Fund Manager Report

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REZCO UNIT TRUSTS: 10 YEAR BIRTHDAY

The end of the current quarter is the 10 year mark for our first unit trust, the Rezco Value Trend Fund. We would like to express our deep appreciation to our clients for trusting us with their investments over this time. We hope that this faith in us has been rewarded by the fund having the best 10 year record in its category with much lower volatility. It is rewarding to note that R100 000 invested in Rezco in 2004 would now be worth R620 500 (with dividends reinvested) compared to R 357 000 if invested in the average fund in the sector. This is what gets us up in the morning: Generating and protecting long term wealth for our clients.  We are working really hard to make sure that we continue to perform as well for our clients going forward. This is what the picture looks like for the past 10 years:

 

MARKET POSITIONING

We averaged the quarter with conservative equity exposure levels due to our concern that the market was pricing in too much upside. Equity exposure is 56.2% with a further 8.7% invested in locally listed foreign property.

ASSET ALLOCATION SOUTH AFRICA FOREIGN TOTAL
Equity 36.3 19.9 56.2
Listed Property* 8.7 0.0 8.7
Medium – Long Bonds 0.0 0.0 0.0
Money Market – Short Bonds 30.3 4.8 35.1
TOTAL 75.3 24.7 100

*Foreign property listed locally

PERFORMANCE

1 YEAR 3 YEARS 5 YEARS 7 YEARS 10 YEARS
Rezco Value Trend 11.0 23.5 17.8 13.9 20.0
Rezco Prudential 12.1 21.2
ASISA SA MA High Equity 11.7 15.4 12.4 8.9 13.6
FTSE/JSE All Share TR 15.4 22.2 18.0 10.6 18.8

*The above are annualised returns and for our retail Class A unit class.

With hindsight, even a 56.2% equity exposure was probably too high as we reached September and the market corrected heavily. The Rezco Value Trend Fund ended the 12 months to the 30th September with a disappointing one year performance of 11%, slightly behind the sector average of 11.7%. At the date of writing (15 October 2014) the fund is up 6.4% year on year with the sector average being up 7%. What is equally unusual for us is that we fell 4.5% during the recent market correction, compared to the average fund falling 4%. The FTSE/JSE All Share Index has declined 7.5% over this period.

Being average over any period is not something that we are accustomed to, nor aspire towards. However, it is in accordance with our style and philosophy that this will happen from time to time. If one looks at the calendar year performance table below, 2009 and 2010 both stand out as years where performance was poor relative to peers. This preceded a run of sector topping years.

Even with the most recent year being below average, The Rezco Value Trend Fund is still no 2 out of 121 funds in the sector over 3 years.

2007 Rank 2008 Rank 2009 Rank 2010 Rank 2011 Rank 2012 Rank 2013 Rank
REZCO Value Trend 18.7 4 4.4 2 9.4 54 12.7 29 12.9 2 29.6 1 27 2
FTSE/JSE All Share 19.2 -23.2 32.1 19 2.6 26.7 21.4
ASISA SA Multi-Asset High Equity 12.4 -8.2 14.9 11.4 5.3 16.3 18
# of Peers 45 53 58 65 77 92 105

 

WHY IS THREE YEAR PERFORMANCE SO IMPORTANT?

Since we are long term investors, our 3 year performance is what is most relevant. Clients may ask: Is this not a good example of the classic investment marketing approach of ignoring numbers that are below average and focusing on numbers that paint a pretty picture? In short, the answer is NO. The majority of core holdings of a unit trust do not and actually cannot change significantly from one year to the next. When we invest, we have a target investment horizon of 3-5 years. We are however disciplined in exiting positions where we no longer are satisfied with the investment case. Our core South African portfolio is very similar this year, where our performance is below average, to last year when it was the best in the sector. Indeed the core holdings have been consistent over the past 3 years where our performance leads the sector.  The table below shows our current holdings as well as 1 year ago and 2 years ago. What is interesting is that the core holdings are similar over time. As a team, this group of shares has significantly outperformed over 3 years and in fact was the core of the top fund in the sector for calendar year 2013.

These are companies that we still believe have great capacity to outperform their peers over the next couple of years.  The consistency over time of core portfolios underlines why chasing funds with great one year performance can be unrewarding for investors.

