The FoF is a combination of underlying managers with diverse skill-sets from various ASISA categories to build an optimal medium equity portfolio. The combination of managers strikes a balance between the CPI+5% target of the FoF, and its objective not to lose money over 12 months.

The overall equity allocation of the FoF was unchanged over the quarter with a lookthrough allocation of 56% close to the maximum 60% allowed by the category. Managers here continue to overweight SA equities (at 38.4%) over foreign equities (at 18.3%), and prefer SA cash (at 19.7%) to SA bonds (at 14.7%). The FoF has a 4.8% allocation to SA property, and a smaller allocation to foreign property and foreign bonds.

Year-to-date, foreign equities (up 13.9%) have substantially outperformed SA equities (up 6.9%), while SA nominal bonds (up 7.7%) have outperformed both SA cash (up 3.4%) and SA inflation-linked bonds (up 3.3%). Within SA equities, SA resources (up 19.2%) have been the top-performing sector. The relative outperformance of SA resources has been driven by spot commodity prices remaining higher than expected (despite global economic growth continuing to decelerate). The strong performance of the underlying asset classes has contributed to the FoF achieving its inflation objective year-to-date.

For the quarter, SA equities (up 2.9%) outperformed foreign equities (up 1.3%), but underperformed SA nominal bonds (up 3.7%). Within SA equities, SA financials (up 7.0%) were the top-performing sector, with SA property (up 4.5%) re-rating somewhat in sympathy. SA inflation-linked bonds (up 2.8%) outperformed SA cash (up 1.7%), but underperformed SA nominal bonds. The rand strengthened against the US dollar over the quarter (up 2.2%) while SA inflation has remained relatively subdued around the mid-point of the 3% to 6% band.

The market now expects the South African Reserve Bank (SARB) to cut short-term interest rates twice this year. This reversal (the market previously was pricing in rate hikes) follows further dovish comments from the US Federal Reserve who is now expected to cut rates in 2019 (the market was previously pricing in four interest rate hikes).

Over the five-year investment horizon of the FoF, SA equities (up 4.3% p.a.) have materially underperformed foreign equities (up 12.3% p.a.) and our expectation for this asset class, while SA nominal bonds (up 8.6% p.a.) and SA cash (up 6.7% p.a.) have both delivered returns that comfortably exceeded CPI (averaging 5.0% p.a.). In contrast, SA inflation-linked bonds (up 3.9% p.a.) has underperformed SA fixed interest and even foreign bonds (up 6.7% p.a.). The underperformance of SA equities has resulted in the FoF not achieving its CPI+5% p.a. objective over this period

South African economic growth continues to surprise on the downside, and is vulnerable for further weakness. The global economic environment could also deteriorate, and the market has arguably been too aggressive in pricing in further interest rate cuts from the US Federal Reserve. The Sage Moderate FoF remains sensibly diversified across manager strategies, with a sensible combination of high conviction managers that have delivered better risk-adjusted returns than the SA equity market, and managers that can protect capital through adverse market conditions.

The market now expects the South African Reserve Bank (SARB) to cut short-term interest rates twice this year. This reversal (the market previously was pricing in rate hikes) follows further dovish comments from the US Federal Reserve who is now expected to cut rates in 2019 (the market was previously pricing in four interest rate

The FoF is a combination of underlying managers with diverse skill-sets from various ASISA categories to build an optimal medium equity portfolio. The combination of managers strikes a balance between the CPI+5% target of the FoF, and its objective not to lose money over 12 months.

The Sage Moderate FoF also makes use of lower-cost index funds to gain exposure to multiple asset classes, and utilises ABAX for its focus on taking advantage of asymmetrical opportunities and Allan Gray for its contrarian investment approach. Managers with a focus on capital protection include Matrix and Sasfin. These managers try not to lose capital over any twelve-month period, and help ensure the overall FoF remains within its maximum 60% equity limit.

