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 - Apr 18
In the US, equities began 2018 strongly, buoyed by ongoing strength in economic data, robust earnings and the confirmation of a major tax reform package. US business confidence reached an unexpected, multi-decade high in March, while GDP for Q4 2017 was revised upwards to show growth of 2.9%. The latter part of the quarter, however, saw a marked increase in volatility as investors first digested the destabilising potential of an elevated US inflation reading and the possibility that the Fed may need to become more proactive in raising interest rates, as well as escalating US-China trade sanctions, which precipitated a renewed bout of turbulence in March.
In the Eurozone, the economic backdrop remained encouraging over the three months. GDP growth for Q4 2017 was confirmed at 0.6% quarter-on-quarter. Unemployment was stable at 8.6% in January 2018. However, forward-looking surveys painted a picture of slower future growth. The composite PMI hit a 14-month low in March, albeit the reading of 55.3 still implies solid growth. European Central Bank chairman Mario Draghi reiterated that interest rates would not rise until well past the end of the quantitative easing programme. On the political front, the key event of the quarter was Italy’s election, which yielded no overall winner. Germany formed a new government after its inconclusive elections in September 2017. Angela Merkel remains as chancellor after her centre-right CDU/CSU agreed another grand coalition with the centre-left SPD.
Emerging markets saw positive returns in the first quarter despite a rise in market volatility stemming from tensions over global trade. Brazil’s former president Luiz Inácio Lula da Silva saw his criminal conviction upheld, while in Russia the central bank cut interest rates and the country’s debt was upgraded to investment grade by ratings agency S&P. In China, macroeconomic data remained broadly stable, albeit there were ongoing signs of a gradual slowing in momentum, with official PMI easing to 50.3. By contrast, there was concern in India over reported fraud at a state -owned bank.
Global and local market review
Global equity markets declined in Q1 2018 with investors unnerved first by concerns about the path of US interest rate rises and then worries over trade. US equities began the year strongly, boosted by tax reforms, but ended the quarter lower amid concerns over inflation and the impact of US-China trade sanctions. Following a 10% correction from its January highs and rallying back 8% by early March, the S&P 500 Index suffered another 5% pullback in the last few weeks, ending the month of March down 2.5% and losing 0.8% over the last three months, which was the first negative quarter since the third quarter of 2015. Eurozone equities posted negative returns as worries over US rates and trade affected other markets. Italy’s election was inconclusive but had limited impact on the equity market.
Emerging market (EM) equities outperformed, delivering a positive return in US dollars. The MSCI EM Index was up +1.5% (total returns) in Q1 2018, ahead of the MSCI World (Developed Market) Index, which was down 1.2%, the first quarterly loss in two years. Over the last three months the FTSE/JSE All Share Index (ALSI) posted a total return of -6.0%. This has been its worst quarterly performance in eight years (Q2 2010: -8.2%). SA Industrials were the worst performer, returning -8.0% Satrix Balanced Index Fund April 2018 (Fund Fact Sheet) years (Q2 2010: -8.2%). SA Industrials were the worst performer, returning -8.0% (Naspers and Tiger Brands were both down 12%). SA Resources lost 3.8% (rising global uncertainty) and SA Financials lost 3.6%.
Of the equity sectors, the top first-quarter performance came from Non-life Insurance (+24.4%), Fixed Line Telecoms (+10.0%) and General Retailers (+9.2%). The worst performance came from Real Estate Development and Services (-31.2%), Software (-30.5%) and Household Goods (-29.0%).
US Treasury yields rose markedly across the curve over the quarter as expectations of growth, inflation and interest rates shifted higher. Volatility returned to markets, picking up sharply from low levels and impacting risk assets. In March, sentiment was negatively impacted by rising trade tensions between the US and China. Tenyear yields increased from 2.41% to 2.74%, reaching a high of 2.95% in February, five-year yields increased from 2.21% to 2.56% and two-year yields from 1.88% to 2.27%.
The Bloomberg Commodities Index posted a modest negative return in Q1 2018. This was attributable to weakness from industrial metals amid rising global trade tensions and concern that further escalation could impact demand. Copper was particularly weak, down 8.3%. Conversely, the energy and agricultural components recorded solid gains. In agriculture, corn (+10.6%) and soy bean (+9.8%) prices were notably strong. In the energy segment, Brent crude (+5.1%) rallied into quarter -end amid rising confidence that Opec would maintain its production cuts through the full year 2018. In precious metals, gold (+1%) posted a positive return but silver (-5.1%) lost value.
EM local currency bonds largely ignored the increase in developed market (DM) yields because the dollar was weakening and global growth projections were being revised higher. Stronger EM currencies also led to lower inflation in EM economies. South African bonds outperformed their EM counterparts as political risks waned and the rand strengthened more than other currencies. The FTSE/JSE All Bond Index (ALBI) returned 8.06% in Q1 2018 and the benchmark R186 yield fell to 7.99% from 8.64%.
The FTSE/JSE SA Listed Property Index (SAPY) delivered a total return of -19.6% during the three months to the end of March 2018, mainly due to company-specific concerns. Relative to other asset classes, the property index materially underperformed equities (ALSI: -6.0%; cash: 1.8%; bonds: 8.1%) over this period. On a rolling 12-month basis, the sector’s total return is -7.1% due to the negative first quarter of 2018.
