PRIVATE WEALTH EQUITY FUND - Q4 2019 - Nedbank
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PRIVATE WEALTH
EQUITY FUND
Q4 2019
Nedgroup Private Wealth (Pty) Ltd Reg No 1997/009637/07, trading as Nedbank Private Wealth. Authorised financial services provider (FSP828), registered
credit provider through Nedbank Ltd (NCRCP16) and a member of JSE Ltd through Nedgroup Private Wealth Stockbrokers (Pty) Ltd (NCRCP59).MARKET REVIEW
The JSE (SWIX40) posted a fourth quarter return of +4.7%. During the quarter, the top performing sectors were
Platinum Mining (+47.0%), Pharmaceuticals & Biotech (+30.9%) and Gold Mining (+26.1%). On the downside, the
decliners were led by Fixed Line Telecoms (-49.9%), Beverages (-15.0%) and Household Goods (-14.3%).
FUND PEFORMANCE
The Fund returned +0.3% for the quarter, underperforming its SWIX40 benchmark by 4.4% over this period.
Stocks held which contributed to Q4 performance included Remgro (+0.47%), Aspen (+0.34%) and Alibaba (+0.31%),
as well as an underweight position in Naspers (+1.00%). Not holding Woolworths (+0.20%) and FirstRand (+0.17%)
also added to relative performance.
Stocks held which detracted from Q4 performance included Adcorp (-1.20%), Adapt IT (-0.85%) and Altron (-0.56%).
Not holding Impala Platinum (-0.74%), Sibanye Gold (-0.62%) and Anglo Platinum (-0.49%) also detracted from
relative performance.
The Fund continues to hold a modest allocation to higher quality, small and midcap shares, where valuations have
retraced to bear market levels last seen in 2008/2009.
PORTFOLIO CHANGES
INTERNATIONAL EQUITIES
The Fund now holds ten international equity positions as detailed in prior quarterly updates. Together with USD cash,
international equities now represent ~15% of the fund.
Cigna Corporation (CI)
During the quarter, the fund added incrementally to its position in Cigna. We continue to believe Cigna presents an
attractive value opportunity, in a relatively expensive US market.
Cigna is a diversified health insurance and services company. The company recently acquired Express Scripts, a
Pharmacy Benefit Manager (PBM), which represents a meaningful acquisition for the Company. Cigna’s Integrated
Medical segment provides large corporates who self-insure, access to its participating network and administration
services. The segment also sells health insurance to Commercial (smaller corporates) and Government (Medicare
Advantage) clients. The Health Services segment provides PBM and mail order pharmacy services. PBM’s aggregate
PAGE 2 OF 5drug prescriptions, which enables them to negotiate reduced medication costs with manufacturers and pharmacies.
Cigna also provides, to a lesser extent, insurance services internationally as well as short and long-term insurance.
Cigna’s latest results showed strong revenue and earnings growth, which translated into strong free cash flow
generation, allowing the group to de-gear its balance sheet. Despite the solid operating performance, the market
continues to take a negative view on the company due to political rhetoric on healthcare that dominates the headlines
going into the November 2020 elections in the US.
Fedex Corporation (FDX)
FedEx, founded in 1971, is the world’s largest express delivery company and the second largest ground shipping
company in the US. The company’s FedEx Express segment provides delivery services for packages and freight
(>70kg per item) to more than 220 countries and counties, covering 99% of the world’s GDP. The FedEx Ground
segment, which uses an independent contractor model, does deliveries in the US and Canada, utilising a drop-off and
pick-up network of more than 50,000 locations. The third segment, FedEx Freight, does deliveries of less than-a-truck-
load in size in the US, Canada and Mexico.
During the quarter, Fedex released its Q2 2020 results. Revenue remained broadly stable at $17bn, while operating
margins contracted sharply to 3.2% from 6.6% in the prior period. Management are incurring capex now, in order to
generate shareholder value in future periods. These initiatives include year-round seven-day FedEx Ground delivery,
enhanced large package capabilities and the insourcing of FedEx SmartPost packages. In addition, operating results
were further impacted by weaker global economic conditions, the loss of a large customer and a more competitive
pricing environment. As a bellwether of global trade, Fedex has been caught in the middle of the trade war between
China and the US. The fund retains a relatively small position to Fedex which we will consider adding to at the right
price.
