Market overview

The second quarter of 2019 maintained the positive trend of the previous quarter, albeit with increased volatility on an intra-quarter basis. The US and Developed markets rebounded strongly while emerging markets nudged up slightly after a stellar first quarter.

Global risk markets experienced a brief correction in May, but the rebound has been swift and characterised by a synchronised and correlated upsurge. The US Fed has continued to signal a remarkable reversal in policy stance. The Fed’s pivot in January ushered in a ‘risk-on’ rally and a return to a regime of favouring the search for yield. The US Fed now appears to be on course to reducing interest rates in July. In 2019, central banks have adopted an abrupt turnaround from Quantitative Tightening to a potential resumption of Quantitative Easing. Market participants are actively repositioning, as financial markets are currently in the throes of navigating this change in regime.

As a consequence, the CBOE Volatility Index (VIX) spiked in May and has stabilised at a relatively higher level. For the moment, the market appears willing to disregard the deep drawdown in December 2018 and the recent spike in volatility. In June 2019, investor complacency and related euphoria returned, as trade-war fears ebbed and central bank dovishness became the prevailing narrative. US equities have rebounded so strongly that we are once again close to all-time highs.

An additional feature of the quarter was the continued recovery in emerging market debt securities. The combination of low valuations, high yields and a supportive Fed policy has buoyed EM financial markets.

Global Bonds advanced by 3.4% as market participants started to price in the Fed’s change in policy stance and synchronised Central Bank dovishness. Emerging market bonds advanced in line with the rally in US Bond yields. It remains unclear whether US Bonds are signalling a return to QE or an upcoming recession.

For the quarter, most major asset classes advanced, with relatively few laggards. Gold surged by 9.0% as the US Dollar weakened slightly on the back of worsening yield considerations and declining growth prospects.

The MSCI World Index advanced by 4.2%. MSCI Emerging Market Index appreciated by a paltry 0.7% over the quarter.

Global property, as measured by the iShares Developed Market Property Yield ETF which tracks the FTSE EPRA / NAREIT Developed Index advanced by 0.7% over the quarter. Global Property was relatively resilient during the market drawdown in late 2018 and had an exceptional first quarter rebound. The second quarter has seen a rare divergence in the returns of global listed property and bonds.

On the domestic front, global market action had a positive knock-on effect. Political and economic issues abound but this had more of an impact at the equity sector level.

Domestic fixed income securities have an exceptional second quarter, in line with global trends. The All Bond Index managed a positive return of 3.77% and inflation-linked bonds, as measured by the JSE CILI Index followed suit with a 2.7% return. Cash, as measured by the STeFI index, returned a steady 1.8%. The JSE Preference Share Index had a solid quarter with a positive return of 5.4%. SA Listed Property had another positive return of 4.5% for the quarter. The listed property sector is struggling to sustain a recovery and has yet to reach the January peak.

The All Share Index advanced by 3.9% and maintained the positive momentum of the first quarter of 2019. The advance was not uniform and in terms of broad sectors, SA Resource had the weakest positive return. Small-Caps advanced by 1.8% and Mid-Caps by 1.5% over the quarter. Small-Caps are down by 1.6% for the year, despite the mild recovery 2Q. In terms of Equity sectors, the top performers were Fixed Line Telecoms +29.7%, Gold +29.6% and Mobile Telecoms +17.6%. The worst performers were Tobacco -15.7%, Chemicals -21.3% and Household Goods -30.9%.

In Q2, SA Equities held up much better than other Emerging Market. Domestic Policymakers and leadership have demonstrated a resolve to address the structural impediments in the fiscus and critical institutions. The process is underway and will take time.

The quarter was more volatile but continued to be dominated by a positive reversal in sentiment towards risk assets in general and equities more specifically. Domestically oriented equities, most notably Small-Caps, have not participated in the recent advance and valuations have reverted to more reasonable levels. The decline in domestic equity valuations has led to less euphoric expectations and represents an opportunity for investors to participate in the recovery on a more rational basis.

