The fund delivered a strong return of 5.8% for the quarter. Our long-term track record remains compelling with 10-year annualised returns of 11.4% and a since inception (16 years) number of 16.8%, both well ahead of inflation and the fund’s benchmark.

This quarter’s performance was remarkably broad based with most major asset classes delivering strongly positive returns over the period. In particular, local and global equities delivered a very solid result for the quarter, the latter further aided by some weakening of the rand during this period. We have maintained a fairly high weighting to equities in the portfolios this year, which benefited investors, and have used selective purchasing of cheap derivative protection to manage the associated risk. We caution that while markets have been remarkably benign, global risks remain elevated given the state of political disruption around the world. We are always cognisant of risk first and as a result have ensured that while we participate in the strong run in equity markets there is protection in place to deal with the unexpected. This is often not appreciated during benign periods in the market and only becomes evident when there is a violent market correction.

Within the local equity portion of the fund, our resource weighting has continued to perform extremely well, specifically our exposure to Anglo American and Exxaro. We have reduced some of this exposure and started to increase our holding in Sasol. Sasol has performed poorly on the back of a low oil price and poor execution of its major construction programme in the US. We now believe the price fully reflects these negatives and offers potential upside on the successful completion of the project and the strong cash flows this should generate for shareholders.

In the industrial space we have added to Netcare and Aspen, such that both positions are now meaningful in the portfolio. We think both stocks have de-rated to the point that the investment case is extremely positive, with little downside and good upside potential in Aspen as their international acquisitions start to deliver and in Netcare as the domestic results improve off a low base.

Owning very little in the way of fixed rate government bonds, either locally or globally, has detracted from the fund's returns. This was however offset by the very strong performance from credit during the period and here the fund was well positioned. After going through a period of remarkably low appetite for credit locally we have seen a spike in demand for new credit which has driven spreads downwards, resulting in good performance from our credit portfolio.

Our property exposure did not contribute to performance over this period but remains a compelling opportunity. With very attractive distribution yields and potential for significant capital growth in the years ahead, we are very confident that these holdings will be an important part of the future growth of the fund. We have continued to add to our exposure to Intu, the UK retail property fund, where we can earn a dividend return in excess of 6% with potential growth to come from rental growth driven by improved centre performance.
The overall exposure to offshore assets benefited from the weakening of the rand in this period and, as a result, we have reduced some of this exposure. Our effective exposure to offshore assets (excluding investments in sub-Saharan Africa) is currently around 32.5%. Of this approximately 26% is invested in risk assets, with the balance being invested in high yielding US dollar and euro instruments.

Overall the fund is well positioned to benefit from the continued run in global markets, but with sufficient conservative protection in place to deal with any potential market corrections which we believe is becoming a higher probability risk.

Portfolio managers Neville Chester, Pallavi Ambekar and Nicholas Stein

The fund managed to eke out a small positive gain of 0.2% for the quarter, marginally ahead of its benchmark, in what continue to be very trying times domestically and also fairly complicated markets globally.

After a promising start to the quarter, the SA equity market came under significant selling pressure in June, resulting in a negative return of -0.4% from the all share index. In part, the weakness was due to a surprising period of rand strength despite the negative macro outlook, but a broad-based sell-off of domestic stocks wreaked the most damage. Resource shares in particular were impacted by the release of the new mining charter which, apart from being ambiguous, proposed a host of new onerous demands on an industry already struggling due to lower commodity prices and rising cost pressures. In an industry which has been struggling to attract new capital and has been haemorrhaging jobs for years, this was an unwelcome announcement which is likely to have further negative implications for growth in the local economy. It has been challenged by the mining sector and given the numerous apparent conflicts with existing laws and the constitution, it is unlikely to proceed in its current form, but it will weigh on the sector in the interim.

