Market overview

Following its December rate hike, the US Federal Reserve maintained a dovish stance regarding the timing of its next rate hike as its benchmark personal consumption expenditure (PCE) index remained stubbornly below its 2% target. This put some pressure on the dollar against major currencies but provided upside for emerging markets (EM) and commodities with gold soaring 16%, platinum 9% and oil recovering 4% in dollar terms. China dominated headlines as its economic growth slowed to 6.8% in the fourth quarter of 2015. The long-anticipated South African budget was tabled in February and while it had some positive aspects, it failed to allay fears of a sovereign credit downgrade. The political conundrum also poised more challenges for South Africa.

Against this backdrop of a weaker US dollar, developed markets returned 0.4% while EMs were up 5.8% for the quarter. The 2015-winning theme of overweight global assets relative to domestic faced some headwinds as EM currencies strengthened. In rand terms, global equities retreated 4.2%, global cash lost 1.2% and global bonds returned a modest 1.9%. SA equities were up 5.9% led by a strong recovery in Gold and Platinum miners, which were up 93% and 75% respectively. The bond market rallied 6.6%, while property returned 10.1%.

Portfolio review

The Fund lagged its benchmark for the quarter and for the year. The overweight global assets position that contributed positively to performance in 2015 came under some pressure in the first quarter as the rand strengthened. The domestic equity building block and the underweight position in property and bonds also contributed to the underperformance. Notwithstanding this, the Fund returned 12.9% over the past three years, comfortably ahead of inflation.

Domestic equity underperformed for the quarter due to its lower exposure to the rallying gold shares. Managers in this portfolio had exposure to Resources but preferred diversified miners to single metal shares. Coronation, who struggled over the past year, delivered significant alpha from its overweight positions in Anglo American, Foschini and Standard Bank. The latter two stocks have performed relatively better as the global interest rate environment continues to be lower-for-longer, offering better valuations than similar stocks. The underweight position in property hurt as property was the best performing asset class for the quarter.

Portfolio positioning and outlook

The Fund remains overweight foreign assets. This position performed exceptionally well for the Fund over the longer term, but detracted in the quarter. We have started trimming our foreign holdings. In light of the volatility in the markets, the Fund is defensively positioned with an overweight exposure to short-term fixed income instruments. We still expect the South African economy to grow by less than 1% in light of rising electricity prices and the drought that is crippling the agriculture sector and pushing up food prices. The threat of a further foreign debt ratings downgrade to junk status remains a possibility. SA bond yields have however, priced some of this and our spreads are now similar to BBB rated countries. The political environment has been a dominating factor since the fourth quarter of 2015 and remains a key aspect to monitor.