Select BCI Cautious Fund - Ryan Jamieson Chantelle Baptiste 26 August 2020 - Boutique Collective ...
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Select BCI Cautious Fund
Ryan Jamieson
Chantelle Baptiste
26 August 2020
Disclaimer
Fairtree Asset Management (Pty) Ltd is registered as a financial services provider with the Collective Investment Schemes are generally medium to long-term investments. Please
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on how performance fees are calculated and applied, is available on request from the accordance with its mandate. The Manager does not provide any guarantee with respect
manager of each fund (“the Manager”), being either Sanne Management Company (RF) to the capital or the return of the portfolio. Excessive withdrawals from the portfolio may
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portfolio is available, free of charge, on request from the Manager. as changes in government policy, taxation and other legal or regulatory developments.
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This information is not intended to provide advice to, or take into account individual
investors’ objectives or circumstances. This material should not be construed to represent All returns are disclosed net of performance fees.
a solicitation to invest in the portfolio and is disclosed for reporting purposes only.
2
Contents BCI Select Cautious Fund Fairtree Equity Update Portfolio Positioning Closing
Select BCI Cautious Fund • Mandate taken over in March 2017 – closing in on a 4-year track record • AUM R345m as at 30 June 2020 • Multi-Asset, Low Equity Fund Category • CPI + 3% Benchmark • A disciplined re-balance process where SAA dominates – little drift • Consistency is key – no massive ‘bets’ on positions 4
Strategic Allocation
Stable capital growth
Active The fund seeks to
provide investors with
At EQUITY high income combined
weight 35%
with stable capital
-2.0% PROPERTY - 3% growth
GLOBAL CREDIT
+2,0%
12%
At ALBI Plus
weight 10%
At INCOME PLUS
weight 40%
5 ASISA classification: SA - Multi Asset – Low Equity. Regulation 28 compliant
7
100
150
200
250
300
350
400
50
Dec 2006
Jun 2007
Dec 2007
Jun 2008
Dec 2008
Jun 2009 CPI + 3%
Fund Return to 31 July 2020
Dec 2009
Jun 2010
BCI Cautious Live
Dec 2010
BCI Cautious Model
Jun 2011
Dec 2011
Jun 2012
Dec 2012
Jun 2013
Dec 2013
Jun 2014
Consistent alpha generation across the business cycle
Dec 2014
Jun 2015
Dec 2015
Jun 2016
Dec 2016
Jun 2017
Dec 2017
Fund Annual Return Relative To Benchmark
Jun 2018
Dec 2018
Jun 2019
Dec 2019
Jun 2020
Select BCI Cautious Fund
Fairtree appointed to the fund in March 2017
3 Year annualised return to 31 July 2020 – net of all fees
8.83% • Select BCI Cautious Fund
10%
• Peer Group Median *
8%
4.71%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
7 Note:* Multi Asset Low Equity Peer group consisting of 130 Unit Trusts with a 3 year track record to 31 July 2020 as per Morningstar
Source: Morningstar
Contents BCI Select Cautious Fund Fairtree Equity Update Portfolio Positioning Closing
Fund Annual Return Relative to Benchmark
Consistent alpha generation across the business cycle
As of 31 July 2020
9.97%
-4.00%
9 *Benchmark JSE/FTSE All Share Weighted Index (SWIX) from inception to 30 Apr 2017, changed to Capped SWIX on 1 May 2017
Source: Bloomberg, Prescient, MetCi
Sector Returns to 28 July 2020
Large Drawdown Defensive
10 Source: BloombergCurrent Fund Positioning
The ability to be flexible is key to adapt to prevailing economic conditions
Defensive Offshore
Offshore Consumer
Resources
SA Inc.*The World post COVID-19
Government Technology Deglobalisation
• Fiscal pressure • Adoption of tech accelerated • RoW vs China
• Constrained monetary policy • Zoom, Teams, Webex • Supply chain diversification
• Income support • eCommerce
• Deficits, Debt, MMT • Resilience over profit
• Tech industry investment will grow
• Governments dependency increases • • Localize business operations