The industrial sector also came under pressure as retail stocks in particular started to bear the brunt of the recessionary conditions as well as increased levels of taxation post the 2017 Budget. These stocks, which are particularly well owned by foreign investors, face a tough few years as the double-digit growth they have grown used to, potentially turns negative. Given very low levels of confidence and continued job losses across all sectors, including for the first time government sectors, consumer expenditure will remain very weak, especially on discretionary items.

The financial sector has also been weak as investors digest downgrades and the prospects of further downgrades to junk status remain very real. Despite producing fairly robust results with low credit losses, the markets remain nervous about the outlook for this sector, and renewed threats to financial companies from political organisations remain a big concern for investors.

In contrast to this, global equity markets continued to perform well despite the increased levels of geo-political noise. With Trump’s constant surprise policy announcements, North Korea’s rising aggression and the looming end of quantitative easing, there is plenty for markets to be worried about. But they seem to be ignoring this as a number of equity markets continue to reach new highs.

We have a high exposure to offshore equity, but have taken advantage of very low levels of volatility to buy put protection very cheaply to hedge out some of the market risks.

Local bond markets had a decent return for the period despite the concerning shift in fiscal direction in SA. Asides from any change in spending patterns due to political changes, the risks of missing targeted revenue collections is rising as the recession starts to bite and tax take expectations reduce. This will put pressure on funding and we expect interest rates will have to rise to accommodate this additional funding. As a result we remain underweight domestic fixed-rate bonds. This is partly offset by our continued overweight position in listed property.

We remain underweight global fixed-rate bonds, and expect that rates still need to normalise towards higher levels. We have seen the start of this, with German Bunds and US treasury yields starting to pick up, but we believe there is still a long way to go.

In a low-return world where assets are broadly expensive, it is a challenge to find investments that will be able to deliver long-term inflation-beating returns. That is why active management is important. Indices may appear expensive on average metrics, but by identifying specific assets which are still cheap, we believe we can still deliver significant, positive real returns over the long term. As certain sectors become expensive there are usually other sectors, which are out of favour, which offer compelling value. We believe the fund has exposure to a number of these investments and will be able to continue to deliver on our long-term track record of delivering inflation-beating returns.

Portfolio managers
Neville Chester and Pallavi Ambekar as at 30 June 2017

The fund had an excellent quarter despite the extremely volatile environment. For the period it delivered a return of 4.4% against the fund's benchmark return of 3.0%. It is a hallmark of our fund's performance that we have generally done well during periods of high volatility and market shocks. Ultimately, valuation is the best protection in an uncertain environment.
Despite great uncertainty, locally and globally, we have had a high allocation to what are traditionally viewed as risk assets (equity and listed property). This is because we believe the actual risk lies in inflation eroding real capital values over time. And given the various asset classes one can allocate to, equity and property still offered the best risk/return payoff profile.

Our equity returns have continued to do well, as on top of markets trending upwards, we have added significant alpha as well. In our domestic portfolios our allocation to resource shares and dual-listed companies with operations outside of SA has done very well. Our underweight position in companies that are sensitive to domestic interest rates and the local economy has also been beneficial as these companies have been hit the hardest following on from (yet another) replacement of the finance minister.

Our global equity position, which had a higher allocation to other emerging markets, has done well, and we have started to reduce our exposure here. This was partly through physically selling down as well as through buying S&P puts which are extremely cheap given the very low levels of volatility in US markets.

Our property allocation has done well, with the UK-listed property stocks ? Intu and Capco ? prospering as the rand weakened towards to end of the quarter. Despite the bond sell-off in March we have done well in the likes of SA Corporate and Rebosis, and we took advantage of some of the earlier market strength in the quarter to reduce some of our higher-rated positions. We have been very underweight sovereign debt for some time, and have maintained this position, which assisted performance significantly this year. Global bond markets remain very expensive due to central bank buying strategies, and the local market does not fully price the risk of greater budget deficits as economic growth weakens and potential demands on Treasury increases.

