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 - 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 their 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.
From an SA asset allocation perspective, cash (STEFI: +1.8%) outperformed SA bonds (ALBI: +0.8%) and the FTSE/JSE All Share Index returned -4.2% (Capped SWIX: -5.1%) in the third quarter of 2019. In Dollars, the MSCI SA (-12.60%) continued to underperform the MSCI EM (-4.25%) mainly due to a weak Rand (- 6.9%). SA equities and SA bonds saw outflows of $5.7bn and $2.4bn respectively year-to-date. Properties, after stabilising somewhat over the first half of 2019, experienced a tough three months, losing about -4.4%. On the corporate side the most important news was the Naspers spin-off of Prosus, which listed on 11 September 2019. Prosus is now the largest listed EU consumer internet company.
Portfolio performance, attribution and strategy
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, the Momentum signal continues to perform very well over the quarter and the past year even though the market has de-trended with the last quarter’s negative performance. Price Momentum is now the strongest performing factor over the quarter as well as a 12-month period. Earnings revisions, however, failed to follow in the footsteps of Price Momentum and underperformed over the quarter as well as the past 12 months, but is well positioned within the broader Momentum strategy to provide diversified Momentum exposure when Price Momentum suffers drawdowns at inception points in the market.
The portfolio strategy has delivered excess returns of 2.1% over the Capped SWIX benchmark for the third quarter. The strategy’s positive contributions to performance was largely attributed to high scoring momentum stocks such as Anglo Platinum, Bidvest, Impala Platinum and Harmony Gold as well as an underweight position in Sasol. In terms of underperformance, detractors included overweights in African Rainbow Minerals, Telkom and Woolworths.
At the last rebalance date at the end of September, we transitioned the portfolio based on the evaluation of new factor signals and the risk levels in the portfolio. Based on these signals, exposure to Anglogold and Wolworths was increased and Northam was added to the portfolio, and this was funded by reducing the position in Harmony and Implats and dropping Exxaro. 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.