De-densification of large cities
• Industries, social compact • Nationalism
• Enhanced home Living
• RoW vs China • Reduced efficiency
• AI/VR surge
• Rising Social pressures
• Heightened competition from China
• Rising Populism
on tech development
Geopolitical Risk
Reflationary PressureCentral bank easing at unprecedented scale
More than $5trn of QE since the crisis
6% of
6M change in Global CB B/S Global
6 000 GDP
5 000
4 000 3.8% of
Global
GDP
3 000
2 000
1 000
-
-1 000
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Dec-08
Dec-07
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
13 Source: Fairtree, BloombergAggressive fiscal policy swamps 2008 package
Fiscal stimulus size as % of GDP
15
2020
2008-2010
10
5
0
Japan
US
France
Italy
UK
Germany
Canada
Spain
Russia
China
14 Source: Fairtree, BCA. Note: Loan guarantees are excluded if a specific amount was released.10
20
40
50
60
30
15
Jul-17
Aug-17
Sep-17
Oct-17
US
Nov-17
China
Composite PMI’s
Dec-17
Source: Bloomberg
Eurozone
South Africa
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
China leads, Europe surpasses US while EM lags
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Global economic recovery takes hold
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20China 2025 Vision China aims to move away from being the "world’s factory“ to the “global tech powerhouse” 16
Globalization has peaked
Trade globalisation
GFC
Covid-19
WWI
WWII
Source: BCA.
*Imports as % of GDP weighted by population. BCA calculation from 1994. Number of countries varied based on data availability.
1750
0
250
300
350
100
150
200
400
450
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
18 Source: Bloomberg. July 2020
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Political instability rising across developed markets
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Global economic policy uncertainty
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20Global fiscal deterioration
High global debt likely forces central banks to keep rates low
Government debt as % of GDP
141 146
131 132
104 107 105 109 102 105 101 103
86 86 85 84
2018 2019 2020 2021
United Kingdom Eurozone Advanced Economies United States
19 Source: Bloomberg, Fairtree, IMF20
-2
-1
0
1
2
3
4
5
6
7
8
Dec-95
Jun-96
Dec-96
Jun-97
Dec-97
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Real yields are at multi-year lows
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Source: Fairtree, Bloomberg as at July 2020. Global yields & inflation calculated as average between US, Japan, Germany and UK
Dec-15
Global policy backdrop will keep real yield low
Jun-16
Dec-16
Jun-17
Global CPI YoY
Dec-17
Global Real Yield
Global 10YR Yield
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20Gold: Commodity vs Equity Performance Miners discounting significantly weaker commodity prices Source: Bloomberg, Fairtree Asset Management, as at 24 August 2020 21
Gold Valuations
Gold Companies trading at attractive valuations
Goldfields EBITDA ($bn) Harmony EBITDA (ZARbn)
2018 2019 2020 Spot 3.0 2018 2019 2020 Spot 28
27
FCF Yield -7% 7% 5% 13% 2.8 2.9 FCF Yield -7% -3% 8% 21%
PE Ratio n.m. 24.8 14.3 7.6 PE Ratio 13.8 12.5 8.5 4.3
EV/EBITDA 5.0 5.3 6.1 3.7 EV/EBITDA 4.8 3.4 4.7 2.3 23
2.0
1.9 1.9
1.7
1.5
1.3 1.3 1.4
1.2 1.2 1.2
1.2
1.0 1.1
7.9
0.7
5.5
0.5 0.5 4.1 4.0 3.9
3.3
0.3 0.3 2.5 2.0 2.7 2.9 2.5
0.2 0.2 2.0 1.6 2.0 2.2 1.9
0.4 0.6 1.0
0.1 0.4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source: Fairtree, Bloomberg, Company Reports, as of 24 August 2020 22Mining Taxes
Mining profitability will provide a meaningful boost to the fiscus
South African Mining Taxes & Royalties - Rbn
100
90 17
+50%
80
70
60 14
+69%
50
40 82
9
30 7 52
20 6
4 23 30
10 19
13
-
CY16 CY17 CY18 CY19 CY20e Spot '21
Taxes Royalties
23
Source: Company Reports; Fairtree; Minerals Council of South Africa, as at 26 July 2020Global vs Local… or Big Tech vs Rest?
