Fund Amalgamated - Official Announcement07 Oct 2016
SIM Low Equity Fund has closed and amalgamated into Sanlam Investment Management Inflation Plus Fund.
Fund Name Changed - Official Announcement25 Aug 2016
The SIM Inflation Plus Fund will change it's name to Sanlam Investment Management Inflation Plus Fund, effective from 25 August 2016
SIM Inflation Plus comment - Mar 16 - Fund Manager Comment02 Jun 2016
Market review
The start to 2016 can be labelled as more of the same. Domestic political upheaval and weak domestic growth coupled with a slow international economic growth scenario left most investors with more questions than answers after the first quarter of 2016. We started the year with equity markets falling by more than 10% on the back of lower oil prices, concerns about debt in the Chinese economy and talk of possible global economic recessions, even in the more stable United States. We saw some stabilization in the latter part of the quarter after the Bank of Japan introduced negative interest rates, the European Central Bank reiterated their commitment to a loose monetary policy, and Janet Yellen sounded more dovish and mentioned their concerns around international markets.
The weaker US dollar brought some relief to emerging markets and commodity prices. The rand staged a mild recovery in the latter half of the quarter and ended at R14.71/$. The ramifications of a possible sovereign ratings downgrade during the year is still, however, a concern to many investors. The Reserve Bank responded to the weaker rand and higher inflation by hiking rates by 50bps and 25bps respectively during the quarter. Domestic inflation printed 7.0% yoy in February and highlighted the Monetary Policy Committee's earlier concerns.
Bond yields compressed and the 10-year RSA yield closed at 9.03% from 9.69% end of December on the back of a stronger currency and improving sentiment towards emerging markets. South African bond yields are, however, still significantly higher than a year ago. Nominal bonds returned 6.6% for the quarter, followed by inflation-linked bonds at 2.2% and cash at 1.7%. Listed property recovered all of its fourth quarter losses and posted a gain of 10.1%.
For the quarter as a whole, the MSCI World Index shed 0.2% in US dollar terms while the MSCI Emerging Markets Index returned 5.8%. At home, the All Share Index advanced 3.9% on a total return basis during the first quarter. On the local front, resource shares posted an impressive return of 18.1%, the Financial Index rose 6.2% while the Industrial Index declined by 0.4%.
Asset allocation
We added to duration assets late in 2015 and early in 2016, including listed property. We still prefer nominal bonds over listed property and inflation-linked bonds. The recent hike in interest rates is also benefitting the significant floating rate debt component of the fund with the resultant higher reset of yields.
The domestic equity exposure decreased over the quarter, mainly due to the protective overlays approaching some of the caps rather than actual equity sales. This took place during the market recovery in the latter half of the quarter. Some of the in-the-money overlays were rolled after providing some downside protection early in the quarter. Funds with international exposure saw a slight decrease in international equity exposure due to rand strength over the quarter.
Investment strategy
During the last quarter of 2015 and first few weeks of 2016 investors got an opportunity to buy attractively priced domestic fixed income and listed property assets. While we've seen some gains of late we still believe nominal bonds are cheap from a longer-term perspective. Our 10-year government bonds are trading above 9%; with a high long-term inflation assumption of 6% investors will be receiving a real return of at least 3%.
Domestic equity is trading at a slight premium to fair value from a bottom-up perspective. We are maintaining our slightly more defensive stance via the equity protective overlays. For funds with international exposure, we still prefer international equities to their domestic counterparts. Over the past year we've maintained our international property stock position relative to developed market bonds while we have also retained our overweight European equity position.
Equities
The FTSE/JSE All Share Index returned 3.9% for the quarter, led by a snapback of the beaten-up resources sector, which gained 18.1% on the back of top performers Gold Mining (+92.8%), Platinum (+74.6%) and General Mining (+12.5%). SA Financials posted a return of 6.2% while SA Industrials declined by 0.4%.
The fundamental drivers of the 'risk-on' rebound experienced this quarter were:
- A recovery in commodity prices, especially the gold price (up 16.4%), and the Brent oil price, which was up 6.2% this quarter and 31% higher from the January lows!
- A more dovish tone by Federal Reserve Chairwoman, Janet Yellen, and further central bank intervention, especially on the part of the Chinese and European central banks;
- Resilient institutional flows in most emerging markets (offsetting outflows from retail investors).
