As the world recovers from Covid-19 induced lockdowns, Fairtree is ‘hoping for a beta year’ on the JSE in 2021 – a 12-month period in which equity prices move up across a range of sectors.
This would be in contrast to last year’s experience, where the JSE’s positive return was almost entirely attributable to the gains in Naspers and mining stocks.
‘What we find very constructive and encouraging is that SA Inc. is starting to recover,’ said Chantelle Baptiste, co-portfolio manager of the Select BCI Equity fund during a webinar. ‘Telecoms companies, general retailers and industrials are all performing well year-to-date. And Naspers continues to be a key outperformer.’
Miners have lagged so far this year, but Fairtree still sees significant opportunity in this sector. An example is Kumba Iron Ore.
‘Kumba is trading on a 24% free cash flow yield at current spot prices. It’s generating a quarter of its market cap in free cash,’ Baptiste said.
Across the sector, resource companies are generating significant cash flows on the back of higher commodity prices.
‘This gives these companies a lot of dry power – the ability to pay dividends, to pay down debt, to invest in current operations, and make acquisitions for future growth’ Baptiste said. ‘So, the general mining sector is looking very attractive.’
Fairtree therefore still holds a significant portion of its portfolio in resource stocks. However, it has sold down some of this position as other parts of the market have also started to look more attractive.
‘In the second half of last year, we started to see a lot of opportunities in SA Inc.,’ Baptise said. ‘We started to fund those opportunities from our resource positioning.’
Primarily this has been through buying into local retailers, but also some South African industrials.
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‘Our biggest challenge right now in our South African equity book is that our buy list is a lot longer than our sell list,’ Baptiste said.
‘It’s a nice position to be in,’ she added, ‘but our struggle at the moment is managing that rotation.’
The broader opportunity set on the JSE has also allowed Fairtree to diversify its portfolio.
‘During the course of the last two years we have held quite a concentrated fund,’ Baptiste said. ‘We held probably less than 40 names, when we have access to 100. There were also some big names like MTN, Sasol and British American Tobacco that we had no exposure to at all.
‘But now we’ve gone into MTN. We’ve gone back into British American Tobacco. So, we want to diversify the fund, and we are seeing that opportunity.’
Identifying the best investments in this environment does, however, require strict discipline.
‘Every day we ask ourselves if we had a blank piece of paper, what would our fund look like. And if that isn’t what the fund looks like, why doesn’t it? If there is a stock in our portfolio and it’s not on that piece of paper, why is it still there?’