The STANLIB Balanced Fund increased by 2% over the last quarter ended 31 March 2016, underperforming its relative benchmark by 1.6%. The 3 and 5-years rolling performance remains good with 0.5% and 1.1% respective benchmark outperformance.

The stand out in the quarter was the volatility in risky assets and the 5.4% appreciation in the Rand. Domestic interest rate sensitive asset classes performed well in this environment with domestic bonds outperforming domestic equities. Domestic multi-national industrial equities also underperformed its asset class in this environment. Similarly, international equities suffered a decline of 5% after its stellar performance in 2015.

Our local market experienced volatile swings in performance during the quarter, falling almost 9% in the first 21 days of 2016 and then rallying more than 16%. The decline can be attributed to negative sentiment around Chinese growth and worries over further devaluation of the Renminbi coming into 2016. The initial pullback was reversed by dovish comments from the US Federal Reserve, which saw the investment community reduce its expectation for interest rate hikes in 2016. This coupled with enhanced stimulus measures from the European Central Bank triggered a risk-on view of the market.

The Resources sector reversed its decline with a 13% bounce in the quarter, although the fundamentals appeared to have little to do with the rally. Financials followed with a 5.4% return, although the rate hiking cycle may limit this, whilst Industrials declined by 0.7%. Global equities rose modestly in the first quarter with the MSCI Emerging Markets outperforming the Developed Markets.

Equity valuation levels remains at elevated levels, with a preference for income products which should still be able to deliver inflation beating returns without the risk of substantial capital losses in the former. Our preference remains skewed to offshore equities, where we find far more value and conviction relative to an expensive domestic equity market.

Looking ahead

We have positioned your Fund conservatively, given the extent of equity market gains over the past six years, together with the level of valuations and continued uncertainty around the global growth path; we remain cautiously tilted to higher quality multi-national companies that have a long-term history of compounding returns over time.

The STANLIB Balanced Cautious Fund outperformed its relative benchmark by 2% over the last quarter ended 31 December 2015.

The domestic stock market, especially locally focused names, saw unprecedented volatility as the minister of finance was unexpectedly changed and then changed again a couple of days later. The local currency was dumped as an escape route from the heightened uncertainty, driving the rand to record low levels against the dollar. This saw the local bond yield blowing out with unprecedented declines in the capital values of more than 6%. The underweight position in local bonds contributed 0.3% to the fund's total outperformance. Similarly to the previous quarter, the fund benefitted from its overweight positions in international equities, property and cash, which had a positive attribution of 1.2%.

The US Federal Reserve finally decided to increase interest rates by 0.25% after advertising the event for some time. The benign inflation outlook coupled with a struggling global growth environment questions the follow through of this restrictive monetary policy action though. Worries over the extent of the slowdown in the Chinese economy kept commodity prices on the back foot and extended further pressure to other emerging markets currencies. Their strategy of weakening their local currency may also have far reaching consequences for the rest of the globe as they compete more aggressively in the export market. Closer to home, we saw the South African Reserve Bank also increasing interest rates in an environment, other than the developed world, where upward pressure on inflation is starting to intensify.

Equity valuation levels remains at elevated levels, with a preference for income products which should still be able to deliver inflation beating returns without the risk of substantial capital losses in the former. Our preference remains skewed to offshore equities, where we find far more value and conviction relative to an expensive domestic equity market.

Looking ahead

We have a bias towards companies that can take advantage of the business cycle stage that we envisage with a strong reference to underlying intrinsic value. We have positioned your Fund conservatively, given the extent of equity market gains over the past six years, together with the level of valuations and continued uncertainty around the global growth path; we remain cautiously tilted to higher quality multi-national companies that have a long-term history of compounding returns over time.