The fund performed well over the past quarter, posting a total return of 4.2%. Over the past 10 years the fund's return of 9.2% has beaten inflation by 3.2% per annum, slightly behind its target of inflation plus 4%. The since inception return, however, still comfortably ahead of its benchmark.

Following the global financial crisis we have had to become used to a world of much lower interest rates. Where it used to be possible to generate reasonable real returns in the interest-bearing portion of a balanced portfolio, it is simply no longer possible. Real returns of only 1% or 2% in cash and bonds have become the norm. Therefore in order to get to our target of inflation plus 4% we have to run with higher exposure to risk assets. We have therefore lifted our maximum exposure to risk assets to 70%, with a limit of 60% on equities. We will continue with our aim of not suffering any loss of capital over any rolling 12-month period - a feat we have achieved in 96% of all rolling twelve month periods since inception of this fund.

The global economy has slowly recovered from the harsh recession of 2009/10 and has in fact surprised on the upside over the past year with most regions enjoying improving conditions. Equities have responded well and new highs have been scored in many stock markets in the developed as well as emerging world.

We have kept our exposure to risk assets high and, as mentioned above, are increasing our limit as we feel these assets still offer good value.

The fund has kept global exposure at the maximum allowed level of 25% of portfolio and is likely to continue this strategy as we feel the valuation and diversification benefits make a compelling argument.

We are currently comfortable in taking on some more risk in the equity and property fields but continue to run the bond portion of the portfolio in a very low risk fashion. We are concerned that global interest rates will normalise at some point and will place upward pressure on yields in the emerging world too. The bond portion of the portfolio therefore has a very low duration, thereby protecting the fund against capital losses that will be incurred in case interest rates do rise. We are also concerned by the state of government finances and prefer corporate to government bonds.

The tense battle for leadership positions in the governing ANC will come to a head in December. Although it is an important event and may be indicative of the future direction of government policy, we just do not know who will emerge as leader of the party. The portfolio has to be robust enough to handle any outcome and volatility that may arise stemming from this conference.

Portfolio managers
Charles de Kock and Duane Cable as at 30 September 2017

Macro overview
Despite the uncertain geopolitical outlook, macro data in developed economies maintained a healthy momentum during the second quarter. Europe remained the best-performing region and markets were relieved when centrist Emmanuel Macron comfortably beat far-right populist Marine Le Pen in the French presidential elections. Despite reasonable economic growth in developed markets, inflation remains subdued. In a widely expected move that reflects the US Federal Reservefs confidence in the domestic economy, US interest rates were hiked in June by a further 25 basis points. The outlook for emerging markets is generally linked to China, either through the trade in commodities, or demand for light manufacturing. During the quarter the concerns around the Chinese governmentfs tightening of liquidity in the domestic economy weighed on commodity prices.

South Africa's deteriorating growth outlook, along with concerns around government finances and an increase in both socioeconomic and political uncertainty continues to weigh on sentiment. The publication of extremely weak first]quarter GDP data in early-June paints a picture of an economy that is heavily constrained and in a technical recession after two consecutive quarters of negative growth. With inflation expectations moderating, it seems increasingly likely that the SARB monetary policy committee will move to a more accommodative stance in the coming months.

Sluggish domestic economic growth has also limited the ability of domestic companies to grow profits, as reflected in the JSE All Share Index, which has been trending sideways. In June, the department of mineral resources released the latest version of the SA Mining Charter which was not well received by the market. If the charter is implemented in its current form, the cost of compliance will simply be unaffordable for many industry participants. The SA Chamber of Mines has already legally challenged the validity of the proposed recommendations, however this process will no doubt take time. The controversial proposals contained in the charter will undoubtedly have negative consequences for investors in local mining shares, but will also raise questions about the risk of investing in South African shares in general. The increased period of uncertainty will continue to weigh on sentiment, which is not conducive to growth. The release of the RMB/BER Business Confidence Index in June confirmed that confidence in South Africa has plunged to levels last witnessed in 2009 after the global financial crisis.

Fund performance
For the year to June, the fund returned 2.3% against the benchmark return of 2.9%. The greatest contributors to annual performance were our positions in Naspers, Mondi and Standard Bank. The greatest detractors from annual performance were our positions in Anheuser-Busch, Mediclinic and Spar. The strengthening of the rand relative to major developed market currencies over the past year has been a headwind to the fund’s performance. We believe the fund’s maximum offshore allocation remains appropriate given the benefits of diversification, value in the underlying offshore assets and our expectation of future SA rand weakness.

