2019 was a challenging year with enormous divergence. The chasm between the best and worst performing assets, regions, economies and markets has not been this severe in many decades.

This was particularly evident in the South African market where many cyclical commodity assets continued to surprise even the most optimistic investors and beneficiaries while SA Focused cyclical assets like SA Retailers and SA Listed Property experienced continued pressure on the back of weak economic performance, low business and consumer confidence and continued investor pessimism.

On top of these frustrating outcomes the local economy continued to struggle as a result of government policy uncertainty, high unemployment, weak consumer demand and suffocating high interest rates. These challenges were further amplified by the return of load shedding in December 2019 and continued challenges at most of the State-Owned Enterprises but particularly SAA where the company was placed in voluntary business rescue.

On the global front – the environment was significantly rosier from a market performance perspective, yet the political environment remained extremely unpredictable and volatile.

Market performance continued to be robust as investor demand for growth assets remained insatiable. Global Central Banks continued monetary support with interest rates remaining at or close to all-time lows in many jurisdictions. This backdrop provided support for decent economic growth yet surprisingly muted inflation.

Inflation remains a major concern for many, yet we believe the structural trends around technology, demographic shift and broader supply of oil as result of shale and other technological advances over the last 10 years, have resulted in a dramatic downward shift in long term global inflation expectations which could support the status quo for the foreseeable future.

Although we saw a rally in most commodity prices over the last 12 months – the price of Brent Crude oil is still below the September/October 2018 highs and although the recent rise will have an impact on inflation in the near term, the effect will be muted and in many cases, deflationary. The average price of oil for 2019 remains below the current levels and therefore an inflationary spike remains a remote possibility.

In summary we believe the global macro-economic environment should remain conducive to a continued rally in global growth assets while cyclical assets could continue to outperform. The political risks remain elevated as the US/China trade war and tensions in Hong Kong and the Middle East loom ominously on the horizon. Furthermore the UK seems hell bent on blowing up the EU and the EU seems completely comfortable in lighting the fuse.

Position going forward

Our portfolios remain well diversified and continue to hold significant exposure to growth assets to provide long term protection against inflation risk and retention of purchasing power.

We continuously look for ways to entrench exposure to growth assets while remaining cognisant of the prevailing risks in the market.

We believe SA Equity and SA Listed Property assets are becoming increasingly more attractive and we would look to increase or at worst maintain our exposure if we experience volatility. On the global front we remain constructive on growth assets as mentioned before.

Below is a summary of our major positions and our strategic thinking:

1. We are true to our investment philosophy with the major focus on managing client expectations and not losing money over the short to medium term (12 to 24 months)

As much as we try to limit the downside and manage short term volatility, the funds need to remain focused on achieving their long-term return objectives and as a result, will always have exposure to growth assets (these provide the long-term growth underpin but also attract short term capital volatility).

2. We are diversified across geography, asset class, currency and investment strategy

The portfolios currently invest around 27.5% to 32.5% offshore and we further increase diversification by investing in SA growth assets that receive hard currency returns or that provide substantial inflation protection. The portfolios also invest in a broad range of asset classes that have different characteristics and return profiles and include exposure to a mix of global currencies, although a large component of between 45% and 60% is linked to the local currency (ZAR). The final approach we use to ensure diversification is by combining a number of different investment strategies (currently 15 to 17) and managers (currently 11 to 13) which we believe results in the best possible risk-return profile for our investors. We will continue to assess the investment managers’ portfolios and periodically adjust the allocations to best reflect our views and risk perceptions.

3. We prefer exposure to assets that we believe offer reasonable value in the medium to long term. We also actively look to down-weight, and where practical, avoid assets that are expensive with a high probability of permanent capital destruction over the medium to long term.

Below is a summary of our major asset allocation positions: . . .

Neutral on local equities on the back of valuation concerns although opportunities have continued to develop;
Overweight global equities on the back of reasonable valuations as a result of strong earnings, further expected growth, diversification benefits and continued low interest rate environment underpin;
Underweight global and local bonds due to risk of interest rate normalization; . . . .

Tactical and active positioning can add significant value, particularly in the local environment;
Overweight global and local listed property on the back of relative and absolute valuations; Offers diversification benefits across geography, currency and industry;
Offers strong inflation protection through yield escalation.
4. Markets remain dynamic which can result in intense short-term swings and emotional reactions from the investment public. This highlights risks but also provides opportunities; .
Tactical positions in local and global short-dated fixed income instruments provide optionality through liquidity which will allow us to make use of short to medium term opportunities that may arise, should markets overreact to negative news or surprises.

5. Uncertainty forces most investors to look for comfortable investments which tend to create crowded trades with significant concentration risk. We are acutely aware of these pockets and aim to avoid these comfort traps by questioning our thinking and remaining true to our approach.

As we have stressed over the last 12 to 18 months, we need to retain growth assets in the portfolio to ensure we achieve our longer-term performance objectives. We recognise that the last 12 to 24 months have been particularly challenging and we are grateful for your continued support and belief in our commitment to you.