inperspective · getting to grips with new ways of interacting professionally and socially. this is...

1

Previously InvestecAsset Management

InPerspective

Investing for a world of change

Winter 2020

Version 1

This is the copyright of Ninety One and its contents may not be re-used without

Ninety One’s prior permission.

3

Welcome to InPerspective 01

South African banks – Value (trap)? 08 Chris Steward and Rehana Khan

Commodities after the COVID-19 crisis – a new normal emerging? 15 Unathi Loos, Daniel Sacks and George Cheveley

SA credit markets – plenty of risks but a wealth of opportunities if managed appropriately 23 Simon Howie

How COVID-19 has reinforced the need to focus on resilient companies 27Clyde Rossouw and Paul Vincent

Meet the investment team 34 Q&A with Rehana Khan

The Ninety One SA Recovery Fund – mobilising the long-term savings pool to help restore SA’s economic health 40 Natalie Phillips

In conversation with Hendrik du Toit, Founder and CEO of Ninety One 44

Contents

1

Welcometo InPerspective

“If you are going through hell, keep going.” – Winston Churchill

Natalie PhillipsDeputy Managing Director, Africa Client Group

Welcome

Welcome

I hope you are all coping with the challenges of life in lockdown and getting to grips with new ways of interacting professionally and socially. This is a new experience for most of us and sometimes I don’t know whether I live at the office or work at home.

2020 started well but the combination of the COVID-19 pandemic and Moody’s downgrade of South Africa’s sovereign debt to sub investment grade, has negatively impacted our economy, corporate earnings, employment and markets.

2

We have had to deal with unprecedented levels of volatility, including the fastest ever 30% decline in the S&P 500 (22 trading days from 19 February) and the worst ever month for our local bond market (-9.8% in March). The recovery has been almost as swift, with the strongest 50-day move for the S&P 500 since 1952 and the Nasdaq hitting a new high.

Welcome

Our business and the portfolios we manage on your behalf have shown resilience through these difficult times. We were bold and agile enough to take advantage of opportunities created by the volatility, to improve the risk and return potential of the portfolios we manage on your behalf.

Risk assets have recovered significantly from their lows, helped by unprecedented monetary and fiscal stimulus. While Wall Street has recovered, “Main Street” has not and the outlook for growth and employment is dire, with South Africa on course for its worst recession in living memory. South Africa’s whole economy PMI (barometer of manufacturing activity) hit a record low of 32.5 in May and GDP could contract +/-10% in 2020 and take years to get back to 2019 levels.

We are committed to building a better tomorrow for our clients and their communities, so we have made a R50m donation to the South African Solidarity Fund and its counterparts in Botswana and Namibia and have matched staff members’ charitable efforts – to date jointly contributing approximately R10 million to charities in our communities. We are also partnering with some of our large institutional clients in launching our South Africa Recovery Fund to provide funds across the capital spectrum to help save companies and jobs. We believe that the institutional savings industry has a key role to play in limiting the damage to our economy and helping its recovery. Our Recovery Fund is a once-in-a-generation opportunity to help mitigate the negative economic impact of the pandemic, while producing a commercial return. We are targeting to raise up to R10bn and already have significant commitments from interested clients. Please read my article in the newsletter for more details.

We are committed to building a better tomorrow for our clients and their communities.

Fastest decline in the S&P 500

30%Strongest move for the S&P since 1952

50 daysWorst ever month for SA Bond Market

-9.8%trading days since 19 Feb 20

22over

Unprecedented levels of volatility

3

Welcome

Our newsletter has something for everyone, with investment, personal and industry insights from our investment and client teams as well as our CEO, Hendrik du Toit.

Our 4Factor team responsible for our General Equity and Balanced strategies share their views on the Banking and Resources sector. Banks are optically cheap but Financials Sector Head, Chris Steward and Portfolio Manager, Rehana Kahn, explain why a selective approach is required given the potential for credit losses even worse than the

Global Financial Crisis.

Commodity prices have been impacted by supply and demand disruptions as well as fiscal and monetary policies. Portfolio Managers Unathi Loos, Daniel Sacks and George Cheveley are excited by the opportunities in precious metals, with gold shares in particular benefitting from central bank stimulus. They highlight how COVID-19 has speeded up existing trends in technology adoption to improve efficiencies, safety and progress towards “greener mining”.

Simon Howie, Co-Head of SA and Africa Fixed Income, highlights the dangers of chasing yield and relying on credit ratings in a market that is likely to see increasing defaults and explains the importance of active management and analysis to manage risks and capture opportunities in the SA credit market.

We are committed to building a better tomorrow for our clients and their communities

4

Our Quality team shares their views on two of their favourite ideas: Booking Holdings and ASML, which have had very different experiences through the COVID-19 pandemic and consequent lockdown. An online travel agent and technology hardware supplier are not obvious choices, but Clyde and Paul explain why they are top 10 holdings in our Global Franchise strategy and the offshore equity component of our Opportunity and Cautious Managed strategies.

Rehana Khan, who recently joined our 4Factor SA Equity and Multi-Asset team, shares her journey to portfolio manager, what she likes most about her new role and the questions investors should be asking about the next decade.

Nata lie

Welcome

We end our newsletter with an edited version of a recent interview by Nerina Visser, President of the CFA Society South Africa and Hendrik du Toit, our CEO. They discuss the role of asset managers, not just as efficient allocators of capital but how they can benefit society as a whole, including encouraging entrepreneurship. Hendrik also covers the importance of diversity, inclusivity, curiosity and empathy as well as an appreciation of history.

An online travel agent and technology hardware supplier are not obvious investment choices.

Our thirtieth year will be remembered for the demerger of our business from Investec Group, our successful listing and rebranding, and the market reaction to COVID-19 and the consequent lockdown of the economy.

We are grateful for your continued support as evidenced by the strong net flows in our recently released maiden results as a listed company and look forward to partnering with you in growing your savings for many years to come.

Warm regards

Natalie Phillips Deputy Managing Director, Africa Client Group

5

South African banks - Value (trap)?

Chris StewardSector Head: Financials

Rehana KhanPortfolio Manager

The fast view ɽ Judging by discount to book value, the universe of global

banks is the cheapest it has been at any time since the Global Financial Crisis.

ɽ The impact of the COVID-19 pandemic has caused investors to question the integrity of book values, resulting in the sector trading at a deep discount to book value.

ɽ For the first time in recent history, the SA banking sector is also trading in aggregate at a discount to book value, which presents a potential investment opportunity.

ɽ All cycles are not the same, so to evaluate the opportunity investors must compare the current cycle’s depth and severity to the Global Financial Crisis, the downside risks must be understood and the optimal risk-adjusted basket of banking stocks must be identified.

ɽ The downside risks to the local banking sector are manifold, but by far the biggest risk facing the banks is credit quality.

ɽ Our central scenario is for the South African banking sector to remain profitable and adequately capitalised in aggregate in 2020, but we remain concerned about the very real downside risks.

ɽ We have a neutral weight in the sector, and are selective in terms of our stock-specific exposures.

ɽ We have selected stocks based on balance sheet strength and ability to withstand a worse-than-expected outcome.

ɽ Our core positions are in FirstRand and Capitec/PSG.

6

There is a common misconception that when banks trade at a discount to book value they must be cheap. Indeed, on this basis, the universe of global banks, as represented by the Bloomberg World Banks Index, must be cheap – as cheap as it has been at any time since the Global Financial Crisis (see Figure 1).


Figure 1: Bloomberg World Banks Index – Price to Book Ratio: 2005-2020

Source: Bloomberg, daily data from 01 January 2005 to 30 June 2020.

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Dec

-19

Jun-

20

A closer inspection of this chart reveals another interesting trend – the multiple to book that investors are prepared to pay for banks globally has been in a structural downtrend for at least the past ten years. Finance theory tells us that the multiple to book that an investor should be prepared to pay for an investment is a function of three key factors:

123

the return on book value the investment can deliver (more commonly referred to as return on equity, or “ROE”);

the risk associated with delivering those returns (the so-called cost of equity, or “COE”); and

the rate at which the investment can grow its earnings. To trade sustainably above book value, a bank needs to be able to generate a ROE in excess of its COE.

The multiple to book that investors are prepared to pay for banks globally has been in a structural downtrend for at least the past ten years.

7

Since the Global Financial Crisis, a combination of factors has conspired to reduce returns and prospects for growth in the banking sector. These include ever-lower interest rates, pressuring bank margins, increased competition from built-for-purpose “fintech” start-ups, compressing and eroding fees across multiple business lines, cost pressures to adapt legacy systems and infrastructure to new channels of distribution, and a vastly increased regulatory and compliance burden. All of this has occurred within the context of a lacklustre global growth environment.

