The Fund returned -9.9% for the quarter, resulting in a return of -7.7% over the last year. The Fund has performed well against its peer group over all meaningful time periods.

The first half of the year saw broad weakness across asset classes. Markets faced numerous headwinds, including surging inflation, rising rates (after more than a decade of easy money), war between Russia and Ukraine and slowing growth in China. These factors combined to increase the risk of a global recession.

The MSCI World Index declined -16.2% for the quarter (dragging 12-month returns down to -14.3%). The MSCI Emerging Markets [EM] Net Index declined -11.4%, resulting in a year-todate (YTD) decline of -25.3%. China fell -11.2% as an extended lockdown in Shanghai undermined the country’s economic growth. China stuck doggedly to their zero-Covid policy despite the near-term economic cost. Ineffective vaccines, low vaccination levels in the elderly population (relative to developed economies) and very low community transmission mean herd immunity is low. Given these headwinds, it is unclear whether attempts to stimulate growth will succeed. Russia remained a global pariah given ongoing military hostility in Ukraine. Western allies are broadly united in their opposition to Russian aggression. Energy commodities remain elevated due to trapped Russian supply and limited investment into new sources of production for several years given decarbonisation commitments. So far this year, the prices of oil (+47.6% YTD), gas (+45.4% YTD) and coal (+127.6% YTD) have all risen meaningfully.

Inflation continued to surprise to the upside as surging energy prices have exacerbated already high inflation. US inflation hit 8.6% during the quarter. Central banks have responded to inflation with widespread rate hikes. Whether inflation can be contained will depend on the willingness of central banks to increase rates sufficiently to properly dampen demand and slow growth.

Although an allocation to global equities has detracted from performance over the last year, we believe that global equities offer attractive risk and return characteristics within a portfolio. As global markets have sold off, we have increased the allocation to global stocks within the portfolio, reflecting the exciting opportunities we are finding.

Rising interest rates have resulted in a wholesale sell-off in long duration growth stocks. In a world where economic growth is slowing, the growth offered by these businesses becomes scarcer. While some may prove to be weak businesses, there are many trading 70% down, offering exciting long-term growth prospects. Indiscriminate price moves do not distinguish between these. We have spoken previously about Auto 1 Group, which is building a pan- European online car retailer. The business has a strong vehicle sourcing model and has executed in line with its guidance as it builds its direct-to-consumer sales business. Despite this, it has sold off materially and offers investors an attractive entry point to a very large market where incumbents offer customers a comparably poor service. Other long duration investments include strongly growing Korean ecommerce and search businesses Coupang and Naver.

A brutal decade in emerging markets is creating further opportunity to pick up high-quality businesses. We have spoken previously about the Fund’s holding in Chinese internet stocks such as JD.com and Tencent (via Prosus/Naspers) where we believed that the shares were pricing in a very conservative outcome. The Fund has also built a position in HDFC, India’s premier housing finance company. The merger of HDFC’s mortgage business with HDFC Bank will create a powerful platform, allowing the bank to provide great distribution reach and data to the mortgage business. The bank too is a high-quality business with a multidecade growth opportunity.

Within the luxury sector, fears of a slowdown in global growth combined with Chinese lockdowns and Russian exits have put pressure on share prices across the sector, creating an opportunity to build positions in both affordable and high-end luxury. Brand owners Capri and Tapestry trade on PE multiples of less than 10 times. An online retailer of luxury goods such as Farfetch has not been immune to the price sell-off which we believe under-price the business’s long-term prospects. We have also built a position in Richemont over the last few quarters as luxury companies have derated. We believe the prospects for this high-quality business remain strong. Richemont has a portfolio of desirable luxury brands across the jewellery and watch sector, with branded jewellery expected to continue growing strongly as it takes market share.