The fund has the dual mandate of protecting capital over all rolling 12- month periods and to beat inflation by 4% over rolling three-year periods. Whilst we were able to protect capital, the funds rolling three-year return of 4.4% unfortunately did not achieve the inflation plus 4% target. This performance has to be seen in the context of the tough investment environment experienced in the recent past where real returns across asset classes have been far lower than the historical trend.

Portfolio activity
From an asset allocation perspective, we further reduced the fund’s exposure to local government bonds during the quarter given our view that valuations are not attractive on a risk-adjusted basis. Although the fund’s overall domestic equity exposure remained largely unchanged, we used share price weakness to add to our positions in Aspen, Steinhoff and MTN. These purchases were largely funded through the trimming of our positions in Standard Bank, Mediclinic and AVI. We made no meaningful changes to the fund’s domestic property and offshore asset allocation during the quarter.

In an incredibly uncertain world, we continue to strive to build diversified portfolios that can absorb unanticipated shocks. We will remain focused on valuations and will seek to take advantage of whatever attractive opportunities the market present us to generate inflation-beating returns for our investors over the long term.

Portfolio managers
Charles de Kock and Duane Cable as at 30 June 2017

Politics
The volatility in the rand and domestic financial instruments over the past quarter can only be explained by the extraordinary political events of late March. It started with the shock recall of finance minister Pravin Gordhan and his team from their international road show, which culminated in the midnight cabinet reshuffle three days later. This was swiftly followed by ratings downgrades from Standard and Poor's (prior to the quarter end) and Fitch (in early April).

The underlying tensions within government and around Treasury in particular have been clear since the shock firing of then finance minister Nhlanhla Nene in December 2015. Our view was that the stalemate of the past year was likely to continue with neither side strong enough to exert their full will. However, the dramatic cabinet reshuffle put paid to that viewpoint. The president made no attempt at evenhandedness, getting rid of the dissenters and promoting the compliant. Especially concerning is the signalled commitment to an imprudent nuclear energy programme while the checks on parastatals such as SAA will be severely weakened, opening the door to more corruption.

Initially, there was some hope that the events will lead to some internal revolt within the ANC. Financial markets therefore reacted in a reasonably muted fashion. However, as the market realises this hopeful outcome will not occur, we are likely to see a further sell-off.
Markets
Up until the dramatic events of late March, the rand was strong, domestic shares performed well and bond yields drifted lower, encouraged by falling inflation expectations and an improving current account deficit. The mood on global markets was also hopeful with rising stock markets in most geographies. Not even further rate hikes by the US Federal Reserve dampened the positive outlook, as the hikes were seen as responding to better economic growth.

Fund performance
Over the past decade to end March, the fund returned 9.11% per annum, 9.48% per annum over the past five years, 6.05% per annum over the past three years, and 5.16% over the past year. For the quarter to end March, the fund returned 2.67%.

The fund has the dual mandate of protecting capital over all rolling 12- month periods and to beat inflation by 4% over rolling three-year periods. While we did manage to beat inflation, we did not achieve the inflation plus 4% target over any of the periods mentioned. These numbers bear testimony to the tough investment environment experienced in the recent past where real returns in the interest-bearing areas have been far lower than the historical trend. Sluggish economic growth has also limited the ability of domestic companies to grow profits as reflected in the JSE All Share Index trending sideways.

Portfolio activity
The volatility in the bond market once again gave us the opportunity to trade government bonds profitably. We ended up being net sellers during the quarter, with our average sell level being 8.35% while our average buy level was 8.75%. As far as equities are concerned, our major purchases were Sasol, MTN, Steinhoff and Naspers. Our largest sales were Old Mutual, Foschini and Murray & Roberts. Within property stocks, we trimmed our holding in Growthpoint while adding to Hammerson. All of these actions favoured rand hedges over domestic counters.

Global stock markets were generally strong, driven by expectations of positive policy changes by the Trump administration (such as lowering corporate taxes). However, the markets have in our view ignored the risks of tensions in the global economy as President Trump advocates protectionism through his 'America First' approach. We consequently decided to reduce our exposure to global risk assets somewhat by lightening both our developed and emerging market equity holdings. In turn, we added to gold ETFs and invested in Coronation Global Capital Plus, which is a lower-risk multi-asset class fund and also one of our international flagship funds.