Investors have become more cognisant of the risks involved in entrusting capital to a (typically) highly-leveraged business model such as a bank, even while banks have been pressured to de-risk and reduce leverage by ever-more-stringent capital and liquidity requirements (the so-called “Basel 3” regulations).

Most recently, the substantial – though at this stage still highly uncertain – impact of the global COVID-19 pandemic on asset prices and credit quality, as well as the future trajectory of the economic recovery, have caused investors to question the integrity of book values, resulting in the sector trading at a deep discount. Nowhere have these trends been more apparent than in Europe, where the banking sector has languished at a deep discount for most of the past twelve years, now trading in aggregate at only 40% of book value (see Figure 2).

Figure 2: Euro Stoxx Banks Index – Price to Book Ratio: 2005-2020


0.0

0.5

1.0

1.5

2.0

2.5

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

9Ju

n-2

0


8

At the end of March this year, for the first time in recent history, the South African banking sector also traded in aggregate at a discount to book value (see Figure 3). Even at the height of the Global Financial Crisis (which the local banks, for reasons outside the scope of this paper, navigated comparatively well), the South African banking sector traded above book value. Due to the disparate ratings across the banks, the relatively modest aggregate discount to book value hides deeper discounts for certain stocks – Absa and Nedbank, for example, both trade at discounts of more than 20% to disclosed book value – yet all are trading at material discounts to their long-term histories.

Figure 3: South African Banks Index – Price to Book Ratio: 2005-2020

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Dec

-19

Jun-

20


A signal such as this should naturally alert investors to a potential investment opportunity. Indeed, had one had the prescience to purchase a basket of South African banks during the latter part of 2008 and early in 2009, when their price to book multiples were troughing, one would have been rewarded with solid absolute, and market-beating relative returns (see Figure 4).

Figure 4: South African Banks Index versus the All Share Index: 2005-2020


0.08

0.10

0.12

0.14

0.16

0.18

0.20

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Dec

-19

Jun-

20


9

If each cycle were the same, and history repeated itself in a predictable manner, investing would be comparatively easy. In order to interrogate this potential investment opportunity, a number of important questions need to be answered:

ɽ How will the current cycle compare in its depth and severity to the Global Financial Crisis?

ɽ What are the downside risks?

ɽ What is the optimal risk-adjusted basket of banking stocks to take advantage of this potential investment opportunity?

The epicentre of the Global Financial Crisis lay in the United States residential property market (and multiple derivatives thereof). While the repercussions were felt globally, much of the damage was limited to the banking sector, and its ability to continue to play the essential role of financial intermediation in the global economy. Banks failed, jobs were lost, and global growth suffered a short, yet sharp, hit.

Ancillary industries were negatively impacted by the subsequent global recession, yet the crisis remained fundamentally a banking one. An unprecedented, coordinated global fiscal and monetary response ensured a robust global recovery. Locally, the banks did not escape the rout, although the impact was contained, and as much to do with ill-considered and overly exuberant credit extension during the 2005-2008 credit cycle as the Global Financial Crisis itself.

There is little doubt that the current crisis, brought on by the COVID-19 pandemic, is significantly more widespread, both by geography and industry, than the Global Financial Crisis. Early indications are for a substantially more pronounced impact on growth and employment across multiple industries. While this has again elicited a massive global monetary and (where possible) fiscal response, there are valid concerns over the ability of governments the world over to orchestrate another recovery akin to that post the Global Financial Crisis.

While the current environment is characterised by a high degree of uncertainty, most South African banks anticipate that the impact on credit quality may surpass that of the previous cycle, potentially by some margin. The parlous state of the South African government’s finances precludes the extent of fiscal assistance being provided elsewhere in the world. Recessionary conditions going into the crisis only serve to compound the problem. One mitigating factor may be the somewhat more conservative approach to credit extension adopted by the banks over the past few years.

There are valid concerns over the ability of governments the world over to orchestrate another recovery akin to that post the Global Financial Crisis.


10

The downside risks to the local banking sector are manifold. The 275 basis points in rate cuts thus far this year will wipe billions of Rands off margin income made from lending; this will be compounded further by muted, and in some categories possibly even negative, credit growth. The economy-wide lockdowns that have been in place since the end of March have decimated many of the annuity fee revenue streams of the banks, as activity levels across branches, points-of-sale and ATMs have declined by more than half. Corporate advisory, insurance and other transaction-related sources of fees have been similarly impacted, with only trading income a bright spot, courtesy of extreme volatility in foreign exchange and rates markets. The extent of the recovery post lockdown remains in question, as consumer behaviour remains cautious, and corporates delay major investment decisions in favour of balance sheet security. Operating costs remain a key focus to try to protect the bottom line, yet recent events have also given rise to incremental costs, as the banks have implemented measures to protect staff and customers, while transitioning thousands of employees to work from home.

By far the biggest risk facing the banks is credit quality. In the context of current projections around the decline in GDP, extent of business failures and job losses, it is very plausible that a “base case” scenario for credit losses in this cycle exceeds the peak of the Global Financial Crisis, and under a “bear case”, exceeds it by some margin. Forecast risk is extremely high, with much depending on the timing and nature of the emergence from lockdown, the ability of the South African government to negotiate unprecedented fiscal challenges, and the extent of support from the global economy. While our central scenario is for the South African banking sector to remain profitable and adequately capitalised in aggregate in 2020, we remain concerned about the very real downside risks.

It is very plausible that a “base case” scenario for credit losses in this cycle exceeds the peak of the Global Financial Crisis.


11

We have subjected the balance sheets of the banks to multiple stress tests to determine the likelihood of breaching their minimum regulatory Core Tier 1 requirements. While all the banks appear adequately capitalised, FirstRand and Standard Bank stand out due to their superior capital buffers. A little more than a doubling of our forecast bad debts charge for Absa and Nedbank would start to create capital adequacy issues, while in the case of FirstRand and Standard Bank, bad debts would need to amount to four times our forecast level (see Figure 5).

Figure 5: “Big 4” South African Banks – Capital buffers under stressed impairment scenario

Common Equity Tier 1 (CET1) %

CET1 'Buffer' (R'million)

Bad Debts FY20 estimate %

Bad Debts peak in Global

Financial Crisis %

Max impairment charge before CET1

'buffer' erosion %

ABSA 10.9 29,917 2.0 1.7 4.9

Nedbank 10.8 20,645 1.6 1.5 3.8

FirstRand 12.4 50,458 1.7 1.9 6.8

Standard Bank 14.0 71,916 1.6 1.6 6.9

Source: Ninety One as at June 2020.

During the Global Financial Crisis, the price to book ratios of the South African banks troughed in March 2009, although most maintained a rating of parity to book or greater (see Figure 6). A similar trough may have been reached in May of this year, albeit with ratings slightly lower (see Figure 2).

Figure 6: “Big 4” South African Banks - Price to Book trough during the Global Financial Crisis

Source: Bloomberg, 2008 and 2009.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-

09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

ABSAFirstRand

NedbankStandard Bank


12

After the trough in 2009, the banks experienced a period of strong absolute and, over most time periods, market-relative returns. Investors were typically rewarded for investing in the banks at depressed multiples. However, it is apparent from Figure 7 that there is little correlation between the relative rating at trough multiples, and the relative performance thereafter.

In fact, over the ensuing five-year investment horizon, the best performing bank by some margin was the one that had troughed with the highest price to book multiple, whilst the worst performer had screened as second cheapest. The thesis to buy the “cheapest” bank, as measured by the deepest discount to book value, in the expectation of the highest return as ratings recover, was not vindicated in practice.

Figure 7: “Big 4” South African Banks - Total Returns in the Five Years post Price to Book trough

Source: Bloomberg, Based to 100 at start of March 2009.

50

100

150

200

250

300

350

400

450

500

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

May

-10

Aug

-10

Nov

-10

Feb-

11

May

-11

Aug

-11

Nov

-11

Feb-

12

May

-12

Aug

-12

Nov

-12

Feb-

13

May

-13

Aug

-13

Nov

-13

Feb-

14

FirstRand

Standard Bank

Nedbank

ABSA

There are typically two reasons why a bank would maintain a higher rating even at trough levels – a lower risk premium being accorded to the bank providing the greatest protection in the event of a “bear case” scenario and/or superior prospects for long-term returns and growth post-crisis. Factors driving the former include capital and liquidity buffers, conservatism in provisioning and asset valuations on balance sheet, pre-provision profitability and, most importantly, franchise quality and management track record. The latter would be driven by return on equity, market share gains and ongoing investment for growth.


