Fund review

Amidst an uncertain quarter, the fund continued to deliver good absolute returns. Over Q3, and in line with our mandate to preserve capital, we reduced our exposure to SA equity. Exposure to SA listed property earlier in the year when the sector saw a dramatic rerating detracted over the one-year performance.

Our strategies are blended around providing a reasonable return relative to the opportunity set in a very risk-controlled manner over the medium term. This stance is borne out in our three and five-year numbers. The fund continues to exhibit high-quality returns, through some tricky periods, from currency, fixed income and equity markets (not one single asset class) whilst staying true to our multi-asset and multi-strategy approach anchored around capital preservation.

Market overview

It’s been a concerning few months for investors as liquidity withdrawal, dollar strength, rising concerns around emerging markets and trade tariff spats have potentially ushered in a new investing environment. It’s not clear how asset valuations will respond to the variety of changes taking place simultaneously across the world. This is one of the reasons our asset allocation process has a variety of scenarios that we constantly evaluate and interrogate.

The changing nature of the global environment (from a liquidity perspective) is causing casualties. It’s not clear what dominoes will topple next. China’s economy is weathering the storm as policymakers there stimulate with reserve and interest rate cuts. Our concerns around rates is driven by a need to be cognisant of forward-looking discount rates to have any sound view around what asset prices should reflect from a medium- and longer-term valuation perspective.

Looking ahead

The world, and by extension the investment world, is becoming more complex and more dangerous given the upside to downside skew. Given the complexity, we are holding fewer assets in fewer jurisdictions and continue to increase our liquidity profile. That may sound strange from a diversification perspective but the less we need to monitor and control, the better our risk management.

It’s been a whirlwind start to the year. Locally, the major themes were a Ramaphoria-powered rally in SA-flavoured risk assets, a severe selloff in property stocks (-20% at property index level), centred around fears of another major corporate fraud and a correction in JSE-listed heavyweights like Naspers and British American Tobacco, albeit for very different reasons. Our generally soft economy and strong Rand have combined to pull CPI inflation down to 4% forcing the SARB to cut short rates, but they accompanied this with a surprisingly hawkish statement. US markets started the year off still cheering the tax cuts signed into law in late December, but then we saw a “flash crash” that was catalyzed by higher US wage inflation and exacerbated by too many market participants betting that volatility would stay low, or grind lower. Although this was a technically-induced event, it was a significant one as it sparked a change in global markets’ animal spirits out of pure greed mode into a healthier appraisal of risks. As absolute return investors we regard this as a regime shift and it is key to how we walk the risk-return tightrope. The other major global events have included a selloff in technology shares with the Facebook data scandal prompting investors to mark down their expectations for firms like Naspers, disappointing economic data (relative to expectations) in Europe and trade war fears courtesy of Mr Trump’s negotiating style. Cutting across all of the above, the US Fed has continued to gradually remove the punchbowl, both in terms of raising short term interest rates and outright quantitative tightening. Markets are battling to digest the fact that the party seems to be nearing its inevitable end and the fact that there is a new Fed Chair adds an additional unknown. Risks have increased, and the markets are now much more alive to them. However, markets were overdue a pause and there are many parts of the globe where underlying activity levels remain healthy, so the change in participants’ risk perceptions shouldn’t be seen as bearish, yet. Given the new risk regime, and the long awaited increase in volatility we are now more circumspect in the way we are taking risk, and are also mindful that the rate of change of global cyclical expansion has slowed.