2019/01/07 00:00:00

The third quarter of 2018 has been another turbulent period for the local equity market with the JSE All-Share TR Index declining by 2.2%. Emerging equity markets have dramatically underperformed their developed counterparts as the impact of geopolitical tensions between the US and China and negative growth revisions in China and Europe were felt by global markets. In South Africa, while the SARB refrained from raising interest rates, the Rand rebounded by +3.7% in September as President Ramaphosa unveiled an economic plan aimed at reviving the economy. The JSE Industrial Index however declined in September by 7.7% recording its worst monthly performance since 2009 as stocks such as MTN (-18%), Aspen (-35%) and Blue Label (-50%) tumbled during the quarter. The selloff has been widespread with few areas of the market escaping bar the SA resource index which continues to be the exception returning +5.2% during the quarter and +21% year-todate.
In a difficult environment, the Northstar SCI Managed Fund performed admirably, returning +1.7% for the quarter versus +1.1% for its benchmark, the (ASISA) High Equity peer average.
With respect to domestic equity exposure, the fund avoided several hazards (Steinhoff, Resilient / Fortress, Aspen) whilst holding three of the top five best performing JSE stocks this year (Sasol, BHP Billiton and Mondi). Good stock picking compensated for the fund’s low weighting in the only performing area of the market, namely SA resources, which we acknowledge may continue to perform well over the short term, but broadly speaking we do not believe it to be a high quality industry. We see better opportunities in the SA industrial space, particularly in the out of favour mid-cap universe, which has drastically underperformed the market over the past 3 years. Confirming our view that stock picking can offset some of the concentration bias on the JSE, the fund enjoyed meaningful returns from several non-resource positions including Old Mutual (+14.5%), Super Group (+14%), Reinet Investments (+10.1%) and Bidcorp (+8%).
The Northstar SCI Managed fund’s offshore equity component continued to perform extremely well during the quarter with a particularly pleasing hit rate of 73% and a win-loss ratio of 244% against the MSCI World Index. Stock contribution was widespread over several sectors with the best attribution coming from global healthcare and information technology. Particularly pleasing were positive contributions from high conviction positions, namely Blackstone Group (+20%), Medtronic (+16%), Visa (+14%) and Thermofisher (+18%).
We expect global markets to remain volatile as geopolitical tensions simmer impacting trade agreements and the US maintains its interest rate hiking course. From a South African perspective, weak Q2 2018 GDP numbers are likely to be a low point of the cycle and in the absence of political shocks we expect the economic environment to gradually improve. The fund is currently well diversified, conservatively positioned and invested in high quality businesses that we expected to perform well through the cycle. We are finding good opportunities, both globally and domestically, which are now starting to offer compelling value.