Trump, Trade Wars, Tariffs, Tanker attacks all that’s missing are tidal waves and tsunamis.
Given all the T’s one cannot help but think the final T will be tears, yet still the USA powers
higher on cheap money and central bankers promising to do all it takes to provide liquidity.

The quarter has been characterized by illiquidity and volatility, JSE volumes have halved as
asset managers sit on their hands hoping to be the first to react when things normalize. The
SAFEX open interest which topped at 260 thousand contracts in 2017 now only has 75
thousand. The Rand had four moves over 6%, two of these moves happening in under five
days. (Currency traders are crying over this, but when I tell them a 10% move in a day for a top
100 JSE share is becoming the new norm they realize their lives are sheltered).

This quarter saw moves over 5% on a day in 21 of the top 40 shares listed on the JSE, this is
neither rational nor sustainable and the biggest issue is that the next day the stocks reversed on
no new news flows. Algorithms search for the volume and sell or buy until they find it, the
moves have very little to do with fundamentals and reality.

Willem and I have always had the mantra that in the SA markets someone else always knows
and when seeing big moves its best not to second guess or be arrogant and believe you know
more, this means we have missed some opportunities but at the same time we have not risked
the portfolios having possible big write-downs. (Steinhoff, CIL, Aspen, Brait and Tongaat have
taught many a newbie that pride comes before a fall).

Looking forward we believe SA small caps are becoming incredibly cheap, unlisted shares are
now trading at higher multiples than the listed ones. The biggest issue however is after entering
a trade how does one exit and in the case of small caps we can only see MBO or corporate action
as the solution. We have allocated a small portion of the portfolios to these opportunities in the
belief that offers to minorities are the next step.

UK property shares have been decimated in the wake of Brexit and the Amazon effect killing the
high street, some of these are now 80% off their highs and we are upping our exposure to these
too. The yields are high for a hard currency asset and the discount to NAV they trade at. Even if
NAV is over stated it still makes them a low risk annuity income stream.

The winter solstice has come and gone; before we know it Christmas will be upon us. Let’s hope
the markets deliver the portfolios some early presents.

All the best.

Arthur & Team

Just when you thought things couldn’t get worse, they do.

I have learnt that life is an hourglass, sooner or later, everything hits rock bottom, all you have to do is be patient and wait for someone to turn everything back around —Anonymous.

This quote is very apt for how South African fund managers must be feeling, the continued flow of bad news, corporate governance issues, EFF, Black First Land First, potential constitutional changes, a consumer that is being squeezed on all sides and foreign funds that seem to have an endless amount of emerging market shares to sell have meant that more than patience has been needed to survive unscathed.

The All Share 40 is down 15% for the year and 18% from the highs made in mid-January. January feels a million miles away and down 15% actually sounds reasonable/acceptable. The algorithms have made the market illiquid and unreadable; one day a share can be down 5% and the next up 5% with no material news. Normally I would say volatility brings with it opportunity however in the current environment the movements away from the mean are so big that every move takes the form of a mini crash or bull market.

Attached below shows that of the top 40, 13 are positive for the year 27 negative but what is striking is the % losses.

How have we at CC survived through all this

1. We made a conscientious decision to trade smaller; the same profits can be made on smaller positions given the larger moves.
2. When instinct and research says buy, give it time because bear markets are vicious, not having a position is having a position and lastly adhere to the 100% rule, when you are unsure don’t trade as whatever trade you do when unsure, will be wrong 100% of the time.

As the festive season draws near and people start reflecting on life and the prospect of holidays we hope the rest of 2018 will treat you well and that we have a good run into the end of 2018. (PS, fingers crossed that no Steinhoff-type announcement jumps up and surprises everyone like last year).

Kind regards

The Courtney Capital Team

Dear Client

The second quarter was a positive one for the portfolios

Given that there are so many extraneous circumstances that have resulted in sharp moves on low liquidity we are pleased to report that we managed to stay away from any bad news stocks and tempered our enthusiasm for small caps which have been offering huge value but remain untradeable and thin. December 2017 was a lesson in not believing everything CEOs tell you — an expensive lesson, but one we will never forget.

