Fund Review

The fund returned 3.66% in rands during the September quarter, or - 2.3% in dollars, as the rand took a knock against the dollar (-5.8%), as well as the pound (-0.6%), but gained against the weak euro (+2.2%). The fund's unit price has just hit an all-time record high in rand terms, while in dollar terms it is 5% below its peak of January 2013.

The fund continues to hold a big allocation to Emerging Market bonds (36%) and an even bigger allocation on the currency front (50%), because they hold a number of currencies without any bond holdings, including Indian rupees and Indonesian rupiah. They are underweight US bonds, European bonds and Japanese bonds. This strategy backfired a bit in September when emerging market currencies took a big knock against the mighty US dollar, along with the euro, pound, Aussie dollar and most other currencies. Fortunately, the portfolio is only slightly underweight the US dollar, at 37.3% relative to the Index's 40.8%.

Looking Ahead

Brandywine, the fund manager, expects long bond yields in the US will remain capped as a result of the still formidable debt overhang (almost $17 trillion for the US government alone), a benign global inflation environment, institutional de-risking, weak credit growth and entrenched concerns of global economic fragility. This is a different view from many managers, who expect bond yields to rise quite strongly. So far in 2014, most managers have been wrong. Brandywine has been right. Brandywine thinks that if the long bond yields do remain capped, then future US Fed policy rate hikes are unlikely to impact local emerging market bonds as much as the process of US quantitative easing tapering did.

The STANLIB Global Bond Feeder Fund will be a specialist feeder fund portfolio. The Manager will seek to achieve an investment medium for investors, which shall have as its main objective long term growth of capital and income. Apart from assets in liquid form, it will consist solely of participatory interests in a single portfolio of a collective investment scheme operated in territories with a regulatory environment which is to the satisfaction of the manager and trustee of a sufficient standard to provide investor protection at least equivalent to that in South Africa, namely the STANLIB Global Bond Fund.

Fund Review

The fund did well during the quarter to end June, returning 2.6% in dollars (3.6% in rands). The fund's unit price has just hit an alltime record high in rand terms, while in dollar terms it is only 2.4% below its peak of January 2013.

The fund continues to hold a big allocation to Emerging Market bonds (36%) and an even bigger allocation on the currency front (53%), because they hold a number of currencies without any bond holdings, including Indian rupees and Indonesian rupiah. They are underweight US bonds, European bonds and Japanese bonds.

Looking Ahead

Brandywine, the fund manager, expects long bond yields in the US will remain capped as a result of the still formidable debt overhang (almost $17 trillion for the US government alone), a benign global inflation environment, institutional de-risking, weak credit growth and entrenched concerns of global economic fragility. This is a different view from many managers, who expect bond yields to rise quite strongly. So far in 2014, most managers have been wrong. Brandywine has been right. Brandywine thinks that if the long bond yields do remain capped, then future US Fed policy rate hikes are unlikely to impact local emerging market bonds as much as the process of US quantitative easing tapering did.

Fund Review

The fund had a good quarter, returning 2.3% in rands and 0.5% in dollars, coming first in its sector, where the average return was 1.4%. For the year to end March, the fund did 11.4% in rands and -2.4% in dollars.

The fund managers, Brandywine Global Investment Management, based in Philadelphia in the US, had a very busy quarter, unusually so, changing the portfolio dramatically. Firstly, they increased the modified duration of the portfolio (sensitivity to changes in bond yields) from 3.8 at end December to 6 at end March, indicating a much higher level of confidence in the lowerfor- longer interest rate story, arising from a benign global inflation environment and concerns about global economic fragility. The current yield of the portfolio increased from 2.7% to 3.8% and the yield to maturity from 2.3% to 3.5%.

The biggest change to the portfolio involved reducing the US exposure from overweight at end December (51% versus 35.7% for the benchmark) to underweight at 27.3% of portfolio (versus 35% for the benchmark). Most of the change went into emerging market bonds, which now comprise 36% of the portfolio, from 18.6% at end December. Mexico was the biggest reallocation, now 14.9% of portfolio versus 2.1% before. South Korea followed with 7.9% versus 4.6% before, then Poland at 4.7%, South Africa at 2.8% (both similar to end December holdings), Malaysia at 2.1%, Brazil at 2.1% and Hungary at 1.5%.

Brandywine expects emerging market bonds and currencies to perform well and that has been happening so far in April. Exposure to peripheral Europe was also increased via Sweden, Italy and the Netherlands (11.1% in total). Australia and New Zealand total 16%. Brandywine even added further currency exposure to emerging markets, via the currencies of Chile (6%), India (5%) and Indonesia (4%), despite holding no bonds in these countries.

Looking Ahead

The structure of the portfolio has enabled it to benefit strongly from the sharp appreciation in the currencies of many emerging markets in the first ten days of April, as well as some capital appreciation in the bonds. Brandywine has so far been correct in 2014 in calling for bond yields to stay relatively flat. In fact the 30- year US government bond yield declined from 3.96% at end 2013 to 3.56% at end March 2014. Bonds have in fact outperformed equities so far in 2014, very much against expectations.

Fund review

The fund has had a tough year in dollar terms in a difficult environment for emerging market currencies and bonds and also for developed market bonds. For the quarter to end December the fund did a good job to record a positive dollar return of 0.8%, despite all the tapering fears. This translated into a positive rand return of 4%. The rand lost 6.4% against the pound, 6% against the euro and 3.1% against the dollar during the quarter. For the year to end December, the fund did -6.4% in dollars. This translated into a decent rand return of 15.4%, thanks to hefty rand depreciation (-23% against the euro, -19.5% against the pound and -18.9% against the dollar), although of course the fund suffered from holding certain emerging market currencies.

The fund continues with its big overweight in US bonds (50.9% of portfolio versus 35.7% for the benchmark) and in US dollars (72.3% of portfolio versus 41.4% for the benchmark), its big underweight in European bonds and in the euro (0.4% versus 27% for the benchmark), its big underweight in Japanese bonds and the yen (0% versus 16.6%) and a sizeable holding in emerging market bonds, although at 18.6% of the portfolio, it is down from around 24% before. The US government holdings are mostly in the 30-year bond, which at a yield of around 4% is already pricing in a 3% real growth scenario and continued low inflation. Thus the managers think the yield could stay fairly flat during 2014.

Looking ahead

The managers of the fund, Brandywine Global, suspect that nominal bond yields may well stay relatively flat in 2014, while real yields drift up on lower inflation. They note that 10-year yields in Mexico, India, Indonesia, Turkey and South Africa are trading above US high yield bonds, which are at 5.7% and look good value here.