PRIVATE WEALTH EQUITY FUND - Q3 2020 - Nedbank Private Wealth
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PRIVATE WEALTH
EQUITY FUND
Q3 2020
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 ALSI posted a return of 0.7% during the third quarter. The sectors leading the advance were Basic Materials +6%,
Consumer Services +4.7% and Telecommunication +3.3%. The decliners included Healthcare -7.2%, Technology -
6.1% and Financials -1.6%. The SWIX40 returned -0.49% for the period.
FUND PEFORMANCE
Nedgroup Investments Private Wealth Equity Fund
Performance to 30 September 2020 (‘R) Fund1 Benchmark2
3 months 1.08% -0.49%
12 months -11.83% 1.80%
Top 5 contributors and detractors for Q3 2020: Overweight positions
Average Performance Average Performance
Top contributors Top detractors
weight contribution weight contribution
Alibaba 4.3% 0.9% Cigna Corp 2.3% -0.3%
Shoprite 2.1% 0.7% Citigroup 1.4% -0.3%
PSG Group 2.5% 0.6% Adcorp 0.3% -0.2%
Altron 4.1% 0.4% Remgro 0.3% -0.2%
Comcast 2.4% 0.3% Mr Price 0.8% -0.2%
Facebook 2.2% 0.3% Raytheon Tech 1.9% -0.2%
Top 5 contributors and detractors for Q3 2020: Underweight positions
Average Performance Average Performance
Top contributors Top detractors
weight contribution weight contribution
Naspers -21.7% 1.3% Impala Platinum -2.6% -0.6%
Anglogold Ashanti -3.1% 0.4% Gold Fields -2.4% -0.5%
British American Tob -0,3% 0.2% Sibanye Stillw. -2.5% -0.5%
Old Mutual -1.2% 0.2% Northam Plat -1.2% -0.4%
Nepi Rockcastle -0.7% 0.2% Discovery -1.0% -0.2%
Anglo Platinum -1.9% 0.1% Absa Group -0.9% -0.2%
1
Net return for the Nedgroup Investments Private Wealth Equity Fund, A class. Source: Morningstar (monthly data series).
2
Benchmark is the SWIX40.
PAGE 2 OF 6PORTFOLIO OVERVIEW
“Market inefficiencies are visible every day to practitioners. But the anomalies do not automatically close. The
challenge is having the conviction and the staying power and the process to exploit them. There can be
occasions when valuation anomalies persist for months or years or even decades.”
101⁄2 Lessons from Experience: Perspectives on Fund Management: A book by Paul Marshall
International eq uities
The Fund’s direct international exposure is predominantly to US-listed companies. We have provided a brief comment
on the three biggest positions as well as a smaller position in Bed Bath & Beyond.
Alibaba: BABA becomes 9988HK
The impact of the trade war between the U.S. and China has thus far had little impact on Alibaba. The Company
continues to benefit from the long-term structural upgrade of the Chinese consumer, which has experienced limited
impact from global trade, as well as COVID-19. However, in recent months, the U.S.’s rebuke for China has moved
beyond trade with the passage of the Holding Foreign Companies Accountable Act in the Senate. The Act aims to
increase oversight of Chinese companies listed on U.S. exchanges and force these companies to comply with new
regulation or face the possibility of delisting.
While Alibaba has stated that it will aim to comply with any incremental regulation, conflicting laws between China and
the U.S. might make it difficult to do so. In late 2019, Alibaba completed a secondary listing in Hong Kong with the
official goal of diversifying its investor base and the unofficial goal of decreasing the risk of worsening tensions
between Washington and Beijing. We are of the view that deteriorating tensions can increase pressure on Alibaba’s
U.S. listed ADRs in the future and cause it to trade at a discount. In response the fund has switched its Alibaba ADR
holding from the U.S. to Hong Kong listed shares.
Comcast: Peacock signs up 15 million subscribers
Comcast’s diversified portfolio of businesses have helped it weather the COVID-19 storm. In a recent update to
shareholders, management stated that it will add more than 500k broadband subscribers, which will be its best quarter
additions yet. This helps to offset weakness in its media businesses caused by COVID-19. NBCUniversal has been
affected by sub-optimal volumes at its theme parks and delaying of its blockbuster movies Fast & Furious 9 and
Minions to 2021. NBCUniversal and Sky have also been impacted by the cyclical downturn in advertising, however,
which has started to recover aided by strong political spending in the U.S. and the return of sport, which is especially
impactful for Sky.
Management disclosed that its streaming platform, Peacock, has seen strong usage with signups reaching 15 million.
Peacock which provides subscriber options from a free ad-supported subscription to a premium $10 no-ad
subscription, launched to its TV and Broadband subscribers in April and nationally in July.