13

Post the Global Financial Crisis, FirstRand and Capitec’s ROEs far exceeded their peers (see Figure 8) and whilst we expect the ROE for the sector to be cyclically lower over the next three years, we still expect these two banks to deliver a superior ROE.

Figure 8: “Big 4” and Capitec South African Banks – Return on Equity (ROE)

Source: Bloomberg and company financials, January 2005 to June 2020.

0

5

10

15

20

25

30

35

40

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

Firstrand

Standard Bank

ABSANedbank

Capitec

Jun-

20In recognition of the potential investment opportunity in the South African banks, we currently have a neutral weight in the sector, and are selective in terms of our stock-specific exposures. Reflecting the uncertainty as to the depth and duration of the crisis, and the ability of the local economy to stage a credible recovery in 2021 and beyond, we have selected stocks based on balance sheet strength and ability to withstand a worse-than-expected outcome, as well as those stocks that we believe will be able to sustainably generate returns in excess of their cost of equity in a post-crisis environment. In this regard, our core positions are in FirstRand and Capitec/PSG.

We have selected stocks based on balance sheet strength and ability to withstand a worse-than-expected outcome.


14

Investing

for a world

of change

15

Commodities after the COVID-19 crisis – a new normal emerging?

The fast view ɽ The pandemic has accelerated key themes in

mining such as declining mining production and heightened ESG risk.

ɽ New social distancing measures, as well as enforced screening and testing, will result in SA’s precious metals mines operating at reduced levels – possibly for the rest of the year.

ɽ Gold mines will be the worst affected by this ‘new normal, which helps inform our bullish stance.

ɽ It is uncertain when previous production levels will be reached, which will provide some longer-term support for Platinum Group Metals (PGM) prices.

ɽ The pandemic may accelerate key trends such as technology and ESG, but the challenge is for technology to be used to improve productivity and mine sustainably whilst protecting human life.

ɽ Continued central bank stimulus should support the gold price.

ɽ We believe gold equities are generally in their strongest position for over twenty years and should continue to deliver good returns and diversification as long as gold prices remain well supported.

Unathi LoosPortfolio Manager

Daniel SacksPortfolio Manager

George CheveleyPortfolio Manager

16


IntroductionThe COVID-19 pandemic is likely to have a material impact on commodity demand, which is hard to quantify and will not uniformly affect all commodities. Depending on one’s view of the shape of the economic recovery post COVID-19 and the effectiveness of the monetary and fiscal support, one can only at best map out various commodity demand to GDP growth scenarios over varying recovery periods. What is clear however is that the pandemic has exacerbated or accelerated recent key themes in mining such as declining mine production supply and heightened environmental, social, and governance (ESG) risk. The response to the pandemic also informs our bullish stance to gold.

The recovery in supply will be slowerSA underground mine supply, already exhibiting a multi-year structural decline, came to a complete halt during the initial Level 5 of SA’s lockdown. This month-long supply disruption dove-tailed with the complete cessation of global industrial demand, and allowed PGM prices (of which SA is the primary producer) to remain well supported. These mines have since reopened but are not yet operating at full capacity. New social distancing measures, as well as enforced screening and testing, will result in a ‘new-normal’ period where SA’s precious metals mines operate at reduced levels. This period could last for the rest of this year.

Gold mines should be the worst affected as they have deeper, older shafts, which rely on workers being carried underground in groups using cage lifts. Gold mining employees mostly still live near the mines in communal hostels, which also complicates social distancing. This contrasts with platinum mines, where workers mostly live in their own accommodation. Additionally, most listed South African platinum companies have operations which were less affected by the restrictions imposed as a result of the pandemic, such as AngloAmerican Platinum’s Mogalakwena open-pit mine, which is mechanized, and Sibanye Stillwater and Impala, which both have offshore operations.

The risk of sporadic COVID-19 outbreaks will also continue to provide significant uncertainty around whether previous production levels will be reached, at least until some form of virus elimination through a vaccine or herd-immunity is attained. This does provide some longer-term support for PGM prices, as supply will remain constrained even as demand recovers. Figure 1 demonstrates the extent to which supply has been disrupted for the PGM sector thus far.

Gold mines should be the worst affected as they have deeper, older shafts, which rely on workers being carried underground in groups using cage lifts.

17

Figure 1: Identified/estimated ongoing supply disruptions, annualised

Unit

Identified/estimated

losses, units1

Adding highly likely losses,

units3

Global refined supply 2019

% of refined supply

Adding highly likely supply

disruptions, % of refined supply

Platinum4 koz 3,594 3,953 8,456 43% 47%

Cobalt kt 5 37 118 4% 31%

Palladium4 koz 2,809 3,141 10,237 27% 31%

Magnesium Ore2 kt 6,240 6,240 21,500 29% 29%

Silver koz 195,962 256,627 1,015,000 19% 25%

Zinc kt 2,684 3,152 13,699 20% 23%

Nickel5 kt 296 503 2,413 12% 21%

Copper kt 2,331 4,452 23,807 10% 19%

Seaborne Met Coal2 Mt 54 54 330 16% 16%

Seaborne Thermal Coal2

Mt 109 114 978 11% 12%

Gold koz 9,827 15,201 153,388 6% 10%

Seaborne Iron Ore2 Mt 52 121 1,505 3% 8%

Vanadium kt 7,300 7,300 98,000 7% 7%

Alumina kt 455 8,500 129,261 0% 7%

Lead6 kt 666 769 12,747 5% 6%

Aluminium kt 1,008 2,808 62,940 2% 4%

Data as at 14 April 2020. Source: Citi Research, Media Reports, Company Reports, Wood McKenzie, IHS, Metals Focus;

Identified losses include price related closures.

1 = Citi estimates of cumulative losses from ongoing and year to date disruptions.

2 = assessed as share of mined supply.

3 = estimated losses in regions supply is deemed highly likely to be restricted (including from logistical bottlenecks.

4 = Mined PGMs losses only (excludes Anglo refinery disruptions).

5 = Nickel losses counted as impact on refined supply.

6 = Mined lead losses only (excludes secondary and refineries).


18

Key trends such as technology and ESG likely to accelerateAny financial results presentation, mine site visit or management meeting often includes a robust discussion on how investments in technology are being used to reduce costs, improve productivity and efficiencies and progress towards “greener mining”. While shareholders loathe to see mining companies spend capital on large growth projects, mining executives have had to focus on increasing the quality of their operating systems to drive costs down whilst incrementally adding to saleable volumes through better processes. Figure 2 indicates the cumulative productivity gains for BHP as a result of technological advancement driving costs down while improving output.


Figure 2: BHP cumulative productivity gains (US$ billion) as a result of technological advancement

Source: BHP company results presentation, 2018.

16

14

12

10

8

6

4

2

0FY12 FY14FY13 FY15 FY17FY16 FY18 Medium

termFY19e

Apart from the earnings – enhancing benefits, technology is a key tool for combatting some of the ESG issues which plague the industry. It is a growing imperative for mining companies to pursue sustainable strategies for reducing water intensity, reducing carbon emissions and reducing fatalities, amongst other things. As company disclosures continue to improve, progress on ESG factors is visible to investors and has an impact on valuation multiples.

19

The COVID-19 pandemic has the potential to accelerate the trends towards increased automated mining and to reduce the labour intensity of the industry. This pandemic has once more highlighted the challenging working environment for underground miners, necessitated by the very nature of deep level mining, and the potential cost to human life. The risk of a COVID-19 outbreak is an added concern to a long list of other dangers such as exposure to toxic gases, seismic fall of ground and collisions with moving equipment.


The COVID-19 pandemic has the potential to accelerate the trends towards increased automated mining and to reduce the labour intensity of the industry

Figure 3: Far more natural resources are required to produce less metal than a century ago

Source: AngloAmerican Smart Mine conference, Bank of America Merril Lynch, June 2019.

What is required to produce of copper?40kg

1900 2018 Future

24t Waste

8t Ore

0.5% Cu

6m3 Water

160kWhr Energy

1t Waste

1t Ore

4% Cu

3m3 Water

10kWhr Energy

We have seen increased tensions with threats of labour strike action as infection and fatality rates have increased in the South American mining regions and here at home the implementation of no-work no-pay policies will negatively impact labour relations going forward. This should be an opportunity for mining companies to invest some goodwill with its workers and communities. Interestingly, it is the companies with better profitability and balance sheets who have responded with care, in terms of subsidising worker incomes and providing community relief during this time.

