Market overview

Following its December rate hike, the US Federal Reserve maintained a dovish stance regarding the timing of its next rate hike as its benchmark personal consumption expenditure (PCE) index remained stubbornly below its 2% target. This put some pressure on the dollar against major currencies but provided upside for emerging markets (EM) and commodities. Gold soared 16%, platinum was up 9% and oil recovered 4% in the dollar. Elsewhere in the world, the European Central Bank (ECB) continued its efforts to stimulate growth – it cut its deposit rate to -0.4% and increased its quantitative easing (QE) programme. China dominated headlines as its economic growth slowed to 6.8% in the fourth quarter of 2015. The long-anticipated South African budget was tabled in February and while it had some positive aspects, it failed to allay fears of a sovereign credit downgrade. The political conundrum also poised more challenges for South Africa.

Against this backdrop of a weaker US dollar, developed markets returned 0.4% while EMs were up 5.8% for the quarter. The 2015-winning theme of overweight global assets relative to domestic faced some headwinds as EM currencies strengthened. In rand terms, global equities retreated 4.2%, global cash lost 1.2% and global bonds returned a modest 1.9%. The US 10-year government bond fell 50 basis points (bps) to 1.8% on the weaker Fed stance. SA equities were up 5.9% led by a strong recovery in Gold and Platinum miners, which were up 93% and 75% respectively. The bond market rallied 6.6%, while property returned 10.1%.

Portfolio review

The Fund outperformed its ASISA MA High Equity peer group average benchmark for the quarter, returning 2.5% versus 1.7%. Over 12 months the Fund returned 6.4% and the benchmark, 4.6%. Although absolute returns are not great over this period due to poor performance from the equity market in general, over a five-year period the Fund outperformed peers by more than 1%, returning 12.4%.

Allan Gray’s value investment philosophy was again the best performing local mandate within the Fund. Performance was driven by good stock selection as well as a higher equity allocation during the quarter. Allan Gray trimmed back exposure to gold mining companies and increased exposure to banks during the quarter. They have also been sellers of SABMiller, British American Tobacco and Anglo American; and buyers in the insurance sector. Coronation bounced back in March with commodities picking up and returned 7.6% for the month. Prudential’s overweight position in Pick n Pay and underweight in SABMiller, resulted in a solid quarterly performance. Foord had a slightly disappointing quarter as a result of their lower bond allocation and higher cash allocation. The cash allocation did however, provide them with optionality. Over a longer period, Foord’s large Naspers underweight continues to detract from performance. Their view is that the recent resurgence of Resources and foreign demand for ‘SA Inc’ companies has stretched the JSE’s P/E. They therefore think there is a high probability of the bourse delivering only single-digit annual returns over the next three years. They also believe the rand will remain vulnerable in the longer term. Investec performed in line with expectations and remains cautionary on their equity allocation. Many of their largest active overweight positions are in stocks with self-help operational improvements, as they believe there is little support from the economy to aid growth prospects or positive earnings revisions. For example, Tiger Brands stands out as a recent attractive addition, given its decision to exit Nigeria, its improving operating margins in milling and baking and its attractive forward P/E ratio.

Global equity exposure marginally outperformed its benchmark for the quarter, returning -0.43% in rands and 0.43% dollar terms. The negative return in rand terms was due to the appreciation of the rand over the quarter. Global bonds outperformed the benchmark by 0.54%, returning 1.41% for the quarter.

Portfolio positioning and outlook

The Fund’s overall domestic equity exposure remains underweight Consumer Services and Telecommunications. During the quarter we increased global equities in favour of local equities. The Fund remains at the maximum permissable foreign exposure as per Regulation 28.

SA looks extremely vulnerable going into 2016, with low growth prospects, a possibility of rising inflation and global sentiment towards the country at lows. The exceptional skills of our underlying managers will be critical in extracting returns from the markets. As always we believe a well-diversified solution will provide optimal risk-adjusted returns for investors.