Iain joined RMB Asset Management in 1993 after completing his studies and joined the investment team soon thereafter. Iain is the portfolio manager of the RMB Equity Fund, the RMB Industrial Fund and the FNB Growth Fund.
Charles heads the research division of RMB Asset Management. Charles previously spent nine years as a senior partner at a major firm of stockbrokers. During this time he was a member of the JSE and was responsible for portfolio management and research.
Truffle SCI General Equity Fund - Jun 19
Financial markets bounced back from May's retreat Global markets bounced back strongly from May's contraction despite many of the market's pressing issues remaining unresolved. Firstly, while the trade negotiations between the US and China are back on track it will take compromise from both sides to reach an agreement. Brexit is firmly on hold as the UK Government's Tory party is still struggling to find a new leader to replace Theresa May even before a revised strategy can be contemplated.
The global economy is currently going through a synchronised slowdown that has seen developed central banks pivot towards more accommodative monetary policy. This more dovish stance by developed central banks has opened up room for emerging markets to also cut rates. Given the limited room for the conventional monetary policy, we may yet see central banks turn more aggressively toward fiscal policy, in an attempt to avoid a recession in the years ahead.
The S&P 500 Index advanced 6.9% in June, representing one of the strongest moves seen in recent times, driven, in the main, by the pivot on interest rate policy from the US Fed.
Much has been said about the demise of the current global equity bull market that, by many measures, is very mature. Having been in place for over a decade, it will rank as one of the longest in history. However, the excesses that normally signal the end of the cycle are not that apparent. But earnings have already enjoyed a very strong advance over the last half-decade and are looking like they are in top-of-cycle range. It is unlikely that earnings growth on its own can sustain further equity gains.
The key risk to the current equity bull market would be earnings disappointments into 2020, or an unexpected rise in interest rates resulting in an upward spike in equity yields. As this does not appear to be on the very short-term horizon the global equity backdrop is likely to remain a benign influence with regard to domestic financial markets.
South African markets followed suit In June the JSE All Share Index produced a total return of 4.8%, having fallen by 4.8% in May. This brings the year-to-date return of the ALSI to 12.2%. All sectors contributed to the performance in June, although the Financial sector and the Resource sector outperformed the Industrial sector by 3% and 2% respectively. The more broadly-based SWIX experienced a more modest advance but was still up 3.1% in the month and by 9.0% year-to- date.
Bonds too enjoyed a good month with yields at the long end softening by about 20bp. Real yields remain high by historical standards. However, the Property index continues to lag, being barely in positive territory year-to-date. As the sector generally lags the economy, distribution growth is likely to disappoint for several years to come.
Precious metals also enjoyed a strong advance Both gold and PGM's had a strong June and no doubt was a significant factor behind the good performance from the Resource sector. Equity returns could have been even better being it not for the currency strengthening by 3.5% against the US$. The gold price breached the 1400 $/oz mark for the first time in six years and the prices of the entire PGM basket rose, possibly indicating a change in sentiment with regard to precious metals that could signal a more sustained move.
SA's economic performance is cause for concern The SA economy is currently trapped in a cycle of low economic growth and high unemployment that if not arrested soon, could result in a major crisis. The current trajectory is leading to greater levels of poverty and inequality that increase the probability of economic instability. Recent statistics on credit growth and retail sales suggest that the currently employed SA consumers are at their limits and are unable to meaningfully take on more debt. Spending on badly needed infrastructure is also declining as seen in the demise of the local construction industry. Barring an export-led windfall the only sustainable path to higher economic prosperity is to increase employment bringing in more people into the consumer economy. Despite President Ramaphosa's positive message at the State of the Nation Address, we have yet to see decisive action taken on critical structural reforms that are necessary to move us out of the low growth environment.
The currency has been surprisingly strong Given the country's disappointing growth outlook it might have been expected that the Rand would remain weak; however, this has not been the case. A consequence of our low growth environment has seen imports decline and with rising commodity exports the country has experienced an improvement in the external trade balance over the recent months. Inflation has also been stable, surprising most economists on the downside. These metrics have underpinned the strong Rand and are likely to lend stability to the currency in the short term, in spite of the weak fundamentals.
Financial markets should produce modest positive returns Low economic growth prospects for the year mean that SA focussed corporates will struggle to grow earnings and dividends in real terms over the next twelve months. Despite this, a large proportion of the SA market is dominated by resource and rand hedge stocks which are still enjoying the benefits of a growing global economy and should still produce modestly positive returns.
Over the shorter term, the outlook for fixed income assets is encouraging. The weak economy and the stable currency are taking the pressure off the inflation rate and are providing the SARB with the data to cut short term interest rates. Given that yields across the yield curve are positive, real returns can be expected from fixed-income investments over the next few months.
