Market overview

The first quarter of 2016 saw a strong recovery in emerging markets (EM) assets on the back of recovering commodity prices and a weakening US dollar. Following its December rate hike, the US Federal Reserve maintained a dovish stance regarding the timing of its next rate hike. This put some pressure on the dollar against major currencies but provided upside for EM and Commodities with Gold soaring 16%, Platinum up 9% and Oil recovering 4% in the dollar.

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 the South Africa 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%. The US 10-year government bond fell 50 basis points (bps) to 1.8% on the weaker Fed stance.

The JSE Shari’ah Equity Index posted a strong recovery, gaining 12.3% over the quarter. The index has a 51% weighting to Resources, greatly exceeding the Resources exposure of the SWIX, and thus had higher exposure to big winners this quarter. These included HAR (+240%), ASR (+159%), SGL (+148%), ARI (+119%), AMS (+95%), KIO (+93%) and ANG, AGL, and IMP (all up more than 67%). Whilst this is a strong recovery for the quarter, it is not enough to claw back the 17% loss experienced by the index last year.

Portfolio review

The end of the first quarter marks one year for the STANLIB Multi-Manager Shari’ah Balanced Fund of Funds. The Fund has posted a 12-month return of +5.7%, pleasingly outperforming its composite benchmark.

At an underlying manager level, Old Mutual Albaraka Equity underperformed the JSE Shari’ah Equity Index this quarter. However, the Fund remains comfortably ahead over the past 12 months (+8.9% vs -9.8%). Old Mutual Albaraka generally retains a lower weighting to Resource counters than Shari’ah peers; however, the Fund had exposure to two big winners in SGL and KIO.

The Old Mutual Albaraka Funds have continued to perform well compared to other Shari’ah compliant equity and multi-asset funds. The Kagiso Islamic Balanced Fund benefited from the Resources recovery, posting a quarterly return of +4.9%.

Portfolio positioning and outlook

The first quarter of 2016 proved challenging for the majority of asset managers. However, given that Shari’ah managers have not benefited from big winners in the market such as NPN, SAB and BIL, we believe that if the market should shift their interest to Resources and more “value” based shares, this should result in more favourable outcomes for the Fund.

We believe that the current portfolio reflects our best investment view for Shari’ah investors over the long-term and we will continue to manage the Fund tactically to protect against any unintended risks when necessary.