24
Source: BloombergThe Bifurcated Nature of the Equity Markets
US Equity Market performance has been underpinned by the Tech Giants
400 S&P 495
S&P 5*
300
200
100
0
2015 2016 2017 2018 2019 2020
Source: Bloomberg, Fairtree, BCA
* S&P 495 is the S&P 500 excluding AAPL, MSFT, AMZN, GOOGL & FB
* S&P 5 includes AAPL, MSFT, AMZN, GOOGL & FBIs there a tech bubble?
The relative outperformance today draws parallels to the heyday of the tech bubble
Nasdaq performance relative to S&P 500
3.5
3.0
2.5
2.0
1.5
1.0 Dotcom
bubble
0.5
1995 2000 2005 2010 2015 2020
Source: Bloomberg, Fairtree
26Valuations are supported by growth
Tech has been a net benefactor of the pandemic and revenue growth supports premium valuations for now
YTD returns
68%
Revenue growth 1H20/1H19
52%
34%
31%
24%
14% 14%
11%
6% 6% 4.5%
Amazon Microsoft Apple facebook Alphabet S&P 500
Source: Bloomberg, Fairtree
27-300000
-200000
-100000
100000
200000
300000
400000
0
Net FDI ($m)
Dec-95
Jul-96
Feb-97
Sep-97
Source: Bloomberg, Fairtree
Apr-98
Nov-98
Jun-99
Jan-00
Aug-00
Mar-01
Oct-01
May-02
Dec-02
Jul-03
FDI dynamics could weigh on US dollar
Feb-04
Sep-04
Apr-05
Nov-05
Net FDI (rolling 4 quarter ave.)
Jun-06
Jan-07
Aug-07
Mar-08
Oct-08
May-09
Dec-09
Jul-10
US election impact on US Dollar
Feb-11
Sep-11
Apr-12
Nov-12
Jun-13
TWI Broad US Dollar (DXY)
Jan-14
Aug-14
Mar-15
Oct-15
May-16
Dec-16
Jul-17
Feb-18
Trump
Sep-18
Apr-19
USD Broad TWI
Nov-19
80
90
100
110
120
130
28DM vs EM Cycles
EM under-/outperformance moves in cycles
GFC
Dotcom bubble Commodity
Super Cycle
EM/DM is the MSCI EM Index/S&P Global 1200 29Terms of Trade Improvement
Precious Metals (35% of exports) vs Oil (17% of Imports)
Indexed Precious Metals vs Oil (ZAR)
250
Oil
230
Precious Metals One year:+52%
210
190
170
150
130
110 One year:-20%
90
70
50
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
30
Source: Fairtree, Bloomberg as at 17 June 2020South African Outlook
COVID-19 may force the hand of reset and reform, but this is taking time
Internal Factors External Support
Interest rates cut 300bps since the start of the year Lower Oil Prices = R40bn back into consumers pockets
Corruption Clamp Down Higher Precious Metal Prices
SARS NPA Hawks Supports
Boost to the Improves
employment in
9 arrested in VBS bank theft; Myeni fiscus through SA’s terms of
the mining
ESKOM deemed delinquent additional tax trade
sector
overhauled and
184 snr Eskom execs take voluntary
being cleansed Global growth restart lead by China
retrenchment packages
CR amended regulation 11 of the state capture
US Dollar weakness will support risk assets/EM
commission
Cases progressing against Eskom leadership, Estina Dairy Multi lateral fiscal support (IMF, World Bank, New
Farm, Julius Malema, Steinhoff Development bank)
COVID 19 has created opposing internal forces
Blatant inconsistency in rules Presenting opportunities for M&A and international
Job losses of 700k – 1.8m (NT assumption) interestSA’s Confidence Crisis The low level of confidence was last felt in 1985’s Rubicon Speech 32
Corruption progress
President Ramaphosa announcement made on 23 August 2020
1. Every cadre accused of/involved in corrupt practices must account to the Integrity Commission immediately or
face disciplinary processes.
