March 2016 saw equities rallying 6.9% in US dollar terms globally as measured by the MSCI World index, with Emerging Markets being a driver, up 13.3% in USD, outperforming Developed Markets as risk appetite increased drastically, not the least due to a more dovish FED in the US and rising oil prices.

The best-performing emerging market was Brazil, up 30.5% in USD, with South Africa being fifth - up 18% in USD as the South African rand also strengthened in the risk-on environment. Year-to-date, MSCI World and MSCI Frontier Markets have delivered negative dollar total returns of -0.2% and -0.8% respectively, while the MSCI Emerging Markets Index is up 5.8%.

In local currency terms, the South African Shareholder-weighted All Share Index (SWIX) was up 8.3%, with Financials posting a very strong 11.5% return, following four months of negative total returns. Resources and Industrials underperformed the market, having been up 5.1% and 5% respectively. Interestingly, while Resources were amongst the best performing sectors in 1Q2016, posting a positive 18.1% (only mid-caps were better at +18.8%), on a one- to nine-year basis, the sector posted negative returns, vastly underperforming the broader market.

From an asset class standpoint, Listed Property and the FTSE/JSE All Share Index were the top performers, returning 9.48% and 6.44% each. Vanilla bonds returned a positive 2.63% followed by inflation-linked bonds (0.93%) and cash (0.58%). Year-to-date, bonds, as measured in the ALBI, have posted a rand total return of +6.6%, outperforming the ALSI..s+3.9%.

USD/ZAR has seen a large increase in volatility over the last few months, gaining 7.1% and hovering around 14.70 at the end of March. The rand also strengthened against the euro (2.8%) and the sterling (3.9%), with the latter being depressed by the Brexit risk. Gold ended the month nearly flat, while Brent crude oil increased by more than 10%, breaching US$40/bbl but nevertheless finished the month at around US$39.6/bbl.

The FED in the US left interest rates unchanged and pointed in a rather dovish statement to a global uncertain growth environment as a risk to US growth while at the same time indicating a less aggressive rate hiking cycle with now only two more hikes of 25bps expected for this year. The European Central Bank meanwhile reiterated its commitment for further Quantitative Easing measures in order to boost growth in the Eurozone.

In South Africa, the Reserve Bank hiked interest rates by 50bps while the Constitutional Court strengthened the position of the Public Protector, thus correcting the government..s interpretation on matters such as the Nkandla ruling. Political repositioning within the ANC added to the currency's and asset classes' volatility.

The first quarter of 2016 was characterized by an environment where liquidity was the overriding factor driving markets. Following the sharp sell-off in the early part of the quarter, March saw Emerging Markets having their best performance in years, while a strong rebound in developed markets drove many indices back into positive returns for the year. On the face of it, that rally pointed to increased confidence about economic growth, even more so, as commodities also came off their lows.

However, looking at the detail, it is clear that the move in share prices lacked any conviction as bond yields stayed low, growth and quality stocks faded and most of the positive moves came about in cyclical value and low quality value. In a way, the market looked uncertain and was trying to close the valuation gap between the leaders where conviction of further rerating was low given the doubts over economic growth - and the laggards where exactly those negative fundamentals were ignored. The result is a market where on aggregate bottom-up expected returns are in low single digits, while dispersion of those expected returns points to interesting opportunities going forward.

The Optimised Equity Fund underperformed the benchmark in March as its exposure was tilted to fundamentally sound stocks which, as described above, did not all get the same bid as some of the lower quality names. At the same time, positive offshore returns were dented by the strength in the South African rand. As markets return to fundamentals and more clarity about future economic growth in particularly US and China is obtained, we are confident that the fund will achieve its investment objectives.