Domestic Policymakers and leadership have demonstrated a resolve to address the structural impediments in the fiscus and critical institutions. The process is underway and will take time. Moody’s seem willing to grant additional time for policymakers to set the country on the road to fiscal recovery.

Domestic Equity valuations remain attractive relative to long term growth prospects. The Rand is likely to remain range bound and could strengthen steadily, as US bond yields decline, and the US Fed continues the current monetary policy path. SA Inc equities are prolonged period that will suit stock-pickers and active managers.

The probability is high that equities, as an asset class, could continue to muddle through. Risk assets have recovered to previous highs but remain extremely vulnerable to either a recession or a sudden increase in risk aversion.

For that reason, we continue to advocate caution and conservatism, with adequate diversification across portfolios.

Portfolio overview

The Fund advanced by 0.64%, which lagged the average fund. Performance was mixed, in a quarter when most asset classes advanced and our fund positioning remained inherently conservative.

In the context of our defensive positioning, the fund navigated the quarter reasonably well. Equity stock selection was the biggest contributor on the domestic front. Our intentional bias towards diversification and conservatism continued as preference shares, inflationlinkers and nominal bonds generated surprisingly strong positive returns and cushioned the downside volatility in other risk assets.

The net result was below-average performance for the quarter, that does not detract from the excellent relative performance of the Fund since the middle of 2017. In particular, the Fund has generated first quartile performance over all periods ranging from 6 months to 3 years.

On the domestic front, our stock selection discipline and asset allocation experience enabled us to maintain our trend of avoiding or averting the worst performing securities and sectors. Our overweight in Financials and selected Resources added value. In equities, our very low exposure to the domestic retailers added significant value.

Detractors we few but had an outsized impact on relative returns. Our overweight in Tobacco and low exposure to Naspers was the biggest detractor. In addition, the lower allocation to domestic equities detracted in terms of asset allocation. Our selection of global equities had another solid quarter. In contrast with recent trends, our overweight allocation to Global Equities was unable to compensate for the lower domestic equity weighing, as currency tailwinds reversed and global stock selection lagged a buoyant domestic equity market.

Our above-average cash position, was a relative detractor over the quarter, as virtually every asset class advanced.

Portfolio positioning

The fund positioning and strategy remains virtually unchanged.

We remain marginally under-weight equities and within equities, we favour global and quality. Our foreign exposure remains high, but we have reduced foreign exposure in anticipation of less currency tailwinds and in response to attractive valuations on the domestic front.

We re-configured our domestic equity exposure during the quarter as value re-emerged after an extended sell-off. We continue to increase exposure to domestically oriented stocks.

Our Fixed Income exposure is inherently conservative, lower duration and adequately diversified. Our increase in government bond exposure during the previous quarter added immediate value. We remain underweight relative to the average fund, based on fiscal considerations. We have no parastatal or SOE debt exposure. Cash is a residual outcome of our investment process. Cash balances increased marginally over the quarter as we rebalanced the currency and sector exposure after significant advances.

The first quarter of 2019 reversed the negative trend of the previous quarter. The US Equity market rebounded strongly and emerging markets continued the recovery that had started in late 2018.

Global risk markets surged upward in a synchronised and correlated fashion as the US Fed surprised the markets with an abrupt reversal in policy stance. The Fed’s pivot ushered in a ‘risk-on’ rally and a return to a regime of favouring the search for yield. The US Fed has since, confirmed their pause in tightening and now appear to be on course to reducing interest rates in the future. The abrupt turnaround from Quantitative Tightening to a potential resumption of Quantitative Easing is truly unprecedented and financial markets are currently in the throes of navigating this change in regime. As a consequence, the CBOE Volatility Index (VIX) declined significantly.

Volatility has returned to the relatively stable pattern of 2017. The spike in volatility and deep drawdown in December 2018, is now a distant memory. Investor complacency and related euphoria has returned. Developed market equities have rebounded so strongly that we are close to all-time highs.

