Not much has happened in the Nedgroup Investments Bravata Worldwide Flexible Fund since our last minimum disclosure document.

Developed markets, specifically Europe and the US, look fully valued with limited investment opportunities available to us. Conversely, our local markets are looking increasingly attractive. Asset prices have declined as company earnings have disappointed, South African growth has slowed and political risks have increased. While many of the South African based investors have been moving money away from local markets, we are increasingly finding attractive opportunities where the asset prices more than account for the risks and low growth. While our South African exposure has historically been limited, as we come across more of these opportunities you should expect local exposure to increase. We note that South African interest rates are expected to decline which should help growth and the local consumer, ultimately benefitting the companies we own and improving confidence.
A look at South African history will show that investing here has never been for the faint-hearted. While the investment outlook may be uncertain, we have been through far worse. In fact, we would suggest that there has been a slow and steady improvement in the prospects of the country over the last 50 years, although not always in a straight line. Could this time be different? We don’t think so. Our constitution has been tested and passed. We have greater transparency than ever before. We live in a democratic country with an increasingly strong opposition. South Africa has an ability to rise above its challenges and surprise to the upside.

While we are optimistic about the future, it’s very important that we are patient and only invest on our terms. We must be sure that that the prices at which we invest more than compensate us for the inherent risks and uncertainty.

We have found that doing unpopular things often leads to short-term underperformance but in the end, has delivered satisfactory long-term performance.

Aylett & Co

2016 for was a very good year for all the funds managed by Aylett & Co. Our performance this year was largely as a result of investments made during periods of underinvestment. It was at these times that our investment philosophy came under intense scrutiny and some of our long-term clients started to question our abilities, even withdrawing funds owing to the client pressures they faced.

Buffett has consistently stated that you are right in investing when the facts are right. It is pleasing that we stuck by our investments because ultimately the facts on which those investments were made were right. Perhaps what I find most satisfying about the success of 2016 was the character and the strength shown by the team to stand by their decisions. We were not dogmatic and when the facts changed we were fast to act. Our decisions to bring foreign cashback to South Africa, and to lighten exposure to foreign investments were good examples. Our investment in South African stocks proved to be timeous and we were surprised by how quickly these stocks recovered.

In hindsight, they simply became too cheap in dollar terms. Many of our stocks turned out to be winners but what excites us more is that from a five-year view they appear to be reasonably valued and with some investments still having significant upside. We have no idea what the future will hold but in the short term we think it is reasonable to expect some relative underperformance. That being said, the Nedgroup Investments Bravata Worldwide Flexible Fund does have some counters that could surprise on the upside.

In the long term, we expect the funds to continue to do well and, as always, we will use any pessimism to either add to existing stocks or to introduce new investments.