Sanlam Select Absolute comment - Mar 17
Markets in March 2017 showed positive returns, with MSCI Emerging Markets (EM) outperforming MSCI World. Within MSCI World markets, the best performance in March was from Europe at +4.1% as political anti euro risk was receding. Meanwhile, North America (+0.2%) and Pacific (+0.7%) failed to perform in March. All of this came about as some the previous capital flows into the US reversed and the value cycle shifted from a highly valued US market to undervalued European and Emerging Markets as expected. Within MSCI EM, Asia gained 3.4% in March, led by India (+6.0%), Korea (+5.3%), Indonesia (+4.6%) and Thailand (+4.0%). Meanwhile, heavyweight MSCI China lagged, posting a US$ total return of +2.1%. EMEA and LatAm gained a more pedestrian 0.6% in March. Russia (+2.1%) was the top performer in EMEA, followed by Greece (+1.6%), Turkey (+1.4%) and Poland (+1.4%).
SA (-0.1%) was mostly flat in US$ terms in March given a weakening rand. Up until 17 March, the rand had appreciated by 2.6% against the dollar over the month, but depreciated by 5.0% in the week to 31 March on SA..s cabinet reshuffle. Year-todate the rand has appreciated by 2.0% against the US$. In rand terms, the SA market as measured by the FTSE/JSE All Share Shareholder Weighted Index (SWIX), was up by 2.2%, with SA Industrials (+4.2%) being the best performers, helped by the solid total returns coming from some of the nonresource rand hedge heavyweights on the back of the weaker rand: Richemont (+11.0%), Naspers (+10.4%), BATS (+9.7%) and MTN (+5.6%). Fixed Line Telecoms (+10.1%) also posted solid total returns over the month. Incidentally, IT was the best performing equity sector in March within all of MSCI World and EM.
Economic fundamentals were bullish on bonds this month, with growth figures showing a contraction in Q4 2016 quarter-on-quarter and February..s CPI softening by 0.3% to 6.3% year-on-year. The SA Reserve Bank also lowered its forecasts slightly. Food inflation, in particular, is expected to decline, as shown by agricultural prices printing in deflation. A weakening rand following the Cabinet reshuffle at the end of March, combined with fears of a downgrade by international credit rating agencies, changed investor expectations somewhat.
Looking across asset classes, by 24 March SA Bonds were up 3.7% for the month, but these gains were wiped out by 31 March on political uncertainty following the Cabinet reshuffle. Cash returned 0.63%, SA bonds provided a total return in March of just +0.4% with inflation-linked bonds retracing previous gains, losing 2.15%. SA bonds provided a total return in March of just +0.4%. SA listed property was flat at +0.1%.
During the period, the Absolute Fund participated in the upside move of markets thanks to a balanced portfolio, with all asset classes bar our underweight domestic bond position, contributing positively. Some of that bond position was switched into high quality credit for yield-pick up, while we also employed a derivative structure following the events in late March to maintain upside exposure while protecting the portfolio from falling yields. From an equity standpoint, the weakening of the rand helped the offshore exposure, while the events around the reshuffle of the cabinet had an adverse effect on financials, particularly banks, which dampened the expected performance somewhat. The select Mid Caps exposure which we held throughout the quarter also had a more muted, while positive, performance. Without excessive assumptions, the calculated expected positive returns of that part of the portfolio are so steep, that their positions in the portfolio are fully warranted. With regards to the events in late March, the team was quick to make the necessary portfolio adjustments, putting derivative structures in place, limiting the negative impact of some of the detractors, and providing the base to take advantage of lower asset prices following the market correction.
The portfolio as a whole is well positioned to take advantage of the flow of capital out of the US into emerging markets and of the improving economic growth profile in SA and around the world. Continued volatility, however, has to be expected.
In this context, it is important to note that the target of this fund is not to never underperform (nobody can do that), but to achieve CPI + 5% over rolling three years and avoid any negative returns over 12 months in down markets. The fund's capital protection process is laid out to cater for extreme risk events, while a robust portfolio construction framework should help to withstand ''normal'' market volatility. As such, short periods of limited underperformance are possible and fully taken into account.
The portfolio will invest in a combination of equities, bonds, money market instruments, listed property as well as international equities and fixed interest investments. The portfolio will be broadly diversified across asset classes. Active asset allocation and securities selection strategies appropriate to the needs of cautious investors will be followed. Net exposure to equities both in South Africa and foreign markets will not exceed 40%. This portfolio will be managed in accordance with regulations governing pension funds. The investment manager will also be allowed to invest in financial instruments (derivatives) as allowed by the Act from time to time in order to achieve its investment objective. This is an institutional portfolio, which will form part of a multi manager solution.
Apart from the above, the portfolio may also invest in participatory interests of portfolios of collective investment schemes registered in the Republic of South Africa or of participatory interest in collective investment schemes or other similar schemes operated in territories with a regulatory environment which 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.
The Trustee shall ensure that the investment policy set out in the preceding clauses are adhered to; provided that nothing contained in this clause 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.
The Manager shall be permitted to invest on behalf of the Sanlam Multi Managed Institutional Prudential Low Equity Fund Two in offshore investments as legislation permits.
For the purpose of this portfolio, the manager shall reserve the right to close the portfolio to new investors on a date determined by the Manager. This will be done in order to be able to manage the portfolio in accordance with its mandate. The Manager may, once a portfolio has been closed, open that portfolio again to new investors on a date determined by the Manager.