Market overview

The first quarter’s rally in global and domestic growth assets subsided in June as economic and political risks resurfaced. Globally, the US Federal Reserve hiked interest rates for the second time this yea-, increasing its short term lending rate from 1% to 1.25%. In Europe, relief prevailed as Emmanuel Macron won the French elections in April, dampening the rise of populism seen in other countries. Economic conditions in Europe continue to look promising. In South Africa (SA), a third rating agency - Moody’s - downgraded SA’s local and foreign currency sovereign debt to one notch above junk status, citing lower growth prospects and a weaker fiscus as part of its concerns. The strength of financial institutions such as the National Treasury and SARB was, however, applauded. Economic growth concerns were validated during the quarter as SA entered a technical recession. Q1 GDP contracted 0.7% against consensus of 1%.

Portfolio review

Achieving real returns has been challenging for balanced funds over the past three years, given the low return environment. More focus has been placed on capital protection. The Fund performed well, outperforming peers, returning 4.9% vs 4.7% since inception. performance for the quarter was in line with peers as the Fund returned 0.8%. Good risk-adjusted returns are still offered from the shorter end of the yield curve - cash and income - an area our managers continue to explore.

The recent departure of Errol Shear from Absa resulted in the termination of our mandate with them. Errol is a seasoned investment professional and our exposure to Absa was specifically to gain his expertise in managing absolute return funds. We replaced the Absa allocation with the STANLIB Absolute Plus Fund. Given that this mandate invests in more growth assets compared to Absa mandate (i.e. it takes on slightly more risk), we made additional adjustments to balance the risk of the overall Fund appropriately. As such, we reduced Coronation’s allocation marginally and increased the allocation to Prudential, which is more of a core manager. Similar to Investec Cautious Managed, STANLIB will manage a global allocation. Our investments into the STANLIB Multi- Manager global funds were thus reduced.

Prudential remains our core position with their relative value philosophy providing a great anchor for the Fund. Investec prefers high quality, reasonably priced shares in their conservative proposition. Coronation remains a higher-conviction manager employing a valuation approach to investing. The Coronation mandate has a medium equity risk profile, with an absolute return focus. In the newly appointed STANLIB Absolute Plus mandate, we have a unique and innovative manager with a flexible approach, exploring areas of the market often overlooked.

The STANLIB Multi-Manager Global Equity Fund had another strong quarter, returning 5.7% in US dollars, 1.4% ahead of the benchmark. Emerging markets outperformed developed markets by 2.1% over the quarter, contributing to the outperformance. Sector positioning also contributed as the Fund was underweight the two sectors that posted negative returns over the quarter, namely Energy and Telecom Services. The STANLIB Multi-Manager Global Bond Fund outperformed the benchmark by 0.5% for the quarter, returning 3.1%. Unfortunately, the rand’s appreciation negated the dollar returns for the global funds.

Portfolio positioning and outlook

We believe the blend of these carefully selected and well-rated managers, complements each other, providing us with the best opportunity to meet or exceed the total Fund’s investment objectives. Great diversification coupled with an exposure to rand hedge shares, remains our biggest theme. Although the high global allocation has detracted from performance recently, we continue to believe the allocation is critical to hedge the political risks SA faces.