Nedgroup Investments Opportunity comment - Sep 12 - Fund Manager Comment25 Oct 2012
September saw another round of monetary policy easing by the world's major central banks. The US Federal Reserve, the European Central Bank and the Bank of Japan all extended their own quantitative easing (QE) programs. While these actions sparked a mid-month rally in global equities, markets gave up the majority of their QE gains by month end. The SARB kept rates on hold at the September MPC meeting, but there is a risk of further rate cuts going forward due to the poor economic outlook both in South Africa and internationally.
Inflation-linked bonds were the best performing asset class in South Africa for the month with a return of 2.7%. Nominal bonds delivered 0.9% for the month, which was ahead of the money market return of 0.4%. The All Share Index finished well off its highs of the month, but still delivered a positive return of 1.6%. Resources were the main driver of equity returns as the RESI delivered 5.7% for the month. Property was the only asset class with a negative return as it delivered -3.2% for the month. However, it remains the best performing asset class in South Africa for the year-to-date.
The rand was relatively stable over the month, appreciating by 0.5% on a trade-weighted basis. Emerging market equities benefited from the quantitative easing actions, with the MSCI Emerging Market Index return of 6.0% outperforming the MSCI World Index return of 2.8%.
Equity volatilities shifted down as the central bank liquidity injections were supportive for risk assets. The VIX fell 1.7 percentage points to 15.7% while Eurostoxx volatility fell 2.3 percentage points to 23.4%. Volatilities in South Africa ticked down slightly, with the South African Volatility Index (SAVI) falling 0.7 percentage points to 18%.
During September, the performance of the Nedgroup Investments Opportunity Fund was driven by the exposure to South African and foreign equities, as well as inflation-linked and convertible bonds.
Inflation-linked bonds (ILBs) have delivered tremendous performance over the last three months. With the continued fall in real yields, ILBs are now looking expensive and we have been systematically reducing our exposure to this asset class. We have maintained an exposure of 22% to convertible bonds as they provide an attractive fixed income return with upside participation.
The foreign exposure was increased from 13% to 20% during September in order to increase our exposure to global equities and take advantage of an opportunity in the offshore convertible bond space. At current valuation levels, we consider foreign equities to be attractive and we will look to increase this exposure going forward.
The net equity exposure of the Fund is currently 42%, with the 22% exposure to convertible bonds providing further upside in the case of rising equity markets. Although equity valuations are reasonable, we remain cautious due to the risks emanating from excessive debt at both the consumer and government levels.