Fund Review

The fund returned -4.2% in rands during the June quarter, or -4.5% in dollars (underperforming the benchmark's -1.2%), as the rand fell just -0.3% against the dollar, -5.8% against the pound and -2.9% against the euro. In the year to end June 2015 the fund did +4.2% in rands, or -9% in dollars (-0.7% in pounds and +12% in euros!).

It was a tough quarter for the portfolio because of the high exposure to Emerging Market bonds (42%) and currencies (47%), as risk aversion from May onwards drove bond yields higher and emerging market currencies down. The fund is still underweight US bonds (31% versus 38% for the benchmark). They prefer to show the regional allocation as 20.8% in Asia-Pacific excluding Japan, with 16% in Emerging Markets, 7.9% in Europe ex- Eurozone, 4.1% in the Middle East and Africa and 44.9% in North & Central America.

Having been overweight the US currency for the past few years, the fund is now underweight the mighty dollar, albeit fairly cautiously (34.5% versus 44.5% for the benchmark). This hurt during the June quarter, as Greece and falling markets in China caused risk aversion. Falling commodity prices hurt some emerging markets as well.

Looking ahead

Brandywine, the fund manager, continues to think that ultrasupportive monetary policy, cheap energy, devalued currencies and low interest rates should make 2015 a pivot year for global growth. They expect the European and Japanese economies to surprise to the upside once the impact of stimulus takes hold. Meanwhile the US economy is already advancing at lift-off speed. However, they still expect long-term safe-haven yields to remain capped on the upside as a result of the still formidable debt overhang, a benign global inflation environment, a low terminal level for G3 policy rates and entrenched concerns of global economic fragility. They believe that select emerging market debt offers the most attractive sources of yield and potential currency return among their investible universe.