Current context
Global equity markets recovered sharply in the first quarter of 2019. The MSCI World Index delivered a total return of 12.6% and the MSCI Emerging Markets Index returned 9.9%. The JSE’s recovery was more lacklustre: the FTSE/JSE All Share Index gained 8.0% and was dominated by rand hedges, especially resources and Naspers. Domestic counters were material underperformers. The FTSE/JSE Small Cap Index lost 3.4% and financials declined over the quarter.

Local fixed income assets experienced some tailwinds from Moody’s decision to keep South Africa’s credit rating unchanged. This has resulted in the sovereign yields reducing slightly, as local and foreign investors continue to see value in South African government bonds. Anchored inflation - well within the South African Reserve Bank’s (SARB’s) 3% to 6% target band - has further supported yields, as the SARB has taken a more neutral stance on interest rates and maintained the existing repurchase rate of 6.75%.

Our perspective
As we have noted for some time, there is pervasive fear in certain parts of investment markets. This is in complete contrast to other areas that are well owned and in which investors are inclined to be complacent. Markets therefore continue to be characterised by wide valuation divergences. We are finding far more opportunities in those parts where investors are fearful, especially in the SA Inc. part of the domestic market, which has endured tough economic conditions and aggressive selling by foreigners in recent years. In fact, our bottom-up analysis is indicating valuations usually seen in deep bear markets. For longer-term investors who can ride out the storm, the return profile from carefully selected securities at such low valuation levels is promising.

Equally as encouraging is the fact that the opportunities we’re finding extend across almost all asset classes - a rare position to be in. We believe that this has allowed us to build diversified portfolios with favourable odds of achieving their mandates under a range of possible outcomes. We’re excited both by the opportunity set, and by the balanced nature of our funds’ investments.

Portfolio positioning
Equity exposure increased from 64.5% to 66.2% over the quarter, as the fund took advantage of the opportunities presented to buy shares in above-average quality global companies at attractive margins of safety.

The fund reduced corporate bond exposures as instrument prices reached our estimates of intrinsic value. Given that these are illiquid instruments, their hurdle for inclusion in the fund is high. As real yields in long-dated government nominal and inflation-linked bonds remain compelling, the fund has been adding to existing positions.

Overall cash levels of 7.1% have not changed over the quarter. The fund retains the valuable option to be a liquidity provider at attractive asset price levels if episodes of market disruption occur in the future.