After the volatility of the previous 12 months, the quarter to the end of September was surprisingly peaceful, with generally muted asset class returns. The FTSE/JSE All Share Index was flat for the quarter, the All Bond Index gained 3.4% and the rand closed 6% stronger against the dollar. These moving parts resulted in the Stable Fund (the Fund) keeping pace with inflation over the period, with the stronger rand being the biggest performance drag.
Asset allocation as at 30 September
In terms of current holdings, 30.4% of the Fund is invested directly in offshore assets, including the Orbis funds, the Allan Gray Africa ex-SA funds and commodity exchange-traded funds. Platinum and palladium account for approximately 90% of the physical commodity holding, with the remainder being gold. In December 2015, 30% of the commodity exposure was to gold, but the gold price has since outperformed both platinum and palladium. Given gold’s outperformance and the high price of gold in rand terms, we sold most of the holding.
Investors will note that the local hedged equity position has declined from 11.8% of Fund at the beginning of the year to 5.8% of Fund today. The reason for the decrease is that a number of the large companies in the Top 40 index that we do not own have underperformed, allowing the hedge to add value. Given the underperformance of the likes of MTN and luxury goods company Richemont, there is less upside in the hedge, so we have reduced the position.
Interest-bearing assets play a key role in the Fund, with South African bonds and money market instruments representing 43% of the Fund. This portion is invested in a very low-risk manner: the overwhelming majority of the bonds are floating rate notes. We don’t think long South African fixed-rate bonds offer a favourable risk-reward profile. The 10-year SA government bond yields 8.60%, only slightly more than the 8.45% investors earn on 1-year fixed-rate bank debt. Long bonds will outperform if inflation and interest rates fall, allowing investors to make capital gains. Conversely, if investors become nervous, as they did in December 2015 when the yield on the 10-year rose to above 10%, capital losses of over 9% could result from a similar move. We don’t think investing in long SA bonds is worth the risk given the small yield pick-up over low-risk money market assets.
One percent of the Fund is invested in the Allan Gray Africa ex-SA Bond Fund, which invests in markets where we think the risk-reward profile is more favourable. My colleague, Nick Ndiritu, explains this in more detail in our Quarterly Commentary.
Changes over the quarter
The most significant change in the portfolio over the quarter is the sale of SABMiller. The 1.8% of Fund holding is reflected as cash as of the end of the quarter.