QUARTER ENDED
2012/09/28 2013/09/30 2014/09/30
TOTAL SA EQUITIES 44.10% 41.00% 36.30%
Discovery Ltd 4.40% 6.60% 6.10%
Omnia Holdings Ltd 6.10% 6.70% 5.20%
Mondi PLC 1.90% 4.90%
Tongaat Hulett Ltd 4.70%
Oceana Group Ltd 2.80% 4.80% 3.30%
Compagnie Financiere Richemont SA 2.60% 4.50% 2.80%
FirstRand Ltd 2.80%
The Bidvest Group Ltd 2.20% 2.00% 1.60%
Royal Bafokeng Platinum Ltd 2.20%
Liberty Holdings Ltd 1.40%
RMB Holdings Ltd 2.40% 5.00%
Investec PLC 1.20%
Sasol Ltd 4.20% 3.00%
Woolworths Holdings Ltd 2.90% 0.20%
Clover Industries Ltd 1.70% 1.90%
Hulamin Ltd 1.70%
Mr Price 4.10%
Avi Ltd 3.60%
Pinnacle 2.80%
Foschini Group Ltd 2.40%
EOH Holdings Ltd 1.70%
Lewis Group Ltd 1.60%
Barloworld Ltd 1.60%
TOTAL LISTED PROPERTY 4.30% 7.90% 8.70%
Intu Properties PLC 2.70% 4.70%
Redefine International PLC 5.20% 4.00%
Redefine Properties Ltd 4.30%
TOTAL SA BONDS 4.60%   0.80%
TOTAL SA MONEY MARKET 24.10% 26.20% 29.60%
TOTAL FOREIGN EQUITIES 20.10% 22.90% 19.90%
TOTAL FOREIGN MONEY MARKET 2.80% 2.00% 4.80%

Coincidently, many of our holdings ran very hard in 2013. Whilst this is gratifying, in that as a team, we won the Raging Bull award for the best Multi Asset High Equity fund in 2013, many of the companies that we like had probably run a bit ahead of themselves in 2013 and needed some time for value to build up again.

The chart below of the price of Discovery illustrates the point.  It shows really good appreciation from R40 to R100 up to the middle of 2013.  Since then, the share price has been consolidating BUT the business has continued to grow and has reported good growth results. We continue to believe in the ability of Adrian Gore, the CEO of Discovery, and his team to create long term value for our clients.

REZCO Asset Management - DISCOVERY

WHERE IS THE DOWNSIDE PROTECTION? IS THIS A BEAR MARKET OR A CORRECTION?

Whilst a sharp fall in the market always creates fear and uncertainty, the following graph shows how common a 5% and even a 10% correction in a month can be. 90% of these corrections proved to be buying opportunities. Investors need to be careful that they do not panic and exit the market during such events as this can often lock in poor returns.

We need to settle the question in our minds, whether this is the start of a bear market or part of the normal process of the markets working things out. We do not believe that this is the start of a bear market for a number of reasons.

REZCO Asset Management - 4 WEEK CHANGE of the JSE

BEAR MARKETS DON’T NORMALLY START FROM HERE

The following graph from Merrill Lynch shows South African Fund Manager sentiment last month. What is noteworthy is how uniformly bearish Fund Managers are. By contrast, most were bullish at the start of 2008. Almost all managers, including us, are sitting on very elevated levels of cash. This is the main reason why our drawdown numbers were similar to our peers in this market correction; we were all equally negative. What this means though is that most managers are already out of the market and are looking for a level at which to deploy the cash build-up. Bear markets normally do not start from such places.

fund manager survey rezco

MARKET CORRECTIONS CAN BE USEFUL

Rezco’s investment philosophy is to invest in businesses that have good earnings growth prospects, with all these businesses listed on major stock exchanges. When these market corrections occur Company Values return to more reasonable levels. These market corrections can therefore be good foundations from which growth resumes in due course, and can therefore be fertile ground for the next 5 years of Creating Wealth returns. Rezco’s focus is on strong companies with sustainable earnings growth at reasonable pricing levels.

We will be using the cash that has built up in the portfolios to pick out opportunities capable of producing above average returns in the market cycle which will emerge in the coming 5 years.

ECONOMIC FUNDAMENTALS

Two factors are deeply disturbing to world markets, namely Ebola and the European economy. We believe that Ebola is unlikely to expand into a global pandemic as it can be controlled in first world countries, and we are backing the pharmaceutical industry to produce a vaccine before things get out of hand. The weak European economy has been a core assumption for us for a couple of years, as we were somewhat puzzled by the huge rally in European shares last year and are not surprised by the current lowering of expectations.

On the positive side, the USA economy is recovering and we are finding some excellent companies there that are set to grow nicely over the next 3 years. Secondly, expectations of a USA interest rate hike have been pushed further out. Increasing interest rates was one of our chief concerns going forward. We see continued low interest rates as very good for equities. Thirdly, a fall in the oil price from $110 per barrel to $85 is very significant to most world economies.

REZCO Asset Management - Crude Oil-Dtd Brent UK Close U$BBL

STANCE GOING FORWARD

We do not believe that economic fundamentals, locally and internationally, are positioned for a bear market. In short, we see the most recent market movements as a correction. Risks remain, so therefore some caution is warranted, but there is no need to become totally risk-averse. Considering and weighing the risks out there, we still believe that equities will outperform cash for the year and that the current market gyrations are a necessary correction. History has shown that these corrections can in fact be good buying opportunities.

We thank you again for the great support over the past 10 years.

Yours Sincerely

Rob Spanjaard and Wally Gray