Welcome to our update for the first quarter of 2019, which reflects a healthy recovery in local and offshore equity markets, following the downturn in the last quarter of 2018. The performance of the market over this period vindicates our approach of focusing heavily offshore, investing in quality funds and assets, and remaining invested in the face of short-term market turbulence.
Here are some of the highlights for the quarter:
Offshore funds—in US dollars and net of fees
- Our pure equity offshore funds gained 14% – 17% for the quarter, outperforming the benchmark, which was up 12.3%.
- Our multi-asset offshore funds gained between 6.5% and 11% for the quarter, erasing most of calendar 2018’s losses.
Local funds—net of fees
- Both our proprietary local funds generated strong returns which were also ahead of their respective benchmarks. For the quarter, the Dynasty Preserver was up 4.7%, and the Dynasty Accumulator was up 8%.
The offshore landscape for Q2 and beyond
Dynasty will be adhering to its current strategy focusing on quality as per below. Last year’s geopolitical and economic risks are on our radar, but we are also seeing some of them starting to moderate. For example, a trade war between the US and China remains a possibility, but the ongoing talks seem to be heading towards an amicable resolution.
The Fed is dovish, which means there is a lower possibility of interest rates rising, which will support global equities markets. And the latest news around the UK’s exit from the European Union also seems to point away from a chaotic departure and towards a softer Brexit that more closely resembles the status quo.
All of that aside, we are, as always, taking a longer view of the global equities market since our clients’ portfolios will be defined by the quality of the funds and assets in which we invest—not short-term global economic and political events. We have a deliberate bias towards quality, choosing companies and funds with a track record of growth in uncertain times.
Local performance—the recovery masks reasons for concern
Although the JSE has shown a good recovery, with the All-Share Index up 8% for the quarter and up 5% over the year to end-March, this top-line number masks the fact that most shares are heavily exposed to the South African economy are not performing well, except for those in the basic materials and technology sectors.
The difficulty facing some flagship ALSI shares over the quarter is shown below:
- Firstrand down 4%
- Vodacom down 15.6%
- Sanlam down 7.6%
- Absa down 6%,
- Nedbank down 8.6%
- RMB down 3.7%
- Remgro down 4.9%
- Shoprite down 15.9%,
- Discovery down 13.8%.
All these shares were down for the year to end-March, with the exception of RMB, which was up 1%. This landscape shows that our strategy of using our maximum offshore investment allowance and investing in the rand hedge shares in the ALSI is the correct approach for current market conditions.
The local economic and political landscape remains uncertain:
- The prospect of a downgrade of the country’s sovereign credit rating by Moody’s is still hanging over our heads.
- Eskom load shedding and state-owned enterprise debt levels are casting a shadow over the country’s economic prospects.
- Policy uncertainty may prevail beyond national elections in May as a result of factional warring in the ANC.
- It remains unclear whether the South African government has the will and capacity to drive through much-needed structural reforms.
We are responding to these risks by reducing local bond exposure and duration, maintaining maximum exposure to offshore assets, and reducing exposure to funds/instruments that would benefit from rand strength and improved local economic performance in favour of index funds and concentrated active mandates. We believe that this approach will protect our clients’ portfolios in the face of uncertainties around the May 8 general election.