Momentum Flexible Factor Portfolio Range
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Momentum Flexible Factor Portfolio Range
quarterly commentary to end June 2021
Assessing investment returns in an outcome-based investment context
The Momentum Flexible Factor Portfolio Range is managed in terms of our outcome-based investing philosophy, where we
design the portfolios to maximise the probability of achieving the inflation-plus return target of each portfolio over the relevant
period, while continuing to meet the portfolios’ risk targets. To achieve this, our portfolio management approach conceptually
starts at an (multi) asset class level, then progresses to the identification of specific investment strategies within each asset class
(if appropriate) and finally ends up in the selection of (potentially more than one) investment mandates awarded to investment
managers that will implement the desired investment strategies.
Given this outcome-based investing framework, when assessing the returns of the Momentum Flexible Portfolio Range, it is
important to start with looking at the returns from the portfolios against their inflation-related targets. This allows us to answer
the question: did we achieve our target over the most recent relevant period? We then assess these returns relative to this
target in terms of the following:
• The returns provided by the asset classes included in the portfolios
• The returns from the building blocks that provide the asset class exposure for the portfolio against their asset class
(or strategic) benchmark. This in turn is explained by:
o The returns from the investment strategies (or styles) used in the building block (if any)
o The returns from the investment managers that were awarded the mandates used in each of the building blocks
This quarterly review thus starts with the assessment of the investment returns generated by the portfolios against their
targeted investment outcomes over the most recent periods. The next section focuses on the economic environment and the
returns generated by the asset classes (beta) for the most recent quarter, measured against our average real return expectations
for each asset class. We review the returns from the building blocks and the underlying investment managers against their
strategic investment benchmarks.
Momentum Flexible Factor Portfolio Range returns
The respective inflation objectives of the portfolios have been difficult to attain, given the low return from growth asset classes
for the last five years. However, the portfolios managed to outperform their respective benchmarks over all periods.
Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 1 of 7Economic overview
Developed market (DM) equities returned 7.9% (in US$) in the second quarter of 2021, emerging market (EM) equities 5.1% and
global bonds 1%. DM equities were supported by policy stimulus and increasing economic activity due to faster vaccinations
against COVID-19, but many EMs are struggling to cope with new waves of COVID-19, denting the pace of their recoveries.
Global growth of 6% is expected this year, moderating to 4.5% in 2022.
Global bonds were affected by rising global consumer price inflation (CPI). Strong demand for commodities, coupled with supply
backlogs and disruptions, contributed to the ‘All Commodity Price Index’ increasing by 85% from April 2020 to May 2021, which
in turn hurled CPI higher via, among others, higher fuel prices. This contributed to increasing nominal bond yields, suggesting
earlier tightening of monetary policy.
However, the pace of increase in commodity prices and CPI should slow next year as demand growth slows, supply catches up
and base effects dissipate. Although the US central bank (Fed) is expected to start talks about tapering their bond purchasing
programme later this year, Fed members indicated interest rates may only increase in 2023.
Global equities normally still perform well when CPI is above trend and rising, as is currently the case. Equity markets normally
experience more sustained pressure when interest rate increases (expected in 2023) draw closer. Although the potential for an
equity market drawdown is increasing, global equities should continue to outperform global bonds as the fundamentals for a
subsequent quick rebound are still prevalent. Low interest rates do not support exposure to global cash.
If South Africa’s adjusted level 4 lockdown is not extended even further, economic growth should surpass 4% in 2021. CPI is
expected to have peaked in May 2021 and should trend downward. A global risk-on environment, prospects of a declining fiscal
deficit and another current account surplus in 2021 supported the rand to an overvalued position by mid-2021. With CPI
projected to average around 4.5% over the next two years, the repo rate is expected to increase twice in 2022, by 25 basis points
each time.
On a forward P/E basis the South African equity market trades at large discounts to both EMs and DMs and justify a preference
within portfolios. SA nominal bond yields remain attractive against their own history, as well as relative to those in DMs and
EMs. Listed property fundamentals remain weak, while prospective SA real cash yields are close to zero.