2. Cadre’s who fail to give an acceptable explanation or to voluntarily step down while they face disciplinary,
investigative or prosecutorial procedures should be suspended.
3. The ANC should publicly disassociate itself from anyone, whether business donor, supporter or member, accused
of corruption or reported to be involved in corruption.
4. ANC leaders are required to make regular declarations of financial interests.
5. Conduct lifestyle audits of all ANC leaders and public representatives.
6. Develop a clear policy on ANC leaders and their family members doing business with the state.Corruption progress
Assessing progress in the National Prosecuting Authority
Aug 2018: Shaun Abrahams fired
Oct 2018: President Ramaphosa suspended the two deputy directors (advocates Nomgcobo Jiba and Lawrence Mrwebi).
➢ As required by law, a commission is appointed to investigate the suitability of the two to hold office.
➢ Following the report, they were fired in April 2019.
Feb 2019: Shamila Batohi is appointed new NPA head
➢ CR announces special investigative unit will be created inside the NPA to prosecute state capture cases. The unit would combine prosecutorial and investigative capabilities.
➢ Ramaphosa promises skills from ‘within government and the private sector
May 2019: Hermione Cronje appointed head of the Investigating Directorate of the NPA
Sep 2019: President Ramaphosa revokes the appointment of five senior prosecutors who were promoted by Zuma just before he left office
Oct 2019: Treasury allocates R38m to get the special unit going; a further R25m allocated to appoint private sector practitioners to assist the NPA; and R102m
allocated to fill vacancies at the NPA.
Feb 2020: 800 posts at the NPA advertised
July 2020 s11 of the Zondo Commission amended to allow the NPA to use evidence from the commission in criminal prosecution as well as to use the services of
people currently working for the commission.
Aug 2020: National Executive Council (NEC) has resolved that ‘government (must) urgently establish a permanent multidisciplinary agency to deal with all cases
of white-collar crime, organised crime and corruption’. several investigative agencies have been pulled together in a ‘fusion centre’ to work on Covid-19
corruptionCorruption progress
Assessing progress in critical state institutions
Eskom
• Money retrieved as follows: R150m Deloitte, 2 Deloitte partners resign; R1bn received from McKinsey
• R3.7bn coal contract with Guptas cancelled
• R14bn oil supply agreement cancelled
• Nuclear energy deal canned
• 3 Aug 2020 Special Investigating Unit (SIU) launched case to retrieve R3.8bn (Guptas, a former minister, former Eskom
executives and board members implicated)
• 300 Eskom managers (including 184 snr Eskom executives) take voluntary retrenchment packages
Transnet PIC SARS
• The board is completely overhauled • June 2019 – April 2019 17 board members and
• 15 senior executives resign senior executives resign Nov 2018 Tom Moyane fired
• R618m repaid by South China Rail • March 2020 Mpati commission report released,
• R1.2bn recovered from Gupta owned entities 3 individuals have been issued summons to May 2019 Edward Kieswetter appointed new
• R232m of Gupta entity assets frozen repay stolen money commissioner
May – August 2019: 7 senior executives
