Old Mutual Top 20 comment - Sept 18
The local market was weak during the quarter, with the FTSE/JSE SWIX All Share Index declining by 3.3%, while in contrast the MSCI World Index appreciated by 8.5% in rand terms. The FTSE/JSE SWIX All Share Index declined by 7.8% for the nine months to the end of September, compared with the strong return of 21% (in rand terms) for the MSCI World Index. This refl ects both the weakness in the rand and the stronger US dollar performance of developed markets. The fund does not invest in offshore companies, which has provided a headwind to performance compared with the peers over the quarter and for the year-to-date performance.
The environment remains tough and share prices are heavily penalised for any miss on market expectations, with the fund’s holdings in Aspen, Blue Label and Naspers as the most signifi cant detractors of performance over this quarter. Fortunately, the structure of the fund, with a bias to shares benefi ting from a weaker rand, provided some protection in a weak market. These include outperforming shares such as Sasol, BHP Billiton, Exxaro and Investec. The fund also benefi ted from not holding MTN, which was down 19% over the quarter, as the headlines were dominated by the challenges it faces with the regulators in Nigeria.
During the quarter, we took profi ts in Discovery, selling our position to zero as it was trading above our fair value. We used the proceeds to add to existing positions in Investec, Old Mutual, Aspen and BHP Billiton.
We have maintained a signifi cant underweight to SA Inc. shares (i.e. companies generating the majority of their earnings locally), given the lack of value within consumer shares, in particular. We believe these companies will continue to operate in a very tough environment for the foreseeable future. Many reported results to the end of June 2018 and almost without exception, these results confi rmed that earnings remain under pressure. Our interactions with management, customers and suppliers would suggest that growth will be diffi cult to come by for the year ahead.
Our emphasis remains on building a highly concentrated portfolio, which requires patience and discipline when looking for opportunities in a weak market.