The core house view fund outperformed the benchmark by 40 basis points over the quarter. Some of the noteworthy performances were had from stocks such as Northam, our preferred platinum counter, with its near 60% rally over the quarter and Steinhoff International, one of our largest holdings, up 23.4% after the company listed on the Frankfurt Stock Exchange. Naspers (underweight) declined by 2.8% due to a combination of rand strengthening and some concerns around the developing internet assets within Naspers taking longer to monetise.
On the downside, Mondi (overweight) suffered a decline of some 7.6% in the period despite posting full year earnings growth of 25%. There is some concern in the market regarding the Kraftliner market. The concern is likely to be transient, while structurally the fundamental outlook for the company remains sound. Being underweight Shoprite (+22.3%) and overweight SABMiller (-4.5%) over the quarter also detracted value.
SIM equity strategy
With the JSE having staged a strong rebound from its January lows, valuations are now once again above our estimate of fair value. Some pockets of upside remain, especially in Financial Services, with the index still down 4% over the past year. On a sector level, we have muted bets with an overweight in resources offset by an underweight in industrials. Within financials, we maintain our overweight position in the banks and Old Mutual. Within industrials, we remain underweight the food retailers and healthcare.
Maintaining the discipline associated with our value investing philosophy is of paramount importance. We will continue to invest in stocks which offer both a discount to our estimate of fair value and the required margin of safety.
Equity outlook
Using a bottom-up valuation of individual companies we find local equities to be currently trading at a slight premium to fair value. While it is possible for the market to grind higher, we have grown more cautious with risk aversion dissipating and many stocks breaching our estimates of their respective intrinsic valuations. This, coupled with the high level of volatility in the equity market, and the economic and political challenges we face, means that downside risk remains high. On a pure relative valuation basis, we are of the opinion that global developed equities remain an attractive asset class, ahead of SA equities.
Given current valuations, we steadfastly maintain our strategy of ensuring a fair degree of downside protection on the local equity component of our funds via the use of protective derivative overlays. This is so that we may continue to protect capital over a rolling 12-month period, while remaining true to our stated aim of delivering long-term real returns at reduced levels of volatility.
International
2016 began on a tough note across risk markets following heightened concerns around recessionary risks and the tightening of financial conditions. In the US, the Federal Reserve kept interest rates unchanged at 0.25%-0.5% at their March meeting, citing "appreciable downside risks" from global economic and financial developments, and that factors behind market volatility earlier this year "had not been fully resolved". In Europe, the central bank tilted the balance sheet towards expansion. On rates, the ECB cut the deposit rate by 0.1% to -0.4% and lowered its benchmark rate to 0%. In China, the National People's Congress lowered the 2016 growth target to 6.5%-7.0% (compared to 7.5% in 2015) with the Chinese government promising a committed focus to growth stabilization and economic rebalancing in 2016.
In dollar terms, the first quarter of 2016 saw the MSCI Emerging Markets Index rally strongly (up 5.8%) while the MSCI World Index fell 0.2%. Higher commodity prices, additional central bank support and the waning of US dollar strength all helped fuel the interest seen in emerging market assets. Global bonds, as measured by the Barclays Capital Aggregate Bond Index, posted a return of 5.9% for the three months to end March. In currency markets, the US dollar began 2016 with one of its largest gains of the past 25 years and exited March with one of its steepest quarterly sell-offs since the early 1990s. The rand strengthened 5.0% to R14.71 against the US dollar, despite idiosyncratic risks.
Within global equities, we continue to prefer Europe and the UK to the rest of the developed world. European companies trade at lower price to book valuations and higher dividend yields than most other developed markets. Our international property holding at an average dividend yield of 5.5% is attractively valued, especially relative to offshore cash and bonds.
Bonds
The Reserve Bank responded to higher inflation by hiking rates by 50bps and 25bps respectively during the quarter. Domestic inflation printed 7.0% yoy in February and highlighted the Monetary Policy Committee's earlier concerns. Bond yields compressed and the 10-year RSA yield closed at 9.03% from 9.69% end of December on the back of a stronger currency and improving sentiment towards emerging markets. South African bond yields are, however, still significantly higher than a year ago. Nominal bonds returned 6.6% for the quarter, followed by inflation-linked bonds at 2.2% and cash at 1.7%.
We added to duration assets late in 2015 and early in 2016. We still prefer nominal bonds over listed property and inflation-linked bonds. Credit spreads widened slightly over the quarter, giving us some opportunities to invest in attractively priced counterparties, including a small allocation to inflation-linked credit. While we've seen some gains of late we still believe nominal bonds are cheap from a longer-term perspective. Our 10-year government bonds are trading above 9%. Therefore, with a high long-term inflation assumption of 6% investors will be receiving a real return of at least 3% - we view this as attractive.
