Fund Manager Comment - Jun 19
Global equities rebounded in June as the US-China trade war ebbed and Trump backed off on some of his threats. Global growth data remained negative with further declines in PMIs. Although the 19 June Federal Open Market Committee meeting saw no rate change, it delivered a strong statement virtually promising a rate cut at the 31 July meeting.
During the second quarter of 2019, the MSCI World Index realised a gross return of just more than 4%, outperforming the MSCI Emerging Markets Index, which managed a very modest return of 0.6% over the same period. Global bond yields continued to rally with US 10-year yields down to 2.01% and trading sub-2% for the first time since late 2016. US 10-year yields are down more than 125 basis points since November 2018. In the first half of 2019, the MSCI World Index delivered a total return of 17.4%, outperforming Emerging Markets (+10.8%). Within the MSCI World, North America was the best performing region with a return of 18.9%, followed by Europe’s 16.5% and the Pacific region’s 11.3%. In South Africa weak economic data dominated the post-election headlines with firstquarter GDP falling 3.2% quarter on quarter, worse than the -1.6% Bloomberg consensus. The President’s State of the Nation Address promised little more than further Eskom bailouts and progress on spectrum auctions with few details/deadlines. During the second quarter of 2019, the FTSE/JSE All Share Index (ALSI) posted a total return of 3.9% versus the 8% for the first three months of 2019. SA Financials was the best performer, returning 5.4%, followed by SA Industrials with a total return of 4%. SA Resources only managed a gain of 2.4% in the second quarter after the large 17.8% total return in the previous quarter. The FTSE/JSE All Bond Index (ALBI) returned 3.7% after posting a similar return of 3.8% in the first quarter. SA Property managed to outperform bonds, posting a total return of 4.5%. Among the other important indices the FTSE/JSE Shareholder Weighted Index (SWIX) (+2.86%) performed in line with the FTSE/JSE Capped Shareholder Weighted All Share Index (Capped SWIX) (+2.90%).
In the first half of 2019, SA Equities was the best performing asset class, with the ALSI delivering a total return of 12.2%. SA Bonds gained 7.7%, whilst SA Property was the worst performing asset class with a total return of 6%. Cash posted a total return of 3.6%.
Portfolio performance, attribution and strategy
Globally, factor performance has reflected investor risk aversion but not in such a clear way that sectors have, as style volatility has increased masking trends in performance. Putting aside Growth, which has clearly been a consistent performer across markets, the poor performance year to date of both Value and Low Risk has been curious. Value is typically seen as the pro-risk/cyclical style, while Low Risk is the opposite and indeed, over the past six months, they have been negatively correlated. However, what we have seen is more rotation in these two styles as investor risk aversion has changed, but they have both been trending down. On a short-term basis, exposure in both styles has provided diversification but over the longer term this has been more problematic. The negative performance trend in these styles mirrors the general risk-on positioning of markets of the past six months.
Domestically, in a reversal of fortunes, Quality continues to experience profit-taking as the equity market turnaround has shown a preference to cyclical shares. This after an extended period of a risk-off environment which provided a fertile ground for Quality factors, in particular profitability factors such as Return on Equity. Investors have been favouring stocks with high profits in order to mitigate macro challenges, and even though economic sentiment has recently been soft domestically, global sentiment has buoyed cyclical stocks and ignored stocks that have durable competitive advantages. Debt to Equity delivered a negative return over the quarter, as the factor’s defensive role continues to be tested during both periods of corrections and recovery.
In terms of stock selection, the largest contributions to outperformance over the quarter came from overweight positions in Sanlam (SLM), Clicks (CLS), RMB Holdings (RMH) and Kumba Iron Ore (KIO), while underweight positions in Sasol (SOL) and British American Tobacco (BTI) also added value. Detractors in relative performance came from overweight positions in Naspers (NPN), Old Mutual (OMU) and Tiger Brands (TBS), as well as underweight positions in Standard Bank (SBK), MTN (MTN) and ABSA (ABG).
There were numerous changes to the index over the first quarter. Additions included Anglo American Platinum (AMS), Liberty (LBH), Quilter (QLT), Standard Bank (SBK) and Woolworths (WHL). Deletions included Alexander Forbes (AFH), Adcock Ingram (AIP), Capitec (CPI), Grindrod (GND), Peregrine (PGR), Pick n Pay (PIK), Reunert (RLO), Sanlam (SLM), Santam (SNT) and Trencor (TRE).
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.
We believe that the benchmark choice and resulting returns form the most important elements of an equity strategy - by investing in a passive vehicle the returns to investment strategies are known. By applying a full replication strategy there is no risk of deviation from the chosen benchmark.