In South Africa (SA), while the commodity cycle has supported the economy in the last few years, we remain concerned about the country’s ability to deliver sufficient economic growth in the long term. A decade of mismanagement has undermined infrastructure, with power and rail capacity in particular constraining the economy. Loadshedding YTD has run at record highs, as Eskom struggles to generate sufficient power to keep the lights on. At these levels, economic growth will be constrained. Other frustrations include poor educational outcomes (which are failing to produce the skills needed to support a productive labour force) and ineffective policy. A year of campaigning ahead of the ANC’s December elective conference will limit any appetite for reform.

The FTSE/JSE Capped SWIX Index declined during the quarter (-10.6%), giving up first-quarter gains to deliver -4.6% YTD. This still marked SA as one of the better performing markets in 2022, with USD returns (-10.2% for the FTSE/JSE All Share) ahead of the MSCI World Index (-20.5%) YTD. Given low starting valuations, we now see SA equities as extremely cheap with broad value across the resource, domestic and global stocks listed on the JSE. For the quarter, resources returned -20.7%, financials -15.8% and industrials -3.0%.
Major industrial constituents Naspers (+42.3%) and Prosus (+32.6%) were up strongly for the quarter. The market responded positively to the Naspers/Prosus announcement regarding their intention to commence an open-ended buyback programme of Naspers and Prosus shares funded by selling down the stake in Tencent. Coronation had previously urged the board (via a letter) to consider these actions given the very beneficial impact on net asset value per share. The meaningful discount at which NPN and PRX trade to their underlying Tencent investment means that at a per share level, exposure to Tencent is in fact increased through this buyback. The discount has already narrowed considerably since the announcement in recognition of both the value that this transaction would create and the positive message it sends about management’s commitment to narrow the discount as well as their intention to optimise capital allocation. The portfolio continues to hold a number of global businesses listed in SA that we believe offer considerable value. Examples include British American Tobacco, Bidcorp, Quilter and Richemont.

Domestic stocks continue to offer attractive stock picking opportunities with their low starting expectations and undemanding valuations (with many trading on high dividend yields too). During the quarter, Remgro made an offer for MediClinic. The JSE has seen several buyouts by international bidders in the last few years underlining the value on offer.

Our emphasis within the portfolio has been on finding businesses that can prosper even in a low growth economy. Examples of these include RMI and Transaction Capital (TCP). RMI’s core holding is OUTsurance which offers strong growth prospects, particularly in Australia, and can pay out the bulk of its earnings while growing. With regards to TCP, we expect the WeBuyCars business to continue to gain market share given its convenient and trusted consumer offer. Management is working hard to build a new technology-led platform in the TCRS business to service global clients.

The financials index returned -15.3% for the quarter. Year-to-date trading by the banks (+7.0%) has shown an ongoing recovery with advances growth across the corporate and retail sectors and low- to mid-cycle credit losses thus far. The rate hiking cycle will deliver endowment benefit for the banks. Strong corporate and household balance sheets are expected to withstand the level of rate hikes forecast without any blow out in credit losses. The Fund has moderate exposure to the banks via FirstRand, Standard Bank and Nedbank. Insurers (-23.1% for the quarter and -10.3% YTD) have seen more challenging trading as the businesses face low growth and competitive pricing in risk at the same time as Covid-related mortalities have inflated claims.

The resource sector declined -20.7% as metal prices broadly retreated off their March highs. European countries have committed to reducing their reliance on Russian energy supply. This is supportive of longer-term goals to decarbonise, but the transition period will be challenging, requiring increased supply of oil, gas and coal from other parts of the world. Fossil fuels have already faced several years of low investment given decarbonisation goals. Attracting capital to fund new production is difficult unless there is a willingness to commit to longer offtake periods. Near-term decarbonisation targets are already wavering in Europe. Constrained supply and growing demand are expected to keep energy markets tight.

