Robert Macdonald is a portfolio manager at Satrix's smart beta and indexation investment business. He is also responsible for research and product development.
Macdonald joined SIM in 1999 working in investment operations and client services. Before joining SIM, he spent three years working in the corporate finance department of PricewaterhouseCoopers.
Macdonald completed his B.Bus.Sci (Finance) (Hons) and P.G.D.A. at the University of Cape Town (UCT), graduating in 1994 and 1995 respectively. He also qualified as a CA (SA) in 1998 from SAICA, and is a CFA charter holder, obtained in 2004.
In his spare time Macdonald enjoys sport (mainly mountain biking), reading and spending time with his family. He is married with three children.
Satrix Momentum Index Fund - Dec 18
In the US, economic growth remained robust and this ultimately overshadowed simmering concerns around the escalating US.China trade war. Stability in growth and employment figures allowed the Federal Reserve (Fed) to enact its widely anticipated increase in the federal funds rate by 25 basis points. The committee dropped its long-standing description of monetary policy as eaccommodativef and reaffirmed its outlook for further gradual hikes into 2019. Data released in September showed wages to be growing at the fastest rate since 2009, while additions to non-farm payrolls remain above 185 000 on a three-month average. As yet, industrial activity indicators show little impact from the trade wars.
In Europe, worries over trade wars and potential US tariffs on cars were a feature of the period. On the economic front, Q2 2018 growth was revised up to 0.4% quarteron- quarter, compared to the initial estimate of 0.3%. Forward-looking activity indicators continued to point towards expansion, albeit at a more subdued pace than at the start of 2018. The Flash Eurozone PMI Composite Output Index (1) for September fell to a four-month low of 54.2. Eurozone inflation was estimated at 2.1% for September, up from 2% in August. There was no change in policy from the European Central Bank who reiterated that interest rates would remain on hold eat least through the summer of 2019.
In emerging markets, there was little progress in bilateral trade negotiations and China responded with tariffs on $110 billion of US goods. Meanwhile, Chinese macroeconomic data disappointed. Turkey experience a sharp sell-off in the Lira, as geopolitical tensions with the US exacerbated ongoing concerns over its wide current account deficit, above-target inflation and central bank independence. South Africafs macro backdrop deteriorated as global liquidity tightened given the economyfs twin deficits, and Q2 2018 GDP growth disappointed, slowing to 0.4% year-on-year. Mexico saw positive general elections and an agreement with the US on NAFTA renegotiation. Despite ongoing risk of new US sanctions, Russia benefited from crude oil price strength.
Global and local market review
The MSCI World Index posted a Dollar total return of 5.1% (+1.9% for Q2 2018), once again outperforming the MSCI Emerging Markets Index (-0.9% in Q3 2018 vs - 7.9% in Q2 2018). In the US, despite political uncertainty and trade concerns, the US equity bull market became the longest in history on 22 August, and advanced in Q3 2018 to significantly outperform other major regions. Over the quarter, the information technology and healthcare sectors were boosted by a slew of robust earnings. Eurozone equities posted a modest gain in Q3 2018 with the MSCI EMU (European Economic and Monetary Union) Index returning 0.4%. Energy and industrial stocks were among the leading gainers. The FTSE/JSE All Share Index fell 0.8% amid Brexit uncertainty and a tempering of the global growth outlook, as a result of the escalating trade war between the US and China. Although trade tensions continued to escalate during the quarter, the Japanese stock market ended September above its recent range to show a total return of 5.9% for the quarter.
Emerging market equities lost value in what was a volatile Q3 2018, with US Dollar strength and the US.China trade dispute weighing on risk appetite. China underperformed as the US implemented tariffs on a total of $250 billion of Chinese goods, some of which are set to increase in January, and threatened tariffs on a further $267 billion of goods. There was little progress in bilateral trade negotiationsand China responded with tariffs on $110 billion of US goods. Turkey was the weakest index market amid a sharp sell-off in the Lira. South Africa also underperformed. The market is vulnerable to global liquidity tightening given the economy’s twin deficits, and Q2 2018 GDP growth disappointed, slowing to 0.4% year-on-year. SA Resources and SA Financials outperformed in Q3 2018 with total returns of 5.2% and 2.8% respectively, while the SA Industrial sector was the drag on the index, shedding 7.8% over the same period.
Portfolio performance, attribution and strategy
Global trade uncertainties and other geopolitical risks once again weighed heavily on investor minds over the prior quarter. This resulted in rotation between the Momentum/Growth and Value strategies during the quarter as the slope of the yield curve gyrated. Short interest in the Price Momentum strategy globally has stabilised near historical average, suggesting it is not as crowded anymore. The Momentum strategy’s macro risk has also declined recently, and it has become more defensive to credit risk. Additionally, the performance of the Price Momentum strategy started to diverge from the Growth strategy as they become much less correlated.
In South Africa, both the Price Momentum and Earnings Momentum strategies have endured a tough quarter. With broad equity indices down in absolute terms over the period, these cyclical strategies are expected to experience some underperformance. Whereas previous quarters saw Earnings Momentum (a subcomponent of Headline Momentum) and Price Momentum exhibit divergent performances, during Q3 2018 we saw synchronised underperformance, as investors disregarded companies with positive earnings sentiment. Typically, however, the Earnings Revisions strategy encompasses a more defensive component, and we expect Earnings Momentum to fulfil its role going forward in our overall Momentum strategy.
As an overall factor the Momentum strategy struggled during Q3 2018 relative to the FTSE/JSE Capped Shareholder Weighted Index (Capped SWIX). The strategy’s positive contributions to performance was largely attributed to high-scoring Momentum stocks such as Assore (ASR), Capitec (CPI) and African Rainbow Minerals (ARI). In terms of underperformance contributors, these included overweight positions in Naspers (NPN), Clicks (CLS), Standard Bank (SBK) and Imperial (IPL), and underweight positions in MTN and Old Mutual (OMU).
At the last rebalance date (mid-September), we transitioned the portfolio based on the evaluation of new factor signals and the risk levels in the portfolio. Based on these signals, Anglo American (AGL), Aspen (APN), Barlows (BAW), Kumba Iron Ore (KIO) and MTN were removed, whereas exposures to Assore (ASR) and Rand Merchant Holdings (RMH) were cut due to their waning strength of momentum signal. On the positive side, we added Exxaro (EXX) and Santam (SNT) based on its current strong signal, and also increased allocations to Anglo American (AGL), all in line with the risk objective of the fund.
We remain convinced of the factor’s medium- to long-term significance and the premium it offers in the South African capital market and remain disciplined in our implementation and extraction of the factor.
The investment objective of the portfolio is to provide investors with income and capital growth in the medium to long term by tracking the proprietary Satrix Momentum Index as closely as possible. Income will be of secondary importance.