Portfolio Manager’s Report as at 31 December 2019

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.