While resource holdings were reduced during recent strength, the portfolio continues to hold positions in diversified miners such as Glencore and Anglo American. Both offer attractive free cash flow streams even at more normal commodity prices. Energy producers such as Exxaro and Sasol also offer attractive free cash flows given the tightness in near-term markets and are expected to return a significant portion of their market capitalisation in the form of dividends in the coming years.

The Fund remains underweight the platinum group metals miners. While near-term cash flows are likely to be strong, longer-term demand will be undermined by a shift to electric vehicles. Governments (particularly European) are expected to accelerate the adoption of battery electric vehicles given recent events as they strive to increase energy independence and reduce reliance on Russian oil and palladium.

As always, our commitment to long-term investing and a disciplined valuation-based approach remains the bedrock of our investment process. While headwinds exist in both global markets and the domestic economy, we believe growth assets are well priced for the risks and offer attractive returns off these low starting prices.

The Fund returned -6.2% for the quarter, resulting in a return of 2% over the last year. The Fund has performed well against its peer group over all longer, more meaningful time periods.
Russia’s unexpected invasion of Ukraine weighed heavily on markets during the quarter. Commodity prices soared, given Russia’s role as a meaningful commodity producer. Expectations for global growth slowed, given rising energy prices, rising interest rates and slowing growth in China.

The MSCI World Index declined -5% for the quarter (dragging 12-month returns down to 10%). The MSCI Emerging Markets [EM] Index declined -7%, with China falling -14%. Given the size of the Chinese economy, a serious slowdown remains a risk to the global economy. China’s zero-Covid policy is becoming impossible to sustain, with ongoing lockdowns undermining growth. China’s geopolitical ambitions and its association with Russia damaged sentiment further. The MSCI removed Russia from the EM index, writing its value down to near zero (-100%). South Africa (SA) performed well, with currency strength (ZARUSD +9%) boosting US dollar returns to 16% (as measured by the FTSE/JSE Capped SWIX in US dollars). The Fund has trimmed its overweight position in local equities to buy global equities, reducing a previously underweight position.

Events in Russia further exacerbated the trend of rising inflation, with a dramatic impact on energy costs (Brent crude +39% for the quarter and +70% over 12 months) and food expected to put consumer disposable income under pressure. Rising inflation has resulted in a round of interest rate hikes by central banks as seen in the US and UK (and SA) during March.

The Fund’s allocation to global equities has detracted meaningfully from performance over the last 12 months. Although we consider global equity indices to be fully priced, we are very excited by the sheer number of compelling stock-picking opportunities that we are finding, most of which are in the loss-making/long duration space and in emerging markets.

Rising interest rates have resulted in a wholesale sell-off in growth businesses. Although many of these stocks became very overvalued in the late stages of a very exuberant bull market, we believe that the market has been highly indiscriminate in its punishment of all loss-making businesses. Many of these companies have incredibly exciting futures and trade at small fractions of what we think they might be worth. Examples include Auto1, Coupang, Delivery Hero and Farfetch.

Negative sentiment towards China and the increased intensity of regulatory intervention have battered Naspers, Prosus and JD.com. Despite the increased risks, we believe that the pricing of many Chinese technology shares assumes a very dire outcome. Tencent is a formidable company that generates good free cash flows, has a very engaged user base and is growing businesses across multiple verticals. An investment in Naspers/Prosus offers an extremely discounted entry point to Tencent. We continue to believe that JD.com is well-positioned given its responsible social practices and growth opportunities (both regionally and across new categories). The company is investing behind its infrastructure to widen its competitive advantage. We expect the business to grow strongly, with expanding margins and strong free cash flow generation. It trades at a very undemanding multiple.

In SA, higher commodity prices are benefiting the domestic economy as the additional revenues help to stabilise the debt burden. This improvement was reflected in Moody’s upgrade in its outlook for SA debt from negative to stable.

While domestically there are signs of positive policy reform (the completion of the spectrum auction and Transnet inviting private sector bids to operate freight networks), the local economy remains weak. A decade of mismanagement has undermined infrastructure, with power and rail capacity in particular constraining the economy. These challenges, combined with a poor education system (which undermines labour productivity), continue to pose structural headwinds to growth.

