Since the Government of National Unity was established in 2024, the initial wave of euphoria has passed. In the early phase, sentiment played a key role in driving stock performance, particularly in sectors like retail and financials, which tend to respond quickly to shifts in confidence. However, it’s the underlying structural changes that will influence investment outcomes over the long term. For investors looking to gain exposure to the SA opportunities we believe will deliver over the long term, the Denker SCI* SA Equity Fund is a compelling option.
We have started to see progress on some much-needed structural reforms, but the true impact of structural changes typically plays out over three to five years.
Load shedding has improved significantly, easing some of the constraints on companies and economic activity. Similarly, efforts to resolve Transnet’s inefficiencies signal an attempt to address critical bottlenecks in logistics. In the water sector, the processing of water use license applications has improved significantly, facilitating investment in sectors like mining, agriculture, and infrastructure. While these steps are encouraging, meaningful reform takes time to translate into sustained economic and market performance, and there is still a long way to go.
For South Africa to unlock its full potential, continued reforms are essential. On a positive note, the macroeconomic environment is supportive – interest rates remain stable and could decline further, creating a more favourable backdrop for businesses and consumers. However, market performance won’t follow a smooth trajectory. Economic recoveries and structural shifts are rarely linear, but even small successes in implementing reforms could trigger a meaningful growth for South African equities.
Historically, when conditions aligned, we saw strong market performance. Between 2010 and 2016, for example, several key factors contributed to the doubling of SA price-to-earnings (PE) multiples, reflecting both earnings growth and improved investor confidence. Today, valuations remain attractive, with many South African companies trading at appealing levels relative to their earnings potential.
Given this backdrop, investors looking for exposure to SA equities over the medium to long term may find compelling opportunities. This is where the Denker SCI* SA Equity Fund comes in.
This SA-only equity fund falls within the ASISA SA – Equity – SA General category.
While short-term market sentiment can drive fluctuations, we believe that company fundamentals are the key drivers of long-term returns.
The businesses we invest in are set to benefit as structural reforms continue to unfold.
Our intrinsic value1 philosophy is rooted in fundamental research, focusing on businesses that can grow their intrinsic value over time. We invest in companies with good business economics, quality management teams and attractive valuations. For us, valuation discipline is key – we only invest when a company’s intrinsic value offers a sufficient margin of safety.
A good example of a company that meets our investment criteria is Mr Price, a holding in the fund.
- Mr Price operates in the fashion value segment and has an exceptional portfolio of brands, including Mr Price, Mr Price Sport, Mr Price Hime, Miladys, Sheet Street, Power Fashion and Yuppiechef.
- In the current economic environment, the company is well-positioned to benefit as consumers shift their spending towards more affordable alternatives. Supported by good cost containment and resilient revenue, this shift is expected to result in improved profitability for Mr Price over the medium term.
- The business delivers strong returns, with our assessment of normalised return on equity at 28% (which is well ahead of its cost of capital). The balance sheet is very strong, holding over R10 a share in net cash. We also rate its management team highly.
There are three key areas we believe give us an edge in SA equity investing: experience, an integrated research approach, and exposure to small and mid-cap stocks.
- Experience: With decades of investing through different market cycles, we have a deep understanding of South African equities. This experience allows us to navigate uncertainty, identify opportunities, and make informed decisions efficiently – even in challenging market conditions.
- Local and global integrated research approach: Our in-house research process gives us a significant advantage, allowing us to assess SA companies not just in a local context, but also relative to global peers. This broader perspective helps us identify value where others may not and make high-conviction investment decisions backed by thorough analysis.
- Small and mid-cap exposure: While the fund has meaningful exposure to SA’s large-cap stocks, where liquidity and stability are key, our expertise in small and mid-caps provides an additional edge. Figure 1 shows the fund’s market cap exposure compared to the benchmark. These under-researched opportunities can offer strong long-term growth potential, giving investors a well-balanced portfolio.
Figure 1: Market cap exposure – fund vs. benchmark
Source: FactSet, 31 December 2024.
Hudaco Industries is an example of one our small cap holdings that has performed extremely well over time.
- Hudaco is a wonderful proxy for SA Inc. as it imports and distributes high quality branded automotive, industrial and electronic consumer related products across southern Africa.
- It has generated a total cumulative return of 175% over the past five years. This is a 22.4% annualised return, despite a tough macro environment.
- It has exclusive relationships with suppliers and original equipment manufacturers, where a value-added component is required in using or installing the product. This strengthens its overall business case and gives the company a sustainable competitive advantage.
- It has a decentralised management structure – so decision-making is distributed across various levels of the company rather than solely at the top.
- It is diversified across multiple industries and sectors of the economy and generates returns well ahead of its cost of capital. We rate its management team highly.
The fund has delivered strong performance over the past five years, achieving solid returns vs. its peers.
Figure 2: Annualised performance since inception – 28 February 2025
Over three years, the fund falls within the top 20% of performers in its ASISA category.
Source: Morningstar, 28 February 2025. Returns are for the B1 class which has an annual management fee of 0.74% (excl. VAT). Returns are net of fees. Returns for periods longer than one year are annualised. Prior to April 2018 the benchmark was the FTSE/JSE Alsi. The highest annual calendar year return since inception was 32.8% and the lowest was –4.7%. Inception date: May 2017. *SCI stands for Sanlam Collective Investments.
Figure 3: Five-year rolling returns since inception – 28 February 2025
The fund has done well over rolling five-year periods. Figure 3 shows that the weighting away from the top 40 stocks has added to relative performance.
Source: Morningstar, 28 February 2025. Returns are for the B1 class which has an annual management fee of 0.74% (excl. VAT). Returns are net of fees. Returns are annualised. *SCI stands for Sanlam Collective Investments.
We believe the Denker SCI* SA Equity Fund offers unique advantages and the potential for attractive returns in the current supportive environment.
To find out more about the fund, or to invest, contact us or find the latest marketing material at the links below.
1. Intrinsic value is the present value of a company’s total expected net cash flows.
*SCI stands for Sanlam Collective Investments.
Disclaimer:
The Manager of the fund is Sanlam Collective Investments, a registered and approved Manager in Collective Investment Schemes in Securities. The Manager retains full legal responsibility for third party named portfolio. The Sanlam Group is a full member of the Association for Savings and Investment SA. A schedule of fees and charges and maximum commissions is available from the Manager. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments schemes. The B1 class is the most expensive class of the fund, with an annual management fee of 0.74% (excl. VAT), maximum initial fee of 3% and maximum annual advisor fee of 1%.
Source of performance figures: Morningstar. Returns are annualised and net of fees unless otherwise stated. Annualised returns are returns for a period that are scaled to one year. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. Changes in exchange rates may have an adverse effect on the value, price or income of a product. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV-to-NAV calculations with income reinvestments done on the ex-div date. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (CISCA). The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002.ape