The challenge therefore is to see technology used in an integrated manner to improve productivity and to mine sustainably whilst protecting human life. As investors we should pay careful attention to the capital expenditure budget allocated to technological advancement for a sustainable profit stream and less attention to cost-cutting strategies to simply meet the next year’s profit targets. Figure 3 depicts how much more natural resources are required currently to produce less metal than a century ago and points to the reality that for a sustainable future, innovation is required to reverse this trend.

20

Gold prices look well supported as central banks stimulateGold has once again shown its status as a safe haven and diversifier within portfolios this year. After an initial sell-off when the markets fell in early March, gold prices rapidly recovered later that month and now trade up around 14% year-to-date. Economic uncertainty has clearly risen sharply in the wake of the pandemic and central banks have responded with an unprecedented amount of fiscal and monetary easing. Past crises, notably the Global Financial Crisis, have shown that gold prices perform well during the recovery. With central banks, in particular the US Federal Reserve, concerned about slower growth leading to deflation, we would expect them to target higher inflation in order to keep real interest rates low and even negative. In this environment, we believe the gold price should be well supported and this will prove a very constructive environment for gold equities.

Figure 4: The high negative correlation to US real rates means gold is attractive in a low to negative real interest rate environment

Source: Bloomberg, 31 May 2020. Time period selected for contextual and illustrative reasons.

* The yield on the US 10 Year TIPS represents real rate of return guaranteed by the US government which is the

interest rate that would be charged in a world where there is no inflation.

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%800

1,000

1,200

1,400

1,600

1,800

2,000

Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20

zo/$SU

Gold Price USD oz US 10 Year TIPS Yield* (right hand axis inverted)


21

Gold equities provide diversification and the promise of more sustainable returns Gold equities provide investors with diversification for their portfolios as well as leverage to the gold price itself. This leverage is good if gold prices are rising but not if they are falling and does add to volatility, particularly as the equities are less liquid than gold itself. However, in the current environment, we believe that gold equities are generally in their strongest position for over twenty years.

After the steep falls in valuation between 2011-2015, many management teams have changed, and debt has been cut drastically. Companies are now focusing on improving returns on capital and returning cash to shareholders rather than prioritising volume growth (see Figure 5 overleaf). With the falls in oil prices as well as rising gold prices, margins for most companies have improved this year from already good levels and even if gold prices fall back, we are still well above the $1100/oz average breakeven cost.


22

Hedging is much reduced from 15-20 years ago, as companies have less debt and lower costs. Disruptions to production due to COVID-19 have, overall, been relatively light and, with strong balance sheets, companies have been able to manage these sensibly and protect workforces. Investors are beginning to be attracted by the sector as companies demonstrate their ability to deliver free cashflows and the promise of sustainable dividends. This is being enhanced by mergers and acquisitions, which are active but being conducted at reasonable valuations with a number of zero premium mergers conducted recently. As long as gold prices remain well supported, we see the equities continuing to deliver good returns as well as diversification over the long term.

Figure 5: The quality of gold companies continues to improve

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Net

Deb

t/N

et D

ebt+

Equi

ty

dleiy FCF ,E

CO

R

ROCE FCF yield Net Debt/Net Debt+Equity

Source: Ninety One, 31 March 2020. *Simple average of Barrick, Newmont Goldcorp, Newcrest, Franco Nevada,

Buenaventura, Kirkland Lake Gold, Evolution Mining, Anglogold Ashanti, Wheaton Precious Metals.


Gold has once again shown its status as a safe haven and diversifier within portfolios this year.

23

SA credit markets – plenty of risks but a wealth of opportunities if managed appropriately

The fast view ɽ The deteriorating economic backdrop

has negatively impacted companies’ ability to repay debt.

ɽ Official credit ratings can be misleading.

ɽ A disciplined approach to portfolio construction is required given the dangers of chasing yield.

ɽ Liquidity can be a challenge, but patient investors should be rewarded with attractive risk-adjusted returns.

Simon HowieCo-Head of SA & Africa Fixed Income

24

African Bank was the first major corporate bond default in South Africa. It could not survive in an environment where consumers were becoming increasingly indebted against a weakening economic backdrop. Since then, South Africa’s macros have deteriorated further and corporate fundamentals have followed suit. The change was incremental, but the compounded impact of this multi-year slowdown is startling.

South Africa’s “blue-chips” have all but disappeared, their balance sheets weakened by ever increasing debt and cost pressure. A raft of companies are struggling to survive. PPC, Tongaat and Sasol are shadows of their former selves. Steinhoff is on life support and Edcon’s life support has been turned off. Many other businesses are struggling for survival, negotiating with lenders for further reprieve and support, with little prospect of any meaningful value for shareholders. Eskom and Land Bank are reminders that state-owned enterprises have also not been immune. This fragile situation will only get worse as the impact of the COVID-19 pandemic takes hold.

Against this backdrop, some might expect widespread rating downgrades and a hollowing out of the investment grade universe in South Africa. But the opposite has happened. Ratings have trended up.

Banks and insurance companies are now strong AAs, sometimes touching AAA, only medium-size corporates are below AA and unsecured bonds issued by property companies typically range from single A to AAA, despite ranking behind secured debt. Local ratings are clearly detached from fundamental credit risk and a poor predictor of default. What’s going on?

The answer lies in the nature of local ratings. Local or “National Scale” ratings are simply a measure of risk relative to the strongest rating in the country – typically the government. It is important to understand the distinction between these ratings, which are designed to compare entities within a particular country, and global scale ratings, which allow for comparison across countries. As South Africa’s sovereign rating deteriorated, the relative rankings within the country converged and none of them are investment grade. Only global scale ratings give a true indication of default probability; and with South Africa now firmly in sub-investment grade territory, local ratings are bunching together, offering very little insight into actual risk.

South Africa’s “blue-chips” have all but disappeared, their balance sheets weakened by ever increasing debt and cost pressure.


25

South Africa’s local ratings of AAA to BBB therefore make more sense when translated into their BB to B global rating equivalents. Moody’s historic default data (Moody’s Annual Default and Recovery Rates 1920-2017, 26 February 2018) suggest only 0.06% of single A credits default per year. This increases to 0.8% for BB and 3.4% for B-rated credit. Over a 3-year period the data suggests one in eight single B credits and 1 in 20 BB credits will default. In short, regular defaults are to be expected in an environment where the universe is sub-investment grade.

So, does this mean local credit should be avoided? The relative strength of South Africa’s banking sector suggests that South African credit, if managed correctly, provides ample returns to offset losses. Many institutional track records suggest the same. And in an environment of increasing volatility in equities, currencies and bonds, the risk profile of credit should be more than offset by the compounding cash returns.

However, it is not a free lunch. Ratings are a poor indicator of risk, and in national scale form, offer no guidance to expected loss. Ratings are also by design a very poor warning sign, typically waiting for real evidence before reacting. Active management is required in selecting and monitoring credit. Selection is the best defence and deteriorating credit must be sold quickly, before the market is aware. Credit liquidity has improved markedly, but that is only for strong credit - there is no market for distressed credit.

South African credit, if managed correctly, provides ample returns to offset losses.


26

And importantly, none of the improved liquidity will offset poor portfolio construction. Local ratings suggest the relative difference between credits is far smaller than in reality, which could make it far too tempting to include some of the riskier credits in standard money market, income and bond funds. In many cases these funds are not constructed with sufficient additional yield to absorb the inevitable defaults that are part and parcel of higher risk credit. A far more discerning approach that avoids the temptation of “chasing yield” is required.

Higher risk credit requires a different approach. The portfolio construction requires diversification and high running yields to absorb defaults. Patience is required; higher risk credit is typically illiquid and prone to become more illiquid with any downturn. Combining patient capital with careful portfolio construction can reward investors handsomely.

Credit offers an opportunity for investors to diversify their portfolios and earn an attractive yield, but risk management is key to minimising potential downside. This is particularly true in the current environment, where credit spreads have increased, offering higher returns versus cash (see Figure 1). Downside risk can be managed through diversification and favouring the stronger credits such as banks and insurance companies in more liquid portfolios, while secured loans can be considered for the patient capital long-term portfolios.

Figure 1: SA listed credit spreads

Source: RMB and Bloomberg, June 2020.

100

150

200

250

300

350

Jan-15 Feb-16 Mar-17 Apr-18 May-19 Jun-20

Financial senior

Financial subordinated

Inward

Corporate

SOEs


27

How COVID-19 has reinforced the need to focus on resilient companies

The fast view ɽ Our Quality portfolios have navigated

the last six months with few casualties, in part due to our focus on business model resilience, stable cash generation and balance sheet strength.