Portfolio management
Our portfolios had another strong quarter with all factors recording positive returns. The allocation to fixed interest and property
were the primary drivers of returns. Global equity and property also contributed to the absolute returns in the quarter.
During the quarter, we reduced local equity marginally in favour of local cash. This cash will be re-deployed in the event of
market weakness. The portfolios, however, were overweight total equity.
Asset class returns
The returns for the asset class benchmarks for the second quarter of 2021 are reported in the first column of the table below.
The next column highlights the returns for these asset classes for the previous year. These one-year returns are then converted
into real returns by deducting inflation (5.2%) for the year. The final column in the table contains the returns above inflation we
expect to get (on average) for these asset classes for a full market cycle.
Nominal returns for the Real returns for Expected real return
Asset class Q2 2021 returns
previous 12 months previous 12 months* (p.a.)
Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 2 of 7Local equity (Capped Swix) 0.6% 27.6% 22.4% 5.8% Local bonds (Albi) 6.9% 13.7% 8.5% 3.3% Local property (Sapy) 12.1% 25.2% 20.0% 7.0% Local ILBs (Ilbi) 3.2% 14.3% 9.1% 2.8% Local cash (Stefi) 0.9% 4.0% -1.2% 1.3% Global equity (MSCI ACWI) 3.9% 15.1% 9.9% 6.5% Global bonds (WGBI) -2.1% -16.2% -21.3% -0.3% Offshore property 5.8% 9.7% 4.6% 4.0% US dollar/rand** -3.4% -17.7% SA CPI* 1.4% 5.2% *CPI is to end May 2021 ** A positive/negative value here reflects the effects of a depreciation/appreciation of the rand against the US dollar on global asset class returns in rand terms. As the rand gets weaker/stronger, the returns of global investments get better/worse from a local investor’s perspective. Building block return assessment As explained above, our outcome-based investment philosophy starts at the asset class level and then goes down to an investment strategy (if appropriate) and investment mandate level within each asset class. We thus construct building blocks that reflect our selected investment strategies and managers that were awarded the mandates to implement these to either improve on the returns of the asset class or manage its risk profile. Local multiple balanced building block The multiple balanced building block returned 2.7% and a very respectable 24.4% for the quarter and year, with the equity allocation driving most of this return. The Coronation mandate returned 1.1% for the quarter. Returns for the past year benefited from recovering markets, asset allocation decisions and alpha in the local equity. Having increased exposure to SA equities during 2020, Coronation remained overweight the asset class, given the breadth of value on offer in resources, global shares locally listed and local shares. The portfolio remained overweight resource shares, given their attractive valuations and had considerable exposure to several of the global businesses listed locally. These were attractive for a variety of share-specific reasons. Major holdings include Naspers, British American Tobacco, Quilter%), Bidcorp, Textainer and Aspen. The focus remained on seeking out opportunities, where the longer-term prospects of investments were mispriced by the market. The Abax Balanced Fund had another strong quarter and returned 5.2% for the quarter, which brought the one-year return to a very credible 33.9%. The main contributors to the returns for the quarter were PSG, Dipula and Pepkor. PSG announced that it was buying back all outstanding preference shares at a handsome premium (R81 compared to R66 share price). Dipula Property was a major contributor for the quarter, as it reported decent results for a property company and also declared a sizeable dividend. Naspers was a detractor as the much-hyped value unlock transaction was poorly received by the market. Interventions by Chinese regulators further spooked the market. Given the huge discount, Naspers was trading at relative to its net asset value, Abax believed these concerns were adequately priced into the share. Foord returned 3.9% for the quarter, with equities contributing most to returns, led by overseas companies, industrials, healthcare and consumer services, while media and commodity cyclicals detracted. Aspen, Anheuser-Busch InBev, Richemont, Pepkor and Foschini contributed most to returns, while Naspers/Prosus and BHP Group were the biggest detractors. Fixed interest also contributed, as the yield curve flattened and holdings in the R2030, R2032 and R2035 were the best Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 3 of 7