PRASA has failed and placed South African Airways Land Bank failed and resign from SARS
under administration bailed out with R3.5bn
Has failed under administration
Former CEO’s (Lucky Montana) and in talks with 4 private buyers 3 former employees are
private properties have been
attached to the administration R10bn required to get the airline behind bars (one of them
by SARS operational again for 20 years)SA Special Adjustment Budget
Fiscal slippage is inevitable; the lack of debt stabilization remains the key concern
Debt scenarios (Debt/GDP %)
145
135 NT Active Scenario
135
125 NT Passive Scenario
115 Oct-19 MTBPS
105
95
85
75 78
65
55
45
18/19 19/20 20/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28
36Employment is crucial for growth
Focus is needed in the secondary sector of the market
SA employed base (millions) Employment across key sectors (based to 100)
1.3
Primary
Secondary 123
3.2 Tertiary
109
93
10.6
Mar 2020
Mar 2008
Mar 2009
Mar 2010
Mar 2011
Mar 2012
Mar 2013
Mar 2014
Mar 2015
Mar 2016
Mar 2017
Mar 2018
Mar 2019
Sep 2008
Sep 2009
Sep 2010
Sep 2011
Sep 2012
Sep 2013
Sep 2014
Sep 2015
Sep 2016
Sep 2017
Sep 2018
Sep 2019
Primary Secondary Tertiary
37
Source: Fairtree, StatsSA, Labour Force SurveyWhy Infrastructure? 54% of the SA’s unemployed currently have a matric or less Source: Ministry of public works and Infrastructure, SIDSSA 38
SARB policy easing to continue
Monetary response remains accommodative
39
SARB 300bps rate cuts unlock c.R100bn to real economyBig Mac Index
Indicates significant devaluation in the Rand
Price of a Big Mac in US$
Switzerland 7.06
United States 5.71
Euro area 4.91
Australia 4.65
Britain 4.34
Thailand 4.05
Brazil 3.99
Czech Republic 3.95
Argentina 3.48
China 3.09
Poland 2.91
Egypt 2.63
India 2.54
Mexico 2.24
Russia 1.88
South Africa 1.86
40
Source: The Economist; Fairtree, as at 26 July 2020Attractive real interest rates
10 year Real yields %
8
6.4
6
4.5
4.0
4 3.4 3.3 3.0
2.3 2.0
2
0.9 0.8 0.5
0
-0.4 -0.4
-2 -1.2 -1.4 -1.7 -1.7
-2.7
-3.0
-4
South Korea
Poland
Russia
US
China
UK
Philippines
Mexico
Malaysia
Indonesia
EU
Brazil
Peru
Thailand
SA
Colombia
Hungary
Turkey
Japan
41 Source: Fairtree, Bloomberg. Local currency 10yr yield minus headline inflation, as at 1 Apr 2020SA Inc. Valuations
Price to Book valuations at extreme levels
42
Source: Fairtree, BloombergFairtree Equity Prescient Fund Holdings
A quality and diversified portfolio
Fund holding as of 31 July 2020 Top Twenty Holdings
1 Impala Platinum Holdings Ltd 9.92%
2 Naspers Ltd 9.87%
3 AngloGold Ashanti Ltd 6.48%
4 Northam Platinum Ltd 6.35%
5 African Rainbow Minerals Ltd 6.11%
6 Prosus NV 5.79%
7 Harmony Gold Mining Co Ltd 5.78%
8 Gold Fields Ltd 4.12%
9 Sibanye Stillwater Ltd 3.87%
10 Kumba Iron Ore Ltd 3.47%
11 Anglo American Platinum Ltd 2.72%
12 Capitec Bank Holdings Ltd 2.59%
13 Mr Price Group Ltd 2.55%
14 Foschini Group Ltd/The 2.35%
15 Woolworths Holdings Ltd/South 2.32%
16 Truworths International Ltd 2.15%
17 Quilter PLC 2.01%
18 Sanlam Ltd 1.92%
19 Anglo American PLC 1.70%
20 Standard Bank Group Ltd 1.36%
43Thank you
PGMs: Commodity vs Equity Performance Miners discounting significantly weaker commodity prices Source: Bloomberg, Fairtree Asset Management, as at 24 August 2020 45
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