The Protector Fund returned 3.8% over the quarter, outperforming its CPI+5% objective. This brings the performance for the last 12 months to 16.2%.The fund continues to provide positive absolute returns ahead of inflation, with a high degree of focus on capital preservation.

Economic and market overview
Global and local equity markets continued their grind higher at a faster pace than economic improvements. During the quarter, geopolitical tensions in the Ukraine, between China and its neighbours and in the Middle East were notable. Monetary policy developments continued to influence asset prices. The US Federal Reserve left its tapering programme unchanged, the Bank of Japan continued with asset purchases and the European Central Bank cut short-term rates and announced it was looking at quantitative easing-style interventions.

In South Africa, the rand ended the quarter only slightly weaker, with the country acting as a relative safe haven in the emerging market context. The crippling five-month platinum sector strike, which came to an end during the quarter, has had broad negative consequences for a wide swathe of the local economy. NUMSA's subsequent strike in the metals and engineering sector will place further pressure on SA's uncomfortably large current account deficit and slow economy. S&P announced their widely-expected sovereign credit downgrade over the period, with Fitch moving South Africa's rating to a negative outlook. Bond valuations look marginally attractive at the long end of the curve. However, capital values remain vulnerable in the short-term given the high level of foreign ownership and an environment of high twin deficits and slowly normalising US monetary policy.

The SARB kept rates on hold at 5.5% over the period, but instituted its own form of forward interest rate guidance, highlighting that we are now in an upward rate hiking cycle. Given the ongoing economic weakness and in the absence of a significant currency shock from here, we expect a fairly shallow and gradual rate hiking cycle of around 1.5% over the next two years.

Fund performance and positioning
Tongaat, FirstRand and Pick 'n Pay were the fund's strongest performers over the quarter, while Lonmin, Metair and Anglo Platinum detracted. Offshore holdings performed well, particularly Apple, Unibail-Rodamco and Intel, as did the fund's PGM ETF holdings. The fund's position in Metair offers significant value as the company is likely to benefit from the global automotive sector's response to tightening vehicle emission standards, particularly by manufacturing batteries for start-stop engine management systems. Metair's subsidiary, First National Battery, has developed the technology to manufacture these batteries and Metair has made acquisitions that give it relevance in Europe's significantly larger vehicle market. Demand for start-stop batteries is expected to increase by 20% pa over the next five to 10 years and Metair is investing to expand production. At the current price, the stock is trading at below 10 times our estimate of normalised earnings.

Overall, levels in the SA equity market are now even more expensive than a quarter ago and we are finding very few undervalued stocks in the local market. Listed property has recently underperformed equities, improving the relative attractiveness of this sector. We have increased the fund's exposure to property companies with foreign operations (Intu Properties and New Europe Property Investments) and certain high quality domestic companies, which we think will fare better in the difficult operating environment we see ahead. The fund's preference share holdings provide a good alternative to cash, with a yield pickup of around 3%. We see value in longer dated bonds and have been increasing exposure into weakness. Inflation-linked bonds are offering very little value at current levels and we have sold our previous holdings. The fund retains a significant allocation to global assets, where we are finding opportunities in certain technology, healthcare and listed property stocks, as well as oil refiners and pipeline operators.