While ending the first quarter on a positive return, the Fund underpeformed its benchmark over the period. The primary contributor to the underperformance over the quarter came from the Fund’s underweight position to the resources sector. In hindsight, we missed an opportuntiy in January to lock in the gains achieved last year from being underweight iron ore, gold and platinum stocks. During the quarter, an improvement in the price of key commodities such as iron ore and oil shifted the market’s focus back on the possibility of improved free cash flow generation, while concerns around company balance sheets and the need for capital raising abated. Whether the rebound in commodity prices is simply a function of seasonal restocking of inventories, or that underlying demand in China has turned and can be sustained, remains to be seen.

The Fund continues to be defensively positioned within resources. We have remained underweight platinum and gold stocks given that the market continues to price the shares off consensus forecasts that are embeding significantly higher-than-spot commodity prices.

The other strong theme during the quarter was in the financial sector, although gains from this sector were undermined by the price volatility in resources. Banking stocks FirstRand and Standard Bank each returned over 16%, and Barclays Africa returned 4% in spite of the announcement of the intended sale by its parent company. Banking stocks had fallen considerably in December on the back of the sharp move in SA bond yields post Nene-gate, as well as heightened concerns that a sovereign ratings downgrade was increasingly likely. There is no doubt some uncertainty remains, and until such time as there is clarity on a potential sovereign downgrade, which is expected following ratings agency reviews in June, we see limited scope for the banks’ valuation multiples to re-rate back to historical levels. Nonetheless, we remain overweight domestic banks, and despite having seen earnings growth expectations for the sector downgraded to mid- to high-single digits, the combination of this modest growth and high dividend yields provides an attractive return package without any need for a re-rating.

In terms of postion changes within financials, the Fund has reduced its overweight position in Old Mutual and added Liberty Holdings within our allocation to the insurance sector. The restructuring announcement from Old Mutual is likely to unlock value for shareholders, and some of this upside was realised in a re-rating during the quarter. As a result the holding has been trimmed to spread some of the risk within the sector to Liberty, which was trading at a larger discount to its underlying embedded value.

Over the quarter, a number of industrial stocks delivered strong relative performances, with the result that positions in a number of these stocks have been reduced. Examples include Bidvest, AVI, Mpact and SABMiller. Some of these were trimmed in favour of alternative stocks within their respective sectors, such as switching from AVI in favour of an increased holding in Tiger Brands, a stock we believe is well positioned to benefit from a recent change in management, and a renewed focus on its core SA business having exited a less successful operation in Nigeria. Other key changes included reducing our holding in SABMiller, where the upside to the AB Inbev offer price has narrowed to the extent that it is a quasi-offshore cash holding. Proceeds have been used to fund an active overweight position in Naspers, which had behaved as a poor rand hedge over quarter given its massive Tencent operations, leaving the rump of its operations trading in strongly negative territory.

Other notable portfolio movements include the sale of Spar to fund further positions in Pick ‘n Pay and MTN. Spar is a high-quality business at a fair price, but the announcement of an acquisition which would require raising capital left more viable options. Pick ‘n Pay remains a turnaround story with profit margins below both its own historic levels and those of its competitors, and we remain confident in the initiatives of new management to drive improved profitability. MTN’s share price has been heavily punished for its Nigerian transgression, and presents an opportunity -- the market value has declined by more than the full value of the current fine, despite the likelihood in our view of a negotiated reduced settlement.

The Fund’s international equity component was a significant detractor from performance over the quarter. This was due to the rand strengthening against major currencies such as the US dollar (5.4%) and sterling (8.0%), and generally poor equity returns in many developed markets where economic data has not been as favourable as the markets would have hoped.

For global equities, our global asset allocation continues to favour global equities over local SA equities, as global equities remain more attractively valued than SA equities on measures like Price-Earnings (P/E) and Price-Book value ratios. From an historic valuation perspective, developed market equities (such as Germany) still appear to be the best value, while emerging market risks are elevated. We also remain underweight commodity producers like Australia and Canada, as well as the US. Given slowing global economic growth, corporate earnings growth remains vulnerable to downward revisions.

The commentary is based on the intended model portfolio, however client-specific portfolio management may deviate slightly.

The FTSE/JSE All Share (ALSI) declined 1.7% on a total return basis in December 2015. Large Caps (-1.1%) outperformed Mid Caps (-4.2%) and Small Caps (-8.9%).

The best-performing sectors were Gold Mining (+18.8%), Automobiles & Parts (+6.9%) and Beverages (+6.9%). The worst were Platinum Mining (-30.2%), Industrial Engineering (-12.1%) and Industrial Transportation (-11.3%).

The Fund realised a total return of -2.3% for the month. The key contributors to the Fund’s performance this month came from the positions in British American Tobacco (up 3.3%), iShares S&P 100 ETF (up 5.8%) and SABMiller (up 7.1%). The main detractors came from the positions in Standard Bank (down 12.6%), Old Mutual (down 7.7%) and FirstRand (down 9.9%).

The one year after fees performance of the Fund is 4.2%, outperforming its benchmark of 2.0%, but under performing the overall market total return of 5.1% (before fees).