Nedgroup Investments Opportunity Fund Quarterly Feedback

By Nedgroup Investments

Omri Thomas of Abax Investments, the managers of the Nedgroup Investments Opportunity Fund, provides an overview of the Fund’s performance for the last quarter, their view on current markets and how the Fund is positioned for them.

Q2 performance
After a tough Q1, many of the positions that hurt the Fund then came back nicely with the Fund performing well in Q2 delivering 13.9% vs the ASISA Category Average of 11.3%. We still think there is substantial upside in quite a few of our positions. What really helped us in Q2 was a good recovery in Sasol leading to us add more at the lows, our exposure to the Abax Global Equity Fund, which contributed on two fronts, namely the depreciation of the Rand and good stock picks within the fund, such as Amazon. Finally, our exposure to Naspers, who had a fantastic quarter with Tencent hitting new highs.

Macro outlook
We’ve seen a very strong recovery in equity markets to almost pre-COVID levels, despite a weak global GDP. We’re probably facing one of the worst economic crises in the last 100 years and yet markets are close to all-time highs. This has been supported by very aggressive and unprecedented monetary easing. The Fed’s balance sheet has grown by about $400 million since the 2008 crisis. The expectation is that their balance sheet is going to grow to $12 trillion by the end of 2021. The market has been further supported by short covering, i.e. the borrowing of shares to sell short, but more recently those short investors have had to buy back those shares at a higher price.

We’ve also seen the growth of very low cost trading platforms where retail and new investors have started aggressively investing in the markets. The South African beneficiary has been Sasol ADR listed in the US with a lot of buying at the lows and more recently a bit of selling coinciding with the weakness that we’ve seen in Sasol. The All Share has also benefitted, mainly into resources and diversified industrials or dual listed stocks like Naspers. A lot of our local, domestic facing stocks are still at quite low levels. The Rand has also been a beneficiary with an extreme sell-off, trading at more than 10% below what we saw as a fair value compared to other emerging markets and commodity currencies. The Rand is currently slightly overvalued. Over the medium term, we remain concerned about the currency and believe we’ll have to keep interest rates relatively high to attract money. Our real rates are still high relative to the rest of the world, which will put pressure on GDP growth.

What’s concerning for us is that it doesn’t look like COVID-19 has peaked yet. It’s picking up in the US again and there’s a lot of talk about a second wave. What concerns us is the economic and not pandemic second wave where the full impact of the economic hit is felt by companies as they report their income statements and balance sheets. We’ve continued to see the beneficiaries of COVID-19 rally with valuations getting to extreme levels, driven by momentum rather than fundamentals. South Africa has also been a beneficiary of the easy money despite poor fundamentals and we see this reflected in both the equity market and the Rand.

Fair values of asset classes
Cheap: SA equities are still reasonably attractive. SA bonds on a relative basis compared to the rest of the world are attractive, but on an absolute basis we think they’re closer to fair to expensive so we have been reducing our bond duration to quite short bond duration. We think SA property is attractive and have been increasing our exposure into the sell-off. We still think hybrids are attractive so convertible bonds, especially the Royal Bafokeng convertible bond, which is getting close to our strike price and is where we will start to participate in the upside. SA cash on a relative basis offers attractive levels even though the nominal rates are a lot lower. We see some value in some of the EM equities. Fair: In the fair bucket are DM equities outside the US and commodities, which are close to being too expensive. Expensive: Anything credit related offshore is expensive, whether it’s bonds, credit, cash or equities as well as the Rand.

Asset allocation
Equities are now at 42% in the portfolio, which is slightly lower than when we last reported. We believe in the medium to longer term, you have to have a substantial allocation to equites and hedge against inflation risks given the amount of easy money in the world. Our bond allocation is 7.9% with short duration SA government bonds. We also introduced inflation-linked bonds to protect against inflation. Our SA property allocation is 6.6%, 7.7% in convertible bonds and 7% in SA cash. Half of our offshore equity exposure of 12.7% is in Eurostoxx where our downside is limited give the capital guarantees. If there’s a further rally in the European market, we expect some nice participation in that. The other half of offshore equities is in the Abax Global Equity Fund with two hedges on the S&P to protect against the global equity sell-off. Our top equity positions are Naspers (hedged), PSG, Sasol and local banks. The remaining offshore exposure is in bonds (7.4%), cash (3.4%) and property (0.5%).

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