Performance was disappointing with very few assets besides cash producing a positive return. There was a noticeable increase in volatility, with the South African Volatility Index rising from 16% to 23% during the quarter. The two primary drivers of this was the deterioration in the economic growth outlook from China and the Fed, which outlined its plan and timetable for the removal of Quantitative Easing (QE) in the US. As an extra-ordinary stimulus measure QE has helped the US economy recover from the 2008 economic crisis. Many financial assets have benefited significantly from this policy and the intended removal of this security blanket has not been taken well by the markets. US treasury yields spiked from 1.6% to 2.5% by the end of June having retreated from 2.7% after Bernanke revised his comments to soothe the market reaction.
In South Africa, the primary impact of this was felt in the interest rate sensitive asset classes of property (which was down 11.1% in May), bonds (down 6.2% in the two months to June) and inflation linked bonds (down 5.5% in June alone). The Rand was also negatively affected as foreign investors disinvested from riskier emerging markets -it depreciated by 7% relative to the dollar during the quarter. Relative performance was driven largely by the amount and nature of Rand Hedge exposure held in manager portfolios. British American Tobacco, SABMiller, Richemont and Naspers outperformed the market handsomely, whilst Anglos, BHPBilliton and the Platinum miners struggled, not to mention the gold shares. Whilst the offshore component of the Fund did very well relative to its internal benchmark composite, the small underweight exposure to foreign relative to peers would have been a drag on performance for the quarter.
Locally, both Cadiz and Investec struggled relative to their peers. Both held high equity content, which should have been positive, however stock and sector selection within this was poor, particularly within Resources. Cadiz was there because of the value, whilst Investec believed that economic outlook in China would improve. Cadiz held the view that inflation would come in below the 6.5% implied by the market and were long, actively trading its exposure as pricing changed. Investec held a lower exposure to bonds and were primarily playing in the corporate bond space. Given the greater flexibility and generally higher equity content with which these two managers operate, we chose to introduce two more core, market-orientated managers to provide stability to the portfolio. The Coronation Balanced Plus and Prudential Balanced Funds were included late in the quarter and will add valuable diversification characteristics to the Fund.