John joined MacroSolutions in June 2014 as a portfolio manager. As a member of the MacroSolutions team, he is responsible for managing conservative funds including the Profile Capital & Stable Growth Funds and the Old Mutual Real Income and Stable Growth Unit Trusts.
John's background as an investment strategist enables him to integrate top down and bottom up analysis into portfolio construction.
Prior to joining MacroSolutions, he was the Investment Strategist for South Africa at UBS South Africa for nine years. In his last two years at UBS, he was also responsible for the emerging EMEA Equity strategy.
John has 15 years of work experience in financial markets in South Africa and London. In addition he has seven years of experience as an economist in public and private sector capacities in Namibia and South Africa.
Old Mutual Namibia Real Income comment - Jun 19
The second quarter of 2019 proved eventful on both the global and local fronts. Global macroeconomic conditions have deteriorated, due in part to heightened US-China trade tensions. While there was positive news stemming from the G20 meeting in the last weekend of June, much uncertainty remains on the subject of global trade. The gloomier economic picture has resulted in central banks adopting a looser monetary policy rhetoric. While some central banks have already cut rates, for example India, Australia and Malaysia, many market participants now expect the US Federal Reserve to loosen monetary policy during the second half of 2019.
Locally, the consensus view has moved to a rate cut from the South African Reserve Bank at the next meeting (in July). This follows a particularly poor Q1 GDP print of -3.2% y/y and a subdued inflation outlook. The results in the National Elections in May, together with the stronger and smaller Cabinet announced shortly thereafter, were necessary but unfortunately still not sufficient conditions for the sought-after local economic recovery we require. Government now needs to urgently implement reform plans, with the future of Eskom being the most pressing issue.
All told, local asset classes outperformed their respective global asset classes in the quarter, aided by the strengthening of the rand. Local bonds delivered good returns over this period, ahead of local equities. Global bond yields fell during the quarter, with German bund yields once again falling below zero while global equity markets advanced by 3.8% (MSCI All Country World Index in US dollar terms).
The Old Mutual Namibian Real Income fund aims to deliver an income that grows over time while protecting capital. Fund performance net of fees exceeded South African cash and bonds for the quarter, benefitting from the South African property exposure. Over the last year the fund returned 89%. This was ahead of inflation of 4.5%, exceeding the fund’s target CPI + 1-2% net of fees.
Performance over the year was ahead of South African fixed income assets, with nominal bonds (JSE All Bond Index) leading the rest, returning 7.6%. Fund performance was driven by yield enhancement within its domestic credit, as well as a strong performance from property A-shares and preference shares. The latter in particular has had a stellar last 2 years, with the index returning in excess of 10% a year. Having a meaningful exposure of 5% in the fund, these ‘between-the-gap assets’ has provided a diversified source of alternative real yield, and some capital growth.
The core of the fund remains invested in domestic fixed income assets, with a preference for low duration variable rate non-government instruments. Interest rate risk in the fund is at benchmark, with South African bond valuations fair in a historical and global context. Having priced in what we expect to be a moderate rate cutting cycle, we will reduce exposure here into any further strength. A higher exposure to Namibian government bonds, which continue to yield an attractive spread over the South African counterparts, further enhanced the fund’s weighted average yield.
While the fund’s recent equity performance have been lacklustre, exposure remains below benchmark and has not been a material drag on performance. After several years of poor performance, valuations in South African domestic equities are attractive for the first time since 2013. We have been adding domestic shares that offer a combination of attractive valuations, and high quality yield. We will continue to deploy cash towards domestic growth assets as we progress towards rate cuts and as opportunities present themselves.
The average yield of the fund is in excess of 8.5%, above our inflation expectations of 5%. Growth asset exposure within the fund is both low enough to maintain the capital preservation mandate of the fund, while providing diversification to the portfolio.
The fund aims to provide an income that grows in line with inflation, while sustaining the level of capital over time and minimising any losses over a 12-month period. The portfolio manager actively manages asset allocation to take advantage of changing market conditions. The fund invests in the full spectrum of Namibian and South African fixed interest investments and select listed property and equities, and may invest up to 30% of its portfolio offshore. The combined listed property and equity exposure is carefully managed and may not exceed 35% of the overall portfolio, but a maximum of 25% can be held in either asset class. At least 35% of the portfolio will be invested in Namibian instruments.