An additional feature of the quarter was the continued recovery in emerging market securities. The combination of low valuations, high yields and a supportive Fed policy has buoyed EM financial markets.

Global Bonds advanced by 1.9% as market participants started to price in the Fed’s change in policy stance. Emerging market bonds advanced in line with the rally in US Bond yields. It remains unclear whether US Bonds are signalling a return to QE or an upcoming recession.

For the quarter, most major asset classes advanced, with relatively few laggards. Gold was surprisingly resilient the US Dollar remained stable based despite worsening yield considerations and declining growth prospects. The MSCI World Index advanced by 12.6%.

MSCI Emerging Market Index appreciated by 10.0% over the quarter.

Global property, as measured by the iShares Developed Market Property Yield ETF which tracks the FTSE EPRA / NAREIT Developed Index advanced by 14.6% over the quarter. Global Property was relatively resilient during the market drawdown and has held it’s own in the recent rebound.

On the domestic front, global market action had a positive knock-on effect. Political and economic issues abound but this had more of an impact at the equity sector level.

Domestic fixed income securities were surprisingly resilient over the quarter. The All Bond Index managed a positive return of 3.8% and inflation-linked bonds, as measured by the JSE CILI Index followed suit with a 0.9% return. Cash, as measured by the STeFI index, returned a steady 1.7%. The JSE Preference Share Index had a solid quarter with a positive return of 6.25%. Listed Property had a welcome positive return of 1.5% for the quarter.

The listed property sector is struggling to recover, with a 9.2% rally in January being gradually eroded by persistent selling over the remaining months of the quarter. The All Share Index advanced by 8.0% to reverse the impact of the previous quarter's losses. The advance was not uniform and in terms of broad sectors, SA Financials lagged the most with a modest decline of 0.4%. Small-Caps fell by 3.4% while Mid-Caps bucked the trend with a positive 2.8% over the quarter.

In terms of Equity sectors, the top performers were Platinum +49.7%, Tobacco +29.5% and General Mining +22.4%. The worst performers were Pharma -12.7% and Industrials -3.9%.

Emerging Market contagion persisted, albeit at lower intensity. Domestic Policymakers and leadership have demonstrated a resolve to address the structural impediments in the fiscus and critical institutions. The process is underway and will take time.

At the end of the quarter, Moody’s provided the country with somewhat of a reprieve, when they held the sovereign rating stable, despite well founded fears of a downgrade. The decline in domestic oriented equities, has resulted in very cheap valuations and represents an opportunity for investors to participate in the recovery on a more rational basis.

The probability is high that equities, as an asset class, could continue to muddle through. Risk assets have recovered to previous highs but remain extremely vulnerable to either a recession or a sudden increase in risk aversion.

For that reason, we continue to advocate caution and conservatism, with adequate diversification across portfolios.

Portfolio overview

The Fund advanced by 8.13% and remains well ahead of the average fund. Performance was more than satisfactory in a quarter when most asset classes advanced and our fund positioning remained inherently conservative. The fund navigated the quarter incredibly well. Equity stock selection was the biggest contributor on both the domestic and global front. Our intentional bias towards diversification and conservatism continued as preference shares, cash and bonds generated positive returns and cushioned the potential downside volatility in domestic and other risk assets.

The net result was above-average performance for the quarter and builds on the excellent relative performance of the Fund since the middle of 2017. In particular, the Fund has generated first quartile performance over all periods ranging from 3 months to 3 years and was one of the few balanced funds to generated positive returns for calendar year 2018.

Our stock selection discipline and asset allocation experience enabled us to maintain our trend of avoiding or averting the worst performing securities and sectors. Our underweight in Financials and selected industrials added value. In equities, our very low exposure to the domestic retailers added significant value. Our overweight in Tobacco and Platinum enabled the fund to hold up better than the average fund. In addition, the lower allocation to domestic equities added value in terms of asset allocation.

