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\”It is better to be roughly right than precisely wrong\” – John Maynard Keynes

Just when you thought it was time for a good break, along comes Omicron, the latest variant of the SARS Cov-19 virus. In many ways, this is another reminder that the future is not certain. Trying to predict the future precisely is thus a futile exercise. However, there is significant opportunity in trying to pick out certain themes that could play out over the near to medium future, with the understanding that these themes may play out in different ways.

So, what are some of the key themes that we are watching and thinking about?

Covid-19

In 2021, we experienced a brutal third wave of Covid-19 caused by the Delta variant. We had high levels of infections and lost many of or friends and family. For a brief time, our infection and death rates were coming down and we thought that life would soon return to normal. Alas, the dreaded virus mutated and our brilliant scientists in South Africa discovered the latest variant of the virus, named Omicron.

What are we looking for? How will the virus mutate, how quickly can we develop herd immunity either naturally or through vaccinations? We watch this to try and understand how we should manage our risks or even take advantage of opportunities that may be presented depending on how this plays out. An example is the continued acceleration in the technology trends of online and digital growth for work from home, on-line shopping, on-line gaming on the one hand and release of the pent-up demand for travel and physical entertainment, increase in elective surgeries that were curtailed during the peak of the pandemic.

Long Bull Market with Easy Monetary Policy

We are witnessing one of the longest bull markets in history, fueled by easy monetary policy (i.e., central banks printing money and creating liquidity) since the GFC (Global Financial Crisis) in 2008. Covid-19 providing another reason to extend this easy monetary policy. At some stage this easy monetary policy must stop, otherwise we will witness high inflation across the globe. In fact, inflation has been ticking up and there are views that this may not be transitory impacting consumers, especially the poor and investors.

What are we looking for? What will central bankers do with interest rates and quantitative easing? Will this tame inflation or could we witness sustained high levels of inflation in the coming years? How will the stock market react and how should we be positioned for different outcomes? When will the stock market correction come and which sectors will be mostly impacted? An example of industries benefiting from mildly higher inflation are banks and retailers. In contrast, companies that require continued investments to grow tend to do badly.

Cold War 2.0

One of the risks we are also watching closely now is the increasing tension between the West and Russia on the one side and the West and China on the other side. The situation in the Ukraine and the diplomatic boycott of the Beijing Olympics are pointing to increasing tensions.

What are we looking for? Could this lead to war or a cold war or even both? And how could this impact the world order, global and local security, the markets, the supply chain, etc. Ironically, markets tend to do well in war times. Could this trend continue? How should we position our and our clients’ funds?

* * * * *

These are a few of the themes that we are tracking.

To date, 2021 has been a good year for the portfolio and we have attracted significant flows from existing and new clients. Some of our winners this year include MTN, Aspen and Shoprite locally, and ASML, Microsoft and Berkshire Hathaway offshore.

Going into the new year, our fund has excess cash that we plan to deploy as these, and other themes play out and we see opportunities in specific companies or sectors to invest in.

Finally, we wish all our clients, staff, and partners well over the festive season. We hope you can rest and spend quality time with your loved ones.

Stay safe.

November 2021 Fund Fact Sheet

The Lunar BCI Worldwide Flexible Funds November 2021 Fund Fact Sheet can be found on our website, showing the latest performance of the fund, amongst other pertinent information.

If you wish to subscribe to our mailing list, you can do so here. Please feel free to forward this to anyone who may be interested in receiving our Insights.

Privacy Notice

Lunar Capital is committed to safeguarding the privacy of all persons transacting with us.  We collect personal information from you and you may submit personal information to us. We handle the collection, processing, and storage of your personal information in accordance with the Protection of Personal Information Act (POPIA) No. 4 of 2013, and your information will not be shared for direct marketing purposes.

Our Privacy Policy can be found on our website, www.lunarcapital.co.za as amended from time to time.

We at Lunar Capital follow an investment philosophy of “Growth at a Reasonable Price”. This essentially guides us to look for companies that have a growth strategy and that are trading at a reasonable price relative to their growth potential. This ultimately leads us to technology companies and companies that utilise technology to drive their competitive and growth strategies.

Shopriteˣ

In this first edition of Tech Talk, we feature Shoprite, a long-term investment in our Lunar BCI Worldwide Flexible Fund.

Shoprite serves over 1 billion customer per annum, and stock over 7 billion different types of products. Over 20 million of Shoprite clients have benefited from the Xtra savings loyalty scheme. Why is this important and what does this have to do with technology?

