Satrix Low Equity 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 do 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 was somewhat higher than the recent past at 2.5%.
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 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 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
After a reasonable first half of the year the equity markets experienced a tough last three months. The FTSE/JSE Capped Shareholder Weighted All Share Index (CAPSWIX) was one of the worst performing general all share equity indices for the third quarter of 2019, down 5.11%, which was in line with that of the FTSE/JSE Capped All Share index (CAPALSI), which realised a return of -5.14%.Both these indices are still in positive territory for the year to date with the CAPALSI about 4% above that of the CAPSWIX.
The decline in the performance of the Capped SWIX index during the last three months was led by earnings downgrades. Brexit uncertainty and a decline in rental income weighed on Intu (-38.6%). Sappi (-31.6%) ended lower with no signs of recovery in dissolving wood pulp (DWP) prices, currently trading at their lowest levels in 30 years. Sasol (-27.7%) sold off on increased uncertainty, as Sasol delayed results due to suspected control weaknesses. Massmart (-29.7%) fell, as it reported its first interim loss in over a decade. Discovery fell by 23.5% given concerns that NHI could be disruptive for medical schemes. However, SA precious metals, particularly Northam (+40.9%), Impala (+36.6%), Harmony (+36.4%), Sibanye (+25.2%) and AngloGold (+11.8%), partially offset the decline in the indices, underpinned by higher gold and PGM basket prices and a weaker Rand.
Your portfolio performed in line with its benchmark. This was mainly due to the optimised model portfolio outperforming the Capped SWIX Index. The model avoided the significantly underperforming Arrowhead properties. The optimised portfolio holds between 135 and 140 shares out of a possible 160 plus shares at an ex-ante active risk of between 6 and 8 basis points.
The unbundling of Prosus from Naspers was effective on 11 September and index changes were implemented with the quarterly index rebalance. The effect of this unbundling was that the combined weight of the unbundled entities were higher (closer to 15%) than the about 10 % in Naspers before the unbundling. During the September 2019 FTSE/JSE index review there were no meaningful constituent changes to the index. Weight changes happened on Anglo American and Naspers. The one-way turnover was about 2%.
The manager shall seek to achieve the objective by investing in a combination of equities, bonds, inflation linked bonds, assets in liquid form from (including money market instruments), listed property and international equities, fixed interest and listed property.
The investment manager will also be allowed to invest in derivatives as allowed by the Act from time to time in order to achieve its objective, as well as in participatory interests in collective investment schemes registered in the Republic of South Africa or of participatory interests in collective investment schemes or other similar schemes operated in territories with a regulatory environment whic is to the satisfaction of the manager and the trustee of a sufficient standard to provide for investor protection which is at least equivalent to that in South Africa. This combination of investments will enable the investment manager to track the performance of the Satrix Low Equity Balanced Index as closely as possible. When nivesting in derivatives, the manager will adhere to prevailing derivative regualtions.
The trustee shall ensure that the investment policy set out in the preceding clauses are adhered to, provided that nothing contained in this clauses shall preclude the Manager from varying the proportions of securities in terms of changing economic factors or market conditions or from retaining cash in the portfolio and/or placing cash on deposit.