South Africa - Personal
This commentary is for the retail class of the fund.
PERFORMANCE
The artificial intelligence (AI) investment rollout, the war in the Middle East and interest rates/fiscal concerns have been the primary driver of asset pricing in the third quarter of 2026 (Q3). The Fund returned -3.6% for the quarter and 1.4% for the year.
FUND POSITIONING
The gold market started the quarter not far off $4 100/oz, climbed to $4 600/oz, before ending the quarter back at c. $4 100/oz. Two competing forces appear to be at play. Market participants are increasingly concerned about government debt levels and a lack of action in dealing with these (either via spending cuts or tax hikes). This was the narrative at play driving gold to $4 600/oz, before the metal’s more traditional driver (interest rates) brought the price back down. A Fed hike and higher 10-year interest rates acted as a headwind. Gold is a non-yielding asset, and higher yields drive competition for gold. Gold market buying is more normalised, with the absence of frenzied retail ETF buying that saw gold hit c. $5 500/oz earlier this year. However, our view remains that gold equities remain expensive. Gold miner margins remain near all-time highs and materially higher than long-run sustainable levels. We have started to see pressure build via material cost increases in the first half of this year (10-20% year-on-year increases in US$ all-in sustaining costs). We have also seen governments beginning to look at ways they can harvest more of the margin (for example, the Ghanaian government didn’t renew the Tarkwa mining release for Gold Fields). While our gold underweight has hurt, our stock picking has been good, with AngloGold being our main gold holding. During the quarter, we shifted some of the AngloGold exposure into Harmony Gold and Gold Fields, which had lagged.
On the platinum group metals (PGMs) front, while the longer-term outlook for platinum, palladium and rhodium deteriorates on faster electric vehicle (EV) penetration, current balances are supportive. Minor metals (iridium and ruthenium) are growing in the mix and now make up 15% of a typical revenue basket. These metals are well-demanded and in deep deficits. This makes the overall PGM market (including the minor metals) more balanced and diversified in the longer term. Supply remains challenged. Cash flows are strong, and cash is being returned to shareholders, in contrast to previous cycles. After the recent sell-off in these metals, value has started to reappear. We bought Impala Platinum towards the end of Q3.
Glencore contributed strongly this quarter, on under-appreciated copper exposure and its marketing business benefiting from trade dislocations in the energy space as a result of the Middle Eastern conflict. We added Exxaro to the Fund this quarter. Its chief earner is its domestic coal business, where it supplies a number of Eskom power stations. It now trades on a price-to-earnings ratio of 6 and a 9% dividend yield.
We saw a welcome recovery in Bytes Technology as well; this position has been built up over 2026 after a disappointing trading update at the start of the year. Fortunately, our analysis, as well as active involvement with the board, has seen the business produce positive recent updates as well as share buybacks, showing that the long-term investment case remains intact.
Large active overweight positions that have detracted from our performance in the quarter included Naspers and Pepkor. This continues to confound us, as these are two of the highest quality businesses available to invest in in South Africa, and they are both now trading below 10 times next year’s earnings.
We believe Tencent will prove to be an AI winner as it leverages its unassailable reach and data lake. The discount at the Naspers/Prosus level has opened up again, and in both cases sits above 40%. This makes share buybacks at these levels more accretive to net asset value.
A combination of many market participants funding gold equities (and funding them via selling SA Inc. shares), as well as concerns around the SA consumer (in large part due to high oil and diesel prices induced by the Middle East conflict – which will reverse at some point), is creating an opportunity for us to buy SA-focused businesses on extremely compelling multiples. One such business is Pepkor. Its massive scale and continued price leadership provides a moat hard to compete against. The combination of Flash and Shop2Shop, and the upcoming launch of a banking product, provides great optionality to bring digital offerings to the unbanked and the cash economy (a sizeable prize). Pepkor now trades on a c. 9x next year’s earnings, which is a very attractive multiple for a business of its quality.
OUTLOOK
Looking forward, it is likely going to be a tumultuous final quarter as we deal with two-decade-high interest rates in developed markets, the outcome of the US mid-term elections, and the local government elections in South Africa. However, we are very optimistic about forward-looking returns as valuations are generally low, and conviction levels of the earnings power of the stocks we own is high. Fund upside sits at above-average levels.
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