ɽ We focus on two key holdings – Booking Holdings and ASML. A summary of our logic behind these holdings is noted overleaf.

Clyde RossouwCo-Head of Quality

Paul VincentPortfolio Manager

28

ɽ Booking Holdings:

ɽ Despite severe travel disruptions, Booking should emerge in strong competitive position as global travel restrictions are gradually lifted.

ɽ The company generates profit margins which are more similar to a software company than a hotel group.

ɽ Booking’s lack of direct costs ensures it has tremendous flexibility to protect profitability.

ɽ Booking is heavily weighted towards leisure versus business travel, which should return more quickly once safe to do so.

ɽ ASML:

ɽ Semiconductor equipment supplier ASML owns a near monopoly in photolithography (used to create microchips in smart devices).

ɽ ASML has supreme pricing power if it brings advanced lithography systems to market, as semiconductor manufacturers add ever more transistors onto chips to increase computing power.

ɽ With latest product iteration, ASML achieves a >3x uplift in pricing.

ɽ COVID-19 has brought additional tailwinds as the drive to remote working accelerated (which boosted memory markets) and as customers requested ASML to ship systems earlier than usual.


As we cross the halfway mark of 2020, it’s a good opportunity to look back and reflect on what has been an incredibly volatile period for global equities. While in January markets were wrestling with the prospect of a full-blown conflict between the US and Iran, attention quickly shifted to the growing incidence of COVID-19 around the world. Thankfully, our portfolios have navigated these unprecedented times with few casualties, in part due to our focus on business model resilience, stable cash generation and balance sheet strength. Nonetheless, even within our universe there have been winners and losers. In this piece, we will discuss how the pandemic has impacted two of our larger positions: Booking Holdings and ASML.

29

Booking HoldingsThe Online Travel Agent (OTA) Booking Holdings has been held in the fund since mid-2016. Our ownership of Booking has seen share price volatility, most notably as the company engages in competitive skirmishes with other OTAs (e.g. Expedia and AirBnB) and Google. Clearly these pale into insignificance compared to the steep drawdowns in the share prices of travel stocks over the first half of 2020. Many operators in the value chain – most notably airlines – have been badly hurt by the severe travel restrictions imposed in virtually all countries. However, despite these challenges, we view Booking as strategically well placed to emerge in a strong competitive position as global travel restrictions are gradually lifted and consumers can begin thinking about a return to their annual holiday schedules.

Figure 1: COVID-19 has affected Booking Holdings and ASML in significantly different ways

Source: Bloomberg, total return in USD, 30 June 2020.

Booking Holdings -22%

ASML, 25%

MSCI ACWI, -6%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Very limited direct overheadsFirstly, it is worth noting that as an OTA, Booking is fundamentally different to traditional hotel groups. Booking.com is one of the worlds most valuable booking platforms and as a result the company generates profit margins which are more similar to a software company than a hotel group. Even as hotel groups have gradually reduced their ownership in physical hotels, moving to a model of franchised or managed hotels, they struggle to compete with the economics that Booking is able to generate.

Booking is fundamentally different to traditional hotel groups.


30

Figure 2 compares the common sized income statements of Booking to that of global hotel group Marriott International. Booking lacks any direct costs, with the company instead taking a royalty on transactions booked on its platforms, rather than offering any hotel management services. Moreover, exactly one third of Booking’s revenues are typically spent on advertising, to drive web traffic to its platforms. While Booking has increased the proportion of brand versus performance advertising over time – the latter being more closely linked to traffic and therefore transactions – there remains an incredibly strong correlation between advertising spend and bookings. During times of stress, Booking is well positioned to slash advertising spend and protect profitability.

Figure 2: Booking’s lack of direct costs ensures it has tremendous flexibility

Source: Company reports, 31 December 2019.

35.5%

9.2%

31.6%

6.1%

33.0%

4.1%

80.6%

Booking.com Marriott International

Operating Profit Selling, General and Admin Advertising Direct costs

There remains an incredibly strong correlation between advertising spend and bookings.


31

leisure travel will return quickly once it is safe to do so

A focus on domestic, leisure travel should aid recoveryOther, more qualitative, reasons also exist for our positive predisposition towards the company. Booking is heavily weighted towards leisure versus business travel. Early indications suggest that leisure travel will return quickly once it is safe to do so, while serious doubts exist as to how quickly business travel will normalise. This will resonate particularly strongly with many of us, having got used to the concept of remote working. Moreover, Booking has a not insignificant exposure to domestic, rather than cross-border, travel. While governments are unlikely to allow unrestricted movement of people until the pandemic is truly under control, the so called ‘staycation’ is no doubt going to grow in prominence. Finally, given the nature of the platform it is, in our view, reasonable to assume the company over-indexes to younger consumers, who might be more willing to travel ahead of the eradication of this deadly disease. As a result, we are optimistic that Booking will be able to capture its fair share of this segment of the travel market.


32

Finally, in an environment of depressed travel, incremental bookings become more valuable than ever. As the premier booking platform, particularly in Europe, we view Booking.com as growing in importance among its fragmented base of hoteliers. Booking’s largely unfettered financial resources leave it well positioned to compete in a post-COVID world, and – unlike the wider market – we would expect the company to capture market share at an even greater rate than before the pandemic.

ASMLHaving owned semiconductor equipment supplier ASML in the portfolio since mid-2018, we have been pleased to see the company as a notable contributor to relative and absolute performance. At first glance, a supplier of hardware into a cyclical end market such as semiconductors might seem like an odd choice for a franchise portfolio. However, ASML occupies the enviable position of owning a near monopoly in photolithography. The company designs and manufactures the lithography machines that clients use to create the microchips used in many electronic devices, such as smartphones and laptops. As such, ASML’s ongoing innovation cycles are one of the main drivers of the semiconductor industry’s never-ending pursuit of Moore’s Law, which states that the number of transistors on a microchip doubles every two years. Lithography equipment allows semiconductor manufacturers to squeeze more and more transistors onto chips, thereby increasing computing power at a truly exponential rate. This unique position affords ASML supreme pricing power, so long as it can innovate in bringing new, more advanced lithography systems to market.

To this point, ASML is in the early stages of rolling out its latest product iteration, Extreme Ultraviolet (EUV) lithography. This represents a huge technological leap forward relative to legacy Deep Ultraviolet (DUV) lithography. As a result, ASML achieves a >3x uplift in pricing, with each tool costing customers more than €100 million apiece. Demand is high as semiconductor manufacturers attempt to produce ever faster chips; this is well reflected in ASML’s order book, which boasts enough EUV tools to keep the company busy for well over a year, in the very unlikely event of no new orders. As EUV grows in ASML’s annual shipments of tools, revenues increase, gross margins expand as cost savings are captured and the end result should be a significant expansion of profits, from already healthy levels.


33

Figure 3: ASML’s new EUV lithography should further boost its profitability

Source: Company report, Ninety One estimates as of July 2020.

EUV

DUV

2012 2013 2014 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e

Two unrelated tailwindsIn the absence of COVID-19, ASML’s growth prospects were already bright. However, the pandemic has brought about two tangential phenomena. Firstly, concerned by the prospect of a more prolonged lockdown, customers asked ASML to ship systems earlier than usual, before all necessarily quality control checks were conducted. Aside from an artificial shifting of revenues between quarters – which has no impact on the long-term value of the business – it again evidences ASML’s importance to its customer ecosystems. Secondly, and more importantly, COVID-19 has caused an accelerated drive toward remote working and everything ‘cloud’, a trend which has also benefited a number of other portfolio holdings, notably Microsoft. This has in turn provided a boost to the logic and memory markets, the latter of which was facing something of an oversupply issue as we entered 2020. Companies typically struggle to reach their full potential when their customers are under pressure, so this COVID-tailwind has provided an incremental boost to the nearer term investment case for ASML.

A deep understanding remains crucial We believe that equity markets remain in a slightly precarious position. While investors await the ugly impact of lockdown on companies’ second quarter results, many broader market indices have recouped most of the losses endured during February and March. At the same time, we expect the market to continue to value those business which are able to offer sustainable growth and above average returns on capital. Now more than ever it is important to have a deep understanding of the opportunities and threats posed both directly by the pandemic and from the continued evolution of an increasingly competitive corporate environment. We continue to focus our research process and portfolio holdings on those companies which we believe have the potential to emerge from these difficult times quickly, in a position of strength and on the front foot.

Now more than ever it is important to have a deep understanding of the opportunities and threats posed both directly by the pandemic and from the continued evolution of an increasingly competitive corporate environment.


