Markets in March 2017 showed positive returns, with MSCI Emerging Markets (EM) outperforming MSCI World. Within MSCI World markets, the best performance in March was from Europe at +4.1% as political anti euro risk was receding. Meanwhile, North America (+0.2%) and Pacific (+0.7%) failed to perform in March. All of this came about as some the previous capital flows into the US reversed and the value cycle shifted from a highly valued US market to undervalued European and Emerging Markets as expected. Within MSCI EM, Asia gained 3.4% in March, led by India (+6.0%), Korea (+5.3%), Indonesia (+4.6%) and Thailand (+4.0%). Meanwhile, heavyweight MSCI China lagged, posting a US$ total return of +2.1%. EMEA and LatAm gained a more pedestrian 0.6% in March. Russia (+2.1%) was the top performer in EMEA, followed by Greece (+1.6%), Turkey (+1.4%) and Poland (+1.4%).

SA (-0.1%) was mostly flat in US$ terms in March given a weakening rand. Up until 17 March, the rand had appreciated by 2.6% against the dollar over the month, but depreciated by 5.0% in the week to 31 March on SA..s cabinet reshuffle. Year-todate the rand has appreciated by 2.0% against the US$.

In rand terms, the SA market as measured by the FTSE/JSE All Share Shareholder Weighted Index (SWIX), was up by 2.2%, with SA Industrials (+4.2%) being the best performers, helped by the solid total returns coming from some of the nonresource rand hedge heavyweights on the back of the weaker rand: Richemont (+11.0%), Naspers (+10.4%), BATS (+9.7%) and MTN (+5.6%). Fixed Line Telecoms (+10.1%) also posted solid total returns over the month. Incidentally, IT was the best performing equity sector in March within all of MSCI World and EM. Large Caps were up 3.2% while Small Caps (+0.2%) and Mid Caps (-0.1%) were mostly flat. Year-to-date, the ALSI has posted a total return of +3.8% vs +2.5% for the ALBI and +1.4% for the SAPY. SA Industrials (+6.6%) have outperformed SA Resources (+2.7%) and SA Financials (-1.1%). Of the industry groups, Consumer Services (+11.1%) and Consumer Goods (+9.9%) have outperformed the ALSI year-to-date. The largest underperformance has come from Technology (-8.9%), Health Care (-7.0%) and Industrials (-3.6%). Within the Large and Mid Caps universe, the shares that have recorded the highest total returns year-to-date are Exxaro, Kumba, Northam, KAP and RCL. The worst total returns have come from the JSE, Netcare, Barclays, AForbes and EOH. Economic fundamentals showed a contraction in Q4 2016 quarter-on-quarter growth and February..s CPI softened by 0.3% to 6.3% year-on-year. The SA Reserve Bank also lowered its forecasts slightly. Food inflation, in particular, is expected to decline, as shown by agricultural prices printing in deflation. A weakening rand following the Cabinet reshuffle at the end of March, combined with fears of a downgrade by international credit rating agencies, changed investor expectations somewhat.

During the period, the Optimised Equity Fund underperformed slightly, essentially due to a prudent approach towards the excessive weight of Naspers in the benchmark. It is worth noting that we look at relative and absolute risk, and as such we deem it inappropriate to put around 20% of clients....money into one position. Adjusting for the resulting underweight in NPN the fund performed in line with what would essentially be a Capped SWIX. It is worthwhile noting that TenCent is now the 10th largest company in the world by market capitalisation and that this will continue to boost Naspers share based on our valuation.

From a portfolio standpoint, the weakening of the rand helped the offshore exposure, while the events around the Cabinet reshuffle had an adverse effect on domestic financials, particularly banks, which dampened the expected performance somewhat. The select Mid Caps exposure which we held throughout the quarter also had a more muted, while positive, performance. Without excessive assumptions, the calculated expected positive returns of that part of the portfolio are so steep, that their positions in the portfolio are fully warranted.

With regards to the volatile events in late March, the portfolio behaved quite well and the team was quick to make the necessary portfolio adjustments, reducing domestic exposure through selling of some retailers and banks. At the same time the fund added to positions in select resources and industrials with rand hedge qualities. Through careful portfolio construction, the portfolio as a whole is well positioned to take advantage of the flow of capital out of the US into emerging markets and the improving economic growth profile in SA and around the world. Continued volatility, however, has to be expected.