LOCAL STOCKS AND BONDS DRIVING MULTI-ASSET PERFORMANCE
South African stocks and bonds continue to provide the impetus for strong investment performances across the full range of Amplify Investment Partners’ multi-asset funds.
Presenting their portfolio performances, asset allocation strategies, and outlooks at an Amplify Power Hour presentation, diverse managers of its multi-asset funds across a variety of risk profiles identified SA government bonds, quality SA Inc shares and selected resources counters as the major drivers of performance over the last quarter. They also believe these will be the drivers of performance in the months ahead.
Across the board, Amplify’s multi-asset funds have outperformed their benchmarks and peer group averages. While recognising the local risks, they believe there is still value in local stocks and bonds.
Amplify SCI* Strategic Income Fund
Eric Nel, CIO of Terebinth Capital and manager of the fund, said the fund’s performance has been exemplary, recording consistent growth and consistent outperformance. However, noting the gradual decline in interest rates, he said this performance should be recognised against a hurdle to generate positive real returns that gets increasingly difficult.
Since its inception in 2014, the fund has delivered 8.11% annual growth against the benchmark STeFI +1% of 7.62% and peer average of 7.24%. Over the past year, the fund delivered 9.19% against the STeFI +1%’s 5% and peers’ 7.36%.
Commenting on the past quarter, Nel said government bonds had generated a very strong performance, as have inflation-linked bonds. In terms of asset allocation, a relatively large portion (38%) of the portfolio is in floating-rate notes, with the rest following a fairly balanced approach, including fixed-rate bonds (22%) and inflation-linked bonds (14%).
The fund’s philosophy is to consider the market from various angles, never position for a single outcome and consider markets from a cycle and scenario perspective. The fund’s managers expect a likely base-case scenario that reflects a shift from mid-cycle momentum to a pause, with South Africa’s recovery dependent on improving politics and reversal of flows. All of the scenarios that the fund’s managers look at advise them to have a much larger exposure to government bonds than what the fund currently holds.
Nel said the fund is using tactical approach during this period of uncertainty, making sure that the portfolio is liquid.
“The performance of the fund continues to be exemplary. We are definitely satisfied with both the short term but, more importantly, the long term performance.”
Amplify SCI* Defensive Balanced Fund
The low equity content fund delivered an 8.36% annual return since inception in 2014 compared to the benchmark and peer average of 6.3%, and last year it delivered 11.76% against the 10.86% average. It has been ranked number two in its class over five years.
Matrix Fund Managers co-CIO and fund manager Lourens Pretorius said the fund has shown consistent outperformance. With an objective of inflation plus 3% net of fees, it has achieved inflation plus 4% since inception and has done this consistently.
Notable over the last quarter is the significant performance of SA government bonds, where the fund has a reasonably aggressive allocation. In April, there was a strong performance of property investments, which have a relatively small weighting, while in May, the fund saw a strong contribution from equity and where the fund is overweight in its allocation to local equities. In June, however, equity has been something of a detractor, and another detractor over the quarter was offshore allocations, especially offshore cash, largely due to the appreciation of the rand.
“We are living in volatile times, the portfolio is reasonably fully invested, we have moved our cash and money market holdings up from very low levels of 5% to almost 20%, we would not be sitting on that forever, we would be assessing how things develop and we would likely migrate back to risk assets but we have significant protection against currency depreciation.”
Amplify SCI* Wealth Protector Fund
The fund, which prioritises income generation and capital preservation, has produced sustainable market-beating returns, compounding at just over 11% over three years, compared to its multi-asset low equity peer performance of 6.49% and benchmark of CPI +3% of 6.82%. The fund has delivered 8.8% annually in the almost five years since inception.
Truffle Asset Management CIO and fund manager Iain Power said there had been a pullback in some resource shares and a strong upward movement in SA Inc shares. The fund’s investments include Pepkor, Vukile Property and Remgro, which remain attractively priced and have delivered decent returns. The Northam convertible bond has also been a driver of performance. Detractors include Naspers and Royal Bafokeng and Impala, which felt the effects of the platinum group metals (PGM) basket price coming down after a strong run.
South African assets are trading at a deep discount to historical valuations and had a better-than-expected performance, particularly resource companies, with record commodity prices, profitability and attractive dividends, sometimes in double digits.
Power said there is quite a lot of bad news priced into the market, stocks are not expensive, and they look good from a forward-looking and return point of view.
