The Old Mutual Balanced Fund delivered better absolute returns in 2019. While the three- and five-year returns are ahead of inflation, they remain below our performance objective given the low returns experienced in previous years. The fund underperformed its peers in 2019. This is attributable to the reduced risk asset exposure, primarily global equity, and the disappointing performance of a handful of local equity counters.
Although we are dissatisfied with recent performance, we maintain the core positioning of the fund – a preference for local assets over global assets. Global equity is less attractive than in recent years, given that the US equity market is late-cycle. The strong dollar, low unemployment rate, high corporate margins, high earnings base and elevated valuations mean that US companies are more vulnerable to disappointment. We believe this argues for a US vs. Europe and emerging market position, but expect returns from global equities to be more muted going forward given valuations.
Turning our attention to South Africa, we believe that progress is being made in terms of putting the country on the reform path. The Cabinet announcements following the elections in May, the appointment of the Eskom CEO and the arrest of suspected state capture actors all point to us moving in the right direction. Against this, we obviously have issues around load-shedding and a worrying fiscal position. That said, we remain positive on our local government bonds and select equities which offer increasingly good value relative to global assets. While the likes of Omnia and KAP have not played out as expected as yet, we believe these are amongst those companies that will benefit significantly as the country continues down the reform path.
We are nearing inflection points locally and globally and accept that the short-term outlook may be noisy, probably more so than usual. Hence, to successfully navigate this period our focus must be on the long-term outlook.