Managers focused on capital growth with highly flexible mandates include Bateleur and PSG. These high conviction managers can implement their best investment view across all asset classes and have the discretion to hold up to 100% in equities if so inclined.

The FoF has enjoyed a strong start to the year, with ABAX being a particularly strong contributor to performance, and given the attractive valuations currently on offer, and the underlying managers' skill-sets, we remain optimistic for the FoF's prospects. The FoF remains relatively fully invested in equities with a look-through allocation of 56% close to the maximum 60% allowed by the category.

Foreign equities at a 15% allocation in the FoF was a material contributor to performance this quarter (developed market equities were up 12.8% in rands) while SA equities (up 3.9%) had a reasonable quarter but materially lagged emerging market equities (up 10.2%). SA nominal bonds (up 3.8%) continued to outperform inflation-linked bonds (up 0.5%) and SA property (up 1.5%) while global property (up 14.5%) the standout performer and significantly ahead of foreign bonds (up 2%).

The subdued performance of SA inflation-linked bonds has been on the back of an improving inflation outlook in SA, while the strong performance of global property has partly been fuelled by an increasingly dovish US Federal Reserve.

The US Federal Reserve left short-term rates unchanged at both their January and March meetings, and signalled their intention for no further interest rate increases in 2019. The pause in their tightening cycle reflects a softening of economic growth and subdued inflation in the US, and gave emerging markets some breathing room with the South African Reserve Bank (SARB) being able to leave interest rates unchanged at both its January and March meetings.

South African economic growth continues to disappoint with the SARB now expecting just 1.3% growth in 2019 (materially less the 1.9% the SARB expected for 2019 as recently as last November) while National Treasury (under slightly more optimistic growth assumptions) only expects SA government debt to stabilise in 2023/4 at 60.2%.

SA government debt is priced as if it was already sub-investment grade, and offer an attractive yield given contained inflation forecasts despite market concern around contingent State-Owned Enterprises (SOE) liabilities and potentially optimistic economic growth forecasts.

The Sage Moderate FoF remains well diversified across managers and strategies and suitably positioned to take advantage of market opportunities as they materialise. Important trades over the quarter were the introduction of low-cost tracker funds and the capital protection manager Sasfin into the portfolio, and the reduction of Allan Gray Balanced and sale of Coronation Balanced Plus.

The FoF is a combination of underlying managers all of whom have proven track records and the ability to generate significant outperformance over time. The FoF has been constructed to make full use of the available equity allowance within the sector, but managers have considerable discretion in whether they choose to utilise it.

At quarter-end, the look through equity allocation of the FoF was 59,0% % which is close to the 60% maximum allowed by the category. The bulk of the equity allocation (45,7%) is South African (SA) equities with the foreign allocation of 21,4% mainly invested in foreign equity (13,2%).

SA equities had a poor quarter (down -1.7%) after a difficult September (down -4,2%) and are now down-7,4% year-to-date. The weakness in the SA equity market has not been confined to domestic-orientated stocks with both Naspers and BTI (two large rand hedge shares listed on the JSE) significantly down from their recent highs. Other SA assets (i.e. SA bonds and SA property) continued to lag SA cash over the quarter, with international equities (up 7,7%) the only significant outperformer.

One manager change was made this quarter on qualitative grounds with the Sanlam Select Defensive Balanced Fund included in the portfolio. Matrix has strong fixed interest capabilities and has successfully run the Sanlam Select Defensive Balanced Fund since its inception. The inclusion of Matrix facilitates the deployment of more assertive managers in the FoF while remaining within in the maximum equity allocation.

The FoF had a challenging quarter relative to its CPI+5% p.a. benchmark, and remains behind year-to-date, and over its stated five-year investment horizon. The challenging returns for the FoF and peergroup over the recent period has mainly been driven by subdued SA equity market returns. The FoF remains well diversified across managers and asset classes, but given its growth focus has a substantial allocation to SA equities. The PSG Flexible Fund was the standout performer over the past year, despite falling short of the inflation target.