The fund has tilted the portfolio slightly to quality SA Inc companies where there is a big value underpin and dividend yields close to double digit such as Absa, Liberty, Momentum Metropolitan, Woolworths, Astral, Telkom, Remgro, Netcare and Pepkor, a lot of them at trading at historic discounts to median valuations, and most delivering better than expected earnings notwithstanding the pandemic. Globally, the fund still has exposure to British American Tobacco (BAT) and Bidcorp, which are attractively priced. The fund’s managers prefer PGMs over diversified miners.
The portfolio has moderate risk exposure, with 33% in net equity, much of it spread in the South African opportunity set, including domestic bonds. The fund prefers South African over global equities, is underweight global equity, and has taken big steps to avoid expensive tech and growth companies.
“We [SA shares] are trading at a fairly deep discount to the historical median, and that is a function of better-than-expected performance generally from the South African companies, but particularly the resources companies where many are enjoying record commodity prices.”
Amplify SCI* Absolute Fund
The medium equity fund, managed by Matrix Fund Managers, returned 14% over the past year, outperforming its peer group, with equities being a major contributor. Over the next 12 months, the fund views SA bonds as a favourable asset class and opportunity set, with a probability of a 10% return, while the local equity base case return outcome is in excess of 20%, with local companies showing strong earnings. Inflation-linked bonds are also expected to do well at an 8% return outcome. However, Pretorius said a subdued return expectation is associated with global equities, and the fund prefers to be overweight local equity.
July has been a volatile month, making the fund’s managers a little more cautious and causing them to reduce duration, reduce the bond allocation, trim the equity allocation, and up cash and money market levels. This is a tactical risk-mitigating move, especially given concerns of capital outflows. The fund’s managers will look for opportunities to increase risk again, taking a nimble approach to be in a position to reinstate risk if they feel markets have digested recent events sufficiently.
Amplify SCI* Balanced Fund
Since the inception of the multi-asset high equity strategy in 2015, the fund has produced an annual return of 8.23%, outperforming the median manager among its peers by 2.2%. In the last year, the fund returned 17.7%.
The last quarter performance was driven by the bond component, a reasonably small component given that this is a high equity fund, and the performance of counters such as MTN and Growthpoint said fund manager Brian Thomas, of Laurium Capital. Detractors have largely been precious metals, including Angloplat, Impala and Northam, primarily due to an 18% drop in the PGM metal basket in rand terms, and gold through the fund’s exposure to AngloGold and Gold Fields.
Looking ahead, the low, or negative real rate environment globally continues, and there is a reopening of trade internationally, with value real economy stocks expected to be the beneficiaries of reopening trade.
Locally, strong commodity prices will dominate the market, and while we are at a late stage of the cycle, there are continuing supportive factors. Outside of commodities, there are pockets of attractively valued assets. Thomas pointed to a spate of M&A activity, such as Heineken buying Distell and Dubai World looking at Imperial, indicating that asset managers and other market players are finding value. There is some resumption of normality, with companies declaring dividends and some positive local developments such as the increase in allowable self-generation of power, offset by the effects of unrest.
As a high equity fund, the balanced fund retains a high level of equity of a little over 70%, with South African equity just 48.8% and offshore 22.5%, with a slant to value. The fund is slightly overweight in bonds, at 16.3%.
In terms of equity exposure, the fund focuses on consumer (such as BAT and Naspers) healthcare (a selection of hospital stocks), financials (it prefers insurers over banks) and selective resource exposure (with a preference for gold, diversified mines and platinum).
“A lot of the stocks that were negatively impacted by the pandemic fall very much in the value category of stocks, and those stocks are real economy stocks that we see as being beneficiaries of this reopening of trade.”
Amplify SCI* Flexible Equity Fund
The fund, which Abax Investments started managing in 2019, has an asymmetrical mindset to capture two-thirds of the upside and only a third of the downside of SWIX. Over one year, the fund delivered a substantial 29% return compared to the benchmark and average peer performance (19%) and SWIX (21.82%).
Omri Thomas, portfolio manager at Abax Investments and fund manager, said hybrid instruments delivered a strong performance in the last quarter, including Eurostoxx notes and PSG prefs. Other performance drivers included Dipula, Gold Fields and Pepkor, while detractors included Naspers, on which the fund has two large hedges, protecting some of the downside and the dollar.
South African shares remain on low forward P:Es, and local bond yields are good. The fund’s managers think equity, bonds, hybrids and property are offering good value. In terms of the fund’s positioning, its large positions are in Naspers, BAT, Eurostoxx notes, Royal Bafokeng, African Rainbow Capital and Alexander Forbes. SA equities account for half the portfolio, and almost 20% of exposure is offshore.
“Our market is not that excessively valued, and we are still managing to find reasonable value in the local market.”
*Sanlam Collective Investments
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