DOMESTIC EQUITIES
Domestic equities – Position sizes reduced
During the period we reduced positions held in RMH, Mr Price, Mediclinic, Sasol and Quilter. Generally, the fund will
reduce or exit positions completely for three reasons; 1.) position reaching fair value, 2.) more attractive, lower risk use
of capital, and 3.) where the facts have changed (eg: a thesis not playing out, an error being made etc). The majority
of the sales during the quarter were driven by positions reaching fair value.
Sasol has been at the forefront of discussions across most asset managers over the last few months. Negative
headlines, a depressed share price and widely different views on estimates of fair value set the scene for many hours
of debate, including within our own investment team.
After a lengthy delay and plenty of shareholder frustration, Sasol eventually released its FY19 results, along with its
independent board review. Given the trading statement which was released a few months prior, the focus of the
PAGE 3 OF 5results was less on the past 12 months financial performance, and more on unpacking what exactly went wrong at the
Lake Charles Chemical Project (LCCP), as well as an update on what shareholders could expect going forward.
The review identified that the conduct of the former LCCP project management team was incompetent and non-
transparent, but no intention to defraud was found. Pleasingly, the review also found that no restatements of financial
performance was required. The causal factors behind the outcomes included inadequate reporting controls, a culture
of deference and insufficient experience in executing mega-projects.
The fund continued to hold a limited position size in Sasol over the last few months. Despite all the negative headlines,
the share price had already discounted the majority of the negative outcomes. The balance sheet risk was the biggest
area of concern. However, Sasol management had a few levers to pull to relieve some of the pressure including: 1.)
passing the dividend, 2.) sale of non-core assets, 3.) continue the hedging program, and 4.) restructure some of the
debt covenants.
In mid-December, Sasol announced the successful replacement of the acetylene reactor catalyst at the LCCP Ethane
Cracker. Importantly, this meant that the capacity utilisation has increased to normal levels and that the quality of the
Ethylene has met the required specification. As a result, in our view, the market quickly priced out some of the looming
short-term risks. In addition, due to some positive developments on the US- China trade war front, the oil price also
traded above our estimate of normalised long-term levels, which further assisted the Sasol share price. As a result, we
marginally reduced our position size as Sasol moved closer to fair value levels.
The fund has been an owner of Quilter since it’s unbundling out of Old Mutual, and at various points since then, the
position size was increased at attractive levels. Quilter is well-positioned in the UK wealth market as an integrated
wealth management business. Via its at-scale adviser force and IT platform, the group benefits from a large and
growing wealth market, where regulatory changes have profoundly changed the industry dynamics in favour of larger
players. Quilter is a relatively capital light business, that we expect will continue to scale up over time as more assets
move on to platforms and as the adviser force continues to grow.
During the quarter, some of the negative sentiment regarding Brexit abated, which saw Quilter’s share price move
closer to our estimate of fair value and as a result we trimmed our position size.
Domestic equities – Position sizes increased
The quarter saw a continuation of volatility which we used to our advantage to add to existing holdings at attractive
valuations. The fund added to positions in Standard Bank and AB Inbev.
The SA banks continue to occupy a modest allocation of the fund’s capital. The most recent results season for the
banks showed stable top line growth and well contained operating cost growth. However, bad debts charges are
beginning to normalise to higher levels as the effects of the dire macroeconomic conditions begin to filter through.
Most management teams are not too optimistic on the outlook for SA and warn that 2020 might become another “lost”
PAGE 4 OF 5year. Despite all the negativity, we believe select valuations in the banking sector are attractive. This view is largely
premised on healthy dividend yields, well capitalised balance sheets and stable ROE’s.
Standard Bank currently trades at c.1.5x price to book and a healthy 7% dividend yield. A key differentiator for SBK
amongst its peers is its higher exposure to Africa, where it earns a healthy 22% RoE. Given the de-rating during the
quarter, the fund used the weakness to incrementally add to its position.
We continue to view AB Inbev as a high quality, globally diversified, defensive business, led by able and aligned
management. Much of the negative sentiment over the last few reporting periods for the business was focused on the
geared balance sheet. Management have however, already pulled a few available levers to address the elevated
financial risk by: 1.) disposing of its Australian unit, 2.) separately listing Budweiser APAC, 3.) reducing the dividend,
and 4.) restructuring the debt to extend the maturity.
