Karl Leinberger is Chief Investment Officer and has 24 years of investment industry experience.

IN A TRYING market where returns have been negatively impacted by COVID-19, the portfolio outperformed the FTSE/JSE Capped Shareholder Weighted All Share Index by 5.9% on a year-to-date basis, and by 7.8% over the one-year period. Importantly, the portfolio has delivered alpha over both the medium and the longer term.

The first quarter of 2020 provided investors with very few places to hide. Equity markets around the world experienced record declines during the quarter. Since January, the Covid-19 outbreak has overtaken our lives and transformed our world, presenting a medical, economic and human challenge that is unprecedented in our lifetime.

The outbreak of this pandemic has impacted financial markets with a swiftness and ferocity normally only seen in a classic financial crisis. In a matter of weeks, global equity benchmarks fell from record highs into bear markets.

The level of volatility experienced during this market sell-off has also been unprecedented; from 19 February to 23 March, the US stock market saw the quickest meltdown in history, with a cumula­tive loss of 33.9% on the S&P 500. The following three trading days saw gains of 17.5%, marking the best three-day stretch since the 1930s. While we did not escape the brutal realities of a declining South African equity market, our bias for rand hedge stocks and low exposure to South African domestic stocks contributed meaningfully to your fund’s outperformance during the quarter.


Overall, the JSE experienced a very tough quarter, with the Capped SWIX declining by 26.6%, dragging five-year rolling returns for the overall market into negative territory. No asset class was left unscathed, but the economically sensitive sectors such as property (-48.1%) and financials (-39.5%) bore the brunt of the pain as they sold off aggres­sively. Industrials (-8.4%) and resources (25.3%) performed relatively better.

In an environment with such extreme price moves, individual stock selection proved critical. Our two highest conviction ideas in the portfolio – Naspers/ Prosus and British American Tobacco – both came through strongly during the quarter.

Naspers (+11%) and Prosus (+17%) benefited from their exposure to Tencent whose business proved incredibly resilient during the economic disruption caused by Covid-19. Demand for digital services such as communication tools, social networking, mobile games, online video, and food and grocery delivery exploded during the lockdown period.

Outside of China, we are very encouraged by Tencent’s growing international gaming business which now makes up 23% of its total gaming revenues. Tencent has stakes in four of the top game developers in the world (TiMi Studios, Quantum, Riot Games and Supercell) and currently has five of the top 10 daily active user games in the world sitting in their portfolio. We believe Tencent is very well positioned to build a dominant global gaming franchise. However, the most exciting area within Tencent at present is undoubtedly digital payments and financial services. We think this business will contribute significantly to group profits over the next three to five years.

Similarly, Tencent is rolling out other financial services products such as banking, wealth manage­ment and insurance. Given Tencent’s distribution capabilities, together with their treasure trove of user data, we think they are well positioned to build substantial and very profitable businesses.

Outside of Tencent, Prosus is primarily investing in three key areas – online classifieds, food delivery and payments/fintech – all of which are growing very rapidly. Prosus is currently trading at a c. 35% discount to its underlying intrinsic net asset value, while Naspers in turn is trading at a c. 5% discount to the market value of its Prosus stake.

Encouragingly, Naspers announced a share buyback during the quarter after it raised cash from the sale of a small part of its Prosus stake. We believe steps like this can create meaningful value for Naspers shareholders and help narrow the discount to intrinsic value over time. We continue to believe both Naspers and Prosus are being grossly mispriced by the market at current levels.

British American Tobacco’s share price (+2%) held up very well during the quarter. As expected, consumer demand for cigarettes has remained remarkably defensive during this unanticipated economic shock. British American Tobacco’s steady growth algorithm of high single-digit revenue growth, driven by strong pricing power, continued cost savings and deleveraging remains intact and is once again being appreciated by investors. It is still trading on only 7.5 times one-year forward earnings and an 8% dividend yield. We still believe this to be very attractive for a stock of this quality and it remains the second biggest position in the portfolio.

Stocks exposed to the domestic economy came under significant pressure during the quarter, as the announcement of South Africa’s lockdown was another body blow for businesses already struggling in a ‘no-growth’ economic environ­ment. Our preference for holding the high-quality defensive food retailers (Shoprite, Spar, Pick n Pay), together with Dischem, versus the more economi­cally sensitive clothing retailers was well rewarded. The food and drug retail sector was down only 13% for the quarter while the general retailer sector was down a whopping 44%.

Our underweight position in the banks also contributed to the outperformance of the benchmark during the quarter. Although there is no doubt that their earnings will come under pressure as they struggle to grow advances and their net interest margins will contract on the back of lower interest rates, their real pain will come in the form of higher credit losses as consumers and businesses buckle under the strain of being leveraged in a very weak economy. However, we have full confidence in the stability of our banking system, and given their conservative past lending practices together with their healthy capital adequacy levels, we believe the banks are well placed to handle the economic shock we are currently experiencing. Our preferred bank holding is FirstRand which trades on nine times our assessment of normal earnings.


One of the big buys for the portfolio during the quarter was Anheuser-Busch InBev. Its share price collapsed on the back of poor results, which were compounded by the impact of Covid-19 (reduced beer consumption and weaker emerging market currencies), coupled with concerns around its high debt levels, which we think are easily manage­able. We bought our position at a price of less than 10 times our assessment of normal earnings. This is an incredible price for one of the world’s best businesses which is engaged in a stable and long-lived industry that has fantastic economics.

Other buying for the quarter was focused on adding to our existing high-conviction ideas such as Quilter, Anglo American and Shoprite on share price weakness. As funding, we sold down our Pick n Pay position and exited our Richemont position during the quarter.

Notwithstanding the uncertainties that abound, our objective remains to build diversified port­folios. We will remain focused on the long term. We will seek to take advantage of this extreme market volatility to invest in attractive opportu­nities that the market may present to us, and in so doing, generate inflation-beating returns for our investors over the long term. We are satisfied with the current portfolio positioning and, given compelling valuations, we are optimistic about future return prospects.

Karl Leinberger is Chief Investment Officer and has 24 years of investment industry experience.