Philosophy
The fund is suitable for pre-retirement savers and falls under ASISA’s multi-asset high equity fund classification. The objective of the fund is to earn the risk adjusted returns by acquiring mispriced securities, while limiting the exposure to any particular macroeconomic or political risk. Asset allocation and stock selection is done on a bottom up basis. We have resolved not to manage the asset allocation or the stock selection on a top-down basis. We are of the view that by managing the assets this way, investors are most likely to meet their long-term investment objectives.

Performance
Since the fund’s inception in May 2017 the FTSE/JSE Capped All Share Index delivered 11.2%, the SA bond market 4.4% and SA cash paid 4.9%. Offshore assets underperformed as the rand strengthened by 8%. In rand, the MSCI World Index delivered 2.8%, US bonds lost 7.9% and US cash declined by 7.7%. Non-benchmarked security selection has been the major source of underperformance; asset allocation detracted only 0.1% from performance since inception. For the final quarter of 2017 the fund underperformed relative to its benchmark. This was mainly due to the loss of value from the fund’s investment in Steinhoff (we disposed of the investment at an average price of R16.17). Asset allocation again detracted only 0.1% from performance over the quarter.

Noteworthy allocations
Owning assets exposed to different macro-economic risks and rewards is how one achieves diversification. This means that not all assets held by the fund can deliver returns in the same environment. Benchmarked domestic assets delivered robust returns (the fund’s equity allocations did not match the performance of the benchmark), while offshore assets have been a drag on rand returns for the fund. We remain committed to maintaining the 25% offshore allocation; split between equities and lower risk cash. We have no intention of increasing the fund’s offshore equity exposure or acquiring long dated developed market debt. We instead prefer to roll shorter dated cash investments which offer lower returns, but which add diversification and reduce the risk of capital losses.

Market review
Markets in South Africa were dominated by three significant events in the last quarter of 2017. The medium term budget statement that disappointed capital markets in October, the accounting scandal at Steinhoff that has had substantial consequences for equity investors in South Africa (with knock on effects for the corporate credit market) and the outcome of the ANC policy conference that provided some much needed optimism.

In the US, the Republican congress (without a single Democratic vote) passed a consequential tax bill. Tax reform combined with pro-growth administrative/ regulatory reform has the potential to see growth in the US accelerate. We are still evaluating the durability and implications of these wide ranging reforms for asset markets. Outlook Cyril Ramaphosa emerged as the new president of the ANC after the elective conference. Since the announcement the rand strengthened materially and equities geared to the local economy have rerated. The improved confidence is positive for the South African economy, but confidence alone will not solve the problems. The country’s balance sheet remains under pressure and policy announcements at the elective conference have the potential to put further strain on the fiscus. Ramaphosa faces the daunting task of unifying the ANC, winning the 2019 election and reassuring investors, entrepreneurs and skilled South Africans that the country is worth the risk. This entails a credible plan to close the gap between government revenues and spending without harming growth prospects (we see a real threat for further credit downgrades and a continued stagnant economy for South Africa). Unfortunately, a credible plan is no longer enough. Effective implementation is also required.