The asset alloca..on of the Northstar SCI Managed Fund in 2019 added value being slightly underweight its benchmark in domes..c equi..es, overweight domes..c fixed income, largely devoid of local property and at weight in foreign assets.
Fixed income within the fund had an excellent year returning 8.3% against the FI benchmark of 6.9%. In addi..on to this alpha genera..on, high exposure to domes..c fixed income assets rewarded unit holders. As disinfla..onary forces pulsate through the global economy, domes..c fixed income assets, having soldoff to reflect downgrade risks, are offering high real returns. South Africa has a growth problem, but at this stage, not an infla..on problem. Although a low growth landscape does hold longterm risk to debt holders, in our view, in the shortterm, debt risk is contained and fixed income assets should outperform SA economically sensi..ve equi..es. Consequently, we remain overweight FI in the fund.
Northstar’s investment philosophy of owning undervalued, quality businesses worked outstandingly again during the year for the foreign component of the fund. Although the same list of high quality offshore names remained in the fund for the dura..on of 2019, weigh..ngs were reduced as the year progressed, a reflec..on of stock markets rallying hard and stock prices nearing and in certain instances exceeding our calculated fair intrinsic values.
The JSE Capped SWIX returned 6.8% in 2019, with the local equity component of the fund returning 5.18%. For the quarter the benchmark gained 5.28% and the por..olio 3.65%. Granted our chosen equi..es slightly underperformed the Capped SWIX, stock selec..on was rock solid and the selec..on effect added 1% to returns – we chose the best performing stocks within the various sectors of the market.
Our philosophy does lead to a natural deselec..on for most poor quality resource businesses – they fail to show persistency of characteris..cs inherent within quality businesses low levels of debt, strong cash genera..on and consistency in producing returns on capital above the cost of that capital. The majority of resource company share prices bo..omed in early 2016, at that ..me, they were producing losses, nega..ve returns on capital and had indebted balance sheets. These companies are the top share price performers of 2019.
Being underweight resources resulted in a nega..ve alloca..on effect in 2019 and cost the fund 2.45%, which stock selec..on alpha exceeding 1%, could not compensate for. To understand this, one needs only look at the performance of the gold and pla..num sectors this year – 108% and 203% respec..vely. Of the top ten share performers on the JSE in 2019, eight were resource stocks. For the next 20 best performing stocks on the JSE for the year, we owned 11 of these.
There will be periods when resources act against our style, such as the last three years (resources 20.5% annualized versus 3.5% annualized for the Capped SWIX), however over longer ..me periods commodi..es have underperformed the broad market and done so with higher levels of vola..lity – since the Capped SWIX was created 8 years ago, it has annualized 10.1% versus resources at 3.5%. The Northstar SCI Managed Fund has a healthy alloca..on to fixed income investments that we believe offer real returns exceeding 3%. It also holds 40 domes..c equity posi..ons which are trading on a weighted average discount to Northstar’s calculated intrinsic values of 18%, a fair margin of safety considering the rela..vely low risk nature of the companies. Finally, unit holders are exposed to quality foreign businesses with diversified earnings streams which will act as a buffer to any nega..ve domes..c events which might unfold.