The objective of the Sage SCI Moderate Solution Fund of funds is to secure steady growth of capital, and to offer a return of at least CPI+5% over a rolling three year period. The portfolio will aim never to have a negative return over any one year period.

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.

There were no manager changes over the quarter. The overall equity allocation of the FoF was largely been unchanged over the past six months with a look-through allocation close to the maximum 60% allowed by the category. Managers here continue to overweight SA equities (at 38.7%) over foreign equities (at 18.1%), and prefer SA cash (at 21.9%) to SA bonds (at 12.5%). The FoF has a 4.5% allocation to SA property, and a smaller allocation to foreign cash, bonds and property.

Over the past year, the FoF performed in line with its CPI+5% p.a. benchmark and benefited from the manager changes that were implemented earlier in the year. Over the three-year investment horizon of the FoF, however, the underwhelming performance of SA equities (up just 3.5% p.a.) has contributed to the underperformance of the FoF relative to its CPI+5% benchmark.

Recent changes to the portfolio have reduced its dependence somewhat on SA equity market performance to achieve its objective, although this remains an important component. In 2019 South African economic growth surprised on the downside, and this put a damper on the performance of SA equities (outside the resource sector) when compared to other equity markets. Our view is that the SA economy remains vulnerable to further weakness.

Despite this, the FoF typically will hold a substantial allocation to equities to deliver on its return objective, and consequently will benefit should SA equities positively rerate. At the same time, the FoF remains sensibly diversified (including a substantial allocation to foreign equities) while aims to protect capital should market conditions deteriorate.