34

Q&A with Rehana Khan

InPerspective caught up with Rehana Khan, Portfolio Manager in our 4Factor team, on her career journey, navigating markets during a pandemic, her views on diversity and her greatest inspiration.

Investment team

Meet the

34

35

You began your career as an article clerk. How did your journey evolve into portfolio management and what have been career highlights thus far?The aspect of my articles that I enjoyed most was the interaction with the various business management teams that we audited and understanding how these businesses made money, as opposed to the tick box and checking duties of an auditor. Auditing did not provide the challenges I needed but it did help me develop an understanding of various business models and provided the opportunity to interact with top company management very early on in my career. This turned out to be a great foundation for my investment career.

After my articles, I became a manager at Deloitte in their Special Services Division. One of my assignments was filling in for a financial manager at a small boutique asset manager. This was my first introduction to the asset management industry. I spent a couple of months there and during this time one of the portfolio managers inspired me with his love and passion for asset management. It piqued my interest and I decided to do a bit more research. This is where the curiosity for this industry started for me. I joined the industry in 2008.

Meet the investment team

1

In the early years, I remember reading extensively in the evenings and over the weekends. Books, articles, newspapers, broker research papers and more – I was determined to build up my knowledge about investments. (I’m still like this, nothing has changed, actually!)

I was fortunate to have two great mentors early on in my career. They recognised the potential in me and allowed me the opportunity and space to develop my own investment style.

Throughout my life, I’ve learnt to love a challenge and I have a fighting spirit. When it’s something I enjoy, it becomes an extension of my day-to-day life. That’s what my job in investments has become for me. I enjoy the challenge of the markets and the way it keeps me humble. It suits my personality as I have always been willing to take risks, accept and adapt to change and admit mistakes.

There is never a dull moment in the markets!

I enjoy the challenge of the markets and the way it keeps me humble.

36

You joined Ninety One this year and currently have portfolio management responsibilities for SA Equity and Balanced strategies as well as the wider 4Factor research platform. What do you enjoy about your role? At Ninety One, I have been given the opportunity to broaden the scope of my portfolio management responsibilities into global equities. I am thoroughly enjoying the challenge of global markets as well as the truly global nature of the business. It’s been a privilege to leverage off the global teams’ research platform and capabilities and assist in fulfilling the completion method of investing in the South African global multi-asset portfolios. Ninety One offers something unique in the South African asset management landscape.

I am energised and enjoy the interaction and new relationships formed with the South African 4Factor team and the broader debates and discussions that take place with members of the Quality and Value teams.

Ninety One is definitely living up to what Hannes van den Berg (co-Head of SA Equity and Multi-Asset) described in our initial discussions: “It’s a place where adults come out to play.”

Financial markets are very volatile and COVID-19 has created a lot of uncertainty. What are your views on the markets?Where do I start? I could write a novel! But I will try to be brief.

Markets are a funny thing. While over the longer term, the earnings ability of the company drives a big chunk of the return, over the shorter term, factors like liquidity and sentiment/positioning also have a role to play – and even more so at inflection points. Thus far in 2020 (merely 6 months into the year), we have gone from one of the quickest market corrections in history to one of the quickest market recoveries in history.

Trying to beat the market is a challenging endeavour. COVID-19 has of course made it even more so with the mountain of uncertainty it brought forth. Commentators and writers have drawn parallels with previous market sell-offs, such as the Great Depression, the dot-com bubble and the GFC. While it shares some characteristics with many of them, recent events are unique.

2

3


36

Thus far in 2020 we have gone from one of the quickest market corrections in history to one of the quickest market recoveries in history.

37

The lockdown of countries globally has led to demand and supply shocks, with many companies experiencing zero revenue over the period. Central banks and governments globally have acted faster and the sheer scale of the stimulus provided surpasses any previous crisis. The aim is to ensure that there is enough liquidity in markets to keep functioning while providing businesses and consumers with some financial help in order to survive the crisis. The big unknown is how much permanent scarring is left behind post the crisis.

The next decade is going to be interesting for markets as we grapple with the aftermath of all the policy stimulus (are we headed into a fiscal stimulus world? Does this lead to rising inflation, which has been absent for so long? Does the value investment style have a chance of a comeback?), debt overhang (do over-indebted governments have to deflate their debt? Or will there be debt forgiveness?) and not to mention demographic shifts (ageing populations in the developed world leading to an interesting change in dynamics).

I am really looking forward to navigating through all these potential scenarios with the teams at Ninety One and ensuring that we invest our clients’ money to our best ability to protect and grow it over time.


Portfolio management remains a very male-dominated world. What has been your experience?There are still very few female portfolio managers in South Africa, as the pace of women climbing the ranks in the industry has been very slow. Female representation on investment teams tends to be greater in the analyst-type roles.

The lack of females occupying more senior roles is not limited to investment management but speaks to traditional gender stereotypes perhaps still being prevalent. This is a complex issue, but with society evolving we are seeing a gradual change. The challenge is to continue breaking down these barriers of perception, and to continue demonstrating through one’s output that you are more than capable of competing on a level playing field.

In my experience, it has perhaps meant having to work harder upfront to be recognised. I have needed to make sacrifices along the way at different points in time. I’ve enjoyed the challenge and where I’ve needed to juggle a few balls at a time, I’ve thankfully had a very supportive husband and parents, who have helped tremendously. I consider myself fortunate to have had mentors early in my career who acknowledged my effort, encouraged me and challenged my thinking. This was the breakthrough that allowed me to push through and achieve my goal of becoming a portfolio manager.

4

38

What does diversity mean to you?Diversity is what makes us unique. This could either be on the surface, such as age, race, gender or at a deeper level such as one’s political or religious beliefs.

I think these differences add layers of complexity but more positively, great opportunity. As an individual, embracing your own uniqueness and using it as a strength and not a weakness, will allow you to elevate yourself and those around you. I believe we should all take responsibility and help each other leverage off our strengths in both our personal and professional lives.

Embracing diversity can give an investment team a powerful and dynamic edge. Think about it: various views and thought processes are brought to the table, debated and discussed in a robust manner, ultimately enabling the team to see the full picture.

5


As an individual, embracing your own uniqueness and using it as a strength and not a weakness, will allow you to elevate yourself and those around you.

39

6

7

Who has been an inspiration to you?My parents are my greatest inspiration. They come from humble beginnings. There is a narrative in society that if you are born into poverty it is very hard to break that cycle and rise above it. My parents proved that wrong. Despite the adversity they faced, they were determined and motivated to change and improve their circumstances. They taught me and my siblings the importance of education, dedication, perseverance, and honesty and how with these traits anything is possible.

My siblings and I are the living image of that realisation.


What would you tell your teenage self?Hard work and sacrifice do pay off in the long term. Don’t let your social circumstances or history determine who you are and what you are able to achieve.

And most importantly, you are not always going to be perfect and get everything right. It’s okay to fail. It sharpens your survival instincts and forces you to learn. It’s all about how you come back from those setbacks and what you learn from them that matters. So, do not be afraid to take advantage of all the opportunities presented to you, or to pursue opportunities that interest and challenge you. You can only make an informed decision once you have given it a proper shot.

In the words of Niki Lauda when he received an award at the 2016 Laureus Awards and dedicated it to all the losers, “Winning is one thing, but out of losing, I always learnt more for the future, so I got a lot stronger from losing.”

What are you passionate about?Apart from the markets, I am passionate and energised by my family, close friends, travelling and making a difference in the lives of people less fortunate that I am.

I enjoy challenging their thought processes, which allows them to break through their conventional boundaries. I learn a lot from this too and it gives me great pleasure watching those around me develop and ultimately achieve their goals. I see it as a reflection of my own journey with my mentors and an opportunity to inspire others.

Spending time with my family energises me (well, most of the time!). I have been blessed with three amazing kids and have a very supportive husband. For me there is nothing more rewarding than our family holidays where we spend quality time exploring new places while experiencing different cultures.

8

I am enthusiastic about being a mentor to those keen to learn.

40

The Ninety One SA Recovery Fund – mobilising the long-term savings pool to help restore SA’s economic health

The fast view ɽ The impact of the lockdown on the SA economy is

severe; if productive capacity is not preserved, it could take a decade for the economy to return to its 2019 size.

ɽ The long-term savings industry has a key role to play in helping to restore the SA economy.

ɽ There are good companies across all sectors of South Africa’s economy that will be facing funding needs that cannot be provided by the banks or the state.

ɽ Ninety One has launched the Ninety One SA Recovery Fund in response, an impact initiative to support SA’s productive capacity, while seeking an attractive return for our investors.

