This is a domestic-only mandate that aims to outperform an investable benchmark of South African (SA) listed equities over rolling seven years. The fund is made up of a combination of active SA equity managers who are expected to be fully invested in SA equities at all times, and implement their best SA equity investment view. The manager combination is deliberately constructed to deliver more consistent returns relative to the benchmark over time.
Over the seven-year time horizon of the fund, SA equities have compounded at 7.6% per annum (and 10.5% over ten years). This equates roughly to 2.5% real return per annum after inflation over seven years (and 5.4% per annum over ten years) in an environment where active managers have found it difficult to outperform their benchmark (both the PPS Equity Fund and its peers have underperformed by almost 2% per annum over this seven-year period) and where in the shorter-term SA equities have battled to deliver positive real returns (over one, three and five years SA equities have underperformed cash).
This year, SA equities have returned 6.8% and have failed to keep pace with cash. Within SA equities, industrials (up 11.0%) and resources (up 25.3%) have significantly outperformed financials (up 0.9%). Large cap rand hedge counters with significant offshore earnings have driven the industrial sector, while resources have been driven by spot commodity prices remaining higher than expected (despite global economic growth having decelerated). The PPS Equity Fund has comfortably outperformed its benchmark year-todate and over three years, as well as its peers (some of whom invest in foreign equities as well as SA equities).
We are mindful of the significant underperformance of SA equities over the past five years (especially relative to foreign equities) and the potential upside should economic conditions improve. Given the nature of the SA equity market, we continue to focus our attention on managers that are well-suited to participate in the local context. To this extent, we have introduced a new manager, Fairtree, into the portfolio this quarter, replacing Coronation and Perpetua. Fairtree is a high conviction, style agnostic manager, and its introduction enhances PPS Equity, and reduces its style dependence.