Most major emerging markets, including South Africa, had a significant rally during the third quarter due to the US Federal Reserve delaying the end of its quantitative easing programme. As a result, there was an increase in most emerging market indices as these offshore investors looked for additional yield in the emerging markets. We see this as a short-term phenomenon, with international investors remaining net sellers of emerging market equities and bonds over a one-year period.
The delaying of the end of the quantitative easing programme has increased our concerns that the local market has become overvalued relative to other markets. The FTSE/JSE Resources Top 10 index rallied 19.4% during the quarter but is still flat at 0.2% for the year to date. In particular, we think that the resources sector, which is an index heavyweight in the FTSE/JSE All Share Index, is overvalued on the back of the foreign buying.
We are content to sit out this type of volatility to protect against future drawdowns on our clients’ funds. Since foreigners remain significant investors in the domestic equity market, we see potential headwinds as a result of the ‘risk on’, risk off trades’ that are currently taking place, and investors should not place too much emphasis over the past quarter performance by the FTSE/JSE All Share Index. Although the Rand has appreciated slightly over its very low levels earlier in the year, our view is still that the Rand is likely to remain under pressure for the remainder of 2013. Our current account deficit at 7% of GDP means we have to attract R240 billion in new investment each year just to maintain the balance of payment account. To this end, the funds are structured to make maximum use of the allowed foreign investment allocation on the weakening Rand.
Quarter 3, 2013
For the quarter ended September 2013, the Value Trend (Balanced) Fund return was 5.1% while the benchmark FTSE/JSE All Share Index (J203) was 12.5% and the average of the South African Multi-Asset High Equity Funds was slightly better at 7.3%. The Prudential (Managed) Fund performance was 5.4% for the while the peer average was 7.3%
Year to Date, 2013
For the year to date our Value Trend (Balanced) Fund return was 19.8% while the benchmark FTSE/JSE All Share Index (J203) was 15.1% and the average of the South African Multi-Asset High Equity Funds was lower at 12.9%. The year to date Prudential (Managed) Fund return was 19.9% while the peer average was 12.9%. The Prudential Fund remains the number 1 fund over the year to date.
As managers we are satisfied with this result, since both funds had avoided many of the problem areas that occurred in the first six months of the year. In particular, the problems in the mining sector reflected in the FTSE/JSE All Share Index (J203) performance for the first six months of 2013. Many of the companies we have invested in have shown significant share price appreciation for the year to date, with investors having consolidated their gains over the past quarter. We remain long-term investors in companies and are excited by the quality of the companies we are holding for our clients.
We expect the current headwinds and tailwinds in the domestic and international markets to continue over the coming months, benefiting those managers with proven stock picking and asset allocation skills.
CAPTURE MOST OF THE UPSIDE BUT LESS OF THE DOWNSIDE
The graph below for the Value Trend Fund, courtesy of Morningstar, neatly captures what we are attempting to do at REZCO. Our objective is to get most of the upside when the market increases but to experience less of the downside. Over time we believe we can make more by losing less. The chart below shows we have participated in 70% of the upside of the JSE but very little of the downside when the market falls.
Click here to download a copy of our newsletter: REZCO Quarterly Newsletter – 201309