Siboniso Nxumalo 00:00

Hi, my name is Siboniso Nxumalo. I'm the Chief Investment Officer of the Old Mutual Investment Group. This is our investment performance review for the first quarter of 2023. Last time I spoke to you, we were reviewing the year 2022. And at that time, I came to you, and I spoke about two themes that we had built our funds around. The one theme was a global wave down, which we were saying, in our investment research, that we're looking at a world where there's a high risk of a global slowdown and a US recession.

And so therefore, our funds cautiously positioned, given that we're anticipating that that is coming. The evidence we've seen so far: we saw a bank actually basically go bust in the US, that's saying that that is coming. And so therefore, we're still holding on to that. The other theme that we had spoken about was a rotation. Be careful about holding on to past winners in terms of this cycle, that this particular cycle is likely to favour more value-orientated, rather than growth-orientated companies. And so therefore, we've seen a shift in our companies.

Siboniso Nxumalo 01:04

So, this time, I'm going to talk about two other themes: a desynchronized world and South African cycle slow. So, let's start with a desynchronized world. What do we mean by that? Meaning that generally, the world moves in sync, except for now. At this moment, we're seeing a high risk of a US recession, we've got to invest within that context. And also, China is reopening. China reopened from its Covid restrictions last year, and that is boosting recovery and the economy in China, and yet the US is slowing down. And so therefore, how we are finding opportunities in that world is that we are underweight US exposed companies, and yet we're finding we're overweight the Chinese exposed companies. And so, we are invested quite a bit in our global funds in the ASEAN, so Thailand, Malaysia, those in equity, and then also in the JSE, we've invested in what's Chinese beneficiaries: Naspers, Richemont, and some of the resource’s companies.

Siboniso Nxumalo 02:03

The second one, second theme that we're going to talk about is the South African cycle slows. Now, we've been optimists about South Africa, but we're seeing a slowdown South African cycle. We're saying that inflation is peaking and will come down. But there is slower growth in South Africa. Slower growth, especially with loadshedding and all that's going on is going to lead to pressure on South African companies' profitability. And so therefore, the companies we're buying in South Africa, that we hold, actually tend to be the big stalwarts, who are very defensive in their nature, and are actually very profitable, and are strong companies that we think can win over the long term and exhibit resilience. But also, in our fixed income space, South African government bonds are yielding very attractive valuations. So, we have gone overweight in South African government bonds. And so, that is actually the frame of how we are positioning client's funds.

Siboniso Nxumalo 02:55

Now, let's look at what's happened over the quarter in terms of our investment performance. Now, remember what I've said. We've been cautious in terms of our performance. And us being cautious, now, when it comes to investing, being early is indistinguishable from being wrong. And so, at this particular moment, in fourth quarter of 2022, and now the first quarter of 2023, our caution did not work. And so therefore, our client's fund underperformed their benchmarks and ranked below average in their benchmarks and the peer group for the quarter and for the 12 months ended March 2023.

But over the last two and three years, you can see our funds' performance is above average. Relative to our competitors, we did very well post the Covid recovery. But after that alpha and those impressive investment returns, we started worrying about a slowing world, we started worrying about a US recession. And so therefore, we pivoted the position of our funds to a much more cautious stance. We saw rising global interest rates, resulting in declining growth in a recession in the US, and that decline in corporate profits, and therefore which would yield to declining markets. Consequently, the funds - our funds - were positioned to miss out in some of the recent rally. Markets have remained stronger than we thought. And so therefore, our returns and our comparative returns, actually haven't looked as appealing.

Siboniso Nxumalo 04:19

And so, sitting here now, if we look at this past quarter, the single biggest drag on our funds' performance during the quarter was an underperformance of Transaction Capital. Now, Transaction Capital is a company we have owned for several years. It has several businesses" it has a taxi business, it has a credit business, and it underperformed because it released a disappointing trading update. Again, illustrating the complexity and how tough the South African environment actually is. And that trading update resulted in a very sharp price decline. Now, we had been trimming the Transaction Capital exposure prior to the update, but we simply weren't selling aggressively enough and post the price fall, we reduced our remaining holding, believing that the company is vulnerable and further vulnerable to a weakening South African consumer.

Now, on the positive side, the funds gained from an overweight position in a company like Bidvest, which reported great results. Anheuser-Busch, the biggest beer company in the world. And Wilson Bayly Holmes, Wilson Bayly Holmes is a small construction company in South Africa, which had closed its Australian business around a year ago. And we had calculated that the market's reaction when Wilson Bayly was getting trouble in Australia was a bit excessive. And so, we avoided holding our position and subsequently the share prices recovered quite materially and added value to clients.

Siboniso Nxumalo 05:40

And as we sum up this quarter's performance, again, it's disappointing. We are disappointed. But like I've said, in investing, being early is indistinguishable from being wrong. We are urging clients to be cautious. We have invested cautiously, we're saying there's a high risk of a US recession, which always correlates with some form of negative performance in markets. We've positioned for that. And so, if that materializes, we should see a strong outperformance in our positioning. And so, for now, we're anticipating a tougher world. But again, we've positioned for that, we've done research in terms of that. I will see you again in the next quarter, as we reflect on this particular quarter that we're in. Thank you.