Going forward, we expect a continuation of the strong organic cash generation to further deleverage the balance sheet
as the premiumisation and portfolio expansion strategies are executed. Given the sharp de-rating during the quarter,
the fund incrementally added to its position.
Company specific commentary – FSR/ RMH/ REM
The fund has been a long-standing owner of RMH, as a discounted entry point to FirstRand. During the period, RMH
announced a restructure of its portfolio, following an internal review.
RMH plans to distribute its 34.1% stake in FirstRand, valued at c.R130bn and, thereafter, monetise the Property
Assets in an orderly manner over time. The FirstRand distribution will be net of the settlement of the FirstRand debt
and associated costs, and an appropriate capitalisation of RMH post the FirstRand distribution. RMH will remain listed
on the JSE until that process is complete. A detailed announcement relating to the restructuring, including the relevant
approvals required and the related timetable, is expected to be made during Q1 2020.
Post the announcement, the market re-priced the discount to NAV on RMH, and the fund used the opportunity to exit a
portion of its holding. The fund retains exposure to RMH & FSR via its stake in Remgro, which will also be distributing,
in full or in part, its exposure to the two assets. We continue to view Remgro as a stable, diversified holding company
which, based on our assessment, is expected to produce attractive returns from current levels, over a range of
outcomes. Based on the attractive symmetry of returns from the current discounted valuation, Remgro occupies a
meaningful proportion of the fund’s capital.
CLOSING
In an uncertain world, with many looming risks, the Fund remains well diversified across several businesses whose
operations span different sectors and different geographies. The Fund remains committed to our over-arching
investment philosophy: “Long-term investing, well-considered” and we would like to thank our unitholders for sharing
the same long-term disposition.
PAGE 5 OF 5NEDGROUP INVESTMENTS PRIVATE WEALTH
EQUITY FUND
DECEMBER 2019
RISK RATING INVESTMENT APPROACH
The appointed investment manager, in conjunction with the Nedbank Private Wealth Investment Research and
Fund Management team, meets on a regular basis to review the fund. The investment manager adopts a bottom-up
approach to position the fund. From a bottom-up perspective, stock picking decisions are based on exploiting
market inefficiencies through diligent fundamental analysis.
LOW MEDIUM HIGH
PORTFOLIO PROFILE
The portfolio seeks to provide investors with capital growth by investing in equities predominantly traded on the JSE
as well as internationally on a select basis. Investors should be prepared for and be comfortable with market
RISK REWARD PROFILE volatility in order to achieve long-term objectives.
Equity investments are volatile by nature and are
subject to potential capital loss. The portfolio is
suitable for investors seeking exposure to equity
markets with maximum capital appreciation as 2
their primary goal over the long term. Investors PERFORMANCE
should have a tolerance for short-term market
volatility in order to achieve long-term objectives. Period Portfolio Benchmark
1 year pa 2.7% 8.7%
3 Years pa -2.3% 5.8%
GENERAL INFORMATION 5 Years pa 1.4% 4.6%
7 Years pa 7.5% 8.3%
BENCHMARK / TARGET RETURN
10 Years pa 10.4% 10.6%
JSE SWIX Top 40 Index
Lowest 1 year return -15.7%
Highest 1 year return 38.0%
INVESTMENT MANAGER ASSET CLASS
Nedgroup Investment Advisors (Pty) Ltd is The annualized total return is the average earned by an investment each year over a given period of time.
