Discovery funds overview

Balanced Portfolios

Portfolio positioning

What added to performance in 2017?

Our offshore investments helped the portfolio, with our regional bias leaning toward more cyclical markets such as Europe and Japan. We also made favourable stock picks internationally that helped performance.

What detracted from performance in 2017?

Our holding in Steinhoff International detracted from absolute performance as the resignation of the company’s CEO in the wake of an investigation into accounting irregularities weighed heavily on sentiment. Our allocation to AngloGold Ashanti, Impala Platinum Holdings, Mondi, Sibanye-Stillwater and South32 also dragged on absolute returns.

Outlook for 2018

Business and consumer confidence is not likely to dramatically change overnight and precipitate a sudden improvement in the country’s economic fortunes.

Portfolio performance

Discovery Balanced Fund – Fund Fact Sheet

Discovery Moderate Balanced Fund - Fund Fact Sheet

Discovery Cautious Balanced Fund - Fund Fact Sheet

Discovery World Wide Best Ideas Fund - Fund Fact Sheet

 

Local Income Portfolio

Portfolio positioning for Diversified Income Fund

What added to performance in 2017?

Our nominal bond allocation contributed positively to performance in 2017. This was largely on the back of sustained positive sentiment towards emerging markets which precipitated record inflows into the local fixed income space.

The local inflation outlook also continued to improve with food price pressures continuing to moderate over the period. Towards the tail end of 2017 headline inflation had moderated to 4.6% in November year-on-year.

Outlook for 2018

Locally, bonds have found favour in the low-inflation environment alongside paltry economic growth, and, at current valuations, we believe bonds still offer decent value. Although, the bond market rallied ahead of the ANC conference, concrete signs of progress will be key in sustaining momentum going forward.

We believe the Ramaphosa victory should be a positive for local fixed income markets in terms of driving policy certainty, reform of key state institutions (e.g. ailing state-owned enterprises) and fostering a conducive environment for investment. Local fundamentals are likely to be supportive of the market, while global factors will need to be closely monitored as central banks look to continue hiking interest rates.

Portfolio performance

Discovery Diversified Income Fund – Fund Fact Sheet

 

Local Property Portfolio

Portfolio positioning Discovery Flexible Property Fund

What added to performance in 2017?

The largest contributor to relative performance in 2017 was Sirius Real Estate, an off-benchmark portfolio holding. Sirius has an innovative management team which extracts value from intensive management of their German business parks. Zero holdings in locally-focussed Octodec and Accelerate also contributed, as both counters disappointed the market with weak outlook statements for the year ahead.

What detracted from performance in 2017?

On the other hand, our overweight in Arrowhead Properties detracted from performance. The counter delivered distribution growth in line with guidance for 2017, but indicated that it would not distribute non-recurring income in future. Their forecast of negative growth in 2018 saw the counter underperform over the final quarter.

Outlook for 2018

Looking ahead to 2018, while the outcome of the ANC Conference should boost confidence and local growth prospects, considerable policy uncertainty remains. Given this and post the rebound in locally focused names in December, we believe a diversified portfolio approach is justified going forward.

We believe we will see nearly 8% distribution growth for 2018 and, coupled with the sector’s forward yield of roughly 7% (about 8% on South Africa-focused names), drive the prospect for another inflation-beating return from the asset class in 2018.

Portfolio performance

Discovery Flexible Property Fund – Fund Fact Sheet

 

Local Equity Portfolios

Portfolio positioning equity portfolios

What added to performance in 2017?

More than 10% of the 21% gained on the JSE All Share Index in 2017 came from one share: Naspers.  This index heavy-weight’s strong gains of more than 70% was driven by the performance of its Chinese subsidiary, Tencent, which had little to do with the domestic market. Secondly, global growth has been strong, benefiting shares such as Richemont as well as most resources stocks.

Performance by the Discovery Dynamic Equity Fund was driven largely by strong gains from smaller cap stocks such as Astral Foods and Clicks as well as resources counters, which included Exxaro and Assore. 

What detracted from performance in 2017?

Rand strength negatively impacted the performance of our offshore holdings.