ɽ We are targeting a fund size of R10 billion over time, with funding raised via two closes.

ɽ As this is an impact initiative, we will seek to measure the social return.

Natalie PhillipsDeputy Managing Director, Africa Client Group

41

In recent weeks, South Africans have seen growing evidence of the devastating impact of the protracted lockdown on our economy. There is now a body of evidence suggesting that the contraction in Gross Domestic Product could be as severe as 10%, and the country looks set to experience the worst recession in living memory. If productive capacity is not preserved, South Africa could experience an L-shaped recession, whereby it takes a decade for the economy to return to its 2019 size.

The financial response needs to be significant and involve all pools of capital, given that the anticipated needs equate to 15%-20% of GDP. The SA Government has limited capacity to provide fiscal stimulus – in addition, the bulk of recent packages tabled involves the redirection of expenditure and provision of guarantees as opposed to an outright injection of new capital. Concerningly, the equity and debt issuances locally are running well behind other markets last year.

Ninety One SA Recovery Fund

How can the long-term savings pool help?There are good companies across all sectors of South Africa’s economy that will be facing funding needs that cannot be provided by the banks or the state. For some, the economic contraction will limit their access to capital to grow and expand existing capacity; for others, it will challenge their solvency as well as their resolve to remain operational.

We believe the SA long-term savings pool has a key role to play in addressing this funding gap. It compelled us to respond with the launch of the Ninety One SA Recovery Fund, an impact investment initiative. With this fund, which we have launched in association with Ethos Private Equity, we hope to support South Africa’s productive capacity and economic recovery from the effects of the COVID-19 pandemic, while seeking an attractive return for our investors.

The current environment has prompted a different level of conversation with our clients, without whom this initiative has no chance of success. With this fund, we are encouraging large institutional allocators to consider an allocation to unlisted investments in a locked-up structure – a clear departure from their standard asset allocation decisions. We are hopeful that these are just the first steps for the savings industry in considering other asset classes that can have a more direct and positive impact on the future of South Africa.

There are good companies across all sectors of South Africa’s economy that will be facing funding needs that cannot be provided by the banks or the state.

42

Given the urgency of the economic situation, we are targeting a first close this month and are encouraged by the strong support we have thus far received from our South African institutional client base. We are targeting a fund size of R10 billion over time, with funding raised via two closes.

As Hendrik du Toit, our CEO and founder, has said, “The lockdown, while necessary to protect the nation’s health, has been akin to putting the economy into an induced coma. South Africa faces a once-in-a-generation economic challenge. With this fund, we would like to support quality businesses and protect the nation’s productive capacity, which will in turn preserve thousands of jobs and support the South African tax base.”


A clear set of investment outcomes – with a focus on economic impactThe priorities for the Ninety One SA Recovery Fund are to protect SA’s productive capacity during the next 24 months, which is key to the long-term economic recovery, preserve jobs and protect permanent loss of equity value. At the same time, it is imperative that we achieve an appropriate return for our investors.

Importantly, as this is an impact initiative, we will seek to measure the social return, with metrics such as employment retention, measures in place to reduce retrenchment and conversion of temporary employees to permanent staff.

The fund will consist of a concentrated portfolio with an appropriate mix of senior and subordinated debt, preferred equity, listed equity and private equity with a deployment time horizon of 18 to 36 months. It will combine the credit and publicly-listed equity skills within Ninety One with Ethos’ private equity expertise.

While we will initially seek support from our institutional investors, we are hopeful that retail investors - subject to the necessary regulatory enablement – will be able to access the Ninety One SA Recovery Fund. In other parts of the world, during the past five years, closed-end mutual funds have been created to facilitate retail investment into long-term assets.

As this is an impact initiative, we will seek to measure the social return.

43

Beyond the SA Recovery FundWe are committed to building a better tomorrow for our clients and communities, so in addition to launching the SA Recovery Fund, Ninety One has also made a R50 million donation to the South African Solidarity Fund and its counterparts in Botswana and Namibia. We also recognise that our staff members are most aware of where the need is in their communities and are matching their charitable efforts. To date Ninety One, along with our people, have jointly contributed almost R10 million to charities chosen by staff members.


We are committed to building a better tomorrow for our clients and communities.

44

In conversation with Hendrik du Toit, Founder and CEO of Ninety One

Ninety One recently hosted a webinar in partnership with the CFA Society South Africa. Nerina Visser, President of the CFA Society South Africa, spoke to Hendrik about the role of the investment industry in addressing some of our economic challenges, whether impact investing can mitigate the negative economic impact of COVID-19 and what skills are needed to thrive in the investment industry. We’ve captured some of the highlights of their conversation below, but you can view the full interview here.

In conversation

In conversation

https://ninetyone.com/en/south-africa/how-we-think/insights/coronavirus/webinar-outlook-for-the-south-african-investment-industry

45

Nerina Visser: Let’s start with this idea of creating an impact. As allocators of capital, we certainly have the ability to create an impact and we seem to do a very good job of exclusion, of staying away from companies or investments that are deemed to be inappropriate from an environmental, social and governance perspective, but I think we have got so much more power if we approach this from a proactive perspective.

Hendrik du Toit: As an industry, we need to ask ourselves what we do for the society around us, because it is, after all, their money, rather than how much alpha we are generating against a benchmark. That is part of our job too, but ultimately, we have neglected asking that question over the last 30 to 40 years.

Show me a country that allocates capital appropriately and you will see a dynamic economy. Show me a country with no capital market and it will be a very poor country.

In conversation with Hendrik du Toit

However, we mustn’t fall into the trap of thinking impact is everything. We are not development finance institutions, but custodians of savings. Look at the example of Naspers, which close on two decades ago decided to refocus on the internet and bought 49% of a small Chinese start-up called Tencent. They have probably generated $100 billion-odd of wealth and most of it belongs to ordinary South Africans through their retirement funds.

So, choosing a good investment is our first job. Our second job is to ensure that that capital works in a visible way for society so that society can identify with it. I don’t think we have addressed that issue enough and that is the reason, for example, why we launched the Ninety One SA Recovery Fund, amongst other initiatives.

46


We must show the government we can come up with better ideas than them.

NV: There is a persistent and growing call for prescribed assets. I see it as government effectively saying to us if you don’t allocate the capital in a way that will create this change in society we need, we will prescribe it for you. Would you say that the Ninety One SA Recovery Fund, along with other similar vehicles, is the industry’s proactive response?

HdT: You are absolutely correct, but – even more importantly – we wanted to stimulate a movement. We wanted to say it is okay to think really long-term. It means preserving productive capacity and the entrepreneurial spirit. We were looking at the mid-sized businesses that would not be able to issue 20- or 30-year bonds in the market at very low interest rates, that were cautious to issue equity too early because they worried about their share prices and who may therefore start cutting productive capacity too quickly and then miss the rebound.

I don’t believe in the V-shaped fairy tale, but I do believe the economy will rebound in the not too distant future. South Africa needs to capture the rebound in order to preserve employment, in order to preserve societies which can then look after their children and generate the skills to be competitive 20 or 30 years down the line, otherwise we will go backwards.

I think the developed world is looking out for itself and the emerging world is going to bear the brunt, not only of climate change but also of the COVID-19 response, and we therefore have no choice but to look after ourselves. South Africa is fortunate to have a highly professional, well-mobilised savings pool. I am not asking investors to take undue risks, but if you have exposure to corporate South Africa and you make an investment which makes sense for corporate South Africa, your value outside of this impact vehicle will be preserved. That is the logic we followed. We must also show the government we can come up with better ideas than them.

47


NV: There is no doubt that South Africans have benefited from the value that has been created in terms of their investments, but very little of that value has directly found its way into the South African economy. On top of that, the pool of investable assets – specifically listed companies – has shrunk dramatically.

HdT: I am not going to hold our industry to account here, but I will discuss what went wrong in South African society over the last two decades. And I’m not talking about corruption. We all know that corruption has been and remains a scourge of society and we need to prosecute fast.

I want to talk about the change in business culture around the world, particularly in our country. We have moved from a community of entrepreneurs to one of paper-shufflers. I think the investment industry should take some responsibility, because it is a consequence of over-emphasising box-ticking and governance for the sake of governance, rather than being focused on asking the real questions: is that business run properly by appropriate people?