Our allocation to global equities had an excellent quarter and provided both diversification and a currency tailwind. Our overweight allocation to Global Equities more than compensated for the lower domestic equity weighing.

Our above-average cash position, was a relative detractor over the quarter.

Portfolio positioning

The fund positioning and strategy remains virtually unchanged.

We remain marginally under-weight equities and within equities, we favour quality and global. Our foreign exposure remains high, but we have reduced foreign exposure in anticipation of less currency tailwinds and in response to attractive valuations on the domestic front.

We re-configured our domestic equity exposure during the quarter as value re-emerged after an extended sell-off. We increased our exposure to domestically oriented stocks.

Our Fixed Income exposure is inherently conservative, lower duration and adequately diversified. We increased our government bond exposure during the previous quarter but we remain underweight relative to the average fund, based on fiscal considerations. We have no parastatal or SOE debt exposure.

Cash is a residual outcome of our investment process. Cash balances increased marginally over the quarter as we rebalanced the currency and sector exposure after significant advances. The decline in domestically oriented asset classes (particularly equities) over the quarter has led to more reasonable valuations and attractive opportunities for diversification.

Market overview

The fourth quarter of 2018 saw an escalation in the "risk-off" trend of previous quarters. The US Equity market initially bucked the trend but December saw an abrupt and deep capitulation which led to global contagion.

The growing disparity across markets and economies intensified over the quarter as trade war rhetoric and central bank actions once again took center stage. The Fed maintained their commitment to quantitative tightening in early December, which initially supported the US Dollar and maintained pressure on Emerging Markets. Fed action and the accompanying narrative eventually led to a tantrum like sell-off in risk assets. Safe havens like Gold and Treasuries benefitted.

The CBOE Volatility Index (VIX) spiked in December. Volatility had been relatively stable since the significant turbulence in early 2018 and despite the increased risk aversion since October. The sudden and deep drawdown in risk assets has punctured the bubble of investor complacency and moderated expectations.

Another feature of the quarter the inability of security prices to rebound quickly, as was the case in previous cycles. Emerging market securities are declining at slower rate and the synchronized global growth narrative is rapidly being replaced by a fears of a global slowdown, particularly in China.

Global Bond advanced by 1.2% and resumed their customary role as a safe haven in times of distress. Emerging market bonds declined marginally by 0.18% in dollars. US Bonds were surprisingly resilient, which seems to indicate that the Fed tightening cycle may be coming to an end.

For the quarter, most major asset classes declined with relatively few safe havens. Gold advanced by 9.67%. The US Dollar remained stable based on relative yield considerations and better relative growth prospects.

The MSCI World Index experienced a large 13.3% loss over the quarter (it's worst quarterly performance since the third quarter of 2011). MSCI Emerging Market Index declined by 7.4% over the quarter. Global property, as measured by the iShares Developed Market Property Yield ETF which tracks the FTSE EPRA / NAREIT Developed Index had a difficult quarter with a decline of -5.28%

On the domestic front, a significant driver of returns was global equity contagion and EM weakness.

The performance of fixed income securities was surprisingly resilient for the quarter. The All Bond Index managed a positive return of 2.7% and inflation-linked bonds, as measured by the JSE CILI Index followed suit with a 0.2% return. Cash, as measured by the STeFI index, returned a steady 1.8%. The JSE Preference Share Index has a solid quarter with a positive return of 4.07%. Listed Property continued to struggle with a decline of 4.0% which takes the year to date decline to 25.3% and the sector is now firmly in a bear market.

The All Share Index declined by 4.9% to exacerbate the negative impact of the previous quarter's losses. All broad sectors declined. SA Industrials were the hardest hit with a decline of 6.5%. Small-Caps fell by 7.3% while Mid-Caps bucked the trend with a positive 2.7% over the quarter.

In terms of Equity sectors, the top performers were Gold Mining +38.1%, Fixed Line Telecoms +25.0% and Platinum +18.4%. The worst performers were Tobacco -27.4%, Pharma -19.3%, and General Financials -9.4%.

