Market overview

The first quarter’s rally in global and domestic growth assets subsided in June as economic and political risks resurfaced. In an attempt to hedge against these risk, investors sought solace in fixed income securities. 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. This was a third ratings agency to downgrade SA sovereign bonds in 2017. On the back of this, cash outperformed bonds, returning 1.9% against 1.5%. Equities retreated 1.0% while property companies returned 0.9%.

Portfolio review

The Fund outperformed its benchmark for the quarter, driven largely by the positive performance from two of its asset managers, Aluwani and Prescient. Over the three-year period, the Fund is 0.90% ahead of its benchmark - an outcome that we find pleasing. Aluwani started defensively positioning its portfolio in the latter part of 2016 due concerns over the normalisation of US bond yields and the impact on local assets. This was rewarded over the quarter as short-dated instruments rallied, outperforming the long end of the curve. Prescient’s performance was largely driven by holding higher yielding floating rate instruments. The manager remained very low on duration. Investec struggled relative to the benchmark due to its higher credit exposure. The Fund outperformed peers over quarter and the one-year period. Performance is 0.80% ahead of peers for the three-year period ending June, ranking in the second quartile.

Portfolio positioning and outlook

The Fund’s defensive positioning reduced over the quarter. Cash reduced from 35.9% at the end of the first quarter, to 30.6% at end of June as managers started taking advantage of attractive valuations in selected longer-dated bonds.

Looking forward, we expect the US Fed to raise rates once more in 2017 as its economy improves. We do not anticipate this to have a big impact on SA assets. In SA, the political environment remains fragile and our expectations of economic growth are now lower than they were at the beginning of the year. The Fund has exposure, however, to high quality asset managers who can navigate through such periods. In this environment of increased uncertainty, we encourage clients to have a long-term focus when making and evaluating investment decisions.