First of the First Quarters

First of the First Quarters

Our first quarterly review

Market Context

The Lunar BCI Worldwide Flexible Fund (LBWFA) was launched on 1 June 2016. In our first quarter to 31 August 2016, several significant events have been playing out locally and globally, which impact the investment markets:

  • The ongoing, so-called SARS war between the South African Finance Minister and his adversaries;
  • A potential for a ratings downgrade (to non-investment grade or junk status) for South Africa;
  • Allegations and counter-allegations of corruption within state-owned enterprises and government departments;
  • A significant reduction in the ANC’s majority and a loss of major metropolitans to opposition parties in the recent local government elections;
  • British voters voting to leave the European Union;
  • Donald Trump winning the Republican nomination for the US Presidential elections;
  • Ongoing speculation on when the US Federal Reserve will raise interest rates in the USA.


The effects of the above has been felt quite significantly in the South African market. In particular, we have seen the Rand react (both positively and negatively) quite substantially when news on any of the above issues flows. The JSE has been looking for direction and also influenced by foreign investors (risk-on versus risk-off). The Price Earnings Ratio (PE) of the market as a whole is quite high, but shows quite a large variation between the different sectors. In particular, the large capitalisation shares like Naspers, SAB Miller, BAT, etc. have quite high PE’s influencing the market PE as a whole.


Our view is that the market is still largely influenced by central bank policies and currency fluctuations. Further, we believe that market is not sufficiently pricing in potential risks. Two recent cases in point: Mr Price and Aspen profit warnings have seen quite sharp corrections in their (and related industry) share prices.


How have we positioned the fund in this context?

We have taken a patient and somewhat conservative approach in the fund given this context. When we launched the fund, we had approximately 50% in cash and 50% in South African equities. This has changed somewhat and is reflected in the two pie charts below:

Figure 1



Figure 2


Even though we have increased our equity position (generally buying in the dips), we are still only 63% in equities. We also took the opportunity to remit cash offshore when the Rand strengthened. Our Top 10 Equity Holdings as at the end of August was as follows:


Figure 3


Needless to say, we are quite happy with the portfolio as it stands at the moment. We believe that we have some great businesses in our portfolio that support certain key investment themes. We are also satisfied that our positions (and size of positions) reflect our view of the valuations of these businesses.  Lastly, that at a portfolio level, we believe that our sector allocation is at a satisfactory level given where we see value at this point in time.


We believe that the structure and shape of the portfolio will change as the market changes. We have a number of other great businesses that we would like to own. At the appropriate time, we will buy into those businesses. We do prefer to hold onto businesses for the long-term, but also prefer to have concentrated positions in those businesses.


The table below provides a synopsis of our likes and dislikes of our Top 6 equity holdings at this time. It is not a comprehensive analysis, but rather a quick view of how we are thinking about these businesses:


Business Likes Dislikes Investment Themes Supported
Omnia – Innovative technology

– Scalable

– Back-door entry into potential resource revival

– Valuation

– Agriculture


– Liquidity

– May take a while for resources to recover

– Innovation

– Growing Emerging Markets Middle Class

Aspen – Global generics and OTC business

– Owner Managers

– Strategic positioning in geographies and product portfolio

– Valuation high

– Risks in some markets (e.g. Venezuela)

– Aging populations

– Growth in Emerging Markets Middle Class

– Exponential growth in Technology

PSG – Diversified business

– Owner managers

– Disruptors

– Focussed on solving SA problems

– Private Equity potential upside

– Underlying businesses pricey – Growing Emerging Markets Middle Class

– Innovative

– Exponential growth in Technology

Changing preferences of millennials

Discovery – Innovative

– Owner Manager

– Upside from global initiatives

– Behavioural driven business model

– Valuation, especially price to Embedded Value

– Banking foray

– Initiatives need to start delivering


– Aging populations

– Growth in Emerging Markets Middle Class

– Exponential growth in technology

– Changing preferences of millennials

Shoprite – Rest of Africa strategy

– Positioned for the cost conscious shopper

– Owner Manager

– Innovative arrangements with property owners

– SA Consumer struggling

– Ability to remit cash from some countries


– Growth in Emerging Markets Middle Class
FirstRand – Great franchises

– Owner manager driven culture

– Innovative

– Valuation (especially ROE)

– Impact on funding if ratings downgrade


– Changing preferences of millennials

– Growth in Emerging Markets Middle Class

Table 1


How have we performed since inception?

We are satisfied with our performance to date, but are mindful that it is still very early days in the fund. Figure 4 below shows the fund’s performance against the market benchmarks we measure ourselves against. Our weighted benchmark is 75% of the ALSI and 25% of the NASDAQ, converted to Rands.



Figure 4


As can be seen we are outperforming our benchmark, but gave back some of our gains that we made in July 2016 during August 2016. Our outperformance (net of fees) against the benchmark is 3.67% for the period. BUT, it’s still very early days.




In our investment strategy over the next quarter, we will:

  1. Continue to be patient in our investment approach, waiting for prices to better reflect value before we invest more funds in great companies for the long-term; and
  2. Begin investing our offshore cash, again on a patient and steady approach. We are allowed to hold a maximum of 25% of our funds offshore.



Despite the turbulence in the market, we are pleased with our start and our performance. We have no doubt that we will continue to face headwinds along the way and that the markets will also provide great opportunities for investing. Whilst we will be patient in investing our funds, we will also not hesitate to be more aggressive if the market conditions provide great opportunities for us.

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