Siboniso Nxumalo  00:00

Hi, my name is Siboniso Nxumalo. I'm a Portfolio Manager at the Old Mutual Investment Group MacroSolutions. This is our third quarter of 2021's investment performance review and outlook.

00:14

We have a good story to tell. Clients enjoyed a pleasing third quarter, with our broad range of funds showing very strong investment performance, relative to the benchmark and relative to the peer group. Thus, we had a strong outperformance, which was a continuation of the recovery clients have enjoyed across our broad range of funds, which has resulted in our range of funds being top quartile over the past year. 

00:43

Let's look at the details. Over the past quarter, our overweight positions in counters like MTN, Omnia, and Sasol, and Old Mutual, which all showed returns of above 25%, 36% for MTN, including some strong returns from the big four banks and Investec contributed meaningfully to the returns. But the key story of the quarter was our underweight position in the Naspers Prosus Group, which year to date, the Naspers Prosus Group is down 46% for Naspers, 52% for Prosus. This particular investment call, we were underweight relative to the benchmark and relative to our peers. 

But this particular call illustrated the advantage of our multi-faceted investment approach. Naspers is a market darling. It's a very sizable position in many client portfolios. Market commentators tend to agree that the Naspers Prosus Group offer compelling fundamental bottom up value. That's before you add the large discount that Naspers and Prosus trade at, relative to the Chinese tech company, Tencent. 

While we do not materially disagree with a market's bottom up views of Tencent - Tencent's a world class company that you could argue warrants a very high rating given its market opportunity. However, there's that famous adage that Albert Einstein is attributed to have said, that says "Not everything that can be counted, counts, and not everything that can be counts, counted." So, just because there's a fundamental and attractive bottom of value, doesn't necessarily mean that that can materialize. 

02:26

So, over the year, our thematic lens - because we look at the world in two dimensions. We look at price, which is the fundamental bottom up value. But we also look at themes, which is more the top down lens into the key themes driving investment decisions. 

Our thematic lens into the world raised concerns about regulation in tech companies globally, including China. This concern with our theme of a cyclical recovery, and that value should outperform growth in that recovery, meant that we have been reducing our stake in the Naspers Prosus Group at the higher valuations earlier on in the year, and deploying that capital into more domestically focused and economically sensitive SA Inc companies. This proved to be a highly profitable decision, as the draconian regulatory decisions in China took their toll on the Tencent share price and leading to a substantial underperformance in the companies from its peaks in the year earlier. As I said, the Naspers/Tencent Group is basically halved year to date. 

03:30

Following a substantial price recovery, we've also been reducing our platinum group metals and diversified minor holdings. These have been stellar performance in the funds for quite a while now and have added meaningfully to client returns. But we have continued then on the other side of the ledger buying a finding opportunity in Investec, Discovery, Pepkor, and Anheuser-Busch, on the back of weaknesses in all of those counter’s price. 

Anheuser-Busch, in particular, we believe is suffering some cyclical headwinds as input costs. Anheuser-Busch is the biggest beer company in the world. So, cyclical input, high aluminum prices, supply chain shortages, high input prices, which are putting pressure on the company's earnings. And we believe that if you look longer-term out, that should wash out and we want to buy a great asset like Anheuser-Busch at attractive prices. 

04:27

However, let's just step back a little bit and look at and refresh you on our key themes. Because we've built funds based on these themes, key themes. So, over the past year, driven by our research, we've identified the following key themes that will drive investment returns that clients hire us to deliver. Globally, we see two themes: earnings over ratings and regime change. And I'm going to go into detail on both of these. 

04:51

Earnings over ratings means we see a strong but maturing global recovery, where returns will be driven increasingly by fundamental earnings, rather than a PE rating, which has been the key driver from the bottom of the Covid induced thing. So, we're looking forward, we're saying companies are going to have to deliver in order to gain out performance rather than the rating that we usually see from the bottom of a cycle. 

05:17

The second thing we see a regime change, that globally, we see a return of inflation over the medium term. That inflation will be driven by supply chain disruptions, which we're seeing, high commodity prices, and also, which is also driven by the record volumes of stimulus that central banks have used to drive and stimulate the global recovery. 

05:36

In South Africa, as we come closer to home, we continue to see a theme of a cyclical recovery that higher commodity prices have, in the short term, created a terms of trade windfall. The balance sheet of South Africa is looking better because we are commodity-producing nation and the continuing vaccination drive in South Africa, and the global recovery will fuel a cyclical recovery in South Africa. And I our final them in South Africa cash is trash, interest rates are low, and those will drive return seeking investors to growth assets like equities, and away from cash. 

06:11

So, in closing, therefore, given the themes that I've highlighted, and obviously the underlying fundamental value that we calculate for each and every company, and we continue to position clients' funds in favour of cyclical or economically sensitive companies, we have positioned the funds towards South Africa, because we see value in South Africa. That value is decreasing, as obviously we see out performance, but we continue to see compelling value in South Africa. And we've positioned client funds also in favour of more value oriented or cheaper names rather than growth names, which have been the key driver of returns over the past year. 

And therefore, looking forward, we believe that our out performance will continue as the companies we are invested in continue to actually deliver a meaningful earnings per share. Thank you. And we will look forward to seeing you again. And hopefully we will also then be communicating good news to you in the fourth quarter, and as we wrap up the year of 2021. Thank you.