Cigna and the approaching US election
The political uncertainty caused by the run up to the U.S. elections and the death of Justice Ruth Bader Ginsburg,
have weighed on the health insurance and administration industry, including our holding in Cigna. One health care
reform proposed during election campaigning is the opening of government run healthcare plans to anyone, which
may impact Cigna’s strong commercial health insurance and administration business. Another is drug pricing reforms
aimed at pharmaceutical companies, which can weigh on the top-line of Cigna’s pharmacy benefit manager (PBM).
PAGE 3 OF 6The death of Justice Ginsburg and the Republicans’ push to add a new conservative justice to the Supreme Court has
increased the risk that parts of the Affordable Care Act (Obamacare) might be repealed. This will leave millions without
healthcare and impact government volumes for insurers, a sector which Cigna has relatively lower exposure to. While
we see little reprieve to this uncertainty for some time, we remain confident in Cigna’s ability to continue to grow its
cash flow over time, with the current discounted share price providing a large margin of safety against any adverse
outcomes.
Bed Bath & Beyond up 6x from the March lows as of the time of writing
The Fund purchased a small position in Bed Bath & Beyond (BBBY) towards the end of 2019. At the time, a leadership
purge marked the beginning of a turnaround strategy. The disposal of non-core banners, floor space rationalisation, an
improvement of the e-commerce offering, and improved merchandising were some of the low-hanging levers which
the new management team set out to pursue. And then COVID-19 arrived. The pandemic saw market participants
questioning the survival of retail under lockdown and beyond. Fortunately, BBBY has had a sound balance sheet to
mitigate the period of business interruption risk which occurred during the peak of the lockdown.
More recent numbers from Bed Bath & Beyond for Q3 show that management has indeed started to deliver on what
they had originally set out to achieve. Albeit off a relatively low base, online sales have seen significant traction and
margins in the business have started to respond positively. Mr Market has responded by swinging from absolute fear
to greed in a relatively short time frame. From the market lows, the counter is currently up 6x. The Fund has used this
swing to more rational expectations and confidence in the turnaround plan to reduce the position size.
Domestic equities
PSG unbundling and exiting Remgro in favour of PSG
During the period under review, PSG undertook the unbundling of the majority of its stake in banking group, Capitec.
The Fund held limited exposure to PSG in the past given its overriding skew to Capitec within its portfolio mix, coupled
with our concerns over Capitec’s stretched valuation.
Having completed the unbundling, the Fund has built up its stake in PSG into a top 10 position by exiting investment
holding company sector peer, Remgro, and by switching PSG’s listed holdings (Curro and Stadio) directly into PSG
itself. While the investment holdco sector remains deeply discounted, our view is that PSG’s no fee structure, more
dynamic asset portfolio and active management team supported this move.
Exited BHP, added to Anglo American
BHP is a large-scale miner with low-cost facilities in stable jurisdictions, led by a prudent management team. Its
Australian iron ore and met coal mines, along with its copper mines in South America are all tier one mining assets
with structural cost benefits, generating cash flows throughout the cycle. While we remain positive on the quality
aspects of BHP, its commodity basket faces downward pressure over the coming years. Iron ore, which dominates
spot earnings exposure, trades well above cost support levels and is likely to pressure future earnings, even if coal, oil
and copper prices continue to improve.
Anglo American is a more-diversified miner with attractive growth prospects. It’s key differentiators from BHP,
diamonds and PGMs, faced strong Covid-19 challenges but are showing meaningful signs of recovery. Its Quellaveco
copper project in Peru is nearing completion and delivers low-cost growth in a future-facing commodity. Anglo
American has a basket of several other initiatives in crop nutrients, PGMs and diamonds that will strengthen the
company’s position and advance earnings.
PAGE 4 OF 6Reduced Shoprite
Food retailer, Shoprite, held a top 10 position in the Fund for some time. The quarter under review saw a sharp
reappraisal by the market of the counter following the release of its full year 2020 trading update and subsequent
results publication.
Shoprite reported a 6.2% increase in Group sales, underpinned by a strong performance from SA supermarkets. The
gross margin was 50bps higher driven by a recovery in supplier allowances and supply chain gains. Operating costs
grew 6.9% (+5.8% excl. covid-19 related costs) and trading profit was 10.4% higher (excl. hyperinflation) with the
trading margin improving 20bps to 5.3%. Management delivered on its target to reduce inventory levels (-9.8%),
contributing to the improvement in the Group’s cash flow and financial position. Net debt declined by R6.1bn to
R2.0bn. Management aims to reduce a substantial portion of the Group’s ~R7bn of USD denominated debt by
December 2020. Diluted HEPS increased by 2.5% but was 16.6% higher when excluding the impact of hyperinflation.
The full year dividend of 383cps was 20.1% higher than the prior period.
