Market overview

Global equity markets recovered strongly from the significant sell-off in the fourth quarter of 2018, gaining 12.6% in rand terms as trade tensions between the US and China eased following months of negotiations. The US Federal Reserve provided further impetus to the recovery as it started speaking with a dovish tone in its recent meetings. SA equities benefited from the global recovery and the JSE All Share Index returned 8.0%. Listed property lagged equity for the quarter with the All Property Index gaining 1.3%. Local bonds performed well, returning 3.8%. With the SA inflation rate remaining contained, shorter duration fixed interest assets continued delivering strong real returns.

Portfolio review

The Fund returned 2.1% after fees for the quarter. Over three years, the Fund returned 8.7% per annum, well ahead of income fund peers at 7.7% and 3.9% above inflation. The Fund’s conservative positioning and avoidance of high allocations to property were the largest contributors to its performance.

Investec had a good quarter due to their higher duration positioning, when compared to Prescient and Aluwani. They remain constructive on nominal bonds over the medium and long term, while their short-term position is more cautious given sensitivity to global disruptions. They maintain their underweight allocation to inflation-linked bonds, expecting a benign inflation environment and continued weak trend in real yields. They maintain an underweight allocation to the local listed property sector as they are wary of long-term earning and believe the asset class is the least attractive in their opportunity set. Investec see no clear catalyst to restore the property supply-demand equation and precipitate a sector rerating.

Prescient has been a consistent performer for the Fund. They remain conservatively positioned from a duration and credit perspective as they do not believe investors are currently being paid for taking additional duration risk. They see the real yields earned in the mandate as attractive and will continue to wait for an opportunity to add risk once the reward justifies the risk. They have continued to enter into trades that protect the real yield currently earned - these include a currency option, inflation swaps and an emerging market note. Prescient is currently underweight listed property but retains a small exposure to Tower Property Fund.

Aluwani continued their good performance, gaining alpha due to their avoidance of listed property and good credit selection. They remain cautious on credit and they are positioned with a low property allocation.

Portfolio positioning and outlook

The Fund remains conservatively positioned with a low allocation to longer duration bonds. Duration remains below one year. The credit position is predominantly in high quality bank issues - more than 70% of the Fund. Collectively, our managers still believe that listed property does not provide enough potential upside, given the difficult retail trading environment. As such, they continue to favour the safer shorter duration fixed interest assets on a risk-adjusted return basis. We expect this Fund to continue delivering strong inflation-beating returns in the medium to long-term with limited risk of negative returns in any one quarter.