The objective of the Sage SCI Protection Solution Fund of Funds is to protect capital and to offer a return of at least CPI+3% over a rolling three year period. The portfolio will aim to never have a negative return over a one year period.

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 underlying managers each of whom have the discretion to implement their best investment view.

There were no manager changes over the quarter. More than two thirds of the FoF is now invested in fixed interest assets (mainly SA cash, but allocations to SA bonds and foreign cash too) while managers in aggregate continue to favour SA equities (17.8%) over foreign equities (10.1%).

Over the past year, the FoF outperformed its CPI+3% p.a. benchmark and benefited from the manager changes that were implemented earlier in the year. Managers that were introduced into the fund recently and that performed particularly pleasingly included Investec, Matrix and Abax. These changes have made the portfolio less dependent on the performance of SA equities than it was in the past.

Over the three-year investment horizon of the FoF, foreign equities (up 19.9% p.a.) and SA nominal bonds (up 9.4% p.a.) have both delivered returns in excess of the CPI+3% p.a. benchmark of the FoF. Unfortunately, both SA cash (up 7.4% p.a.) and SA equities (up 3.5% p.a.) and have delivered more muted returns. While the return from SA cash is expected (and remains a significant allocation in the FoF given its capital protection focus) the underperformance of SA equity has contributed to the underperformance of the FoF relative to its CPI+3% p.a. objective over the past three years.

South African economic growth surprised on the downside in 2019, and is vulnerable for further weakness. The fairly defensive positioning of the FoF at year-end (with 27.9% invested in equities compared to its 40% allowance) is indicative of the relative attractiveness of fixed interest assets in this environment. As was discussed last quarter, the FoF in its diversified allocation to asset classes that could benefit from rate cuts consequently protects investors from the reinvestment risk of only holding cash, while at the same time the focus on capital protection should limit downside risk