One Year On …

One Year On …

Market Context

We launched the Lunar BCI Worldwide Flexible Fund (LBWFA) on 1 June 2016. In our first year to 31 May 2017, several significant events have been playing out locally and globally, which impacted the investment markets:

  • Political events in South Africa have not only impacted investment sentiment negatively, but also led to a ratings downgrade, historically high unemployment levels, very little trust between government and business and a decline in investments;
  • A weakening South African macro-economic environment;
  • 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 and American voters voting Donald Trump as their 45th president and the potential uncertainty his presidency may bring to the world;
  • The S&P 500 and the Nasdaq reaching historical highs;
  • Rate increases by the US Federal Reserve and speculation on how much more can be done to normalise US and European interest rates.


This has created a lot of turbulence in the investment markets during this period. The USD/ZAR exchange rate reacted to these factors and was a significant driver of equity market valuations.

We have been of the view that valuation levels (reflected in the Price Earnings Ratio (PE)) on the JSE has been quite high. This has reduced somewhat, and if you exclude some of the heavyweights like Naspers, BAT, Richemont, AB Inbev; PE ratios look somewhat better. However, we still hold the view that there’s still a lot of risk in the market, particularly as rates start increasing in the US and other developed markets, and as political events play out in SA. We anticipate that the turbulence will continue in the equity, bond and exchange rate markets. However, we think that certain assets are looking better in value.

The Nasdaq market is also near all-time highs and there has been a weakening of technology stock prices recently. Regulatory issues such as fines for anti-competitive practices have been a factor influencing share prices.


How have we positioned our fund?

Our strategy of phasing in our foreign allocation paid off somewhat but as expected, not perfectly. The Rand strengthened during the period from 15.71 to approximately 13.11 to the US Dollar. We had very good dollar returns on our foreign holdings (Amazon, FaceBook, AliBaba, Amgen, Nvdia). The small loss that we made in foreign exchange translation was more than offset by the returns we achieved in our foreign holdings.

In the local market, we had excellent returns from PSG, Shoprite and FirstRand; satisfactory returns from Aspen, Discovery, Omnia, and Capital and Counties; and negative returns from Ethos Capital, Rhodes Food Group, Consolidated Infrastructure Limited and AdapIT of the holdings we still have in the portfolio. Small cap shares have been under pressure since the beginning of the year, in our opinion largely due to the negative sentiment in the market.

We also sold off Woolworths at a small loss, Telkom at a good profit, Balwin at a loss and Alphabet (Google) at a small profit. These were sold either because we changed our minds about the investment thesis, or we had better opportunities elsewhere, or they were tactical investments.

Our overall holdings are reflected in the charts below:



Figure 1: Asset Allocation



Figure 2: Sector Allocation


Our total equity position is now at 87% in equities, which is an increase through the period.

Our Top 10 Equity Holdings as at the end of May 2017 was as follows:


Figure 3: Top 10 Holdings


Ideally, we would be more fully invested in equities. However, in the current market, we believe retaining some cash is prudent and provides an option to acquire assets that become available at good prices.

In the businesses that we own, most have great long-term potential, i.e. they have and continually seek to gain competitive advantage through innovation. They support key investment themes. We are also satisfied that our positions (and size of positions) reflect our view of the valuations and risks in these businesses.

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, and 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
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

Aspen – Global generics and OTC business

– Owner Managers

– Strategic positioning in geographies and product portfolio

– more attractive at these valuations

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

– Regulatory

– Aging populations

– Growth in Emerging Markets Middle Class

– Exponential growth in Technology

Discovery – Innovative

– Owner Manager

– Upside from global initiatives

– Behavioural driven business model

– Big data 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

Omnia – Innovative technology

– Scalable

– Back-door entry into resource sector revival

– Valuation

– Agriculture


– Liquidity

– May take a while for resources to recover

– May experience margin pressure due to droughts

– Manufacturing sector in SA under pressure

– Innovation

– Growing Emerging Markets Middle Class

FirstRand – Great franchises

– Owner manager driven culture

– Innovative

– Valuation (especially ROE)

– Higher funding costs due to ratings downgrade

– SA Macroeconomic fundamentals poor


– Changing preferences of millennials

– Growth in Emerging Markets Middle Class

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

Table 1


How have we performed since inception?

We are satisfied with our performance to date of 0.99% after fees and expenses, despite a real negative return during the period.  We are mindful that it is still very early days in the fund. The fund ranks 10th out of 55 funds in the Worldwide Flexible category. The average performance of the Worldwide Flexible category was -2.78%.

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: Cumulative Performance


As can be seen we are marginally outperforming our benchmark, we returned a 0.99% versus the benchmark (Weighted line (yellow) in the figure above) of 0.79%. Twelve months is a very short period in which to assess our performance.



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. Slightly reduce the number of counters we hold to increase the concentration in the fund.



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 better investment opportunities.

May we take this opportunity of thanking our clients and co-investors; our partners and all our followers and readers for helping us get off the ground. We will continue to learn and hone our investing skills. We will continue to share our learning and encourage more people to invest, especially those from previously disadvantaged communities.

We believe that an investment culture will not only positively impact individuals and their families but also our communities and the country as a whole.

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