The quarter was characterized by continued emerging markets sell off, rand weakening 16% against the dollar and 10% against the pound and the all share index is down close to 2% for the year. The amazing thing is that only 9 shares of the 40 are up and of these 7 are rand hedges so being in the correct sector again beat overall index performance.

The power of conviction

Donald Trump, Cyril and the ANC, Brexit and trade wars continue to make taking any fundamental macro view impossible hence the portfolios also only trading in very few counters over the quarter. We prefer to trade what we know rather than offering a generic buy a bit of everything and hope to perform similarly to the index, when asset managers are in doubt they tend to move to a quasi-index tracker as its easier to explain losses that way, here at Courtney we would prefer to be in cash than hold shares just because the equity model says so.

Looking ahead

The emerging market sell off accelerated in the beginning of this quarter with the Turkish Lira showing down 22%, China Index 25% and Brazil Real down 14% for the year. EEM sell-offs generally pre-empt a world sell off. USA rate rises (the S&P now yields less than the 10 year for the first time in 9 years) means we will continue to be very conservative on the portfolios and hope by the end of the next quarter be able to report more positive returns.

The Courtney Capital Team

July 2018

Dear Client

“Beware what you wish for you may just get it”

After three years of complaining about lack of volatility and a gentle upward grind of world markets the first quarter of 2018 has delivered volatility in buckets. Traders now find themselves complaining of irrationality, illiquidity and volatility caused by the most innocuous tweets, whispers or possible short selling rumors.

Algorithms, ETFs (exchange traded funds) and quazi-index trackers have created an environment where the majority of fund managers find themselves all long similar themes, the result of this is that when there is a change of trend and panic results everyone rushes for the door together, our mission is to hopefully be the first one to recognize this change and be the first one out or at least reduce the long equity exposure such as to reduce losses.

Time in the market has always been a strong policy of ours but as a small and nimble fund manager we hope to outperform the ‘titanic’ managers over time.

JSE performance

The All-share started 2018 at 52823 points and closed at the end of the quarter at 48794 points, for a loss of 7.6%. Most of this could be ascribed to Naspers which was down 18% and reinforced our view last year that having exposure of over 20% to a share is not only bad asset allocation but is irresponsible. Another bellwether that saw big under-performance was British American Tobacco, a big dividend payer but out of favour due to slow delivery on smokeless alternatives – we preferred to get exposure to BTI via Reinet which trades at a 38% discount to NAV and has 70% of its NAV in BTI and this softened the liability.

What does the future hold?

The Trump rhetoric will continue to spook markets (he has an election to win and so won’t stop the America first narrative till after that), inflation is ticking up as oil continues to be massaged up prior to the listing of the Saudi wealth fund, wage increases due to limited unemployment and lack of qualified workers also is putting pressure on employers. These all point to higher interest rates which in turn could lead to downturn in the economy if raised too quickly. The FED is wary of this scenario and we doubt that they will push the accelerator on this front but then we do have a new fed chair so it’s all guess-work at the moment.

The Cyril euphoria is starting to wane

And South Africans are starting to wonder if anything has actually changed, mining charter about turns, football thugs, land claims and more corruption in the auditor space as well as the PIC backing Sagarmatha are all cause for alarm, we have taken an overweight ZAR hedge stance, this is not only based on an SA view but also on the chance that the carry trade is beginning to unwind as USA increases rates and South Africa has entered a reduced rate environment.

With thanks

We appreciate your continued support and hope to sail through the turbulent waters that we currently face with your NAV intact. I often get what’s app messages from Willem between 2 and 3 am in the morning and can assure our sleep patterns are affected not by a fear of loss (we are confident in our valuation metrics even though the market has a way of making you look a fool) but more by the fact that the current volatility has reinvigorated us to find more opportunities to enhance the returns on the portfolios.

Kind regards

Courtney Capital Team