Shoprite through their Shopriteˣ unit has been collecting data on the spending habits and experience of their clients. This rich and deep dataset is mined and informs how Shoprite innovates to improve the shopping experience of their clients and incentivises them to shop and save at Shoprite stores, including Checkers, Usave, and, House and Home.

Some of you may have used the Sixty60 app, where you order on-line from Checkers and have your goods delivered within 60 minutes of ordering. This is an amazing service and convenience, and is particularly useful for many who are now working from home.

Recently, Shoprite launched a new concept store called Checkers Rush, where you will be able to shop at a Checkers Rush store by a simple process of registering yourself as you enter and picking goods off the shelf and walking out without having to go through a checkout process. Machine vision cameras identify the goods you have taken and charge this to your account as you take items off the shelf. No more checkout queues.

Shoprite’s loyalty and savings scheme, Xtra, is also honed by the insights that they derive from their data that they have collected and mined.

The motto of Shopriteˣ is to fuse data, technology and innovation to create a fast and frictionless experience for their clients. These and other innovations make Shoprite a significant competitor by attracting more customers, who experience better shopping experiences through these innovations.

August 2021 Fund Fact Sheet

The Lunar BCI Worldwide Flexible Funds August 2021 Fund Fact Sheet can be found on our website, showing the latest performance of the fund, amongst other pertinent information. If you wish to subscribe to our mailing list, you can do so here. Please feel free to forward this to anyone who may be interested in receiving our Insights.

Privacy Notice

Lunar Capital is committed to safeguarding the privacy of all persons transacting with us. We collect personal information from you and you may submit personal information to us. We handle the collection, processing, and storage of your personal information in accordance with the Protection of Personal Information Act (POPIA) No. 4 of 2013, and your information will not be shared for direct marketing purposes. Our Privacy Policy can be found on our website, www.lunarcapital.co.za as amended from time to time.

5 Year Performance & Offshore Portfolio Launch

Ashraf Garda in conversation with Sabir Munshi & Guni Goolab

Prof Shabir Madhi on Covid 19

Download the Example Family Balance Sheet

 

“The value of our good(s)^* is not measured by what it does, but by the amount of good it does to the one concerned.”

Milton S Hershey

At Lunar Capital, our ultimate measurement of how well we are doing is not by the fees that we earn or by the value of our assets under management but rather by the financial freedom you, our clients and co-investors have achieved; and the wealth that you have generated for your families.

We have all suffered the consequences of the Covid-19 pandemic; from the loss of those close to us, to hospitalisation or illness, to the loss of jobs or income and being locked-down for extended periods with limited social interactions. I would like express my deep gratitude and to thank you our clients and co-investors, our staff and directors and our business partners for continuing to show faith in us despite the difficulties that you may be facing.

We have had a significant number of new clients joining us in 2020. Welcome to all of you and we hope to have a long and mutually fruitful relationship with you.

Pleasingly, your faith has paid off well for you, our investors; where your investments in the Lunar BCI Worldwide Flexible Fund grew by:

• 15.57% for the 2020 year, and
• 42.38% since inception of the Fund (Source: Morningstar).

R100 000 invested in our fund at inception would be worth R 142 000 as at the end of December 2020.

We highlight below the key positioning of the Fund:

• ±60% of the fund is invested in offshore assets.
• ±35% is in technology via holdings in Amazon, Microsoft, Square, OKTA, Pinterest, Naspers, amongst others.
• ±12% is in Biotechnology via holdings in iShares Nasdaq Biotech ETF and Aspen.
• Our offshore position has been increased from 30% to 60% over the past 18 months.

An absolute highlight was being independently recognised with the Fund featuring in the prestigious FINWEEK business magazine.

Our Top 10 equity holdings as at the end of December 2020 are:

We continue to view technology as the underpin to our investment strategy, whether directly in technology companies or those that are able to use technology to create a competitive edge.

You can visit our website for more detailed reporting on our performance.

We thank you again for your support and you wish that you and your loved ones are healthy and that your journey to financial freedom and building wealth for your family continues.

 

Timothy Rangongo from finweek reviewed the Lunar BCI Worldwide Flexible Fund. Read his review: “Exposure to cutting-edge global businesses”

 

Blog 43 – Local or Offshore?

The debate on whether to invest locally or offshore has been raging again recently. Many financial commentators are comparing the returns on the JSE All Share index to the S&P 500 Index. The JSE All Share Index (ALSI) represents the broad South African stock market and the S&P 500 index represents the broad US stock market.

Let’s take a look at illustrative 10-year returns on the ALSI and the S&P 500:

The Rand weakness against the US Dollar during the last 10 years (from 7.39 to 14.00) also played a significant role in the JSE ALSI’s underperformance in the most recent 10-year period. In the last 10 years to end December 2019 – the JSE ALSI significantly underperformed aginst the S&P 500; but in the 20 years to end December 2019, it is the S&P 500 that lagged the JSE ALSI. This is largely due to the significant outperformance of the JSE ALSI in the 10 years to end December 2009.

Hindsight is a perfect science and chasing past returns is generally a bad idea. Beginning 2010, if you looked the last 10-year returns, you would have been tempted not to take any money offshore. Looking back through this would have been a costly mistake.

But let’s be cautious here because it does not mean that because the JSE ALSI underperformed in the last 10 years against the S&P 500, that this will now reverse. We can find a variety of reasons that this may not be the case:

• South Africa is faced with low economic growth, high unemployment, the impact of COVID1-19 on the economy and state resources, corruption levels in the public and private sector, etc.
• The dominance of large multinationals and technology companies offshore further makes the case for investing more of one’s savings offshore.

The counter arguments against investing in offshore markets are also many:

• Valuations play a significant role in deciding where to invest. From a historical perspective, the JSE looks cheap and the S&P 500 looks in expensive territory.
• Despite the economic malaise in SA, there are many excellent businesses here with talented and hardworking people. During this doom and gloom time, we could see good opportunities to invest in businesses that would provide a good return over the medium to long-term, because their valuations have been hammered.
• Currency fluctuations can play havoc with assets valuations, and the direction of currency movements is difficult to predict. This is especially so for the Rand. Investors who are not comfortable with fluctuations in their investment portfolios may sell in a panic, locking in losses and ultimately destroying the value of their savings and investments. Rand movement in the long-term has been one-way bet, but in the short and medium-term it has not only weekend sharply but also strengthened significantly from oversold positions.

Offshore is very wide and very big: is it US, Europe, China, Japan, India? Is it Tech sector, bio-sector, resources, healthcare, retail, ….? Is it Equities, bonds, property, …? Offshore is not just the S&P 500. This wider set of investment alternatives provides both more opportunities and more risks for investors.

The point is that the decision of whether to invest locally or offshore is not an easy one. This should not be a binary decision; it is not one or the other. There are multiple factors at play, and these are not static; decisions made now or in the future may change the opportunities and risks.

Our position then is not to be one or the other, i.e. local or offshore. We could favour one view over the other, which would mean that we would have a heavier weighting for our favoured view. We currently have a higher weighting in offshore assets (broadly favouring technology and biotechnology sectors) but also have a broader geographical diversification (i.e. not all assets are US-based).

Our aim is to provide real returns (i.e. above inflation) for our investors over the long-term. We do not favour one-way bets, where we could be either heroes or villains. We recommend that our clients invest with regular monthly debit order investments, rather than large one-off investments. This is the best way to ride out the fluctuations and volatility of markets.

We currently still favour a cautious approach both locally as well as offshore. We have taken opportunities based on our assessment of value to acquire certain assets or to move more money offshore. Similarly, we have sold certain assets if our assessment was that they were overvalued.  As an example, in the recent strengthening of the Rand against the Dollar, we took another tranche of funds offshore, to bring our offshore assets to 58% of the portfolio. We have also taken a small position in offshore emerging markets.

See our Fund Fact Sheet for additional information on the performance of the Lunar BCI Worldwide Flexible Fund, our asset allocation, top holdings and our fee structure.

Our Performance and Investment Strategy during the Covid-19 Pandemic.

 

LUNAR BCI Worldwide Flexible Fund

Investing is not easy because the market can behave in ways that is irrational in the eyes of investors or unexpected given investor sentiment and macro-economic trends. Our job as investors is thus to be able to sift through all the information that could affect share prices and identify those drivers that are pertinent at any point in time. Then, to act accordingly. This is no trivial task.

Looking back at 2019, sentiment in the South African market was and still is low, given the financial and political woes in government and state-owned enterprises; more shenanigans and greed in corporate South Africa; high levels of unemployment and no clarity on how we can get out of the mess we are in and grow our economy for wider benefit. Despite this the JSE All Share rose by over 12%, if you include dividends. The US markets reached record highs in 2019 despite trade wars and arguably a dysfunctional political environment. The Rand strengthened by approximately 2% over the US Dollar during the year, but not in a straight line.

Our strategy from late 2018, was to acquire good businesses whose prices were significantly lowered and presented much better value in the South African market and to reduce our technology exposures in the offshore market. We also took the opportunity to move cash offshore whenever the Rand showed strength. As at end December 2019, we had 44.6% of our assets offshore and 55.4% in South Africa. Our cash holdings was 15% to give us the ability to acquire assets should opportunities arise.