We remain overweight in the resources sector, not as a function of any top-down view, but rather the result of our bottom-up assessment of value on a stock by stock basis. Our overweight in the gold sector is a function of our positive view on AngloGold which continues to trade at a large discount to its global peers. We also like the diversification it brings to the portfolio in a world of increasing geopolitical tensions. We remain overweight in the platinum sector as certain stocks are still trading at a significant discount to their intrinsic value, despite the recent exceptional performance. Our largest position in the diversified miners remains Anglo American where the valuation on its rump assets remains on an undemanding 3 times EV/EBITDA. We maintain our overweight position in British American Tobacco. Despite the significant derating seen in the stock, it continues to deliver earnings growth in-line with our expectations. Also, the stock trades on an attractive forward dividend yield of 7.5%.
On the 22nd of May 2019, Sasol issued an update on the progress of the construction of their Lake Charles Chemical Project (LCCP). The update was disappointing as they guided for an additional $1bn cost overrun on the project when it is almost 96% complete. This was particularly shocking given that Sasol management had issued an update on the LCCP project only 4 months earlier on the 8th of February 2019, where they assured the market the project would be completed within a range of $11.6bn - $11.8bn. Given the above disappointing update, we believe that management may not have had a sufficiently clear line of sight around what was happening on the ground at the project. As a result of the additional cost overruns, the expected project return has declined from 7.5% to 6 - 6.5%. As a shareholder, this is extremely disappointing but the cost of the LCCP project is largely sunk capital, which we still think should generate $1.0bn of EBITDA by 2022. At the current share price, the market is not putting any value on the capital spent on the LCCP. Once production at LCCP is ramped up over the next three years we expect the market to put a value on the cash flow produced by these assets. As a result, we maintain an overweight position.
South African focussed stocks continue to struggle in the current low growth environment. SA corporate margins are being squeezed by increasing costs which they are unable to pass through to consumers given the poor economic backdrop. If the broader SA economic backdrop does not improve, we expect that SA focused stocks will continue to struggle to deliver real returns, increasing the probability of a value trap. Our exposure to the local economy remains largely through the financial shares, being banks and insurers, which are reasonable value, and offer forward dividend yields of over 5% and mid-singledigit earnings growth. These shares are liquid and more defensive than many of the direct consumer-facing shares, which have more exposure to the challenging economic environment. We remain underweight the retail and SA industrial shares as PE multiples are not cheap enough given the difficult economic backdrop. We remain underweight the property sector where fundamentals continue to look poor.
We think the risk of distribution resets remains high as rent negotiations still favour the tenants. While distribution yields in some cases remain optically attractive the quality of distributions is low. Contributors and detractors
Top contributors for the quarter included BHP Billiton, Anglo American, AngloGold, and Impala Platinum, which all enjoyed the benefits of higher commodity prices and an improving earnings outlook. Other contributors included our underweight positions in Netcare, Life Healthcare and Glencore. Our overweight positions in FirstRand, Equites and the newly spun out Multichoice Group also made a meaningful contribution to performance. Detractors included Sasol as discussed above, as well as British American Tobacco plc which was a slight detractor on the back of continued negative market sentiment around the deteriorating US tobacco regulatory environment. Despite the poor performance from a share price perspective, the company guided for a better than expected second-quarter earnings performance, which should see full-year earnings grow at high single digits. The fund's underweight position in MTN detracted over the quarter as the market reacted favourably to MTN underpinning their dividend guidance by selling down non-core assets. KAP Industrial Holdings and Hulamin, two smaller industrial companies, also detracted from performance post disappointing earnings updates.
The Truffle MET General Equity fund shall be a Domestic General Equity Fund.
The portfolio will invest a minimum of 75% of the market value of the portfolio in equities at all times.
The portfolio may also include participatory interest or any other form of participatory interest in collective investment schemes or other similar schemes. Where the aforementioned schemes are operated in territories other than South Africa participatory interest or any form of participation in these schemes will be included in the portfolio only where the regulatory environment is to the satisfaction of the manager and trustee, of a sufficient standard to provide investor protection at least equivalent to that in South Africa.
Nothing contained in this supplemental deed shall preclude the Maanger from varying the ratios of the aforementioned instruments relative to each other (except as required by the Act), or the assets themselves, to maximise investment potential, should changing economic factors or market conditions so demand. Provided also that nothing contained in the investment policy shall preclude the Manager from retaining cash in the portfolio and/or placing cash on deposit in terms of the deed. Provdied further that the Manager shall ensure that the portfolio includes securities and assets in liquid form, of at least the aggregate value required, from time to time, by the Act.
The Manager will be permitted to invest on behalf of the Truffle General Equity Fund in offshore investments as legislation permits.
The Trustee shall ensure that the investment policy set out in this Supplemental Deed is carried out.
For the purpose of this portfolio, the manager shall reserve the right to close the portfolio to new investors on a date determined by the manager. This will be done in order to be able to manage the fund in accordance with its mandate. The manager may, once a portfolio has been closed, open that portfolio again to new investors on a date determined by the manager.