Given the well-diversified multi-asset nature of Capital Plus, we construct the portfolio to withstand unforeseen events. In the case of South Africa, the rand invariably acts as the biggest shock absorber and owning global assets as well as a high proportion of domestically listed companies that derive the bulk of their earnings from outside the country have again proven the be a prudent approach.

2016 was certainly a year full of surprises! Given the backdrop of Brexit and the election of Donald Trump as the next US president, not many would have anticipated the resilient performance of global markets last year.

In US dollars, the MSCI All Country World Index returned 1.2% for the quarter and 7.9% for the calendar year, while the MSCI Emerging Markets Index returned -4.2% for the quarter and 11.2% for the calendar year. Locally, the FTSE/JSE All Share Index (ALSI) returned -1.9% for the quarter and 15.9% for the calendar year in US dollars. Given the significant strengthening of the rand over the period, this translated into a rand return of 2.6% for the index for the calendar year.

As expected, the US Federal Reserve raised interest rates by 25 basis points in December. Our base case remains that the pace of interest rate normalisation will be gradual and that interest rates will remain at historically low levels for longer. Despite the increased geopolitical uncertainty, the prospects for continued accommodative monetary policies, and the expected fiscal stimulus (lower taxes and increased state spending on infrastructure) in the US under the Trump presidency, this will most likely continue to be supportive of risk assets in the year ahead.

Locally, the political backdrop remains volatile; however, with the progress made since Nenegate, we have seen some improvement in investor sentiment since the end of 2015. Despite the weak base set in 2016, the SA economic growth outlook remains anaemic.

For the calendar year, the fund returned 4.3% against the benchmark return of 10.4%. The underperformance relative to the benchmark is predominately a result of the -7.6% returned by the offshore assets held in the portfolio. The primary reason behind these negative returns is the rand’s 11.5% appreciation against the US dollar during the year.

The fund’s domestic equity performance of 12.3% for the calendar year was pleasing after a difficult few years, outperforming both the benchmark and the ALSI return of 2.6%. The strong recovery in commodity prices in 2016 provided the tailwind for resource shares, which returned 34.3% in local currency terms for the calendar year, comfortably outperforming industrials and financials, which returned -6.6% and 5.4% respectively. Some of the notable moves in commodity prices (in US dollars) of the year include coking coal (+189%), thermal coal (+86%) and iron ore (+85%). The greatest contributors to annual performance were our positions in Anglo American, Standard Bank and Exxaro. The greatest detractors from annual performance were our positions in Anheuser-Busch InBev, Woolworths and Mediclinic.

The performance of our domestic bond holdings of 11.5% for the calendar year contributed to the fund’s return. We believe that yields on global government bonds are too low and do not offer value. We do, however, believe that the yields on local bonds are attractive, especially given a more favourable outlook for inflation in SA over the medium term. The risk premium implied when comparing the yields of local bonds to other developed and emerging market bonds suggests that the market has largely priced in most of the uncertainties related to the SA political landscape.

The fund’s domestic property performance was flat for the calendar year relative to the SA Listed Property Index return of 10.2%. The key detractors from annual performance were our positions in Intu and Capital & Counties, which were adversely impacted by the impact of Brexit and the strengthening of the rand relative to the pound. We believe that both stocks remain attractive on a longer-term view and they trade at a significant discount to our assessment of intrinsic value. We expect domestic properties to show reasonable nominal growth in distributions over the medium term. This, combined with a fair initial yield, offers an attractive holding period return.

In terms of asset allocation, equities remain our preferred asset class for producing inflation-beating returns over the long term. We maintain the maximum 25% offshore limit within the fund. Although our offshore allocation has hurt performance in 2016, we believe our weighting is justified based on underlying valuations and the longer-term benefits of portfolio diversification.

The global economic environment marked by sluggish growth and very low yields remains tough. It is in tough times such as these that protecting capital is vital, and we manage the fund accordingly. The fund aims to achieve inflation plus 4% over the long term, and to produce no negative returns over any rolling 12-month period. The longer-term returns of 9.9% over five years and 13.0% since inception remain ahead of the fund’s target.

As we start a new year, we are bombarded with predictions from numerous financial experts about what lies ahead in 2017. History has taught us that our ability to forecast the immediate future is limited. We will remain focused on long-term valuations and will seek to take advantage of whatever attractive opportunities the market will present us to generate long-term rewards for our investors. In an incredibly uncertain world, we continue to strive to build diversified portfolios that can absorb the many surprises that are likely to come our way in 2017.