2022 in review
At the start of the new year, we find ourselves reflecting on 2022… a year like no other, a year of pain. To better appreciate outcomes experienced in the year gone by, it is helpful to briefly note the historical context preceding the start of 2022.

In the aftermath of the Global Financial Crisis (GFC) (which ended around midway through 2009), developed world countries adopted unprecedented, exceptional and coordinated policy actions. What followed, among other things, was an extended era of ultra-low or
negative interest rates. By midway through the 2010s, it was thought that the nconventional policies would be temporary but, ultimately, they continued through the entire decade. By the end of the decade, naturally, the status quo thinking became heavily entrenched, an the asset classes and strategies that continued to be relative beneficiaries of such an environment became very crowded and expensive - they were everyone’s go-to when building a portfolio.

With the arrival of the Covid-19 pandemic in early 2020 and the deflationary demand shock that followed (which again reinforced the entrenched view that low inflation and low interest rates would persist, boosting already very expensive assets even more), these ‘longin-the-tooth’ policies were further extended, and even intensified with the addition of enormous developed market fiscal policy stimulus. Fuel was added to the fire, so to speak.

As 2022 began, an unexpected war started in Ukraine, resulting in shortages of agricultural commodities and an energy crisis in Europe. Chinese regulatory uncertainty and a property crisis further jangled market nerves. Global supply chains started transforming from ‘just
in time’ to ‘just in case’, relocating more business processes and suppliers closer to home, ushering in a new era of reverse globalisation.

As pandemic lockdowns eased, long, dormant inflation started picking up. While inflation had initially been deemed as ‘transitory’, it soon became clear that high inflation was likely going to be more persistent and that policymakers would have to unwind their ultraaccommodative policies. Markets began to slide.

Mid-way through 2022, the world was wrestling with the highest inflation rates in 40 years, and central banks around the world responded with an unprecedented series of interest rate hikes, sending stocks and bonds into a correction that continued into the end of the year.

In retrospect, 2022 was indeed a stomach-churning year. Looking at the returns produced from major global asset classes: the World MSCI Equity Index lost 18% in USD terms, the fourth worst annual performance since 1970; the Bloomberg Aggregate Global Bond Index lost 16% in USD terms, easily the worst year ever, dating back to 1976; a 60:40 combination of the former lost 17.4%, and you would have to look back to 1931 during the Great Depression and the 1937 crash to see worse annual performance numbers from the magical 60:40 formula. Locally, performance numbers were more measured, as emerging and commodity-producing economies share a very different dynamic to the large, developed world economies. With the local currency depreciating by 7% versus the US dollar during
the year, the FTSE/JSE SWIX All Share Index and the All Bond Index (ALBI) each returned a positive 4% in local currency terms.

Looking forward

The likely cause for most of the uncertainty experienced in 2022 is the build-up to a very important inflection point the market is in the process of assessing. We believe the market is trying to find a new equilibrium in a world where money is no longer easy to come by.
The era of low inflation is likely behind us, as we start to see the effects of deglobalisation and underinvestment in the real sectors of the global economy manifesting. The period of ultra-low global interest rates is most likely also over for now, and the assets that have
fared well in the low inflation environment are unlikely to be the same ones that will fare well in a high inflation world.

We believe investors need to reassess the market with a fresh mindset. The shares and sectors that are likely to fare well going forward may surprise some, and are likely to come from areas that have been deeply unpopular for a long time. It’s important to note that market volatility is likely to continue, and while dislocations are never pleasant, they present attractive opportunities for patient, long-term investors.

We are encouraged by the performance we have been able to provide in our funds due to our early positioning for the big changes that have taken place in the investment environment. More importantly, we remain excited about the rich opportunity set that this
adjustment period and the accompanying bouts of volatility bring, as it allows us to continue applying our proven 3M process and play a crucial part in building robust long-term portfolio strategies for our investors.

Portfolio performance and positioning

Over the quarter the PSG Balanced Fund returned 13.0% versus the benchmark return of 2.0%. Positive contributors to the fund’s return for the quarter were Prudential plc, Discovery Ltd and Hammerson plc, while put option hedges and Raubex. detracted marginally. This brings the year’s return for the fund to 9.2%. All asset classes contributed positively, with notable individual contributors being Grindrod Shipping Holdings Ltd (which was sold during the year), Hosken Consolidated Investments Limited and offshore oil drilling company Noble Corp. Defensive put option hedges also contributed positively as headline equity indices were weak.

Positions in Quilter plc, Liberty Global plc and Discovery Ltd were the top detractors over the year.

Notable changes to the portfolio included harvesting some of the gains from our equity and property positions and adding to fixed income opportunities that presented themselves in the quarter. The fund retains strategic put option hedging, moderating the aggregate market risk position taken in the portfolio. The fund’s largest purchases over the quarter were SA government bonds, Wheaton Precious Metals Corp and CNX Resources Corp, and Grindrod Shipping Holdings Ltd, Resilient REIT Ltd and Resona Holdings Inc were the largest
sales.

The fund is suitable for investors with an investment term of 5 years and longer. Over the short-term returns can be volatile and for this reason it is important to measure fund returns over the relevant investment term. Over the 5-year time horizon, the fund returned 6.9%
p.a. versus the benchmark return of 10.0% p.a. Since inception, the fund has produced an annual return of 12.8% compared to the benchmark return of 10.4%.