The FoF is a combination of underlying managers with diverse skill-sets from various ASISA categories to build an optimal high equity portfolio. The combination of managers strikes a balance between the CPI+7% target of the FoF, and its objective not to lose money over 24 months.

The FoF has enjoyed a reasonable start to the year, but is slightly behind it CPI+7% p.a. benchmark given the relative underperformance of SA equities as an asset class. The outlook for SA equities remains uncertain given the weak economy, but we have confidence in the ability of the underlying managers' skill-sets to unlock value for the FoF. The look through allocation to equities was largely unchanged over the quarter at around 66.6% with the bulk at 46.7% invested in South African equities and 19.9% invested in foreign equities.

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 hikes). Over the seven-year investment horizon of the FoF, SA equities (up 10.2% p.a.) have materially underperformed foreign equities (up 18.8% p.a.) and our expectation for this asset class, while SA nominal bonds (up 7.8% p.a.) have outperformed SA inflation (up 5.3% p.a.) and both SA inflation-linked bonds (up 5.9% p.a.) and SA cash (up 6.3% p.a.). The underperformance of SA equities has resulted in the FoF not achieving its CPI+7% p.a. objective over this period.

South African economic growth continues to surprise on the downside, and is vulnerable for further weakness. Despite this, the Sage Long-Term FoF requires a substantial allocation to equities to achieve its long-term inflation target. Consequently, it remains invested with managers with the necessary skills to deliver an attractive risk-adjust return when compared to the SA equity market, while also having the ability to protect capital through adverse market conditions.

The FoF is a combination of underlying managers with diverse skill-sets from various ASISA categories to build an optimal high equity portfolio. The combination of managers strikes a balance between the CPI+7% target of the FoF, and its objective not to lose money over 24 months. Managers focused on capital growth with highly flexible mandates include Bateleur and PSG. These high conviction managers can implement their best investment view across all asset classes and have the discretion to hold up to 100% in equities if so inclined. The Sage Long-Term FoF also makes use of Fairtree for its expertise in SA equities and 36One and Allan Gray to run balanced mandates. Finally, by making use of Matrix with its focus on capital protection, and low-cost index funds to gain predictable exposure to various asset classes, the portfolio construction ensures that the overall FoF remains within the overall 75% maximum equity limit set by the category.

The FoF has enjoyed a strong start to the year, but remains dependent on SA equities delivering reasonable returns, given their importance in achieving a CPI+7% return. The outlook for SA equities remains uncertain given the weak economy, but we have confidence in the ability of the underlying managers' skill-sets to unlock value for the FoF. The look through allocation to equities was reduced from 70.4% to 66.5% over the quarter with the foreign equity allocation increased from 14.0% to 16.9%.

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 Long-Term FoF remains well diversified across managers and strategies and suitably positioned to take advantage of market opportunities as they materialise. Important trades over the quarter were the introduction of low-cost tracker funds and 36One into the portfolio, while Centaur and Coronation were both sells.

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 68,5% which is somewhat less than the 75% maximum allowed by the category. The bulk of the equity allocation (55,3%) is South African (SA) equities with the foreign allocation of 16,7% mainly invested in foreign equity (13,1%).

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. One manager change was made this quarter on qualitative grounds with the Sanlam Select Defensive Balanced Fund included in the portfolio. Matrix has strong fixed interest capabilities and has successfully run the Sanlam Select Defensive Balanced Fund since its inception. The inclusion of Matrix facilitates the deployment of more assertive managers in the FoF while remaining within in the maximum equity allocations. The FoF had a challenging quarter relative to its CPI+7% p.a. benchmark, and remains behind year-to-date, and over its stated investment horizon. The challenging returns over the recent period has mainly been driven by subdued SA equity market returns.

The FoF remains well diversified across managers and asset classes, but given its growth focus has a substantial allocation to SA equities. The PSG Flexible Fund and the Fairtree Equity Fund was the standout performer over the past year, although both fell short of the inflation target of the fund.