Steady capital and income growth The fund aims to achieve steady growth of capital and income for investors, according to its fact sheet. The fund manager is a signatory to the UN’s Principles for Responsible Investment.
The resource sector has lived through a tough couple of years as China’s demand for raw materials dropped. South African miners, together with their counterparts in the rest of the world, had to adapt quickly to survive.
Some of those companies now offer enticing value propositions. Element Investment Managers is picking the winners.
The Element Earth Equity Fund has returned over 17% since the start of the year to patient investors, with especially gold miners benefitting from the upswing, explains Jeleze Hattingh, portfolio manager at Element. The Element Flexible Fund didn’t hold any of the so-called “darlings” (such as Naspers*, SABMiller and BAT) that drove performance across a broad spectrum of local funds during 2014 and 2015, she says.
“We look at resource stocks from a bottom-up fundamental viewpoint,” she says. “If we work through the numbers we still see significant value in certain resource stocks. Not all of them.”
One such stock is AngloGold Ashanti, which is also the flexible fund’s largest equity holding. The company has cut its cost base by 30% over the past three years and now mines gold at about $960 per ounce, Hattingh explains. With the current gold price, that relates to free cash flow of about $300 per ounce, she says.
“We look at companies that have a strong balance sheet and do not have to come to the market in the foreseeable future to raise equity or try to refinance existing debt,” Hattingh says.
The fund’s exposure to local bonds is largely limited to corporate debt. The current government debt market is very volatile, with yields reacting near-immediate to political statements, she says. In this environment, her fund is taking a wait-and-see approach to when SA’s sovereign debt rating is downgraded. The market reaction to this will surely be negative, which would create a “better” entry point into government debt, Hattingh explains.
Why finweek would consider adding it:
The fund rode out the downturn in the commodity sector. Focusing on miners that have cut costs drastically stands to benefit any investor.
Gold funds have had a stellar kick-off to this year, according to Morningstar Research data. Bullion’s price is not determining the extent of profits, but rather the double-positive of cutting costs and producing in rands.
The fund’s cautious approach to the government debt market may stand it in good stead when, and if, the country gets downgraded to junk. The move in bond prices should not be as dramatic as post-Nene in December, but may still proffer returns to the patient.