Market overview

Global equities returned 12.6% in rand terms, driven by the positive impact of trade talks and the dovish US Fed tone. European equities bucked the global trend, retreating 0.8% in US dollar terms on the back of a broad economic slowdown in the region. SA markets rallied 3.9%, driven primarily by resources, which gained17.8% and in particular, iron ore, palladium and platinum.

The SA 10-year government bond rallied from 8.87% to 8.60%. As developed market central bankers started implying that there would be no interest rate hikes in 2019, foreign investors bought up $0.5 billion of SA bonds. SA cash gained 1.7% for the quarter. Following a dismal 2018 the listed property market enjoyed a welcome bounce back in January. Disappointingly, the momentum faded, and listed property finished the quarter up only 1.3%.
Portfolio review

The Fund returned 4.23% on a net basis for the quarter. This is a reasonable return considering the bounce in domestic equity and listed property in January, albeit short-lived in the property space. The Fund is 0.4% ahead of peers over the 12-month period and has a pleasing longer-term track record.

The Fund is constructed using underlying STANLIB Multi-Manager building blocks to gain exposure to various asset classes. Going into the quarter, the local bond building block was slightly short the long end of the curve, thus underperforming the ALBI for the quarter. It still managed to deliver alpha of 1.3% ahead of the benchmark on a gross basis over the 12-month period. The cash building block delivered a quarterly return of 1.93%, outperforming the benchmark by 0.15%.

The absolute income building block returned 2.1% for the quarter after fees. Over the three-year period, it returned 8.7% per annum, well ahead of income fund peers at 7.7%, and 3.9% above inflation. Its conservative positioning and avoidance of high allocations to property were the largest contributors to the stellar performance. The property building block returned 1.4% for the quarter, well ahead of peers at 0.7% and outperforming the All Property Index (ALPI) benchmark.

STANLIB Multi-Manager Global Equity underperformed the benchmark for the quarter due to overweight positions in emerging markets (EM) and financials that dragged on performance. Sands produced another positive quarter of alpha, with stock selection contributing strongly. STANLIB Multi- Manager Global Bond performed in line with the benchmark for the quarter. Exposure to credit and EMs contributed, while developed markets lagged. During February, we replaced Capital with PIMCO.

Portfolio positioning and outlook

We caution that global equity markets are back to their highs, presenting some vulnerability especially as US economic activity is losing momentum. We will use rand weakness opportunities to trim the Fund’s overweight exposure to global equity. On the positive side, our underlying managers continue to see value in domestic shares and we therefore have a small overweight exposure to this asset class. From an economic point of view, many of the Fund’s underlying managers have indicated that inflation is expected to remain firmly within the 3% - 6% band, with the SARB targeting more the middle of the band. For this reason, as well as the continued low rate of growth in SA, the underlying managers maintain a more positive view on SA bonds.

Market overview

The global trade war between the United States and China continued to dominate headlines during the quarter. The US intensified tariffs on Chinese goods and China retaliated. Despite the tussle between the two economic giants, the US economy remains strong. This is visible in the rally of the US dollar and their robust labour market. These positive developments gave the Fed room to hike interest rates in September from 2.0% to 2.3%.

Unfortunately, the higher developed market (DM) interest rates and stronger US dollar do not bode well for emerging market (EM) assets such as South Africa, and most EM countries saw their currencies weaken. SA fared worse than its EM peers as signs of poor economic growth surfaced during the quarter, resulting in SA moving into a technical recession.

SA equities lost 1.6% over the quarter, driven largely by poor returns from industrials. SA property lost 1.0%, while SA bonds returned 0.8%, driven largely by short-dated instruments, which gained 1.9%. SA cash was up 1.7%. The weaker rand provided a boost to offshore returns leading to a 4.3% total return from global equities.

Portfolio review

The Fund delivered a reasonable return of 1.8% net of fees, for the quarter. This was pleasing considering the performance of risky assets in a largely declining investment environment. Over the longer term, the Fund remains ahead of its peer group, outperforming by 0.6% over a three-year period. The Fund is constructed using underlying STANLIB Multi-Manager building blocks to gain exposure to various asset classes. Performance of the local bond building block was in line with both peers and the index benchmark for the quarter, while maintaining its outperformance of peers on a 12-month basis. The local cash building block also performed well, outperforming its benchmark by 0.3% due to its portfolio construction that includes incomeoriented managers. The absolute income building block was marginally behind peers for the quarter, but remains comfortably ahead for the 12-month and 36-month periods. The property building block outperformed its benchmark for the quarter and remains a solid long-term performer despite the recent turmoil in the property sector. The local equity building block was ahead of its benchmark for the quarter, showing solid recovery following the Steinhoff debacle.

Long-term performance of the Fund over the 10-year period ending September remains pleasing and ahead of its peer group benchmark.

Portfolio positioning and outlook

Despite trimming some of the global equity exposure, our outlook remains positive and we maintain an overweight exposure to global equities. While a lot of uncertainty remains locally, we see the potential for positive changes that may come through in the coming few months. We believe that a lot of the uncertainty has already priced in, thus providing a good entry point for investors to benefit from positive changes. On this basis, we are slightly overweight local equities and property while maintaining a relatively sizeable overweight to income assets for cushion in the short term.

In addition to further rate hikes in the US, we expect trade wars to continue dominating headlines and this could weigh heavily on EM sentiment. The global and SA environment remains highly uncertain and we continue to emphasize the importance of having a long-term focus when making investment decisions.