Offshore securities rose 10.5% in Rand and 9.9% in US$ over the period. Key positive contributors in the offshore portion were Union Pacific, rising 21.6%, TJX, gaining 19.4% and Nestle, up 17.7% in US $. The main contributing detractor was Abbvie, down 11.5% in US$ over the quarter.
The fund has an 11.8% allocation to attractive yielding property stocks (local and offshore) which rose 6.6% during the quarter. To add some further yield to the portfolio, preference shares are held amounting to 4.4% of total assets. The yield on these instruments is on average almost 10%. We view this as attractive given specific future value unlock catalysts we have identified.
The average historic dividend yield of all the securities in the fund is 4.9%, with the prospective 12-month forward yield expected to be over 5%. Note that this is a gross yield which does not include local and offshore withholding taxes as well as management and admin fees.
We expect the fund to grow distributions ahead of SA inflation for the forthcoming 12 months, in line with its objective.
Our core style of investing predominantly in attractively valued quality shares we believe delivered a respectable return for the quarter. The style places an emphasis on earnings and dividend stability and predictability.
Over a full market cycle, we believe this approach to be best suited to delivering the fund’s stated objective.
Looking forward we see value in a number of South African and Offshore equities. South African based industrial companies especially look to be showing attractive value with very low earnings bases. However, this needs to be balanced against the gloomy economic conditions present domestically. Our current cash position sits at 10% (local and offshore combined). Given the evolving macroeconomic and political risks facing both South Africa and various developed economies we will be measured in the deployment of cash, demanding a significant margin of safety in the purchase price of any investment.
The portfolio's investment universe will apart from assets in liquid form, consist mainly of equity securities and property securities, as well as preference shares. The portfolio will invest in shares with positive dividend characteristics and may use derivatives to hedge out any market risk on shares where the view on capital growth is not positive. The portfolio may invest in listed and unlisted financial instruments, in accordance with the provisions of the Act, and the Regulations thereto, as amended from time to time, as well as in offshore investments as permitted by legislation, in order to achieve the portfolio's investment objective. The manager may from time to time invest in participatory interests in portfolios of collective investment schemes registered in the Republic of South Africa and which are consistent with the portfolio's investment policy.