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 Balanced Index Fund - Sep 19
In Quarter 3, the MSCI EMEA index (which includes South Africa) fell 7.02%, which was worse than the returns of that of the MSCI Emerging Markets (EM) at -4.25% and far behind the MSCI World’s 0.53%. Year to date, the picture does not change much with the MSCI EMEA at 5.13%, relative to the MSCI EM return of 5.89% and way behind the 17.61% for the MSCI World.
The Federal Reserve and the European Central Bank both eased policies to offset signs of weaker global growth. The US economy has weakened but is not in a recession mainly due to fiscal support offsetting the adverse impact of the trade war. The inversion of the US yield curve is perceived as tolling the bell for a near-term global recession whilst Draghi also added to the call for fiscal easing.
Adding to that, commodity prices took a dive with key iron ore benchmark prices plunging some 20% in a matter of weeks and the key industrial metal, copper, hitting two-year lows. The key global manufacturing indices have also dived and are at fiveyear lows - but was at least stable over the last two months.
In the UK, Eurosceptic Boris Johnson has become the prime minister after being elected as leader of the Tories. There appears a greater likelihood of a no-deal Brexit or, at the very least, yet another postponement of the October decision deadline. The market has discounted this in large part with a weaker Sterling. As business decisions get postponed, the UK could dip into a technical recession.
In South Africa the SA Reserve Bank held the policy rate unchanged at 6.5% at its September meeting, but its statement was more dovish than in July when it did cut. For Quarter 2 of 2019, GDP was 3.1% quarter-on-quarter, above the consensus of 2.4% and reversing the first three months’ contraction. SA headline CPI accelerated from 4.0% in January to 4.5% in March and then settled around 4.3% in August 2019. Forward rate agreements are now pricing in a 25bp rate cut in the next six months.
The SA Listed Property Index (SAPY) realised a return of -4.4% during the third quarter of 2019. The best performing shares in the SAPY for the last quarter included Sirius (19%), Resilient (9%), Investec Australia (8%) and Liberty 2 Degrees (3%). By contrast, the worst performers were Hospitality B (-16%), Fortress B (- 15%), Redefine (-13%) and Mas Plc (-13%) During the September index rebalance there was one constituent deletion, namely Accelerate Property Fund (APF), and one addition, which was Stor-age Property (SSS) in the SA Listed Property Index (SAPY). The one-way turnover (2.5%) was somewhat higher than the recent past.
Developed market bond yields continued to trend lower. Yields on the benchmark US 10-year bond declined 34 basis points from 2.0% at the end of June to 1.66%. In Europe, the yield on the 10-year German Bund touched a new all-time low of - 0.716%.
The All Bond Index returned 0.78% for the quarter, underperforming the SteFI cash index return of 1.83%. The 3- to 7-year sector delivered the best return (1.29%). The yield on the benchmark R186 rose 0.235% to 8.32% while the R2035 (16-year bond) yield rose 0.17% to 9.61%.
With inflation remaining relatively subdued, demand for inflation protection has been week. The inflation-linked index returned just 0.25% for the quarter. Yields on the week. The inflation-linked index returned just 0.25% for the quarter. Yields on the I2029 (10-year) rose 0.24% from 3.17% to 3.41%. The yield on the ultra-long I2050 reached a new high of 3.65% in September before ending the quarter at 3.63%.
Equity portfolio performance and attribution
Globally, factor performance has continued the general trend for the year with Low Volatility and Momentum outperforming and Value underperforming up to the end of August. In September there was a significant rotation from Momentum, Quality and Low Volatility into Value, but this was short-lived and it does not seem like a structural shift in trends has occurred. It is interesting to note that historically there has been no structural relationship between Value and Low Volatility, but in 2019 these two factors behaved like polar opposites, which was especially true from May onward, where Low Volatility generated strongly positive returns and Value significantly negative returns.
Domestically, value signals like Price to Cash Flow and Price to Book have delivered strong performance over the past year, but the Dividend Yield and Earnings Yield factors continued to underperform in the third quarter. Momentum as measured by Price Momentum continued to outperform in the third quarter while the more defensive Earnings Revision signal marginally underperformed. Locally, quality signals of Profitability and Growth continued to underperform in 2019 after experiencing strong outperformance in 2018.
The multi-factor approach of the fund, where stocks are selected based on their combined Value, Momentum and Quality signal, added value over and above the single factors but still underperformed the benchmark FTSE/JSE Capped Shareholder Weighted All Share Index over the third quarter.
From an attribution perspective, overweights in Anglo Platinum, Harmony Gold and Clicks and an underweight position in Sasol added value to the strategy over the quarter. Counters that detracted value from the strategy included an overweight in Kumba Iron Ore, Telkom and Truworths while an underweight in Naspers also detracted from performance.
In terms of constituent changes to the Satrix SmartcoreTM index, we added Spar Group while deletions were Sibanye Gold and Tsogo Sun Hotels.
The investment objective of the portfolio is to provide investors within income and capital growth in the medium to long term by tracking the proprietary Satrix Balanced Index as closely as possible.