Prior to joining MacroSolutions, he was the Investment Strategist for South Africa at UBS South Africa for nine years. In his last two years at UBS, he was also responsible for the emerging EMEA Equity strategy. John has 12 years of work experience in financial markets in South Africa and London. In addition, he has seven years of experience as an economist in public and private sector capacities in Namibia and South Africa.John joined MacroSolutions in June 2014 as a portfolio manager. As a member of the MacroSolutions team, he is responsible for managing conservative funds including the Profile Capital and Stable Growth Funds and the Old Mutual Real Income and Stable Growth Funds. John’s background as an investment strategist enables him to integrate top-down and bottom up analysis into portfolio construction.
Old Mutual Real Income comment - Dec 19
The final quarter of 2019 was positive for risk assets, resulting in good returns for the full year. Despite slower economic activity globally and the increased intensity of the trade war between the US and China, global equities marched steadily higher. The US Federal Reserve stepped in to arrest the slowdown, cutting rates by 0.75%, and progress on a trade resolution towards the end of the year helped lift global equities nearly 24% in rand terms in 2019 with the US equity market leading the way. From a sector perspective, IT was the stand-out performer, while energy was the laggard.
Local equities caught the move higher in global equities in the fourth quarter, ending almost 7% higher for the calendar year. This was driven primarily by a strong performance from the platinum and gold sectors as precious metals moved higher. Despite the rand ending the year stronger, other rand hedge counters contributed positively with double-digit returns, while many SA-facing names were under pressure. In addition to weak economic conditions, instances of stock-specific issues arose in the form of excessive debt levels and ESG matters. The local property sector also suffered, returning a paltry 1.9% in 2019. Despite the weak economy, persistent Eskom problems and growing downgrade risks, local bonds returned over 10% in 2019.
The Old Mutual Real Income Fund aims to deliver an income that grows over time while protecting capital. The fund targets a return of CPI plus 1-2% after fees. In 2019, the fund delivered a return of 6.8%, well ahead of inflation of 3.6% for the year. Over the last three years, the fund has delivered a return of 7.1% per annum, which was 2.6% ahead of annualised inflation over that period.
The fund’s allocation to local fixed income assets was the primary driver of returns with local government bonds delivering a good return despite concerns that South Africa could suffer further downgrades to its credit rating. While nominal bonds delivered good returns for the year inflation-linked bonds have performed poorly. However, with real yields of over 3.5% we are happy to hold around 10% of the portfolio in the asset class. Not only does this lock in an attractive real yield, but it also provides the portfolio with a hedge against any potential increase in inflation over the medium term.
During 2019, the fund’s allocation to growth assets delivered disappointing returns. Local property counters continued to de-rate. While this has been a drag on the fund’s performance we think many of the local property companies offer compelling dividend yields, which largely price in the very poor operating conditions. Over time, we expect them to deliver good real returns. While many property shares performed poorly the fund did benefit from its holdings of Dipula Income Fund (DIA) A-shares and Fortress REIT (FFA) A-shares, which delivered returns of 17% and 14% respectively. While we have sold out of our holding in FFA we continue to hold DIA which, despite the good return during 2019, still offers a dividend yield of over 10%. Unfortunately, the fund’s holding in equities performed poorly over the year, with exposure to some domestically oriented shares detracting from the fund’s performance. While the shorter-term performance from the fund’s growth assets has been disappointing they fulfil an important role in the fund’s strategy of delivering real returns over the medium term.
Looking forward, the fund remains focused on locking in a diverse portfolio of attractive domestic yields. The bulk of this is through domestic bonds and highquality credit. The fund’s average yield is currently about 8% versus our expectation of inflation in the region of about 5%. Foreign exposure remains low and serves primarily as a hedge against domestic growth assets, as global assets, especially global bonds, are unattractively priced offering limited reward for considerable risk.
The fund aims to provide an income that grows in line with inflation, while sustaining the level of capital over time and minimising any losses over a 12-month period. The portfolio manager actively manages asset allocation to take advantage of changing market conditions. This fund is suited to investors who can accept a lower initial income in return for the expectation of inflation-matching growth in income over the recommended investment term, while maintaining the value of their capital. It is suitable as a low-risk investment in retirement. The fund invests in the full spectrum of fixed interest investments. The fund may invest up to 25% of its portfolio in selected listed property shares and up to 10% in equities. The fund may gain exposure to foreign assets up to a maximum of 30% of its portfolio (with an additional 10% for African ex-SA investments). Derivatives may be used for efficient portfolio management purposes.