The FoF is a combination of underlying managers all of whom have proven track records and the ability to generate significant outperformance over time. The look through asset allocation of the FoF (i.e. the split between equities and fixed interest, and South African and foreign assets) reflects the aggregate asset allocation decisions of the five underlying managers each of whom have the discretion to implement their best investment view.

The FoF has enjoyed a reasonable start to the year, and we remain optimistic for the FoF's prospects. The introduction of capital protection focused managers earlier this year reduced the look through equity allocation of the FoF to just over 30%, and the FoF continues to be less dependent on the performance of the (SA) equity market to deliver on its inflation objective. The FoF is overweight SA cash (at 32.3%) relative to SA bonds (at 24.0%) with a small allocation of 4.8% to SA property

Year-to-date, foreign equities (up 13.9%) have substantially outperformed SA equities (up 6.9%), while SA nominal bonds (up 7.7%) have outperformed both SA cash (up 3.4%) and SA inflation-linked bonds (up 3.3%). Within SA equities, SA resources (up 19.2%) have been the top-performing sector. The relative outperformance of SA resources has been driven by spot commodity prices remaining higher than expected (despite global economic growth continuing to decelerate). The strong performance of the underlying asset classes has contributed to the FoF achieving its inflation objective year-to-date.

For the quarter, SA equities (up 2.9%) outperformed foreign equities (up 1.3%), but underperformed SA nominal bonds (up 3.7%). Within SA equities, SA financials (up 7.0%) were the top-performing sector, with SA property (up 4.5%) re-rating somewhat in sympathy. SA inflation-linked bonds (up 2.8%) outperformed SA cash (up 1.7%), but underperformed SA nominal bonds. The rand strengthened against the US dollar over the quarter (up 2.2%) while SA inflation has remained relatively subdued around the mid-point of the 3% to 6% band.

The market now expects the South African Reserve Bank (SARB) to cut short-term interest rates twice this year. This reversal (the market previously was pricing in rate hikes) follows further dovish comments from the US Federal Reserve who is now expected to cut rates in 2019 (the market was previously pricing in four interest rate

Over the three-year investment horizon of the FoF, SA equities (up 2.8% p.a.) have materially underperformed foreign equities (up 10.2% p.a.) and our expectation for this asset class, while SA nominal bonds (up 9.9% p.a.) and SA cash (up 7.1% p.a.) have both delivered returns that comfortably exceeded CPI (up 4.8% p.a.). In contrast, SA inflation-linked bonds (up 2.0% p.a.) and foreign bonds (down -0.3% p.a.) both gave negative real returns (i.e. after SA inflation) over this period. The underperformance of the FoF relative to its CPI+3% p.a. objective has largely been driven by disappointing SA equity returns.

South African economic growth continues to surprise on the downside, and is vulnerable for further weakness. The global economic environment could also deteriorate, and the market has arguably been too aggressive in pricing in further interest rate cuts from the US Federal Reserve. Consequently, we remain convinced that a well-diversified strategy that combines managers with different approaches is the most sensible manner to consistently deliver of the return objective of the FoF.

The FoF is a combination of underlying managers all of whom have proven track records and the ability to generate significant outperformance over time. The FoF was successfully restructured last quarter to consist solely of underlying managers in the same ASISA category as the Sage Protection FoF.

The combination of managers strikes a balance between the CPI+3% target of the FoF, and its objective not to lose money over 12 months. Managers focused on capital growth include Allan Gray and Prudential, while the more recent appointments of Investec, Matrix, and Sasfin all have an explicit capital protection focus.

The FoF has enjoyed a strong start to the year, and we remain optimistic for the FoF's prospects. The introduction of capital protection focused managers has reduced the look through equity allocation of the FoF to just of 30% at quarter-end, and the FoF is no longer as dependent on the performance of the (SA) equity market as it was in the past, given SA fixed interest assets are highly attractive to these managers on current yields.

SA equities (up 3.9%) had a reasonable quarter, but only modestly outperformed nominal bonds (up 3.8%) and materially underperformed both emerging (up 10.2%) and developed (up 12.8%) market equities. Our assessment of the upside to SA equities has been reduced despite attractive valuations given the likelihood that economic growth could continue to disappoint.

SA property (up 1.5%) and SA inflation-linked bonds (up 0.5%) both underperformed SA cash (up 1.7%) with global property (up 14.5%) the standout performer and significantly ahead of foreign bonds (up 2%). The subdued performance of SA inflation-linked bonds has been on the back of an improving inflation outlook in SA, while the strong performance of global property has partly been fuelled by an increasingly dovish US Federal Reserve.

The US Federal Reserve left short-term rates unchanged at both their January and March meetings, and signalled their intention for no further interest rate increases in 2019. The pause in their tightening cycle reflects a softening of economic growth and subdued inflation in the US, and gave emerging markets some breathing room with the South African Reserve Bank (SARB) being able to leave interest rates unchanged at both its January and March meetings.

South African economic growth continues to disappoint with the SARB now expecting just 1.3% growth in 2019 (materially less the 1.9% the SARB expected for 2019 as recently as last November) while National Treasury (under slightly more optimistic growth assumptions) only expects SA government debt to stabilise in 2023/4 at 60.2%.

SA government debt is priced as if it was already sub-investment grade, and offer an attractive yield given contained inflation forecasts despite market concern around contingent State-Owned Enterprises (SOE) liabilities and potentially optimistic economic growth forecasts.

The Sage Protection FoF is well diversified across managers and strategies and suitably positioned to take advantage of market opportunities as they materialise.

The FoF is a combination of underlying managers all of whom have proven track records and the ability to generate significant outperformance over time. The FoF has been constructed to make full use of the available equity allowance within the sector, but managers have considerable discretion in whether they choose to utilise it.

At quarter-end, the look through equity allocation of the FoF was 38,4% which is close to the 40% maximum allowed by the category. The bulk of the equity allocation (24,7%) is South African (SA) equities with the foreign allocation of 24,7% split between foreign equity (11,1%) and foreign cash (10,4%), with a small allocation to foreign bonds and foreign property.

SA equities had a poor quarter (down -1.7%) after a difficult September (down -4,2%) and are now down-7,4% year-to-date. The weakness in the SA equity market has not been confined to domestic-orientated stocks with both Naspers and BTI (two large rand hedge shares listed on the JSE) significantly down from their recent highs. Other SA assets (i.e. SA bonds and SA property) continued to lag SA cash over the quarter, with international equities (up 7,7%) the only significant outperformer.

The underlying managers in the FoFs continue to favour SA equities as an asset class, despite its recent poor performance, on valuation grounds. SA bonds also look reasonably attractive (offering a real yield of 4%) and both Investec and Matrix has reasonable exposure to this asset class, while Prudential has a significant exposure in inflation-linked bonds.

Two manager appointments were made over the quarter to improve the consistency of the returns of the portfolio. Investec Cautious Managed forms part of the quality franchise at Investec, while Matrix has successfully run the Sanlam Select Defensive Balanced Fund since its inception. Both managers have strong fixed interest capabilities, and Investec especially offers something different in how they construct equities too.

The portfolio had a difficult quarter relative to its CPI+3% p.a. benchmark, and remains behind year-to-date, and over its stated three-year investment horizon. The challenging returns over the recent period (for the FoF and its peergroup) have mainly been driven by subdued SA equity market returns. The FoF remains well diversified across managers and asset classes with a preference for SA bonds, SA equities and international equities. The Allan Gray Stable Fund remains the standout performer over the past year, with Nedgroup Investment Opportunity Fund a material detractor.