The graphs below show our asset allocation and sector allocation as at 31 December 2019.

Our Top 10 Equity positions as at the end of 2019 is presented below.

How did we perform?

Our investment strategy worked well for us and our fellow investors in the Lunar BCI Worldwide Flexible fund, returning 17.68% after costs for the 2019 calendar year. Over 3 years, we returned 7.48% pa (Source Moneymate).

Some of our notable returns in 2019 came from the following businesses we are invested in:

• Impala platinum (+291%)
• Naspers (+58.3%)
• Microsoft (+52.6%) in USD
• OKTA (+46.9%) in USD
• Aspen (+38.1%)
• Mediclinic (+35.9%)
• iShares Biotech ETF (+26.9%) in USD
• Amazon (+24.9%) in USD

Our most disappointing investments returns (i.e. negative returns) came from:

• Pinterest (-40.8%) in USD
• Square (-23.5%) in USD
• Long 4 Life (-11.2%)

The Rand/Dollar exchange rate did not have a material impact on performance through the year, as has been the case in previous years.

What is our strategy now?

Our investment philosophy is to invest in great businesses that provide growth over the long term, provided we can acquire them at a reasonable price. From time-to-time, we will also take tactical stakes in businesses that we do not desire to hold for the long-term. Conversely, we also reduce our stakes in great businesses that in our opinion are significantly overpriced.

We seek businesses that meet our investment philosophy and can benefit from the following core demographic trends:

• Millennials are now the largest economic power, generation-wise.
  • They shop online, are selective on where they buy homes and settle down (cities) and what they value (experiences, environment, family).
  • Many millennials are vegans.

• The world’s population is aging, and the aged need care.
  • They are price-sensitive on what they need most (financial services, healthcare, personal services, retirement villages, drugs). As longevity has increased, these services are required for longer.
  • They are more health-conscious than previous generations.
    seek retirement villages that better cater for their healthier lifestyles.

• Megacities dominate economic activity globally and the migration from rural areas and small and poor regions continues.
  • The demand for housing and services (water, electricity, transport) continues.

• Globalisation and the increasing wealth of the middle class in emerging markets shape their spending habits (supermarkets, global brands, travel).
  • However, if aspirations are not met, there is high risk of social upheaval.

• Economic powers are being challenged and challengers are being pushed back.
  • In the last few decades global GDP has shifted from the developed markets to developing markets by a ratio of approximately 80/20 to 60/40. China has been a large beneficiary of this shift, but other markets like India, Turkey, Brazil and Indonesia have also benefitted.
  • China has ambitions to retain its once dominant economic position in the world. The USA fights back with Trade Wars.
  • India too has its own ambitions of rising up the global economic ladder.
  • War in specific zones will likely be a feature (Middle East).

• Resource scarcity spurs innovation.
  • The demand for energy has spurred the revolution in renewable energy.
  • Agricultural technologies have also significantly improved yields in food production.
  • We anticipate similar innovations in water and energy technologies.
  • Commodity cycles will continue to ebb and flow providing investment opportunities.

• Technology will continue to disrupt the status quo.
  • Information, pharmaceutical and genetic technologies will continue to develop and potentially disrupt industries and businesses.
    • The next block-buster drug, gene therapy or killer-app will be key in unlocking investment opportunities.
    • Fintech is maturing and there are some real challengers to financial services incumbents.
    • Cryptocurrencies are not dead yet and may yet make a come-back.
  • As the world becomes more digital; data privacy and information security will become increasingly critical for individuals and businesses.
  • Artificial Intelligence and robotics will likely become more mainstream, but will present ethical and social dilemmas. 5G will be a key enabler in AI, Internet of Things, self-driving vehicles.
  • Space technology is maturing rapidly. 

Our overall view is that the US markets are largely overpriced, but there are selected opportunities that still present value. We broadly favour emerging markets, including selected opportunities in South Africa. We will continue to seek to invest in great businesses that meet our investment philosophy and criteria.

For more detailed information on the Lunar BCI Worldwide Flexible Fund, see our Minimum Disclosure Document.

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Thank you to our clients, staff, directors, and business partners for your support, guidance and friendship. Whilst there are always significant risks in the financial markets, there will also be opportunities from which to profit. It is left to us to identify these risks and opportunities through our investment philosophy and methodology. Our aim to provide a platform for growing the wealth of our families and communities is intact and we will continue to utilise this and enhance it.

We look forward to continuing our journey with you; growing our business, growing your and our wealth, empowering our families and communities to grow their wealth.