The Fund remains defensively positioned for risk as reflected by our overweight cash position with high yielding negotiable certificates of deposit (NCDs), a defensive local equity positioning, and a significantly reduced bond exposure. We continue to favour offshore equities to local equities due to the demanding valuations of the local equity market. We are underweight offshore exposure in total.

Market overview
The quarter started in a risk-on mode with markets bullish about both global and emerging market (EM) growth. This bullishness was initially driven by continued hopes of US tax cuts, infrastructure spending and deregulation bolstering the longer-term global growth story. Risk assets continued to gain momentum with the Dow Jones Industrials Index breaking through the 20 000 level in January 2017. Expectations of a further US Fed rate hike were realised in March 2017 with a 25bps hike in the federal funds target rate. Janet Yellen said they will remain accommodative, allaying fears of an aggressive tightening cycle. Uncertainties around President Trump..s ability to realise his campaign promises grew. The repeal and replacement of Obamacare was withdrawn in the House vote and that, together with the blocking of the Middle Eastern travel ban by the courts, caused the risk rally to lose some momentum towards the end of the quarter. Questions intensified about the impact these failed attempts will have on the magnitude and timing of anticipated tax cuts and infrastructure spending.

China experienced very strong credit growth earlier in the quarter, which led to a sharp rally in commodities. This rally was sustained despite Chinese authorities that started tightening towards the end of February with a 10bps hike in the rate of their medium-term lending facility. Iron ore, however, came under pressure in the last week of the quarter on the back of weaker Chinese steel prices, together with doubts surfacing about the timing of anticipated US tax cuts. In Europe, dovish sentiment from a patient Draghi on European Central Bank (ECB) policy resulted in the likelihood of tapering of Europe..s quantitative easing (QE) program being further out. The European economic recovery gained further traction in the quarter with strong PMI..s and business confidence surveys (IFO) on improving fundamentals and improved earnings from European companies. There are still near-term political risks in Europe. However, with an upcoming election in France, and even though Dutch populist candidate Geert Wilders did not fare well in their elections, the risk still remains that French populist candidate Marine Le Pen could win the French election. This would likely cause a setback to the European growth outlook. However, we see this is a low-probability event. In South Africa, rumours started as early as January that president Zuma was wanting to replace Finance Minister Pravin Gordhan. A business day story published on 2 February 2017 quoted sources that said ''Jacob Zuma'' hit out against Treasury for frustrating the party..s economic transformation agenda....at a recent ANC lekgotla. These were strong signals of the dramatic political events that were to play out during the last week of the quarter with President Zuma reshuffling his Cabinet in a move that resulted in Finance Minister Pravin Gordhan being removed and replaced with a less experienced minister Malusi Gigaba. This move also prompted S&P ratings agency to cut SA foreign-denominated bonds to subinvestment grade rating.

This move has prompted widespread criticism, even within the ANC, but it appears that President Zuma has sufficient support from within the party structures to survive the move, as evidenced by the latest apology to the president from the ANC. The downgrade by S&P puts our local debt one notch above junk status. For South Africa, to be removed from offshore investment grade indices that track EM fixed income assets we need to be rated sub investment grade by at least two rating agencies. Initial estimates are that, if this were to happen, offshore investors would be forced sellers of roughly $7 billion. This would place significant pressure on local bonds and the currency. The South African rand ended the quarter 2.2% stronger against the US dollar. The MSCI All World Index ended the quarter up 6% in US dollar and up 3.8% in South African rand. The S&P 500 ended the quarter up 4.7% in US dollar. Brent crude ended down 7%. The FTSE/JSE All Share Shareholder Weighted Index ended the quarter up 3.3%, with resources up 2.7%, financials down 1.1% and industrials up 6.6%. The All Bond Index returned 2.5% for the quarter and cash 1.7%.

Fund overview
The fund's positive performance over the quarter was helped by the overweight holding in offshore equities, as well as by being underweight offshore cash during the period, and the rand having strengthened by 2%. The fund also benefited from its large holding (38%) in high yielding NCDs. Bond holdings contributed positively in the quarter. SA equities in the fund returned 3.8% over the quarter, compared with 3.3% for the FTSE/JSE SWIX Index. The major contributors to returns were overweight allocations to defensive sectors such as consumer staples, as well as timeously reducing specific resources exposures before the weakness in February and March.

Fund positioning
We remain defensively positioned with a focus on absolute returns and as a result we prefer high yielding NCDs. At the end of quarter, we reduced our bond holdings significantly after the replacement of Finance Minister Pravin Gordhan with the less experienced Minister Malusi Gigaba. We see risks of capital losses increasing as we believe South Africa's domestic investment grade rating will be at risk if the change results in a slippage of fiscal discipline. We believe offshore equity has better earnings growth prospects at more reasonable valuations than South African equities. During the quarter, we increased our allocation to offshore equities by increasing our exposure to Europe where we see a stronger cyclical recovery with improving earnings momentum. We remain underexposed to SA Equity where we believe valuations are still stretched and believe the domestic economic recovery to be further out with a muted earnings outlook. We see the pace of US tightening and an eventual reduction in European Union quantitative easing programme as a risk for emerging markets and South Africa. There is also added risks that if Trump imposes import tariffs, global trade could be disrupted and this could turn into an additional risk for South Africa and emerging markets.