Emerging Market contagion persisted, albeit at lower intensity. Domestic Policymakers and leadership have demonstrated a resolve to address the structural impediments in the fiscus and critical institutions. The process is underway and will take time. The decline in domestic assets has led to less euphoric valuations and represents an opportunity for investors to participate in the recovery on a more rational basis.

The probability is high that equities, as an asset class, could continue to muddle through. Risk assets remain extremely vulnerable to either a recession or a sudden increase in bond yields.

For that reason, we continue to advocate caution and conservatism, with adequate diversification across portfolio's.

Portfolio overview

The Fund declined by 3.43%, but remains well ahead of the average fund. Performance was satisfactory in a quarter when many asset classes experienced fairly significant declines.

The fund navigated a difficult quarter incredibly well. Our intentional bias towards diversification and conservatism came to the fore as preference shares, cash and bonds generated positive returns and cushioned the downside volatility in domestic and other risk assets.

The net result was above-average performance for the quarter and builds on the excellent relative performance of the Fund since the middle of 2017. In particular, the Fund has generated first quartile performance over all periods ranging from 3 months to 2 years and was one of the few balanced funds to generated positive returns for calendar year 2018.

Our stock selection discipline and asset allocation experience enabled us to maintain our trend of avoiding or averting the worst performing securities and sectors. Our underweight in listed property and selected industrials added significant value. In equities, our reduced exposure to the domestic consumer added value. Stock selection was reasonable and enabled the fund to hold up better than the average fund. In addition, the lower allocation to domestic equities added value in terms of asset allocation.

Our global equities continued to perform well up to November and provided both diversification and a currency tailwind. In direct contrast and in an abrupt turnaround, global equities sold off in tandem over December and gave back all of the relative gains over the quarter. Our overweight allocation to Global Equities more than compensated for the lower domestic equity weighing over most of the year but did not work very well in the fourth quarter.

In mitigation, our long standing above-average cash position, was a rare positive contributor to performance over the quarter.

Portfolio positioning

The fund positioning and strategy remains virtually unchanged.

We remain marginally under-weight equities and within equities, we favour quality and global. Our foreign exposure remains high, but we have reduced foreign exposure in anticipation of less currency tailwinds and in response to attractive valuation on the domestic front.

We re-configured our domestic equity exposure during the quarter as value re-emerged after an extended sell-off. We increase our exposure to listed property and banks.

Our Fixed Income exposure is inherently conservative, lower duration and adequately diversified. We increased our government bond exposure during the sporadic over during the quarter. We have no parastatal or SOE debt exposure.

Cash is a residual outcome of our investment process. Cash balances declined marginally over the quarter as we found new opportunities to deploy capital. It is likely that cash will reduce even further. The decline in domestically oriented asset classes (particularly equities) over the quarter has led to more reasonable valuations and attractive opportunities for diversification.

Market overview

The third quarter of 2018 saw a continuation of the "risk-off" trend of previous quarters. The US Equity market bucked the trend, led by the Tech heavy Nasdaq which maintained strong positive momentum.

The growing disparity across markets and economies intensified over the quarter even though trade war rhetoric and related actions waned slightly. The Fed maintained their commitment to quantitative tightening, which bouyed the US Dollar and maintained pressure on Emerging Markets.

The CBOE Volatility Index (VIX) held steady, with a slight downward bias from the spike in February. Volatility has been relatively stable since the significant turbulence in early 2018. Heightened investor complacency and apparent lack of fear remain a worry - a repeat of the VIX spike in February will lead to sudden and deep drawdowns in risk assets.

Another feature of the quarter was the stability of higher risk-premia across various asset classes. Securities prices have not rebounded quickly, as was the case in previous cycles. Emerging market securities are declining at slower rate but the synchronized global narrative no longer provides support.

Global Bond yields rose across the board. Emerging market bonds were the hardest hit, with a 10.4% decline in dollars. US Bonds were once gain the most resilient. Turkish bonds declining by 21.6% and Brazilian bonds by 15.7%.