SIM Inflation Plus comment - Dec 15 - Fund Manager Comment16 Mar 2016
Market review
The year 2015 will be remembered for all the wrong reasons. From a stuttering global economic recovery, weak emerging market currencies, a slowing Chinese economy right down to poor local sentiment and weak domestic economic growth. The cherry on top was three local Finance Ministers in one week - we are still dealing with some of the reverberations of this at the start of 2016. The strength of the US dollar was a catalyst for some of the pain, especially the impact on commodity prices. A general commodity oversupply situation and fears of slowing Chinese demand compounded the effect. The US economy was the only light at the end of the global tunnel and a well communicated ‘lift-off’ was achieved in December when the federal funds rate was increased for the first time in over nine years.
In South Africa, the Monetary Policy Committee hiked rates another 25bps in November; this will surely be followed by a series of hikes in 2016 given the very weak currency and threat to the inflation target. The events in December surrounding the dismissal of the Minister of Finance and the re-appointment of Minister Pravin Gordhan do give confidence that the government does heed financial markets. In all likelihood National Treasury’s hand has been strengthened and it would find it easier to follow a macro-prudent economic policy that will support the inflation target.
Over the course of the year the rand weakened dramatically, from R11.57/$ to R15.49/$, while the repo rate increased from 5.75% to 6.25%. As can be expected, bond yields increased over the year and especially during December. Nominal bonds had a terrible year, returning -3.9% for the year and -6.4% for the quarter. Inflation-linked bonds posted +3.7% for the year, while cash delivered +6.5% for the year. Property posted a decent +8.0% for the year although it lost 4.7% during the last quarter.
The FTSE/JSE All Share Index (ALSI) ended 1.7% higher for the quarter and 5.1% for the year. Over the quarter the SA Resources Index declined by a massive 19.2%. The last quarter of 2015 saw the MSCI Emerging Market (EM) Index gain 0.7% in dollar terms versus the 5.1% gain from developed market peers (MSCI World Index). 2015 proved to be a tough year for both emerging and developed markets, down 14.6% and 1.8% respectively.
Asset allocation
Towards the latter part of the quarter we started adding some duration to the fund. Post the dismissal of the Minister of Finance, nominal bond yields increased significantly and we used this opportunity to increase the fund’s duration in a measured fashion. There is a possibility of a downgrade of South Africa’s credit rating to sub-investment grade during the year, but bond investors are well aware of this and their fears are more than likely reflected in the current bond prices.
The domestic equity exposure decreased over the quarter, mainly due to the effect of our derivative overlays than actual equity sales. We’ve maintained throughout 2015 that domestic equity is expensive and derivative overlays have added significant value over the past year, while also contributing to the overall low volatility of the fund. The rand looks cheap against the US dollar from a purchasing power parity perspective; we therefore implemented some currency hedges for funds with offshore exposure to protect the fund against significant rand appreciation.
Investment strategy
Domestic fixed income assets have re-rated during the last quarter of 2015. Our view is that this is a longer-term buying opportunity, although we acknowledge that the risk premia for South African assets have increased. The real return on offer from nominal bonds is between 3% and 4%, which is attractive relative to other asset classes. The fund’s fixed income component is yielding well over 8% and bodes well for income seeking investors.
We’re maintaining our downside protection for domestic equities. The challenge is to make sure we allow for enough upside participation for the fund. Although domestic equities are starting to show value from a bottom-up perspective, it is still expensive versus emerging market peers. We still prefer offshore equities to their domestic counterparts, but the valuation gap has closed more recently. International property stocks are preferred to developed market bonds while we have also retained our overweight European equity position.
Equities
The FTSE/JSE All Share Index delivered a paltry return of +1.7% for the quarter and +5.1% for the year as a whole. Sectoral performances for the quarter were mixed with SA Resources the hardest hit, down 19.2%, while SA Financials came off (- 3.3%) and SA Industrials outperformed with a return of +6.6%.
SA Industrials benefited from the corporate action of SABMiller (+20.9%) and the continued strong performance of the likes of Naspers and British American Tobacco (+14.8%). Naspers rebounded by 22.5% in the quarter aided by good results from its associate Tencent, which is listed in Shanghai. On the downside, resources stocks remained under pressure. Anglo American plummeted 40.3% during the quarter with listed subsidiaries Amplats down 19.1% and Kumba Iron Ore off a whopping 47.5% as a result of disappointing trading updates.