Volume growth and market share gains: SA supermarkets grew sales by 8.7%; Checkers +13.5%, Shoprite +5.5% and
USave +16.5%. Like-for-like sales were up 6.8% with inflation averaging 3.0% for the period, translating into
impressive 3.8% volume growth. Liquor sales, which represent 5.8% of SA supermarket sales, were 3.3% lower as a
result of 79 lost trading days. The SA supermarkets division reported a surprise 30bps improvement in its already
industry-leading margin, to 6.6%.
A country-by-country review: The Non-SA operations continue to be challenged by currency devaluations reporting a
decline in sales of 1.4%. On a constant currency basis, sales grew +6.6%; Angola -1.2%, Mozambique +3.8% and
Zambia +15.7%. The trading loss narrowed slightly to R28mn from R37mn. In line with previous communication,
management has taken some actions to stabilise this division including the reduction and de-dollarisation of 48 rental
agreements and limiting further capital into the operations. Shoprite announced its intention to exit its Kenya (2 stores)
and Nigeria (24 stores) operations, and that a country-by-country review of its non-SA operations is under way. We do
not expect a wholesale exit from the rest of Africa by Shoprite given its strong position and historical success in
markets such as Angola and Zambia. We would, however, view any further divestments from unprofitable and/or
marginal markets as positive.
Investment view: The 2020 result, in our view, re-affirmed Shoprite’s position as the best-in-class food retailer in SA as
well as management’s ability to deliver on its stated objectives. While we expect limited margin gains going forward,
we expect Shoprite to deliver stable sales and earnings growth as it continues to defend its market position in the
mass middle market and increase its penetration at the upper end via the Checkers brand. The ongoing focus on
better working capital management and disciplined capital allocation should drive a sustainable improvement in cash
generation and returns over the medium term.
The market was quick to reward Shoprite for this impressive performance, sending the share price more than 20%
higher shortly after the release of results. The Fund took the opportunity to reduce its position in Shoprite at a level
which we considered more fairly reflect its prospects.
CLOSING
The Fund ended the quarter with approximately 24% of its available 30% direct exposure to international markets. The
Fund will continue to move towards the maximum 30% allocation as market conditions permit.
The Fund’s performance in recent years has been hurt by its exposure to smaller market capitalisation SA Inc. stocks.
The relentless de-rating of this area of the market was laid bare at the end of the quarter by the trading statement of
software and digital services group, Adapt IT, for the year to 30 June 2020. Based on the guidance provided by the
Company, the shares were trading on a historic PE of just 1.5x on the date of the announcement. 1.5x, not 15x.
PAGE 5 OF 6The macro issues in South Africa are well documented. The primary job of the investor is to distinguish between a
poor outlook and negative news headlines and share prices which are discounting even more pessimistic prospects.
As always, “the challenge is having the conviction and the staying power and the process to exploit them.”
PAGE 6 OF 6NEDGROUP INVESTMENTS PRIVATE WEALTH
EQUITY FUND
SEPTEMBER 2020
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 -11.8% 1.8%
3 Years pa -6.7% 0.6%
GENERAL INFORMATION 5 Years pa -2.5% 3.2%
7 Years pa 2.5% 5.7%
BENCHMARK / TARGET RETURN
10 Years pa 8.1% 9.4%
JSE SWIX Top 40 Index
Lowest 1 year return -24.8%
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 7.2%
Industrials 8.7%
REGULATION 28 COMPLIANT
Consumer goods 7.0%
No
Health care 2.3%
INCEPTION DATE Consumer services 19.3%
01 May 2004 Telecommunications 2.3%
Financials 25.6%
FUND SIZE Technology 3.6%
R 1,045 Million Cash and money market 0.4%
1 Foreign equity 23.0%
NET ASSET VALUE
Foreign cash 0.5%
4936.29 cpu
MINIMUM INVESTMENT
Lump sum: R50,000
TOP 10 HOLDINGS
INCOME DISTRIBUTION Share Percentage
Frequency: Annually Naspers Ltd 8.4
December 2019: 125.81 cpu Anglo American Plc 6.3
Previous 12 months: 125.81 cpu Alibaba Group Holding 5.0
PSG Group Ltd 4.7
The Bidvest Group Ltd 4.5
FEES
Sanlam Ltd 4.0
Annual management fee (excluding VAT): 1.00% Allied Electronics Corp Ltd 4.0
BID Corporation Ltd 3.9
British American Tobacco Plc 3.9
Total expense ratio 1.18% RMI Holdings Ltd 3.4
Transaction costs 0.30% Total 48.1
Total investment charges 3 1.48%
MINIMUM DISCLOSURE DOCUMENT Published: 12 October 2020NEDGROUP INVESTMENTS PRIVATE WEALTH
EQUITY FUND
SEPTEMBER 2020
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 July 2017 and
ending June 2020.
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
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