Assets prices across the board grinded higher in a low volatile fashion during the quarter. Local equity (+6.7%) produced the best returns, bringing the total return year to date to 11.8%. Having outperformed in the 1st quarter, Resources underperformed Financials and Industrials as the extended strike action in the sector negatively impacted sentiment. Global equity in Rands (+5.8%) also benefited from a general improvement in global economic growth prospects. Assets priced in dollars benefited from the slight weakening of the Rand in the quarter. Local Property (+4.4%), Bonds (+2.5%) and Income (+1.8%) out performed cash as sentiment amongst fixed interest investors shifted to a lower for longer monetary stance in South Africa. In the context of this, the portfolios 3.8% return was pleasing. Performance relative to peers was however a little disappointing and this was mainly due to the large exposure to resources within the equity component of the portfolio. Performance from the local only managers was mixed. Whilst Investec benefited from exposure to non-resource rand hedges, Cadiz struggled and dragged down the local only component of the portfolio. Our exposure to the Coronation Balanced Plus Fund and Prudential Balanced Fund added to relative performance with them ranking 27th and 32nd out of 115 in the ASISA MA High Equity Category.

Having reduced foreign exposure in the 1st quarter, we spent most of the 2nd quarter buying it back at lower levels. Subsequent strong performance in the offshore component resulted in a near 26% exposure to foreign in the portfolio at quarter end. We down weighted the Cadiz portfolio to finance the foreign and this resulted in reduced local equity exposure. Whilst this was replaced with some global equity, we also noticed a pick-up in exposure to SA commodities, SA property and foreign cash in the total portfolio.

Many of the managers we speak to are finding it harder to find good value opportunities in the local equity market. Most are underweight local equity and overweight global equity. Global bonds are regarded as unattractive, and accordingly most fixed interest markets around the world are perceived to be expensive. From this perspective there appears to be a fair amount of cash on the side lines waiting for opportunities to get in.

The portfolio continued to show positive momentum relative to the peers during the quarter, building on the out-performance in the 2nd half of 2013. This can partially be attributed to the general outperformance of value shares over the more expensive momentum shares, the continued rally in equity and also because macro factors like the Rand were less of an influence over total performance - the Rand was broadly flat for the quarter, albeit that it depreciated significantly in January only to recover in February and March. Total global exposure was reduced from around 25% to around 23.5% by quarter end and at R/$10:50 we are currently in the process of again increasing our global exposure.

For the quarter, local equity (+4.3%) was the best performing asset class followed by global bonds in Rands (+2.9%), local property (+1.8%) and global equity in Rands (+1.8%). SA bonds (+0.9%) produced positive returns in spite of the SARB hiking interest rates by 0.5% in January, but lagged the other asset classes. The hike was somewhat surprising to the market in the face of a very weak economic growth backdrop. Clearly, the SARB acted pre-emptively in response to the rapidly depreciating Rand given the likely negative impact this depreciation would have on inflation. There has been some improvement in the current account deficit and this is being viewed positively. The Fund performed well in this environment, marginally outperforming the average of its peers in its ASISA category for the quarter.

The local only managers contributed strongly to performance, especially Investec which held a high exposure to equity, particularly Firstrand and Steinhoff which performed strongly. The global only exposure of the Fund marginally underperformed its benchmark due to the outperformance of global bonds over global equity and our underweight position in global bonds. Both Coronation and Prudential outperformed the benchmark category average, albeit their positioning was significantly different to one another. At a total portfolio level, the Fund is overweight foreign equity, whilst exposure to local bonds was increased at the expense of local cash during the quarter.

Given current equity valuations, elevated geo-political risks and broadly rising interest rates, we suspect that it will be much tougher year to produce inflation beating returns in comparison to 2013 and caution investors to lower their return expectations relative to previous years. Value as a theme is likely to be rewarded.