The objective is to provide investors high long-term capital growth with a relative low risk of long-term capital loss

The fund switched Management Company from Cadiz Collective Investments to Boutique Collective Investments (RF) (Pty) Ltd. on 03 Sep 2020

PORTFOLIO COMMENTARY

The Cadiz Equity fund gained 5.6% this quarter. The rolling 1 year return was a gain of 8.5% which outperformed the benchmark return of 7.1%. The Fund delivered 6.6% p.a. for the rolling 3-year period which outperformed the benchmark Capped Swix return of 4.7% p.a.
2019 was plagued with a lot of macro uncertainty throughout the year. Despite this, MSCI World equities delivered 28% (in dollars). The US S&P 500 led the way returning 31% while Emerging markets returned 19%. The two main events that supported global equities were, the US Federal Reserve changing from interest rate hikes to cutting interest rates. Other central banks followed suit providing a healthy underpin to global markets. The other event that boosted equity markets towards the end of the year was a phase one trade agreement between the US and China.

For 2020, analysts are expecting the US equity market to return between 7% and 11%, which is made up of between 5% and 9% earnings growth and 2% dividends. However, the equity bull market that started in 2009 is aging and there are several fundamental headwinds and macro risks to this view that could alter the performance for 2020. Risks that need to be monitored include: •

Declining profit margins because of rising wages and input costs greater than revenue growth. •

High debt levels. •

Equity markets are not cheap, trading on valuations above their long-term averages. If earnings were to disappoint analyst expectations, equity markets could fall significantly. •
Political and geopolitical risks.

The best way to invest in this environment is to hold a diversified portfolio of both global and local stocks. Our bottom-up stock selection enables us to find attractively priced businesses even when the overall market valuation is high. Our approach is to invest in predominantly good quality businesses with strong balance sheets and capable management that can compound their earnings over time.

PERFORMANCE REVIEW

The main contributors to performance for the year came from the exceptional return of the platinum and gold counters we hold in the fund. Solid returns were also generated from our multi-nationals; Facebook, Naspers, Alphabet (Google) and British American Tobacco along with positive contributions from Mediclinic, Metair and Booking Holdings.

Stocks that continue to detract from performance were the UK property counters and the offshore drilling companies. Local general retailers also underperformed this quarter as companies faced margin pressure, due to their operating costs growing more than revenue.
FUND POSITIONING

Equity exposure has increased to 93% from 86%, including 2.2% in property, due to increased offshore equity exposure and good returns over the quarter. Our offshore equity exposure has increased to 29.9% from 26%. The cash holding in the fund is 7%. We incrementally increased our position to multi-nationals Naspers and British American Tobacco. We increased our position in local retailers Shoprite, Truworths and Massmart as the share prices declined. We believe these businesses are attractively priced and offer investors good long-term returns.

The fund incrementally added to US Retailers, which had a better quarter after a disappointing third quarter. No new stocks were added to the fund. The fund sold out of Sasol and Brait as their investment cases no longer stacked up. •

Sasol was a small position in the fund and was sold due to the increased financial risk. The balance sheet is under strain due to the large amount of debt incurred for the Lake Charles Chemical Project (LCCP). Sasol is close to breaching its debt covenants and has already stopped paying a dividend. Operational uncertainty at LCCP continues with continual capital cost overruns and management revising their earnings expectations downward. Sasol also needs to invest further capital in its operations to reduce its carbon emissions. All of this points to sub-par returns on capital.

We have lowered our assessment of the business and have exited this investment as the risk/reward is no longer attractive. We remain disciplined in sticking to our investment philosophy and process and focus intently on limiting permanent capital loss in order to grow your capital over the long term. This is achieved by investing in predominantly good businesses at attractive prices with capable management and low financial risk.

Thank you for your continued support.