Our overall allocation to offshore assets is sitting close to its maximum as we are very concerned about the National Treasury's change in direction under the new finance minister, and the rhetoric that is now emanating from what used to be a bastion of fiscal restraint within government. Should radical economic transformation move from just words into action, it is likely to be very negative for the economic prospects of the country and this will reflect in domestic asset prices and the value of the currency. We believe it is appropriate to position the fund as conservatively as possible in these times to protect investors' capital.

Please note that the commentary is for the retail class of the fund.

The fund delivered a respectable return of 5.1% for the year to end- December 2016, marginally ahead of its benchmark return of 4.9%, in what has been an incredibly challenging 12-month period. 2016 was marked by a number of surprise political outcomes and significant volatility in asset classes. We managed to deliver returns ahead of benchmark through great stock selection and active asset allocation, offset partly by our overweight exposure to foreign currency in a year when the rand strengthened against most currencies.
Within our equity selection, there were two main drivers of returns. In our domestic equity portfolio our overweight position in commodity shares added significant alpha over the local equity market. Despite a lot of negative short-term concerns regarding the outlook for commodities at the beginning of the year, the sum of all these fears were more than reflected in the prices of these companies. We saw a strong re-rating of all our commodity holdings in 2016 as the price of physical commodities stabilised and markets recognised the shares were trading at very low ratings. Despite the re-rating, we continue to hold a significant position in resources as we feel the share prices still offer decent upside in the current environment.

The other main driver of returns in the equity portion of the fund was our overweight position in emerging markets within our global equity portfolio. This was also a position we had held for some time contrary to the popular sentiment. We felt the markets had priced in a lot of negative news, with very little recognition for a potential turnaround. Subsequently, 2016 saw emerging market equities do well in local currency terms, and most of them performed even better in US dollar terms as many emerging market currencies had also been oversold. We have reduced some of this position towards the end of 2016 but still have meaningful exposure to emerging markets.

Where the fund did well by not having exposure was global bonds. After many years of cautioning around the risks of buying global bonds on incredibly low yields, we saw global bond markets sell off quite vigorously at the end of the year. This was driven by a combination of the realisation that short-term rates in the US are going to rise and the potential for greater debt issuance as a result of the new president's fiscal plans. Despite the sell-off in US 10-year bonds, we still do not find the assets attractive enough to warrant an investment as yet. We have increased our weighting in local bonds during this period. After having virtually no exposure to fixed rate bonds in SA, we have pushed the fund's exposure up to 5% as the yields on SA 10-year government bonds surpassed 9%. With inflation having peaked at the end of 2016, and likely to decline into the 5% range in 2017, we think a real return from these bonds of 4% to 5% is quite attractive.

We also continue to hold a fairly heavy weighting in SA property. By having exposure to the mid cap names on yields of between 9% and 12% our property holdings significantly outperformed the index. We continue to hold on to these companies given their fairly high yields and the potential for further capital appreciation. What detracted significantly from our performance was our holdings of the UK-listed property companies, Intu and Capco. These companies' share prices were hit hard by the result of the Brexit vote and further impacted by the extreme weakness of the pound. We have maintained a big holding in Intu as we feel the share price has been unfairly sold off in these circumstances. The share trades at a discount of close to 30% to its underlying NAV, which we do not believe is at all warranted by the group's prospects going forward. Transactions in physical property subsequent to Brexit have confirmed that the NAV is accurately stated.

At the beginning of the year, when the rand sold off after the Nenegate debacle, we did bring back a significant portion of our offshore exposure, from its maximum of 35% to around 29%. While this was the correct call, the strength of the rand has meant that our offshore exposure has still detracted from our total rand return. We remain comfortable with our offshore exposure given the diversification benefits it offers and the potential returns we believe we can generate from a wider investment universe.

The volatility of markets across the board has once again shown the value of the actively managed multi-asset fund. By using all the tools available, the fund has managed to deliver a good return under trying circumstances. We remain confident that, looking forward, the fund will continue to deliver on its mandate to beat its quantitative benchmark as well as inflation over time.