As the Nedgroup Investments SA Equity Fund celebrates its 10^th anniversary, we reflect on the last decade of investing in the local South African equity market. The fund has delivered performance of 7% per annum, while outperforming its benchmark by 0.7% per annum, since inception (net of fees) and lower than expected absolute performance in what has turned out to be a very difficult period for local markets. The consistency of outperformance is demonstrated by the fund outperforming its benchmark over 80% of the time over any rolling 3- and 5-year period since its inception.

The fund only invests in SA-listed equities and aims to be fully invested in the local market at any time, and thus its prospects are closely linked to some large drivers, including the South African economy and Chinese economic growth. The fund is managed primarily on a bottom-up fundamental valuation-based approach, while applying a macro-overlay. Given the hedge fund DNA of the fund manager, Laurium Capital, the fund opportunistically takes advantage of special situations as and when they arise.

The investment team at Laurium Capital has adopted an integrated research approach, with our investment analysts covering South African, African, as well as global equities. As a boutique investment firm with a close-knit investment team, we have found that our approach results in a cross-pollination of ideas and picking up on trends and themes, which has given us a better understanding of South African equities from both a thematic and valuation perspective.

The portfolio managers of the fund were originally Murray Winckler and Gavin Vorwerg with Dwayne Dippenaar and Junaid Bray being appointed as co-portfolio managers in 2020. The Nedgroup Investments SA Equity Fund is managed on a multi-counsellor basis, with a strong focus on the overall fund structure to ensure the best investment outcome for underlying investors.

Over time, shares like Naspers and Prosus, MTN, BHP, ABSA, Anglo American, British American Tobacco and Mediclinic have contributed positively to the fund’s performance.

One of the larger lessons over the period we have managed the fund has been to increase our aversion to low quality companies that appear to be cheap, but ultimately end up being value traps.

Needless to say, the South African economic environment has been challenging. We believe South African management teams are resilient and resourceful, and navigate their businesses well in the face of macro headwinds. In addition to this, as discount rates have risen globally, South African equities have derated significantly.

We continue to see opportunities as we view SA-listed equities to be undervalued on an absolute basis, and especially relative to other emerging and developed markets. As we look out over the investment horizon, we expect several headwinds to turn into tailwinds, which should be supportive for SA-listed equities:

• The removal of election uncertainty. Our base case is for a benign election outcome
• A reduction of interest rates over the next 12-18 months, which will support the domestic consumer and may result in a rerating of the local market
• A reduction in loadshedding as the private sector and renewable power comes online. We have already seen a large supply response from the private sector post government deregulating parts of the electricity sector
• Logistical constraints have been challenging, especially in the rail and port sector run by Transnet. We are seeing several signs of public-to-private partnerships addressing key bottlenecks, although this is expected to take 2-3 years to translate into tangible benefits
• The peak of the global interest rate cycle could result in a weaker US dollar, which could be supportive for emerging markets and South Africa
• Chinese economic expectations have been reset lower. A recovery off these low expectations could be supportive for resource demand and South African equities

We believe our South African equity portfolio is well positioned to benefit from the upside based on the above factors. Given the depressed nature of expectations, incremental positive changes are expected to be well received, and generate returns for our clients.