Global trends, local implications
At first glance, the current global economic environment appears a minefield to global and local investors. Despite the relative expensiveness of US equities, doubts persist regarding the strength of the US economy, with fears of a recession now reflective in the Treasury yield curve. The economy also appears to be near full employment which has forced monetary policymakers to pre-empt any inflationary impact. These developments have led to a swing in the outlook for US Federal Reserve rates, with the now dovish rhetoric in complete contrast to the indications made during the final quarter of 2018.
Negotiations between the US and China over trade seem to be moving along rather sluggishly, while countries in the EU are showing of mixed GDP performance. And of course, the looming impact of Brexit is something that global investors just can’t ignore.
Locally, there are several events during 2019 that provide both risks and opportunities to local fund managers. Moody’s have been interrogating South Africa’s credit worthiness, and the delay of their findings can be viewed as a double-edged sword – it provides South Africa some breathing space yet creates further uncertainty in a market looking for direction. South Africans then head to the ballot for national elections on the 8th May, a vote that will test the confidence in Cyril Ramaphosa’s administration. And then there’s Eskom, the Achilles heel of the South African economic growth outlook and a potential cornerstone to Moody’s decision.
Much has been made of the relative cheapness of emerging market equities relative to their US counterparts, however a return to historic P/E levels could be at the mercy of global sentiment. South Africa’s bourse offers exposure to companies linked to both the domestic and non-SA story, but the remainder of the year hinges, to a degree, on the likelihood the world can rediscover a ‘risk-on’ environment.
So how does all this impact the Nedgroup Investments Balanced Fund?
The chart below shows the asset allocation of the Nedgroup Investments Balanced Fund, as at the end of February 2019. Strategically, the portfolio is characteristic of majority Rand hedge positions, with notable holdings in SA-listed companies with offshore exposure. This is further supported with foreign equities and bonds making up around one quarter of the portfolio.
From a risk management point of view, the fund makes measured use of derivatives with around 8% of equities hedged. Significantly, the composition of the portfolio looks to provide resilience and show responsiveness to both local and international developments.
During the recent 12-month period, the fund’s main contributions have come from SA companies with offshore earnings, such as Implats, Northam, Sasol, and Anglo American. Capitec is a more domestically-focused stock that continues to outperform its peer group and reward shareholders. Offshore positions in Ping An Insurance Group (China), along with US Dollar-denominated bonds, have similarly contributed to outperformance over the period.
Performance of the Nedgroup Investments Balanced Fund
In the chart below, we review the Nedgroup Investments Balanced Fund’s performance relative to peers within the ASISA Multi Asset High Equity Category. As evident, the Balanced Fund’s three-year performance was not resistant to the impacts of Steinhoff and Brexit. However, the relative strong performance of the portfolio during subsequent periods provided investors with a level of confidence in the strategy. By striking the right balance between local & offshore and equities & fixed income, the strategy has displayed the ability to steer through multiple scenarios.
The recommended investment horizon for a multi-asset high equity fund is typically around five years, and the Balanced Fund has consistently been in the top quartile across these longer time frames. In the chart below we review the fund’s 1-year performance relative to category peers. There are currently 196 funds in this class, and for illustrative purposes we have limited the chart below to those funds with AUM greater than R 1 billion.
Much of the funds success to date can be attributed to the integrity of our Best of Breed™ Fund Manager, Truffle Asset Management, enabled by the experienced and stable team. The employee-owned manager remains steadfast in the application of their investment philosophy, under the guidelines of a disciplined and rigorous approach to portfolio construction and risk management, and we remain confident in their ability to deliver long-term performance for our investors in this fund.