However, given the many global headwinds, SA is relatively well positioned given its commodity basket. This, combined with low starting expectations and undemanding valuations, supported strong returns from SA equities for the quarter, with the FTSE/JSE Capped SWIX Index delivering 7% in rands. The Fund benefited from its overweight position in SA equity.

Quarterly performance across the sectors was divergent, with resources (+19%) and financials (+20%) strongly outperforming industrials (-13%).

The resource sector was up strongly as Russia’s invasion of Ukraine resulted in a risk/scarcity premium being priced in across almost the entire commodity spectrum. Commodity markets were already tight entering 2022, but Russia’s significant role in supplying a number of these markets has created further pressure. Russia is a key producer of palladium (27% of the global total), natural gas (19%), metallurgical coal (17%), crude oil (10%) and thermal coal (9%). Developments in this period will have outsized consequences for energy markets for many years to come.

As would be expected, energy producers benefited sharply during the quarter, with Thungela (+118%), Exxaro (+45%) and Sasol (+37%) all up meaningfully. Holdings in the diversified miners (Glencore +18% for the quarter and Anglo American +22% for the quarter) have contributed strongly to performance over the past few years. While they remain sizeable holdings, position sizes have been cut given the ongoing strength and subsequent reduction in the margin of safety.

The heightened uncertainty during the quarter also buoyed the gold equities and the Fund took the chance to trim these holdings during the period. Goldfields and AngloGold ended the quarter, up 32% and 7% respectively.

The Fund is underweight the platinum group metals miners. While near-term cash flows are expected to be strong, longer-term demand is expected to be undermined by a shift to electric vehicles. Governments (particularly European) are expected to accelerate battery electric vehicles adoption given recent events as they strive to increase energy independence and reduce reliance on Russian oil and palladium.

The financials index returned 20% for the quarter, driven by a strong performance from the banks (+25%) and life insurers (+17%). The four domestic banks that reported during March all showed a strong recovery in pre-provisioning operating profit to a level matching or exceeding their pre-Covid levels. This was aided by a faster-than-expected recovery in the economy and good cost control. Rising interest rates should support future earnings. Holdings in RMI (+73% over 12 months, +15.5% for the quarter) and Transaction Capital (TCP) (+10%) have contributed to the Fund over their holding period. RMI continued its journey to simplify its structure, unveiling the value inherent in OUTsurance - a fast growing insurer with the ability to pay out the bulk of its earnings. Despite the RMI share price moves (+73% over 12 months, +15.5% for the quarter), it remains an attractive investment. The core OUTsurance asset trades at a low lookthrough multiple relative to its high-quality nature and strong growth prospects, particularly in Australia. We expect TCP’s We Buy Car’s business to continue to gain market share given its convenient and trusted consumer offer.

Industrials declined -13% for the quarter given the decline in its major constituent (Naspers -33% and Prosus -39% for the three-month period). Our portfolio has meaningful exposure to several global businesses listed in SA that we believe offer considerable value. In addition to Naspers/Prosus, examples include British American Tobacco, Bidcorp, and Quilter. These counters generally lagged resource/domestic counters during the period as global markets sold off. We used the weakness in its share price to build our holding in Richemont. Richemont has a portfolio of highly desirable luxury brands across the jewellery and watch sector, with branded jewellery expected to continue growing strongly.

In keeping with a trend consistent through 2021, domestic companies continued to report results ahead of our expectations given a more resilient economy and stringent cost-cutting. Our emphasis has been on finding businesses that can prosper even in a low growth economy. For example, a business such as Shoprite has continued to invest behind its franchise and is growing revenues by gaining share in a competitive, low growth economy.
While headwinds exist in both global markets and the domestic economy, we believe our holdings are well priced for the risks and should offer attractive returns off these low starting prices.