36ONE Asset Management has been appointed as the exclusive manager of the PPS Managed Fund. This fund seeks to achieve medium to long term capital growth by investing across asset classes, utilising 36ONE’s fundamental bottom up approach, combined with a top-down macroeconomic overlay. In the PPS Managed Fund (as in our other partnership strategies) our approach is to partner with a manager that our comprehensive research process has identified as having the skill set and capability to successfully manage the strategy. Partnership managers typically do not yet offer a similar strategy in the retail space. The PPS Managed Fund aims to outperform CPI+5%, and has an investment horizon of greater than six years. This fund is managed according to Regulation 28 of the Pension Funds Act and therefore is a suitable standalone vehicle for retirement savings.

Global stocks continued their upward trend in the fourth quarter. The MSCI ACWI index gained 9% in the fourth quarter, breaking through highs in December, at levels not seen since early 2018. Economic conditions have improved over the last three months as trade war concerns have waned and monetary stimulus has aided growth. The US and China, after months of back and forth, agreed to phase one of a trade deal, involving the rollback of existing tariffs on Chinese imports to the US in return for an increase in US energy and agricultural product purchases. This helped allay concerns about further trade war escalation and paves the way for discussions on more contentious issues such as intellectual property transfers. Concerns about year-end liquidity issues in the repo market, saw the Fed rapidly expand its balance sheet in December. Ultimately, some of this liquidity injection spilled over into equity markets, helping propel the S&P 500 and the MSCI higher.
Looking at the year ahead, China has accelerated the reduction in bank reserve requirements and stimulated additional credit growth to ensure that their 2020 GDP forecasts are achieved. A final settlement to the long-standing Brexit dilemma will hopefully stabilise and propel the Eurozone area into low levels of economic performance this year. The US seems set for the positive continuation of its 2019 GDP growth, with ongoing strength in wage and domestic consumption drivers. On the local front, the JSE Capped SWIX Index finished the year strong, rising 5.3% during the fourth quarter and bringing its 2019 return to 12%. Resources were the best performing sector for both December as well as 2019, posting a return of 7% and 28.5% respectively. Platinum and gold miners led the sector higher: Impala Platinum, Sibanye Gold, Northam Platinum, Anglo American Platinum and Harmony Gold were the top five shares on the JSE for 2019. Companies in the telecommunication sector struggled, with both MTN and Telkom dragging on the index’s returns.

South Africa’s economy unfortunately continued its slow decline as stage 6 load shedding hit the country for the first time. Worryingly, this was during a time when many businesses had already begun winding down for the festive season and it remains to be seen how the power utility will cope with peak demand. On a more positive note, it seems that the wheels of justice are slowly beginning to turn as a group of former Eskom senior managers have been arrested and charged with corruption. We look forward to seeing this trend continue in 2020 under a reinvigorated National Prosecuting Authority.

Moody’s Investor Services painted a grim picture of the country’s economy and changed the outlook on its government debt rating from stable to negative. The change in outlook reflects rising concerns that the government lacks the political will to implement the much-needed changes to lift growth. A pessimistic view is exacerbated by the fact that most of the headwinds to growth and financial stability are well-known and of long standing, such as the high unemployment rate, income inequality and acute financial stress in the state-owned enterprises (particularly Eskom and SAA). Following the bond selloff after the Medium-Term Budget Policy Statement in October as well as the subsequent negative sovereign credit outlook, we took the opportunity to increase our bond exposure. Our funds duration remains very low with little to no interest rate risk.

The PPS Managed Fund returned 13.1% for 2019. The domestic and offshore equity contribution was 8.5% and 3.5% respectively. The mining sector remains a favoured sector within the portfolio and we continue to remain constructive on the platinum sector due to structural reasons - we believe that increasing environmental regulations globally will continue to support demand. Equally on the supply side, a new platinum mine can take anywhere from 7 to 10 years to develop, which means that supply is going to remain subdued for the foreseeable future. Our portfolio continues to reflect bearish local sentiment with little exposure to domestic shares. During the quarter we continued to reduce our holdings of South African banks, as the earnings outlook for the sector continues to deteriorate. In addition, we took advantage of the stronger rand towards the latter part of the year to increase our offshore holdings. A diversified portfolio of global shares will provide protection in a scenario where the rand depreciates.

The Funds’ performance was positive for the quarter and outperformed the ASISA Multi-Asset High Equity category average. Positions in Impala Platinum, Northam Platinum, and Sibanye Gold contributed positively to performance. The largest detractors from performance came from AB InBev and the foreign cash exposure. Our offshore exposure benefitted from a strong rise in global markets. The top performing offshore holdings include Target, Facebook and Microsoft while positions in Nintendo, Dell Technologies and Verra Mobility detracted from performance.