Outlook for 2018

It is too early to get too defensive. The domestic market should continue to be supported by strong global growth momentum as well as the uplift in domestic consumer and business sentiment.  That said, domestic political leadership changes will probably take longer to resolve than some may expect, so some caution is warranted.

Portfolio performance

Discovery Dynamic Equity Fund - Fund Fact Sheet

Discovery Equity Fund – Fund Fact Sheet

 

Global Balanced Portfolio

Portfolio positioning Discovery Global Balanced Fund of Funds

What added to performance in 2017?

Growth assets had a strong year as the improvement in global economic growth gained momentum. All major equity markets generated positive returns in local currency terms. Japanese equities led the pack, hitting a two-decade high towards the end of the year. US equities followed close behind followed by the European market. The UK market lagged global equities as Brexit uncertainty weighed on returns. Emerging market assets also experienced strong performance across equity and bond markets given robust investor flows and positive growth indicators.

Outlook for 2018

Leading growth indicators continue to point to ongoing momentum in the global economy and above-trend growth in major economies over the next six to 12 months. Beyond the next 12 months, we believe the risk of recession is beginning to rise, with medium-term indicators progressively pointing to a higher probability of recession one to two years out.

Portfolio profile and performance

Discovery Global Balanced Fund of Funds – Fund Fact Sheet

 

Global Equity Portfolios

Portfolio positioning Global Equity Feeder Fund

What added to performance in 2017?

A large part of the fund's outperformance in 2017 was due to stock picking in the consumer staples sector, more specifically food and beverage stocks. Within the sector, Chinese beverage company Kweichow Moutai added most to relative returns.

What detracted from performance in 2017?

Media companies held within the portfolio detracted from relative returns. The largest detractor was US energy producer Hess, where share value fell on the back of market concerns about its strategy to move away from mature, higher cost areas to chase growth in lower cost markets.

Not holding high flying tech stocks Tencent and Alibaba in the early parts of the year detracted from relative performance as both firms went on to see their shares rally strongly after efforts to monetise their large respective user bases started to bear fruit, bolstering cash generation credentials. These developments prompted us to add Alibaba to the portfolio in August.

Outlook for 2018

Following a year of outstanding equity returns it would be tempting to call an end (or at least a pause) in the market rally. While perceived high market valuations have pushed many commentators to make this call recently, experience suggests that valuation levels rarely herald a market decline.

Value shares remain cheap in relative terms and when compared to absolute historical valuations. This gives us further confidence that the wider equity market rally may have further to run.

Discovery Global Equity Feeder Fund - Fund Fact Sheet

Portfolio positioning Global Value Equity Feeder Fund

2017 Summary

The fund has performed well in 2017 against a backdrop of further underperformance by value stocks, with the fund outperforming not only this ‘value factor’ but the broader global equity market, too. Japanese stocks in particular were strong contributors to the fund’s outperformance, due to a combination of positive local equity market returns, healthy underlying business performance and re-ratings of our specific Japanese holdings. While some of our Japanese positions remain attractively valued, we will not hold onto a stock solely due to its newfound popularity, and have recently reduced or sold a number of our Japanese holdings accordingly.

2018 Outlook

With equity markets moving ever-higher, often despite a lack of underlying earnings growth, we continue to be disciplined in not overpaying for businesses, and will only look for investment opportunities where we see genuine value. Currently those pockets of value reside in sectors such as financials and energy (both of which have resulted in recent additions to the portfolio) and in regions such as emerging markets and the UK. Indeed, the UK is currently one of the cheapest of all developed markets in our investable universe, with what we believe are some very attractive investment opportunities spanning financial, industrial and consumer discretionary sectors, explaining the fund’s overweight allocation to that market.

Discovery Global Value Equity Feeder Fund - Fund Fact Sheet

 

Capitec exposure

At the end of January, Viceroy Research issued a report on Capitec, which sent the bank’s shares tumbling by 20% in just one day. However, at the time of writing this report, there were no confirmations that the Viceroy report was accurate. Our exposure to Capitec is extremely minimal as shown below: