Market overview

The first quarter’s rally in global and domestic growth assets subsided in June as economic and political risks resurfaced. Globally, the US Federal Reserve hiked interest rates for the second time this year, increasing its short term lending rate from 1% to 1.25%. In Europe, relief prevailed as Emmanuel Macron won the French elections in April, dampening the rise of populism seen in other countries. Economic conditions in Europe continue to look promising. In South Africa (SA), a third rating agency - Moody’s - downgraded SA’s local and foreign currency sovereign debt to one notch above junk status, citing lower growth prospects and a weaker fiscus as part of its concerns. The strength of financial institutions such as the National Treasury and SARB was, however, applauded. Economic growth concerns were validated during the quarter as SA entered a technical recession. Q1 GDP contracted 0.7% against consensus of 1%.

Portfolio review

Achieving real returns has been challenging for balanced funds over the past three years, given the low return environment. The Fund performed ahead of peers over twelve months, returning 1.92% vs 1.49% and marginally outperformed peers for the quarter. The low returns were mainly attributable to local equities performance. The appreciation of the rand also detracted from performance.

Allan Gray marginally underperformed for the quarter, but longer-term performance remains excellent. The short-term detraction from performance was caused by a relatively high allocation to equities and a low allocation to Naspers. Allan Gray currently prefers Financial Services firms. Coronation reduced their Resources allocation in favour of Consumer Goods shares like Spar, British American Tobacco and Pick n Pay - a more defensive positioning. Their allocation to growth assets remains the highest of all our balanced managers due to their property allocation. We are pleased with the performance from Coronation.

Investec’s performance lagged over the quarter but longer-term performance remains good. Their holdings in local Food Producers and Retailers detracted from absolute performance, as the market priced in a more subdued recovery in consumer confidence following soft data releases. Investec reduced their Consumer Goods position - specifically Tiger Brands - in favour of Resource shares such as Mondi.

Similar to Allan Gray, Foord has a relatively low allocation to Naspers. This has hurt them over time. Foord’s big bets are through Rand Hedges like British American Tobacco (BTI) and Richemont. This detracted from performance in 2016, but has assisted performance recently. Foord also has a sizeable allocation to Commodity share, New Gold as well as Aspen. Prudential maintains an overweight position in Banks and Resources. Their run of solid performance continues.

The STANLIB Multi-Manager Global Equity Fund had another strong quarter, returning 5.7% in US dollars, 1.4% ahead of the benchmark. Emerging markets outperformed developed markets by 2.1% over the quarter, contributing to the outperformance. Sector positioning also contributed as the Fund was underweight the two sectors that posted negative returns over the quarter, namely Energy and Telecom Services. The STANLIB Multi-Manager Global Bond Fund outperformed the benchmark by 0.5% for the quarter, returning 3.1%. Unfortunately, the rand’s appreciation negated the dollar returns for the global funds.

Portfolio positioning and outlook

We believe the blend of these carefully selected and well-rated managers, complements each other, providing us with the best opportunity to meet or exceed the total Fund’s investment objectives. Great diversification coupled with an exposure to rand hedge shares, remains our biggest theme. Although the high global allocation has detracted from performance recently, we continue to believe the allocation is critical to hedge the political risks SA faces.