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Glenn Silverman
Global Chief
Investment Officer |
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Economies and markets |
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The year 2009 certainly surprised
many. Who would have thought amidst a global financial crisis that
the local market, as represented by the All Share index, would
return 32% in rands for the year, and 90% in US dollars. From the
lows in March, the market has risen an even more impressive 123% in
dollars and 56% in rands. This again emphasises that stock markets
are forward looking, and with most of the bad economic news
discounted in share prices at the low point in March, any good news
resulted in the markets moving higher. The authorities threw many
“kitchen sinks” at the problem, and by March were at last able to
stabilise the situation. That, however, obviously has some negative
long-term implications. The challenge now is to weigh the improving
economic outlook -- with the attendant interest rate risks --
against the high level of earnings expectations embedded in market
prices. The risks are high, with a number of identifiable global
imbalances evident, and a “double-dip” a possibility from the second
half of 2010. However, with cash in the West at zero yield, it
simply doesn’t look that hard to beat with other asset classes! We
have set out a more detailed market view elsewhere, but believe the
year could be a tale of two halves, with volatility levels almost
inevitably rising, and TAA (tactical asset allocation) increasingly
necessary but also increasingly challenging, to add value. Our view
that SA, along with the globe, is unfortunately reverting to a
“boom-bust” scenario, holds strong too. We have made substantial
changes to enhance all aspects of our TAA process, some of which are
detailed below. |
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The rand has been a stalwart
currency, driven by strong foreign inflows that have permeated many
emerging markets in search of growth and yield. Although difficult
to time, our view is that with the foreign flows the rand could
strengthen further. These flows will inevitably reverse, leaving the
rand extremely vulnerable. Maximising offshore exposure is thus one
of our focus areas.
The SA economy was hard hit by the global recession. The deep
interest rate cuts will start to have a positive effect into 2010,
but the view after the Soccer World Cup is far less clear.
The investment team has worked hard over the past year to ensure the
necessary building blocks are in place for us to overcome the
investment obstacles in our path and flourish in the more uncertain
world we see ahead. For example, the bulk of the restructuring of
our global portfolios was completed in 2009, with some tweaking to
be done in 2010.
So look forward to another interesting year! |
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Focus of past quarter
The investment team pushed hard to complete a number of key
projects that had dominated much of 2009. Much time was spent
documenting all aspects of our new processes and further
improving our governance standards. This included our formal
process and philosophy document, portfolio guidelines for every
fund, and revised investment committee terms of reference. All
required documentation was completed and approved and the focus
for 2010 is squarely back on optimally implementing our process.
Highlights of the Fourth Quarter
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a) Locally:
- Portfolio changes
initiated in the third quarter were completed – see below
- The changes to our
investment team structure, alluded to in the third-quarter
report, were implemented and bedded down
b) Globally:
Full responsibility was assumed from EIM for our Global
Flexible fund;- Over 90 manager meetings
were undertaken during the year, including visits to
managers in the UK, Europe and the US;
- Numerous global
operational due-diligence sign-offs were concluded;
- Two additional managers
-- Walter Scott and Wegelin -- were included in our global
equity fund from 31 December;
- Global Entrepreneur was
closed on 1 November and all its funds directed into the IS
Global Balanced fund.
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Steven Price
Chief Investment Officer (SA)
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Detailed consultants’ bulletins
were circulated elaborating on and explaining all the above
changes.
IS Investment Team
Certain team changes were alluded to in the last quarterly
report, namely a new SA CIO and the bolstering of our market and
economic research and portfolio management teams. These have
been implemented and the enhanced team structure fits very
nicely with our process. With the largest team since the
inception of the business, and a clearly defined process that we
believe is unrivalled locally, we are ready to face any
challenge the markets and the industry may throw at us.
Investment
Portfolios and Performance
We closed 2009 with all the proposed changes to our funds fully
implemented and bedded down. In a world without change this
would have left us nicely positioned for 2010. Unfortunately,
this industry never sleeps and towards the end of the year we
were notified of significant developments at some of our key
asset managers. For full details, refer to the manager-research
section of this quarterly report. The key development was Allan
Gray announcing during November that it was closing its doors to
any new client flows. This will have significant implications
for our business and certain of our portfolios. We were one of
Allan Gray’s largest clients, with the manager well represented
in our key Performer and Pure Equity fund. We will communicate
more detail in this regard shortly. The industry also continues
to experience staff changes, and we are mindful of any potential
effect of these on our funds.
On the performance
side, results were mixed in a quarter that saw the equity market
up just over 11%. A quick glance at the 2009 performance of our
portfolios very pleasingly reflects strong positive alpha across
the product range. Unfortunately, though, the portfolios that
delivered negative alpha in the 12-month period are two of our
flagship funds, Performer and Pure Equity. Aside from base
effects playing a part in this underperformance (refer below),
2009 was a tough year as a result of managers being caught a bit
on the sidelines with conservatively positioned portfolios as
markets rose from the lows in March. However, we are confident
the changes made to these portfolios over the past two quarters
will bear fruit.
As discussed above, a key focus of 2009 was our Global
portfolios, to which positive structural improvements were made
on the back of an intensive offshore manager-research schedule.
The results were pleasing, with our key Global Balanced
portfolio outperforming its benchmark by 4.3% for the year. The
outperformance was driven by all asset classes, notably Global
Equity (5.5% alpha), Global Bonds (7.1% alpha) and the
alternative funds (Gold, Commodities and Prudential). The Select
WEF outperformed the MSCI World Index by 2.9% and the Flexible
Fund beat its composite benchmark by 2.6%. This was in sharp
contrast to the disappointing figures of 2008.
We need to caution, however that the excellent results of our
key local and global funds, especially in the first quarter,
form a very high base for the 12-month numbers to first-quarter
2010. As such, we expect a temporary base effect/statistical
fall-off in our alpha numbers for this period. By the second and
third quarters of 2010, the numbers are expected to steadily
improve.
In closing, 2009 was a bit of mixed bag in terms of our
performances, with excellent results from our fixed-interest
range, Entrepreneur and Global portfolios, but more muted ones
from our key Performer and Pure Equity portfolios.
More detailed commentary on particular portfolio performance can
be found in the relevant sections of the quarterly.
Conclusion
Our key priorities for 2010 are to further utilise our Mars 2 &
3 systems, which embrace tactical manager allocations (TMA)
within our products; implement our TAA views through the newly
created TAA building blocks; approach markets with some degree
of caution; but also be aware that low-risk assets such as cash
face their own challenges too! As always, we thank you for your
valued support and look forward to engaging with you in 2010,
which promises to be another interesting year. |
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