Momentum: Globally, cyclical sectors performed more strongly in January and February, when the market was focused on faster rate hikes, while in March the broader decline in risk appetites saw more defensive areas outperform. From a style perspective, this was consistent with the global Momentum and Growth factors’ correction during March, as rotation and perhaps profit-taking have dragged on a generally positive Momentum factor during 2018, primarily driven by perceived increased risk to global growth.
In South Africa, there was large consistency with global outcomes, as back-endloaded cyclical pressure over the quarter dampened an otherwise strong Momentum signal. Earnings Revisions (a sub-component of Headline Momentum), on the other hand, once again has not performed in line with Price Momentum, generating negative returns as poor earnings sentiment failed to deliver in an environment with high levels of corporate uncertainty.
As an overall factor however, the Momentum strategy struggled during Q1 2018 relative to the FTSE/JSE Shareholder Weighted Index (Swix). The strategy’s performance was attributed on the positive side to exposure to its off-benchmark underweight positions in property stocks, including Resilient (RES), NEPI Rockcastle (NRP) and Fortress (FFB), while overweight positions in Standard Bank (SBK) and Barloworld (BAW) aided the strategy. On the negative side, cyclical exposure to Northam Platinum (NHM), African Rainbow Minerals (ARI), Kumba Iron Ore (KIO), Exxaro (EXX) and Assore (ASR) weighed on the strategy, while speculation around Capitec (CPI) fundamentals also contributed negatively.
At the last rebalance date (mid-March), we transitioned the portfolio based on the evaluation of new factor signals and the risk levels in the portfolio. Based on these signals, Exxaro (EXX), Reinet (RNI) and Impala Platinum (IMP) were removed, and Harmony (HAR) and The Foschini Group (TFG) were added. Exposures in British American Tobacco (BTI) and African Rainbow Minerals (ARI) have also been reduced while exposures to Mr Price (MRP) and JSE (JSE) were added 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.
Quality: After a stellar 2017, the S&P Quality South Africa Index experienced another strong quarter as investors continue to favour stocks with defensive characteristics. Despite largely pro-cyclical domestic sentiment (e.g. leadership optimism, declining risk of credit rating downgrade, improving inflation outlook), global macro concerns have instead dominated mindshare and subsequently weighed on the local share market.
This environment continued to suit companies with strong balance sheets, clean earnings and high return to equity, as represented in our Quality basket. Furthermore, based on our analysis, the valuation gap between Quality and the market is still not pricing in the substantial historic premiums of a Quality strategy, and thus still presents value to investors who seek the strategy’s diversification benefits within this factor portfolio construct.
In terms of stock selection, the largest relative outperformance over the quarter came from the overweight positions such as Mr Price (MRP), Truworths (TRU), Standard Bank (SBK) and Clicks (CLS), as well as underweight positions such as Naspers (NPN), Resilient (RES) and NEPI Rockcastle (NRP). By not holding these stocks, the fund accreted substantial value relative to the Swix. On the other hand, the largest two detractors in Value came from overweight positions in Capitec (CPI) and Tiger Brands (TBS), as a speculative report from Viceroy and an outbreak of listeriosis respectively weighed on these counters. Other overweight detractors included Exxaro (EXX) and Kumba Iron Ore (KIO). There were no constituent changes to the S&P Quality South Africa Index over the prior quarter, as this index rebalances in June and December each year.
The index and portfolio remain focused in its extraction of Quality and should markets give way to further risk aversion, the defensive character of the basket should prove rewarding while not meaningfully compromising returns during up markets.
Stable Dividend: After a fantastic performance during the 2016 calendar year, Value measures have experienced a disparate 2017 and start to 2018. The divergence between deep value measures (e.g. price-to-book) and yield measures (e.g. dividend yield) has been substantial, with the former struggling, and the latter continuing to perform well as investors seek defensive qualities during a period of high levels of uncertainty and flight to safety.
The impact of the news in December regarding the accounting irregularity at Steinhoff still has investors on edge, with further speculation surrounding Capitec and technology shares continuing to weigh on market sentiment. Further to these stock-specific issues, global forward macro momentum has slowed, which has largely favoured defensive shares with high dividend yields, in particular domesticorientated shares, of which the Stable Dividend strategy has significant exposure to.
During Q1 2018, overweight exposure to Foschini (TFG), Mr Price (MRP), Truworths (TRU), AECI (AFE) and JSE played a strong positive role here, while an underweight position in Naspers (NPN) also added excess return. Holdings in Exxaro (EXX) and African Rainbow Minerals (ARI) detracted from the index’s relative performance.
There were many changes to the Satrix Stable Dividend strategy during the prior quarter, including 13 counters coming into the index, and 10 counters leaving the index.
Volatility has once again become the dominant factor in financial markets globally, exemplified by the VIX fear index experiencing its biggest daily spike in history during the quarter. There are growing concerns that global businesses may be subject to new regulation and be the target of tariffs if a US-China trade war escalates. Political risk is dominating fundamentals and we now have progressed into a new era where central banks are not the backstop supporting financial markets.
In South Africa, the sentiment pendulum has swung from pessimism to optimism with the new political administration driving business and consumer confidence higher with expectations of a solid economic recovery being discounted. Either way, economic mood swings tend to be exaggerated. Also, the expectation that President Ramaphosa will, in one fell swoop, reverse years of maladministration and corruption are unrealistic.
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.