Neville Chester is a senior portfolio manager with 27 years of investment experience.

Nicholas Stein is an analyst and portfolio manager with 15 years of investment industry experience.


The Fund returned -0.9% for the quarter and 3.2% for the last 12 months. The Fund’s long-term performance remains pleasing against both the peer group and its benchmark


For the quarter, our overweight position in Momentum was the largest contributor to performance, followed by positions in the diversified miners. The pullback in Naspers and Sasol detracted over the period.

The quarter (Q3-22) was notable for the increased commitment from central banks globally to a longer period of high interest rates as well as a big shift in fiscal policy in the UK which wreaked havoc across all British asset classes. The US dollar was the outstanding asset globally in Q3-22, with risk assets and fixed income under pressure across the board.

The US dollar has benefitted from a global flight to safety in 2022 and has been one of the best performing major assets with a 17.2% appreciation year to date (YTD) in the Dollar Index. With the rate hiking cycle in full swing, an investor in 10-year US government bonds can now earn 3.7% which compares to yields ranging from 0.5% – 3.2% over the last decade. South African investors will be acutely aware of the dollar’s strength this year with the rand having lost 13.5% YTD to end September at R18.09/USD.

During the quarter we added Barloworld and Mondi to the portfolio, two stocks that have sold off due to them having operating units with Russian exposure. Mondi had declined 29% in the first nine months of the year, with Barloworld registering a 40% decline. In both cases the sell-off was more than the value of their Russian assets.

Mondi is a business that we have owned in the past and know well. It is a low-cost and high-quality producer of a variety of packaging and paper products sold in European and South African markets. 80% of group capacity is in the bottom half of the cost curve and their relative position versus their European peers has improved this year due to Mondi’s higher levels of pulp integration which drives meaningfully lower reliance on gas in their manufacturing process. Mondi sold off aggressively in the wake of the Russian invasion of Ukraine due to their Russian business making up 20% of group EBITDA. Given the 29% decline seen YTD, we believe the market has completely written off the Russian business despite a recent agreement reached to sell the asset to a non-sanctioned Russian businessman for Rub95bn (c.Eur1.85bn at spot rates). In addition, Mondi will extract Rub16bn (c.Eur250m) of cash in dividends ahead of the sale. The transaction still needs to be signed off by the Russian sub-commission of foreign investments while    the dividend needs Russian Finance ministry approval. We have seen this commission approve deals this year, but they have applied seemingly arbitrary haircuts to transaction values, so there is some risk to the amounts eventually realised. Even if we were to value the Russian business at zero then Mondi still offers an attractive 51% upside to fair value, with up to 20% of the market cap potentially being realised on top of this if the deal is approved at face value.

Barloworld has taken a different approach to Mondi with their intention to hold onto their Russian business instead of selling it. Before the invasion, Barloworld’s Russian business made up 32% of its fair value, which contrasts heavily with the 40% YTD decline in its share price. The majority of the business is performing very well as evidenced by their recent 11-month trading update coming in ahead of expectations in the key divisions. This is in stark contrast to how the market is taking a view on the business's prospects. Barloworld has a large yellow equipment business in South Africa where new and aftermarket sales stand to grow strongly in line with their record order book. Importantly, management are on the front foot and returning capital to shareholders through dividends and buybacks. Valuing Russia at zero, we see 25% upside for Barloworld with up to 85% if the Russian business can return to its former glory: an attractive payoff profile.

We remain overweight resource shares and added meaningfully to our Anglo American position in the quarter. We are optimistic on the outlook for commodities over the medium to long term despite the building macro risks. China, the world's largest consumer of commodities, has been in decline for much of 2022, with commodity intensive sectors like real estate and car production being particularly badly hit. Despite this weakness, we have seen continued strong pricing across the commodity spectrum and would expect a return to growth in the Chinese economy to potentially offset any slowdown in consumption that appears elsewhere. Commodity inventories are low and there is good evidence historically that the lower inventories are going into a recession, the quicker the snap back in pricing on the other side.  With stable to growing commodity demand offset by tight supply we expect commodity prices to remain elevated and for the miners to continue returning excess cash to shareholders, as they have been doing over the last few years.

Momentum rose 17.74% in the quarter on the back of strong results and a positive shift in capital allocation. Momentum was able to demonstrate the value of their loss-making Indian business through a capital infusion from the Abu Dhabi Investment Authority, which came in at a valuation above ours and the market's expectations. Alongside their strong results in September, the group announced a buyback programme that will boost the per share value of the business given the deep discount it continues to trade at. Momentum trades at a 50% discount to its embedded value and we continue to see a lot of upside in the share.


We believe that the Fund is well positioned to benefit from cheap South African equity markets, with the weighted average upside for the Fund at the same levels as the market crises of 2008/2009 and 2020.

Please note that the commentary is for the retail class of the Fund. View the Top 20 Fund


SA retail readers

Neville Chester is a senior portfolio manager with 27 years of investment experience.

Nicholas Stein is an analyst and portfolio manager with 15 years of investment industry experience.

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