The SIM Active Income Fund will change it's name to Sanlam Investment Management Active Income Fund, effective from 25 August 2016

SIM Absolute Return Income Fund has closed and merged into SIM Active Income Fund.

Market review
The start to 2016 can be labelled as more of the same. Domestic political upheaval and weak domestic growth coupled with a slow international economic growth scenario left most investors with more questions than answers after the first quarter of 2016. We started the year with equity markets falling by more than 10% on the back of lower oil prices, concerns about debt in the Chinese economy and talk of possible global economic recessions, even in the more stable United States. We saw some stabilization in the latter part of the quarter after the Bank of Japan introduced negative interest rates, the European Central Bank reiterated their commitment to a loose monetary policy, and Janet Yellen sounded more dovish and mentioned their concerns around international markets.

The weaker US dollar brought some relief to emerging markets and commodity prices. The rand staged a mild recovery in the latter half of the quarter and ended at R14.71/$. The ramifications of a possible sovereign ratings downgrade during the year is still, however, a concern to many investors. The Reserve Bank responded to the weaker rand and higher inflation by hiking rates by 50bps and 25bps respectively during the quarter. Domestic inflation printed 7.0% yoy in February and highlighted the Monetary Policy Committee’s earlier concerns.

Bond yields compressed and the 10-year RSA yield closed at 9.03% from 9.69% end of December on the back of a stronger currency and improving sentiment towards emerging markets. South African bond yields are, however, still significantly higher than a year ago. Nominal bonds returned 6.6% for the quarter, followed by inflation-linked bonds at 2.2% and cash at 1.7%. Listed property recovered all of its fourth quarter losses and posted a gain of 10.1%.

What we did
We added to duration assets late in 2015 and early in 2016, including listed property. Property rerated very quickly, however, and towards the end of the first quarter we started reducing some counters after posting returns of more than 20% over a couple of months. We still prefer nominal bonds over listed property and inflation-linked bonds. Credit spreads widened slightly over the quarter, giving us some opportunities to invest in attractively priced counterparties, including a small allocation to inflation-linked credit. The recent hike in interest rates is also benefitting the significant floating rate debt component of the fund with the resultant higher reset of yields.

Our strategy
During the last quarter of 2015 and first few weeks of 2016 investors got an opportunity to buy attractively priced domestic fixed income and listed property assets. While we’ve seen some gains of late we still believe nominal bonds are cheap from a longer-term perspective. Our 10-year government bonds are trading above 9%. Therefore, with a high long-term inflation assumption of 6% investors will be receiving a real return of at least 3% - we view this as attractive. Current sentiment is still fairly pessimistic and this coupled with volatility will in all likelihood give us more opportunities to buy attractively priced fixed income assets.

Market review
The year 2015 will be remembered for all the wrong reasons. From a stuttering global economic recovery, weak emerging market currencies, a slowing Chinese economy right down to poor local sentiment and weak domestic economic growth. The cherry on top was three local Finance Ministers in one week - we are still dealing with some of the reverberations of this at the start of 2016. The strength of the US dollar was a catalyst for some of the pain, especially the impact on commodity prices. A general commodity oversupply situation and fears of slowing Chinese demand compounded the effect. The US economy was the only light at the end of the global tunnel and a well communicated 'lift-off' was achieved in December when the federal funds rate was increased for the first time in over nine years. Focus has now shifted towards the pace of further rate increases in the US.
In South Africa, the Monetary Policy Committee hiked rates another 25bps in November; this will surely be followed by a series of hikes in 2016 given the very weak currency and threat to the inflation target. The events in December surrounding the dismissal of the Minister of Finance and the re-appointment of Minister Pravin Gordhan do give confidence that the government does pay heed to financial markets. In all likelihood National Treasury's hand has been strengthened and it would find it easier to follow a macro-prudent economic policy that will support the inflation target.

Over the course of the year the rand weakened dramatically, from R11.57/$ to R15.49/$, while the repo rate increased from 5.75% to 6.25%. As can be expected, bond yields increased over the year and especially during December. The 10-year RSA bond yield closed the year at 9.69% from 7.87% at the beginning of 2015. Nominal bonds had a terrible year, returning -3.9% for the year and -6.4% for the quarter. Inflation-linked bonds posted +3.7% for the year, while cash delivered +6.5% for the year. Property posted a decent +8.0% for the year although it lost 4.7% during the last quarter.

What we did
Towards the latter part of the quarter we started adding some duration to the fund. Post the dismissal of the Minister of Finance, nominal bond yields increased significantly - we used this opportunity to increase the fund's duration in a measured fashion. There is a possibility of a downgrade of South Africa's credit rating to subinvestment grade during the year, but bond investors are well aware of this and their fears are more than likely reflected in the current bond prices.

We also used the sell-off in property to add some exposure to this asset class. On a relative valuation basis nominal bonds are still cheaper than property, but the fund's very low exposure to property (slightly over 1%) warranted an increase to this asset class. Our generally defensive stance gave us scope to increase the risk of the fund's asset mix during the quarter.

Our strategy
Domestic fixed income assets have re-rated during the last quarter of 2015. Our view is that this is a longer-term buying opportunity. As per our usual approach we'll increase risk in a measured way when we believe we are adequately compensated for the risk we take. The fund's yield is currently well over 8% and bodes well for income seeking investors. To close this commentary I'll repeat a previous (popular) observation: Increased market volatility provides asset managers with opportunities to buy cheap assets and exploit the inefficiencies that occur when everyone turns 'fearful'.