Sanlam M-M Cautious FoF comment - Sep 18
A thawing in trade relations between the US and its key trading partners, better-than-expected corporate earnings, and solid US economic growth underpinned gains in developed market risk assets during the quarter. Global growth remains relatively resilient, but inflation risk is clearly on the rise. Although US growth is diverging somewhat from the rest of the world, leading indicators of economic activity suggest that global growth has peaked, and with it earnings growth. As such, some risk mitigation in 2019 is warranted as the late-cycle recovery wanes. Trade war concerns, while ever present in investors’ minds, were largely shrugged off. The Fed unanimously agreed to raise interest rates by 25bps, in line with market expectations. Also, the Italian bond yields reached a five-year high after the government unveiled plans for a sharp increase in public spending. Also, emerging market contagion was a key theme in the third quarter of this year. Locally, President Ramaphosa announced measures – both financial and non-financial – which is intended to revitalise the economy.
The MSCI World index delivered some 8.39% in rands, largely underpinned by the strong performance of the US equity markets reaching record highs. As such, the S&P 500 delivered some 7.71% in dollars, while its developed counterparts across the Atlantic struggled during Q3. Global bonds underperformed their risky counterparts, delivering 2.39% in rands, as the US 10-year bond yield weakened above the psychological 3% level. Emerging market bonds came under selling pressure in the first half of the quarter as capital flight resulted in bond spreads widening. The capitulation of emerging market central banks to raise rates did, however, place a floor under currencies and bonds. As such, emerging market bonds outperformed their developed counterparts, delivering some 4.78% in rands. Global listed property was muted during Q3, delivering some 0.10% in dollars and 3.35% in rands.
SA equities underperformed their developed and emerging market counterparts in Q3, delivering some -2.17%% in rands. The local market was largely driven lower by the Indi-25 index, which delivered some -8.25% in rands. Also, the Resi-20 and Fin-15 indices delivered 4.60% and 4.20% respectively in rands. Bond yields pushed higher during the course of the quarter, and eased somewhat in September. As such, the ALBI delivered some 0.81% in rands. Inflation-linked bonds underperformed their sovereign counterparts, delivering some 0.56% in rands. Also, local cash delivered some 1.76% in rands for the same period. SA listed property came under further selling pressure in Q3 and a derating of property relative to bonds accounted for the sector’s -1.01% return in rands. The derating was in all likelihood due to ongoing uncertainty about the FCSA and JSE investigation of insider trading against the Resilient Group.
The SMM Cautious FoF portfolio outperformed its benchmark over the quarter ending 30 September 2018, with the biggest contributors being the Truffle Low Equity Fund and the passive component, which had a large offshore holding benefiting from the weaker Rand. The SIM Inflation Plus Fund allocation also contributed strongly, whilst the Matrix Low Equity allocation detracted value.
The objective of the portfolio is to generate capital growth over the long term and to generate income at moderate levels of volatility in portfolio values. This portfolio will have moderately conservative (cautious) risk qualities and will be managed on a multi manager basis. Investments to be included in the portfolio will, apart from assets in liquid form, consist solely of participatory interest in portfolios of 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 which is to the satisfaction of the manager and the trustee of a sufficient standard to provide investor protection which is at least equivalent to that in South Africa. Apart from cash and assets in liquid form, the portfolio will invest in participatory interests of underlying portfolios that provide exposure to equities across all economic groups and industry sectors of the JSE Securities Exchange South Africa as well as across the range of large, mid and smaller cap shares and may invest in derivatives, subject to prevailing regulations. The portfolio will comply with regulations governing pension funds.The portfolio will consist of a mix of collective investment portfolios investing in equity, property, bond and money market instruments. The exposure to equities will not exceed 40% of the portfolio. This portfolio is part of a range of risk profiled, multi managed fund of funds portfolios and the SMMI house view tactical asset allocation given specific market conditions will be applied uniformly to the range of portfolios. Therefore, should the house view be bullish on equities, the tactical allocation to equities will increase across all 5 funds in line with their respective maximum equity exposure limitations, whilst equity exposures will decrease uniformly across all 5 funds should the house view be bearish on equities. Given the application of the SMMI house view exposure approach it is highly unlikely that these portfolios will ever have similar effective equity exposures.The Manager will be permitted to invest on behalf of the Sanlam Multi Managed Cautious Fund of Funds in offshore investments as legislation permits.