Markets in March 2017 showed positive returns, with MSCI Emerging Markets (EM) outperforming MSCI World. Within MSCI World markets, the best performance in March was from Europe at +4.1% as political anti euro risk was receding. Meanwhile, North America (+0.2%) and Pacific (+0.7%) failed to perform in March. All of this came about as some the previous capital flows into the US reversed and the value cycle shifted from a highly valued US market to undervalued European and Emerging Markets as expected. Within MSCI EM, Asia gained 3.4% in March, led by India (+6.0%), Korea (+5.3%), Indonesia (+4.6%) and Thailand (+4.0%). Meanwhile, heavyweight MSCI China lagged, posting a US$ total return of +2.1%. EMEA and LatAm gained a more pedestrian 0.6% in March. Russia (+2.1%) was the top performer in EMEA, followed by Greece (+1.6%), Turkey (+1.4%) and Poland (+1.4%).

SA (-0.1%) was mostly flat in US$ terms in March given a weakening rand. Up until 17 March, the rand had appreciated by 2.6% against the dollar over the month, but depreciated by 5.0% in the week to 31 March on SA..s cabinet reshuffle. Year-todate the rand has appreciated by 2.0% against the US$. In rand terms, the SA market as measured by the FTSE/JSE All Share Shareholder Weighted Index (SWIX), was up by 2.2%, with SA Industrials (+4.2%) being the best performers, helped by the solid total returns coming from some of the nonresource rand hedge heavyweights on the back of the weaker rand: Richemont (+11.0%), Naspers (+10.4%), BATS (+9.7%) and MTN (+5.6%). Fixed Line Telecoms (+10.1%) also posted solid total returns over the month. Incidentally, IT was the best performing equity sector in March within all of MSCI World and EM.

Economic fundamentals were bullish on bonds this month, with growth figures showing a contraction in Q4 2016 quarter-on-quarter and February..s CPI softening by 0.3% to 6.3% year-on-year. The SA Reserve Bank also lowered its forecasts slightly. Food inflation, in particular, is expected to decline, as shown by agricultural prices printing in deflation. A weakening rand following the Cabinet reshuffle at the end of March, combined with fears of a downgrade by international credit rating agencies, changed investor expectations somewhat.

Looking across asset classes, by 24 March SA Bonds were up 3.7% for the month, but these gains were wiped out by 31 March on political uncertainty following the Cabinet reshuffle. Cash returned 0.63%, SA bonds provided a total return in March of just +0.4% with inflation-linked bonds retracing previous gains, losing 2.15%. SA bonds provided a total return in March of just +0.4%. SA listed property was flat at +0.1%.

During the period, the Absolute Fund participated in the upside move of markets thanks to a balanced portfolio, with all asset classes bar our underweight domestic bond position, contributing positively. Some of that bond position was switched into high quality credit for yield-pick up, while we also employed a derivative structure following the events in late March to maintain upside exposure while protecting the portfolio from falling yields. From an equity standpoint, the weakening of the rand helped the offshore exposure, while the events around the reshuffle of the cabinet had an adverse effect on financials, particularly banks, which dampened the expected performance somewhat. The select Mid Caps exposure which we held throughout the quarter also had a more muted, while positive, performance. Without excessive assumptions, the calculated expected positive returns of that part of the portfolio are so steep, that their positions in the portfolio are fully warranted. With regards to the events in late March, the team was quick to make the necessary portfolio adjustments, putting derivative structures in place, limiting the negative impact of some of the detractors, and providing the base to take advantage of lower asset prices following the market correction.

The portfolio as a whole is well positioned to take advantage of the flow of capital out of the US into emerging markets and of the improving economic growth profile in SA and around the world. Continued volatility, however, has to be expected.

In this context, it is important to note that the target of this fund is not to never underperform (nobody can do that), but to achieve CPI + 5% over rolling three years and avoid any negative returns over 12 months in down markets. The fund's capital protection process is laid out to cater for extreme risk events, while a robust portfolio construction framework should help to withstand ''normal'' market volatility. As such, short periods of limited underperformance are possible and fully taken into account.