authorised as a Financial Services Provider
under the Financial Advisory and Intermediary
Services Act (FSP No. 1652). PORTFOLIO STRUCTURE
ASISA CATEGORY
South African Equity General
Basic materials 9.3%
Industrials 16.1%
REGULATION 28 COMPLIANT
Consumer goods 5.1%
No
Health care 4.4%
INCEPTION DATE Consumer services 19.2%
01 May 2004 Telecommunications 3.3%
Financials 17.1%
FUND SIZE Technology 7.5%
R 1,462 Million Cash and money market 2.9%
1 Foreign equity 11.7%
NET ASSET VALUE
Foreign cash 3.3%
5738.4 cpu
MINIMUM INVESTMENT
Lump sum: R50,000
TOP 10 HOLDINGS
INCOME DISTRIBUTION Share Percentage
Frequency: Annually Remgro Ltd 5.0
December 2019: 125.81 cpu Prosus 4.3
Previous 12 months: 125.81 cpu RMI Holdings Ltd 4.2
Allied Electronics Corp Ltd 4.1
Pepkor Holdings Ltd 4.1
FEES
The Bidvest Group Ltd 3.7
Annual management fee (excluding VAT): 1.00% MTN Group Ltd 3.3
Reinet Investments SCA 3.3
Shoprite Holdings Ltd 3.2
Total expense ratio 1.17% BHP Group Plc 3.0
Transaction costs 0.27% Total 38.4
Total investment charges 3 1.44%
MINIMUM DISCLOSURE DOCUMENT Published: 23 January 2020NEDGROUP INVESTMENTS PRIVATE WEALTH
EQUITY FUND
DECEMBER 2019
SINCE INCEPTION CUMULATIVE PORTFOLIO PERFORMANCE
The graph shows growth of R5 000 000 invested in the portfolio plotted against the Fund's benchmark, the FTSE/JSE SWIX40, as well as the average of the ASISA South African
Equity General category.
Mandatory disclosures:
1. Funds are valued daily at 15:00. Instructions must reach us before 14:00 (12:00 for Nedgroup Money Market Fund) to ensure same day value. Daily prices are available on request from your
relationship manager.
2. Performance is calculated for the portfolio and individual investment performance may differ as a result of initial fees, the actual investment, the actual investment date, the date of reinvestment
and dividend withholding tax. Data source: © 2015 Morningstar.
3. Total Expense Ratio (TER), expressed as a percentage of the Fund, relates to expenses incurred in the administration of the Fund. A higher TER does not necessarily imply a poor return, nor
does a low TER imply a good return. The current TER may not necessarily be an accurate indication of future TER’s. Transaction Costs (TC), expressed as a percentage of the Fund, relates
to the costs incurred in buying and selling the underlying assets of the Fund. TC are a necessary cost in administering the fund and impacts fund returns. It should not be considered in isolation
as returns may be impacted by other factors over time including market returns, the type of fund, the investment decisions of the investment manager and the TER. The Total Investment
Charges expressed as a percentage of the Fund, relates to all investments costs of the Fund. Both the TER and TC of the Fund is calculated on an annualised basis, beginning October 2016
and ending September 2019.
Whilst Nedbank Private Wealth offers you a choice of investment services, the underlying funds forming part of Nedbank Private Wealth strategy solution, are managed by Nedgroup Investments.
More specifically, Nedgroup Collective Investments (RF) Proprietary Limited, is the company that is authorised in terms of the Collective Investment Schemes Control Act to administer the Nedgroup
Investment Private Wealth unit trust portfolios. It is a member of the Association of Savings & Investment South Africa (ASISA). Contact: Nedgroup Investments, P O Box 1510, Cape Town 8000,
info@nedgroupinvestments.co.za, Tel 0860 123 263 (RSA only). The Standard Bank of South Africa Limited is the registered trustee. Contact: Standard Bank, P O Box 54, Cape Town 8000, Trustee-
compliance@standardbank.co.za, 021 401 2002.
Unit trusts are generally medium to long term investments. The value of your investment may go down as well as up. Past performance is not necessarily a guide to future performance. Nedgroup
nvestments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which
includes the possibility of losing capital. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Certain unit trust funds may be subject to currency fluctuations due to its
international exposure. Nedgroup Investments has the right to close unit trust funds to new investors in order to manage it more efficiently. A fund of funds may only invest in other unit trust funds, that
levy their own charges, which could result in a higher fee structure. A schedule of fees and charges and maximum commissions is available on request from Nedgroup Investments. For further
additional information on the fund, including but not limited to, brochures, application forms and the annual report please contact your relationship manager.
Contact
Nedbank Private Wealth
Contact suite 0860 111 263
email: contact@nedbankprivatewealth.co.za
Visit www.nedbankprivatewealth.co.za for further details
MINIMUM DISCLOSURE DOCUMENT Published: 23 January 2020You can also read
