NAV on 2019/11/20
|NAV on 2019/11/19
|52 week high on 2019/11/11
|52 week low on 2018/12/28
|Total Expense Ratio on 2019/06/30
|Total Expense Ratio (performance fee) on 2019/06/30
Sanlam Collective Investments
MSCI World Financial Index ZAR (net of fees)
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Kokkie joined Sanlam Investment Management (SIM) in February 2004, as head of the international financial services sector, to help set up a conventional global investment unit. Kokkie previously spent 10 years with Old Mutual Asset Managers where he became a portfolio manager and Head of the Financial Services sector. He joined SIM from Coronation, where he managed the local Financial Services Fund and the Global Financial Services Fund listed in Dublin.
Denker SCI Global Financial Feeder Fund -Jun 19
Global equity markets experienced another relatively good quarter, albeit with more modest performance than in the first quarter (Q1). Looking at the indices in US dollars – on a total return basis the S&P 500 Index gained 4.3%, the MSCI World Index gained 4.2% and the MSCI Emerging Markets Index, lagged again, closing 0.7% higher this quarter. The surprising decline in long dated developed market government bond yields, which started in Q1, did not subside. Yield on US 10 year maturity bonds declined from 2.4% at the end of Q1 to 2.0% at the end of Q2 and the yield on 10 year German bonds declined from -0.1% to -0.3%.
In late June, the Federal Reserve (the Fed) indicated that it might cut interest rates sooner than previously thought by cutting the word ‘patient’ out of its policy statement. It added that it would ‘act as appropriate’ to sustain economic expansion. President Trump has often taken to Twitter to share his exasperation with the Fed’s previous rate increases.
Prime Minister Theresa May announced that she would step down as leader of the ruling Conservative Party in the United Kingdom after successive failures to deliver an acceptable Brexit deal. Boris Johnson and Jeremy Hunt are in the race to replace May as leader. Both Johnson and Hunt have claimed that they can renegotiate the withdrawal deal with the European Union and get it through Parliament before the expiry date of 31 October 2019.
Portfolio and performance review
The fund performed well this quarter, and year to date, largely thanks to the United States (US) which was the largest contributor to the positive return. India, Europe and the United Kingdom (UK) were the largest detractors.
Although we invest “bottom-up” (i.e. we have a stock picking philosophy), in a low growth, low interest rate environment the macroenvironment plays a significant role and we continuously assess the environments in which the companies we are invested in operate.
At the moment the largest geographical investments of the fund are the US (37%) and then around 10% each in India, the UK and Europe.
The US banks and insurers have done very well for us and are reporting good results, but Europe has lagged so much and has become so undervalued that we have decided to switch a bit of the US into the best positioned opportunities in Europe (ING, Kruk and NLB).
ING is one of the best banks in Europe and a leader in digitalisation strategies, Kruk is a leading debt collector (based in Poland) and has been buying up books to collect at significant discounts whilst NLB is domiciled in Slovenia (and has operations in Slovenia and surrounding higher growth countries) and due to being a fairly new and unknown listing is trading on a 10% dividend yield.
The combination of quality and very attractive valuation makes us want to add to our UK holdings (especially One Savings Bank and Legal and General), but we don’t want to increase our position until we see how Brexit plays out.
India is experiencing a liquidity scare after a few real estate developers defaulted in 2018 and 2019. Hence we decided to reduce exposure to banks potentially affected and invest in HDFC. Over many years and through many crises we’ve learnt that in times of uncertainty there is a flight to quality banks and insurers and hence it is better to sit on safe ground whilst the crisis plays out. We did consider selling out of India totally but it is one of the few countries in the world that can still grow at 5%+ and the financial sector is the oil that is vital to facilitate such growth and benefits from it.
The financial sector is currently ignored by investors and unloved, and based on the increased regulatory complexity and negative press about low interest rates we understand that emotion. However, the market misses the fact that the sector has largely dealt with the regulatory burdens and focused on cutting costs and unprofitable units (Deutsche Bank is one of the last that is finally being forced to do this).
What the market really misses is that in times of change there are winners and losers and we’re finding that the managements (and countries) that were on the front foot are taking market share and have improved their return on capital. Two examples are our top holdings, JP Morgan and Essent (both in the US), but the best example is Tinkoff Credit Services (TCS) which has grown its market share from almost zero to 12% over the past 10 years by being one of the most technologically advanced financial services players in the world (I recommend you Google TCS and see for yourself).
Finally, we are encouraged by the fact that Warren Buffett (with a 50 year track record of substantially outperforming the markets) has increased Berkshire Hathaway’s investment in the financial sector to about 70% (refer our article on our website on this topic). Like Warren, we take longer term views and focus on shareholder value growth, but we have the advantage that we have a much larger pond to fish in being able to invest in smaller challengers (like TCS and Essent) and also in faster growing emerging markets such as India and Indonesia.
You have to go back a long time to find when last the sector was this undervalued. It’s important to remember that, when investing for the long term, it’s usually best to be patient and let the compounding shareholder value growth work for you. Even in this tough environment, the average annual growth in shareholder value of our portfolio is around 12% per annum - and investors are getting this at a discounted valuation.
The portfolio will apart from assets in liquid form, invest in participatory interests of the Sanlam Global Financial Fund established under the Sanlam Universal Funds PLC approved by the Irish Regulator in April 2004. The Sanlam Global Financial Fund will have foreign exposure of at least 85% at all times and will be actively managed. Subject to the investment restrictions, the Fund will primarily invest in equities traded in or dealt on the stock exchanges or regulated markets. The Portfolio may, where the Manager considers it in the best interests of the Fund, invest up to 100% of its net assets in securities traded in or dealt on the stock exchanges or regulated markets considered by the manager to be emerging markets.
The Trustee shall ensure that the investment policy set out in the preceding clauses are adhered to; provided that nothing contained in this clause shall preclude the Manager from varying the proportions of securities in terms of changing economic factors or market conditions or from retaining cash in the portfolio and/or placing cash on deposit.