48

We need to encourage entrepreneurial energy in this country, and there is no shortage of great examples. Just compare the difference in fortunes between a company like Naspers, which was an Afrikaans media company with nowhere to go when apartheid ended but transitioned under Koos Bekker to a tech giant, to the New York Times today. It was a brave, bold move on the part of Bekker. Similarly, Brian Joffe, who built up Bidvest; Michiel le Roux and Capitec; Adrian Gore and Discovery; Stephen Koseff and the Kantors with Investec. Look at what they created. Brave and bold thinking by entrepreneurial people who had a real vision.

We need to think about how we encourage that in the context of the savings pool of South Africa, which can finance it. That doesn’t mean venture capital investing. It means respecting a culture of entrepreneurial energy and drive and sometimes a bit of otherness because these people are not your run-of-the-mill corporate bureaucrats. They are different. You have to understand that and, as investment analysts, balance that with the need for certainty, the need for clear numbers.


NV: One of the cornerstones of a good investment strategy is diversification and yet, when it comes to the way that we manage our investment process and our investment teams, we fall far short of this. What should we do to ensure the diversity and inclusion really gets to its valid place?

HdT: I think diversity is important, but it is really about inclusion and inclusivity. You need to have an inclusive culture in your business and allow for ‘otherness’ – a place where people can be themselves. Can they tell their stories? It is often not the person with the CFA and all the degrees from great universities who becomes the great investor, but the ‘other’ person who has the variant perspective, who sees the world slightly differently, sees the opportunities, sees the change and who is then supported by highly professional people who can provide the framework.

Also, it is clear that we have to get to a black majority in the boardroom in SA. It is good that transformation has been mandated in the way it has because otherwise we would still have had a lily-white and completely unrepresentative industry today. The story of the Rugby World Cup team and their victory sums it up – it was not just Siya Kolisi as the captain but a genuinely diverse, inclusive team which brought a certain motivation they wouldn’t have had otherwise.

perspective

variant

49

NV: I want to end by focusing on the individual investment professional. What skills do they require to be future fit for the new world we find ourselves in?

HdT: As an investment professional, the one thing that always wins in the end is curiosity. That curiosity must be combined with humility, because if you aren’t humble, the markets will humiliate you. You are going to be wrong so many times in your career and you have to be able to get up, recover and dream about being right, at least in the active business, where you have to take brave positions and brave bets.

But curiosity is paramount, and it’s not just curiosity about investments but a proper understanding and appreciation of history. Even if it doesn’t repeat itself, it always rhymes.

Finally, empathy for your fellow human beings is important. When I entered the industry, it was one in which greed trumped everything else, and nobody thought about the person sitting at the other end of the portfolio. Social consciousness without an excessive political correctness is important.

NV: Hendrik, some final words from you before I let you go.

HdT: We must all remember what an incredible privilege it is to be in this industry. We are not making widgets; we are able to look outwards, look at the world. We are learning the whole time and we have this huge responsibility to deal with the hard-earned savings of ordinary working men and women. We have an obligation, but also a fantastic opportunity, and in this world, we are more needed than in a simplified, flat world.

Social consciousness without an excessive political correctness is important.


50

Performance

Source: Ninety One, as at 30.06.20. All returns are in ZAR and periods greater than one year are annualised. WM Reuters 16h00 London exchange

rates have been used to convert international strategies from base currency to ZAR. The value of your investment may go down as well as up and

past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying

international investments to go up or down. Performance is shown gross of fees with gross income reinvested. A schedule of fees and charges and

maximum commissions is available on request from the company/scheme.†Spliced performance – returns quoted are Capped SWIX from 01.11.17 onwards; returns quoted prior to this date are SWIX.

*The AF Global LMW MedianTM has not been published, the return is therefore the best estimate for the most recent month’s return.

Investment Strategy 1-year 3-year (p.a.) 5-year (p.a.) 10-year (p.a.)

Emerging Market Fixed Income

Cash Ninety One Money Market 7.5% 7.9% 7.9% 7.1%

STeFI 3M 6.4% 6.8% 6.8% 6.2%

Bond Ninety One Flexible Bond 2.1% 8.4% 8.1% 8.9%

Ninety One Triple Alpha Bond 4.5% 9.4% 8.7% 9.2%

ALBI 2.8% 8.1% 7.5% 8.3%

Credit Ninety One Credit Opportunities 8.7% 10.9% 11.2% 10.8%

Ninety One Credit Income 8.3% 9.4% 9.4% 8.8%

STeFI 3M 6.4% 6.8% 6.8% 6.2%

Ninety One Corporate Bond 4.7% 10.1% 9.7% 10.1%

ALBI 2.8% 8.1% 7.5% 8.3%

4Factor

SA Equity Ninety One General Equity -5.1% 2.9% 2.7% 11.4%

Ninety One Active Quants 0.1% 5.4% 3.4% 11.4%

Capped SWIX† -10.8% 0.0% 0.9% 10.0%

Ninety One Property Equity -39.2% -18.4% -8.8% 5.5%

SA Listed Property Index -40.2% -19.9% -10.1% 4.1%

SA Balanced Ninety One Balanced 2.5% 6.2% 6.0% 11.7%

AF Global LMW MedianTM 2.2% 5.0% 5.2% 10.7%

SA Managed Ninety One Managed 11.8% 10.2% 9.9% 13.5%

(ASISA) South African MA High Equity 0.5% 3.6% 3.5% 8.1%

SA Value Ninety One Value -2.3% 1.1% 6.1% 5.9%

ALSI -3.3% 5.1% 4.2% 10.9%

Quality

South Africa Ninety One Opportunity 12.0% 9.1% 9.1% 12.1%

CPI Lagged+6% 8.1% 9.6% 10.5% 10.9%

Ninety One Cautious Managed 11.2% 9.6% 9.2% 10.2%

CPI Lagged+4% 6.1% 7.6% 8.5% 8.9%

International

4Factor EquityTM Ninety One Global Equity 26.3% 16.5% 12.7% 18.9%

Ninety One Global Dynamic Equity 20.5% 15.1% 12.3% 19.2%

Ninety One Global Strategic Equity 21.1% 15.7% 13.2% 20.3%

MSCI AC World 25.8% 16.6% 14.4% 18.4%

Quality Ninety One Global Franchise 37.0% 22.3% 20.0% 22.4%

MSCI AC World 25.8% 16.6% 14.4% 18.6%

51

Change makes us determined

Previously Investec Asset ManagementNinety One SA (Pty) Ltd is an authorised financial services provider.

Investing for a world of change

Important informationThe information contained in this publication is intended primarily for professional investors and should not be relied upon by

private investors or any other persons to make financial decisions. All of the views expressed about the markets, securities or

companies in this document accurately reflect the personal views of the individual fund manager (or team) named. While opinions

stated are honestly held, they are not guarantees and should not be relied on. Ninety One SA (Pty) Ltd in the normal course of its

activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of

its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision.

We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information

subsequently becomes inaccurate.

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular

individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should

act upon such information or opinion without appropriate professional advice after a thorough examination of a particular

situation. We endeavour to provide accurate and timely information, but we make no representation or warranty, express or

implied, with respect to the correctness, accuracy or completeness of the information and opinions. The investments referred to in

this document are generally medium to long term investments. Their value may go down as well as up and past performance is not

necessarily a guide to future performance. Fluctuations or movements in exchange rates may cause the value of the underlying

international investments to go up or down. Additional adviser fees may be paid and if so, are subject to the relevant disclosure

requirements. Forward pricing is used in respect of the underlying investments. A prospectus is available in respect of the

underlying investment fund on request from Ninety One Assurance Limited. All pooled products are administered by Ninety One

SA (Pty) Ltd (an authorised financial services provider) and underwritten by Ninety One Assurance Limited (a registered long-term

insurer). Any additional information on the Fund including application forms, fees and reports can be obtained, free of charge, at

www.ninetyone.com.

Specific portfolio names References to particular investments or strategies are for illustrative purposes only and should not be seen as a buy, sell or hold

recommendation. Unless stated otherwise, the specific companies listed or discussed are included as representative of the

Strategy or Strategies. Such references are not a complete list and other positions, strategies, or vehicles may experience results

which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market

conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction.

More information is available upon request.

Indices Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs

associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to

generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability

whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for

other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI.

None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind

of investment decision and may not be relied on as such.

FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2020. Please note a disclaimer applies to FTSE data and can

be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf

Ninety One SA (Pty) Ltd is an authorised financial services provider.

SA

_04

39

_06

20

Contact information

Natalie Phillips Deputy Managing Director36 Hans Strijdom Avenue

Foreshore, Cape Town 8001

T +27 (0)21 416 2000

www.ninetyone.com

inperspective · getting to grips with new ways of interacting professionally and socially. this is...

Documents