Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro 

Perspective Number 48 of 2020. 

And I want to talk about a bottom-up story for a change. I was reading the weekend papers, and there's a lot of coverage of the President's investment conference, saying that it was all just public relations, which I thought was a little bit harsh. 

One of the projects announced last year was Sappi Saiccor Mill expansion. This project was put on ice due to the COVID crisis, and the company needed some extra money to restart it. They had to raise 1.8 billion, of which we provided more than 10%, and we're the second largest investors. The good news is this money will be used to expand production by 110,000 tonnes, all of which is for the export market. It is great to see financial markets supporting projects that will provide jobs and exports in the future. The actual product they make is called dissolving wood pulp and is used as a more environmentally friendly way of making textiles. At the moment, demand in China is going crazy, as inventories have collapsed. 

From a client's perspective, we're obviously doing this to get a good return. We bought convertible bonds in the fundraising last week, which give us a yield of five and a half percent, which is better than cash. But more importantly, these convertibles give us the option to buy Sappi shares over the next five years. We think this is very valuable. Sappi is currently trading at R27, and we think it can easily double in price. 

While we're not excited by the fact that Sappi is a very cyclical business in a declining industry, it is a world leader in what it does. Management have also done a great job of managing debt down over time, and we rate their ability. We also believe that the security in terms of the convertible bonds is very high, based on this South African business, which is in much better financial shape. We're buying the shares at a cyclical trough and things will get better from here. And we're buying the exposure at half price. 

We find convertible bonds very attractive in delivering inflation plus solutions, because we can get the yield with the possibility of extra equity-like return. This particularly suits some of our conservative funds. So, for instance, John Offord, the Portfolio Manager of Stable Growth and Real Income, was a big buyer in this issue. And the reason for that is because the convertible bonds are much lower risk than the shares. 

Our ability to allocate to hybrid instruments is a key competitive advantage relative to pure equity and pure bond managers. One wants to have access to all the tools in building integrated solutions. So, it's exciting to see that amidst all this doom and gloom, there's still some investment and for us there's also opportunity to make money for our clients. I hope you enjoyed this bottom-up perspective.