Autus Prime Cautious comment - Mar 19
The Autus Investment Team customarily begins the year with a strategic investment workshop to consider the economic and investment factors likely to influence the markets in coming year. This year the mood was less sanguine because members identified several risks to keep an eye on in the coming months. These include the dire state of the government finances and its ever-increasing debt exacerbated by the perilous state of the SOE’s -especially Eskom, credit downgrade potential, the looming national election and a slowing global economy amongst others.
During the quarter the national budget, read by Finance Minister Tito Mboweni, confirmed government’s desperation to raise additional revenue, cut rising expenditure and reduce financial demands from poorly functioning SOE’s. Eskom’s crisis deepened and the intermittent load-shedding is retarding national productivity and economic growth. SA GDP grew by 0.8% in 2018 and is forecast to grow by 1.5% in 2019. Goldman Sachs recently predicted that the electricity crisis could subtract 0.3% from Q1 GDP growth. The RMB/BER Business Confidence Index slumped to a low of 28 index points in the first quarter of 2019. Seven out of ten business people polled expressed dissatisfaction with the current business environment. Particularly concerning is that the declining confidence cuts across all sectors of the economy including the building, retail and manufacturing sectors. The consumer remains constrained and with rising petrol costs, hikes in electricity tariffs and a weaker rand, inflation may begin to tick up. For February 2019, a consumer price inflation rate of 4.1% was recorded. This was comparatively benign mainly because food costs remained relatively constant. Inflation for 2019 is expected to remain within the 3-6% SARB target range. With a frail local economy, slowing global growth and moderate inflation the SARB is not expected to raise interest rates in 2019. At their March review, Moody’s left their rating unchanged.
Internationally, global growth is beginning to slow. Interest rate hikes in the US are looking less likely this year as consumer spending weakens. Talks of a US recession are beginning to emerge. Interest rates in China were lowered during the quarter to support flagging growth there. The lack of consensus in the UK on an acceptable Brexit and the concomitant uncertainty is harming new investment and the prospect of growth in the UK. European economies are forecast to remain stable in 2019. The Brent crude oil price has risen by 27% to end the quarter at US$69.00. The global inflationary impact of these higher prices, if sustained, will be closely monitored. These factors combined with the ongoing trade negotiations between China and the US have fuelled investor jitters. We expect more of this jostling to occur in the markets until these major issues are resolved.
This low equity multi-asset fund aims to generate stable long-term growth in capital while generating a moderate level of income. The Autus multi-fund process undertakes active asset allocation and selects asset class specialists to manage the various asset components of the Fund. Investors in the Fund therefore achieve diversification of assets as well as asset managers. The asset allocation process is informed by the team’s assessment of macro and well as micro economic factors both local and international. The offshore component of the Fund is directly managed by Autus Fund Managers. The Fund began the quarter under review with an underweight exposure to risk assets and an overweight holding in cash and fixed-interest investments with a short duration. During the quarter the equity holding was gradually increased to a neutral benchmark weight. Property remained underweight while within the fixed-interest asset class, the mix between short-term and longer duration bond funds was tilted in favour of the latter. The Fund’s cash holding was reduced.
The specialist managers selected for the Fund combine large as well as boutique managers with investment pedigree. During the quarter, Marriott Dividend Growth Fund, Allan Gray Bond Fund, Coronation Bond Fund and the SIM Enhanced Yield Fund were added to the portfolio. The offshore shares held include includes global blue-chip stocks such as Mastercard, Microsoft, Visa, Amazon, Apple and Alibaba shares. A holding in the Vanguard S&P 500 Index provides low-cost exposure to US companies. During the quarter the Fund’s holding in Boeing was sold before news of the airplane crash in Ethiopia. For the quarter, the Fund returned 3.2% versus its benchmark of 4.1%. For the six-month since its inception at the end of September 2018, the Fund returned 4.57% compared to its benchmark of 2.32%. Most importantly the fund has not recorded a negative return albeit in its very short performance history. Uncertainty will prevail in the minds of investors as the general election approaches. The election outcome could have a significant bearing on the performance of investment markets depending on how economic and investor friendly policies are addressed. We remain cautious favouring capital preservation above return during this phase of the market cycle.
In order to achieve its objective, the portfolio will at all times invest a minimum of 75 percent of its net asset value in portfolios of collective investment schemes which are not managed by the same investment manager and which are consistent with the portfolio's investment policy. The composition of the fund shall reflect the investment structure of retirement funds with a cautious risk profile and is compliant with the prudential guidelines to the extent allowed by the Act.