In what proved a tumultuous month for politics in SA, the fund delivered solid gains in March, marginally ahead of the peer group average at +1.5%. Our positioning over the past year has been that of being tilted toward rand weakness, with a significant direct offshore allocation being retained.

This has cost investors over the past year as global appetite for emerging market (EM) assets has pushed the rand to recent highs of R12.30/$, only to be followed by a sharp fall-out in the wake of Jacob Zuma’s actions of 31 March 2017. Following these events, we retain a healthy (17%) direct offshore allocation, with our view that risks to South Africa’s long-term fundamentals have risen dramatically, in the absence of positive leadership, from here.

The bond market movements since 31 March appear to have priced in the S&P downgrade, as well as a fairly benign evolution of SA’s fiscal trajectory, in our view; the risks remain that - absent a political change of direction for the better - domestically-focussed assets in SA will suffer further valuation degradation.

To balance the risk of a positive outcome in this regard in the portfolio, we retain a full weight to SA banks, with our preferred entry points being FirstRand and Barclays Africa. These assets will prove high-beta plays to any positive resolution to SA’s political woes, and are currently very cheap.

Top contributors to relative performance vs SWIX during the month included ADvTECH (+5%), a lack of Netcare (which declined 19% during the month) and Astoria Investments (+6%). Our offshore holdings in aggregate contributed 80bps of the performance during the month, despite the rand ending only 2% weaker month on month, outperforming the MSCI World.

The key detractor from performance during the month was Sun International, which declined 12% following a very poor result (costing the fund 40bps of performance), which fell well short of our estimates. While we still regard the Times Square project as possessing very attractive economics, the debasement of earnings has made the valuation much less attractive, capping upside. We have decided to exit our holdings in Sun International.

December brought to close what has undoubtedly one of the toughest years in recent memory, and certainly since the inception of this fund. Following almost three years of >25% annualised returns, the fund delivered a -9.5% total return in 2016 following a gain of 0.6% during December - well below the peer group (3%YTD) and benchmark (+4.3% YTD).

Much of this can be attributed to the fund's offshore exposure (blunted by a strong rand), our resources positioning (or lack thereof) during most of the year, as well as an early underweight position in banks. Brexit also proved costly for the fund, with Capital & Counties (Capco) doing most of the damage (-1% vs benchmark). Finally Astoria's share price decline proved costly (2% performance detraction), but we are very positively disposed to this asset given our conviction in the underlying investments and the deep discount to NAV which has opened up.

Looking ahead to 2017, we believe domestic equities in general are well poised for significantly better returns than in 2016, with last year being held back by relatively high starting valuations and unprecedented sales by foreigners. The consensus 12-month forward P/E multiple of the SWIX Index is now sub 14x having started 2016 higher than 15x, while reported earnings growth should accelerate with much higher resource prices.

We see value in Naspers, diversified miners, Aspen Pharma and-in domestically-focussed sectors-Sun International and Foschini. We believe one of the key risks to equity returns globally in 2017 is the potential for US long-term interest rates to rise further, but we believe much of the action here has already occurred and much higher rates would also pose risks to the growth outlook. Our currency exposure is broadly neutral versus benchmark.