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 in 2017, increasing its short term lending rate from 1% to 1.25% and this,
coupled with positive earnings expectations from US and European companies drove investors away from global bonds into growth assets such as equities. South Africa (SA) decoupled from this trend - equity markets lagged fixed income as concerns of lower than expected economic growth made headlines. These were validated over the quarter when SA entered a technical recession as Q1 GDP contracted 0.7% against a consensus of 1%.
Moreover, a third rating agency - Moody's - downgraded SA's local and foreign currency sovereign debt to one notch above junk status in June. In such an environment, one would expect a sell-off in bond yields. This was not the case however, as strong foreign inflows came to the rescue. Global equities returned 1.5% outperforming cash and bonds which produced 0.8% and -0.04% respectively. SA equities lost 1.0%, property returned 0.9%,
cash 1.9% and bonds 1.5%.

Portfolio review

The Fund outperformed peers over the quarter and 12-month periods. Its high allocation to domestic fixed income helped performance as defensive assets rallied over the year. The Fund also had higher exposure to offshore equities and despite the stronger rand, global equities performed very well. Although we started trimming this exposure at the beginning of the year, the Fund remains overweight relative to its peers. Amongst the underlying building blocks, the local bond building block took longer duration positions during Nenegate and benefited as bond yields came down from post December 2015 levels. The local equity building block also had a good year largely driven by positive stock selection from some
of its valuation-oriented managers such as Coronation and Prudential. The local cash building block also had a good year. The property building block had a difficult quarter as concerns of lower GDP growth in SA weighed heavily on its small cap shares. The long-term performance of the Fund has been pleasing over the 10-years to the end of June, with performance remaining ahead of peers.

Portfolio positioning and outlook

The Fund remains overweight growth assets relative to peers, a position we started building early in the year. Within the fixed income component, there is a high exposure to short-dated instruments. Looking forward, the SA political environment remains fragile and our expectations of economic growth are now lower than they were at the start of the year. In this environment of increased uncertainty, we encourage clients to have a long-term
focus when making and evaluating investment decisions.