A balanced view on the past quarter’s soccer match

By Frederick White, head of Balanced Funds at Sanlam Investments

If the last quarter in domestic financial markets was a soccer match, equities left it until the dying moment in overtime to score a last-minute goal and emerge as the victorious asset class in an overall weak market. By the close of markets on the second last day of the quarter, only cash showed a positive return for the month, but after a very strong final day, equities sneaked in just ahead of it with a 2.1% return for the quarter. Domestic property declined (again) by 2.3% for the quarter, but this time it beat the longer duration fixed-interest assets, with both bonds (-3.8%) and inflation-linked bonds (-4.6%) declining by even more.

Local equity

Even though domestic equities ended the quarter in positive return territory, it underperformed a weak MSCI Emerging Markets (EM) Index (more on EM below) by 4.6% in Rand terms due to comparatively poorer economic fundamentals than its peers. Domestic equities were priced ‘fairly’ throughout the majority of the quarter, and as a result we have not made any material changes to our local equity positioning. We maintain hedges covering about 15% of our equities, to provide partial protection in the event of a fall in equity markets.

Local fixed interest

We began the quarter with a moderate local bond positioning. However, as bond yields rose above 9.2% (measured by the yield to maturity on the FTSE/JSE All Bond Index) towards the end of the quarter, we became interested in local bonds for the attractive real returns on offer and increased our exposure to access this attractive yield.

Local property

Post the large correction in local property last quarter, we continued to hold a fairly sizeable position in SA listed property. The sector remained under pressure, but this quarter it outperformed most fixed-interest assets (except cash). At yields of close to 8%, the asset class offers good real returns that require very little distribution growth before rivalling fixed-interest assets.

The currency

In line with EM jitters, the Rand had a very weak quarter (15.9% weaker against the US Dollar), which saw it rapidly unwinding the bit of overvaluation it had built against DM currencies last year. This was the main source of foreign assets’ material outperformance during the quarter, with the MSCI World Index delivering more than 18% in Rand terms and the Barclays Global Aggregate Bond Index almost 13%.

Global equity

We continue to hold the bulk of our foreign exposure in foreign equities. Our view is that foreign equities should continue to deliver returns that are better than those expected from bonds.

Global fixed interest

We continue to avoid global fixed-interest assets, since it is difficult to find a scenario where these provide any form of real return in the foreseeable future. Developed market (DM) bonds are offering low or negative prospective real yields. In addition, their yields are more likely to rise than fall, due to the quantitative easing policies of central banks coming to an end.

Global property

We retained a small position in a select basket of DM real estate investment trusts (REITs) and continued investing in a diversified portfolio of attractively priced real assets (property, renewable energy, infrastructure, utilities) where long-term contracts are in place for income to rise with inflation. These assets should maintain their low empirical correlation to equity markets and continue to provide an attractive real return given the attractive initial yield combined with the contractual growth in the income stream.