2018/12/13 00:00:00

The global equity market delivered good returns for the quarter, but lacked meaningful breadth as US equities (+7.5% in US dollar terms) easily outperformed every other major region. US equities responded to robust economic growth in the region and strong earnings growth reported by the companies during the quarter. Negative sentiment persisted in emerging markets, as China showed signs of slower growth, commodity prices remained under pressure and the likes of Turkey and Argentina reminded investors of the risks of investing in the developing world. Unsurprisingly, emerging market currencies, equities and bonds fell during the quarter, particularly in August and early September.
Local assets, already suffering from the poor emerging market sentiment, were dealt another blow in September as Stats SA announced that our economy had fallen further in the second quarter. Although the rand and the bond market largely recovered their losses by the end of the quarter, the equity market was unable to mount a comeback, ending the quarter slightly lower (-1.7%). The challenging economic environment, reflected in company results and updates, shows little sign of relief in the near term. Aspen was a notable casualty of disappointing the market, losing more than a third of its value in a matter of days. The fund delivered good absolute returns in this tough and volatile quarter. Longer term, the fund has delivered returns in excess of inflation, but below the levels to which we strive. The recent years have been difficult for risk assets, as local economic growth has been weak and many overseas endeavours attempted by companies have yet to bear fruit. That said, the fund has delivered very competitive performance, as reflected in the top quartile positioning over all periods from one to seven years.
Looking forward, we find value in the local bond market, particularly given the recent sell-off. We have steadily increased the fund’s exposure to local government bonds, but only at yields that we believe compensate our clients for the risk. While we believe that South Africa is making progress on the economic reform front, it is slow progress. As such, local assets will benefit in time, yet remain exposed to external and, at times, internal factors for now. Hence, the yield or price we pay for bonds and other local assets is crucial.
Value is firmly embedded in our process. However, the environment going forward must be conducive to unlocking that value and to driving an investment beyond its fair value. One example of this is the heavyweight counter Naspers, which has long been a core holding in the fund. At the beginning of this year we softened our view on that positive outlook. This, in turn, necessitated a lower core position. The result is that our clients benefited in the good times, and have been somewhat protected from the recent volatility in the Naspers share price.
Another good example is Aspen. Aspen has experienced fantastic growth due to acquisitions. However, the fund had no exposure to this stock as we felt the growth story to be unsustainable, the returns to be deteriorating and the valuations to be on the expensive side. Investors in Aspen have now been disappointed and consequently sold the share down sharply.
We aim to grow the real wealth of our clients over the long term through our solutions. While valuations are important, we believe that they need to be viewed in the context of the environment that awaits us. This requires constant vigilance, particularly given the dynamic global landscape.