Our core house view fund had a tough quarter, underperforming the benchmark by 55 basis points. The main detractors from performance were an underweight position in Brait, and overweight positions in Anglo American, Barclays Africa and Foschini respectively. Overweight positions held in Sappi and British American Tobacco and the underweight in Shoprite added value.
SIM equity strategy
We have muted sectoral bets with an overweight position in resources offset by an underweight in industrials. Within industrials we remain underweight healthcare on valuation grounds. We took some profits in SABMiller and Steinhoff and added to The Foschini Group, which trades at an attractive forward PE ratio of 9.5 and a 5% dividend yield. We used the book build by Naspers to add to our position at a discount to the market. Within resources, we are overweight Sasol, paper, diversified miners and platinum, while we are underweight gold and iron ore miners. Within financials, we added to our positions in Sanlam and MMI at attractive valuations. We remain overweight the banks and Old Mutual.
Despite the volatility and poor economic outlook for South Africa, we stick to our philosophy of favouring stocks that trade at reasonable valuations, while making sure that risk is well managed.
Equity outlook
In an environment of ongoing global macro uncertainties combined with the unfolding of SA-specific issues, investors are continuing to pay up for quality businesses with international exposure and low financial/operating gearing. This is evident in a small, concentrated number of shares trading at high PE ratios and supporting the overall market price level. South African equities continue to trade at a substantial premium to other emerging markets on both a price to earnings and a price to book basis. Even though local equities are about 10% cheap using a bottom up valuation of the individual companies we continue to prefer global developed market equities.
Given current market conditions we believe the risk of capital loss remains, necessitating a continued cautious and disciplined approach to investing. Our considered strategy of minimizing risk through explicit downside protection via the derivative overlays that we have on the local equity component has proven beneficial to our funds and we believe continues to remain well justified.
International
Globally, there was certainly no shortage of economic and market surprises as we hurtled towards year-end. In the US, the Federal Reserve hiked interest rates for the first time since 2006 with the improving labour market data and domestic growth fundamentals supporting the Fed lift-off. At the same time that the Fed has taken further steps to tighten policy, the Bank of Japan and European Central Bank (ECB) remain in a very accommodative stance with the ECB further cutting the deposit rate in December 2015 to -0.3% to help boost still-low inflation. In China, the uncertainty about the outlook for the renminbi and the efficacy of policymakers led to large capital outflows. Concerns about Chinese growth took centre stage as economic activity data continued to disappoint.
The final quarter of 2015 saw the MSCI World Index post a dollar return of +5.1%, compared with a small gain of 0.7% for MSCI Emerging Markets. 2015 proved to be a tough year for both emerging and developed markets, down 14.6% and 1.8% respectively. Global bonds, as measured by the Barclays Capital Aggregate Bond Index, fell 0.9% for the three months to end December. In currency markets the US dollar remained strong against all global currencies and the rand sold off massively to close the year at R15.49/US$ from R11.57/US$ just 12 months earlier. Within global equities, we continue to favour Europe and the UK to the rest of the developed world on relative valuation grounds. Our international property holding at an average dividend yield of close to 5.5% is attractively valued versus offshore cash and bonds.
Bonds
The Monetary Policy Committee hiked rates another 25bps in November; this will surely be followed by a series of hikes in 2016 given the very weak currency and threat to the inflation target. Over the course of the year the rand weakened dramatically, from R11.57/$ to R15.49/$, while the repo rate increased from 5.75% to 6.25%. As can be expected, bond yields increased over the year and especially during December. The 10-year RSA bond yield closed the year at 9.69% from 7.87% at the beginning of 2015. Nominal bonds had a terrible year, returning -3.9% for the year and -6.4% for the quarter. Inflation-linked bonds posted +3.7% for the year, while cash delivered +6.5% for the year.
Towards the latter part of the quarter we started adding some duration to the fund. Post the dismissal of the Minister of Finance, nominal bond yields increased significantly and we used this opportunity to increase the fund’s duration in a measured fashion. There is a possibility of a downgrade of South Africa’s credit rating to sub-investment grade during the year, but bond investors are well aware of this and their fears are more than likely reflected in the current bond prices. Domestic fixed income assets have re-rated during the last quarter of 2015. Our view is that this is a longer-term buying opportunity.