Market overview

Following its December rate hike, the US Federal Reserve maintained a dovish stance regarding the timing of its next rate hike as its benchmark personal consumption expenditure (PCE) index remained stubbornly below its 2% target. This put some pressure on the dollar against major currencies but provided upside for emerging markets (EM) and commodities. Gold soared 16%, platinum was up 9% and oil recovered 4% in the dollar. Elsewhere in the world, the European Central Bank (ECB) continued its efforts to stimulate growth – it cut its deposit rate to -0.4% and increased its quantitative easing (QE) programme. China dominated headlines as its economic growth slowed to 6.8% in the fourth quarter of 2015. The long-anticipated South African budget was tabled in February and while it had some positive aspects, it failed to allay fears of a sovereign credit downgrade. The political conundrum also poised more challenges for South Africa.

Against this backdrop of a weaker US dollar, developed markets returned 0.4% while EMs were up 5.8% for the quarter. The 2015-winning theme of overweight global assets relative to domestic faced some headwinds as EM currencies strengthened. In rand terms, global equities retreated 4.2%, global cash lost 1.2% and global bonds returned a modest 1.9%. The US 10-year government bond fell 50 basis points (bps) to 1.8% on the weaker Fed stance. SA equities were up 5.9% led by a strong recovery in Gold and Platinum miners, which were up 93% and 75% respectively. The bond market rallied 6.6%, while property returned 10.1%.

Portfolio review

After strong performance in recent quarters, the Fund underperformed peers in Q1 2016, returning 1% for the quarter. Over a 12-month period however, the Fund is performing in line with peers. It should be noted that the Fund has a secondary objective of protecting capital and its slightly more defensive positioning may result in marginal underperformance when equity markets rally. The largest detractor in performance over the period was the appreciation of the rand, given the Fund’s maximum global allocation. We however, remain confident in the larger global position relative to peers.

Prescient, one of the Fund’s defensive mandates, had a low return for the quarter due to its focus on protecting on the downside, while giving away some of the upside. Absa’s defensive mandate performed in line with expectations for the quarter, with their larger inflation-linked bond allocation contributing positively over the short to medium-term. Coronation’s moderate mandate bounced back in March as commodities picked up. At almost 15%, Coronation has the highest property allocation in the Fund, which contributed to performance for the quarter. Prudential had a good month thanks to an overweight position in Pick n Pay and an underweight in SABMiller, resulting in a solid quarterly performance.
Global equity exposure marginally outperformed its benchmark for the quarter, returning -0.43% in rands and 0.43% dollar terms. The negative return in rand terms was due to the appreciation of the rand over the quarter. Global bonds outperformed the benchmark by 0.54%, returning 1.41% for the quarter.

Portfolio positioning and outlook

The Fund’s domestic equity exposure remains underweight Consumer Services and Telecommunications, while Resources and Financials are the biggest overweight relative to the SWIX. More recently, managers have started to see value in Financial shares. Old Mutual, British American Tobacco and Standard Bank were the largest overweights relative to the SWIX at quarter end, while Naspers was the largest underweight.

The Fund remains at the maximum allowable foreign exposure as per Regulation 28. . This position performed exceptionally well for the Fund over the longer term, although detracting in the quarter. We have however, started to trim our foreign holdings. Overall total equity remains slightly higher relative to peers. Another differentiator relative to peers is the higher global bond allocation, which we believe is a great diversifier over time.

We still expect the South African economy to grow by less than 1% in light of rising electricity prices and the drought that is crippling the agriculture sector and pushing up food prices. The threat of a further foreign debt ratings downgrade to junk status remains a possibility. SA bond yields have however, priced some of this and our spreads are now similar to BBB rated countries. The political environment has been a dominating factor since the fourth quarter of 2015 and remains a key aspect to monitor. On a positive note, our managers are seeing good buying opportunities in the local equity market.