For the quarter, most major asset classes declined with relatively few safe havens. Gold declined by --8.3%. The US Dollar strengthened based on relative yield considerations and an underlying growth narrative.

The MSCI World Index appreciated by 5.1% compared to the MSCI Emerging Market Index which declined by 0.9% over the quarter.

Global property, as measured by the iShares Developed Market Property Yield ETF which tracks the FTSE EPRA / NAREIT Developed Index had an uneventful quarter with slight decline of 0.15%

On the domestic front, a significant driver of returns was the weakness of the rand as a consequence of sustained US dollar strength and EM weakness.

The performance of fixed income securities was surprisingly resilient. The All Bond Index managed a positive return of 0.80% and inflation-linked bonds, as measured by the JSE CILI Index followed suit with a 0.60% return. Cash, as measured by the STeFI index, returned a steady 1.70%. The JSE Preference Share Index has a solid quarter with a positive return of 2.59%. Listed Property continued to struggle with a decline of 1.03% which takes the year to date decline to 22.16% and the sector is now firmly in a bear market.

The All Share Index declined by 2.2% to reverse some of the previous quarter's gains. SA Resources led the way, with a 5.2% return, followed by Financials with 2.8%. SA Industrials were the hardest hit and caused the drag on the entire index, with a decline of 7.8%.

Emerging Market contagion persisted, albeit at lower intensity. Domestic Policymakers and leadership have demonstrated a resolve and ability to address the structural impediments in the fiscus and critical institutions. The process is underway and will take time. The decline in domestic assets has led to less euphoric valuations and represents an opportunity for investors to participate in the recovery on a more rational basis.

The probability is high that equities, as an asset class, could continue to muddle through. Risk assets remain extremely vulnerable to either a recession or a sudden increase in bond yields. For that reason, we continue to advocate caution and conservatism, with adequate diversification across portfolio's.

Portfolio overview

The Fund appreciated by 0.90%, well ahead of the average fund. Performance was satisfactory in a quarter when many asset classes experienced fairly significant declines.

The fund navigated a volatile third quarter incredibly well. Our intentional bias towards diversification and conservatism came to the fore as preference shares, cash and off-shore equities generated positive returns and dampened the downside volatility in domestic assets.

The net result was above-average performance for the quarter and builds on the excellent relative performance of the Fund since the middle of 2017.

Our stock selection discipline and asset allocation experience enabled us to maintain our trend of avoiding or averting the worst performing securities and sectors. Our underweight in domestic bonds and listed property added significant value. In equities, our reduced exposure to the domestic consumer added value, as general retailers declined significantly.

In domestic equities we had solid results for the quarter. Stock selection was reasonable and enabled the fund to hold up better than the average fund. In addition, the lower allocation added value in terms of asset allocation.

Our global equities performed well in absolute terms due to good stock selection and provided both diversification and a currency tailwind. The solid dollar performance of our global equities was augmented by Rand weakness and added significant value over the quarter. Our overweight allocation to Global Equities more than compensated for the lower domestic equity weighing.

Above-average cash provided a drag on performance over the quarter.

Portfolio positioning

The fund positioning and strategy remains virtually unchanged.

We remain marginally under-weight equities and within equities, we favour quality and global. Our foreign exposure is remains high, due to rand weakness and market movements.

We re-configured our domestic equity exposure during the quarter as value re-emerged after an extended sell-off. We increase our listed property exposure and we anticipate moving to overweight in future.

Our Fixed Income exposure is inherently conservative, lower duration and adequately diversified. We increased our government bond exposure during the sporadic declines during the quarter. We have no parastatal or SOE debt exposure.

Cash is a residual outcome of our investment process. Cash balances declined marginally over the quarter as we found new opportunities to deploy capital. It is likely that cash will reduce even further. The decline in domestically oriented asset classes (bonds & equities) over the quarter has led to more reasonable valuations and attractive opportunities for diversification