performers, as longer-edated maturities outperformed. Foord maintained its overweight equity exposure, as it believed market conditions should continue to support equity prices in the medium term. Ninety One Asset Management returned 1.9% for the quarter. The allocation to apparel retailers (The Foschini Group, Truworths International, Pepkor Holdings and Mr Price Group) and banks (Capitec Bank, ABSA Group and FirstRand) performed well for the quarter. Returns were further enhanced by holdings in MTN Group, Richemont and Investec, while the allocation to the Platinum Group Metals shares (Impala and Anglo American Platinum) came under pressure in the quarter. The holdings in Naspers and Prosus also detracted from returns. Exposure to South African credit and government bonds added value. Resource exposure was trimmed slightly in favour of Bid Corp, Aspen Pharmacare, Life Healthcare and Netcare. Local absolute strategies building block The absolute strategies building block benefited from the continued rally in local asset classes and returned a respectable 2.8% for the quarter. Being overweight equity as well as allocations to inflation-linked bonds and property were the main drivers of returns. The Sentio Absolute Return Fund performed satisfactorily for the quarter, posting a return of 2.8%, during a difficult quarter, which was characterised by a combination of sharp style rotations, low liquidity and uncertainty around the US interest rate outlook. Top contributions in equities came largely from positions in MTN, Richemont, Sanlam, Aspen and Pepkor, while derivative structures around some of the miners, retailers and banks also added. Detractors included positions in Naspers, Angloplats, Impala Sibanye and Northam. In fixed income, the portfolio was overweight (especially at the long end of the curve due to attractive valuations) and benefitted from bull flattening during the period. After the strong ALBI return in May, risk was reduced to be neutral to the benchmark. Prudential had another solid quarter and significantly outperformed the objective. The portfolio returned 3.r9% for the quarter. The largest asset-class contributors to absolute returns for the quarter were the fund’s exposure to SA nominal bonds (by far), followed by SA ILBs and SA listed property. In terms of specific equity exposure, among the strongest equity contributors to absolute returns for the quarter were the fund’s holdings in diverse shares like MTN, Truworths and PPC, as well as financial shares like Investec, Absa, Standard Bank, Old Mutual and Remgro. Naspers was by far the largest equity detractor from absolute returns, while resource holdings like Implats and Amplats also weighed on returns. Laurium recorded a return of 1.4% for the quarter. Laurium is constructive on South Africa and continued to have reasonable exposure to South African-focused companies’ earnings (SA inc.). Within the South African listed market, the investment manager saw attractive opportunities in the healthcare, insurance, industrial and telecommunication sectors, along with some of the large global consumer shares including British American Tobacco and Naspers. It also had a reasonable exposure to resource shares including diversified miners. Laurium remained constructive on bond valuations on the back of recent progress in reforms, and continued commitment to fiscal consolidation shown thus far by National Treasury. The investment manager continued to see value across the SA bond curve and would only look to reduce duration at lower yield levels. The real return building block, which is a conservative strategy and more focused on capital protection, returned 3.5% for the quarter and 15.0% for the year. These returns outperformed the inflation objective by a healthy margin. Absa Asset Management returned 4.0% for the quarter, but remained very conservatively positioned, given its concerns around equity valuations. However, the investment manager is finding opportunities in the local market, which appears attractive relative to developed markets that seem priced-for-perfection. The equity exposure at 30 June was 24%. Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 4 of 7
Prescient delivered a return of 2.1% for the quarter. Property and nominal bonds were the strongest contributors to returns for the quarter, while equities detracted. The building block was restructured during the quarter to increase effective equity exposure to 30%, while trimming bond exposure to 10% and listed property to 5% to help fund the equity overweight. Local cash building block The second quarter of 2021 was a very good quarter for local fixed income asset classes, as bond, ILB and property yields rallied strongly. Globally, there was some respite from the reflation theme that caused chaos in global bond markets last quarter. The US Fed reiterated what it believes to be a transitory rise in inflation, causing US, 10-year yields to decline by 30 basis points. While locally, it appears that the long-awaited structural economic reform programme has finally gained some traction with an opening up of the energy sector, partial privatisation in the state-owned enterprise sector, an affirmation of the judiciary’s independence and some hard lines drawn in the political factional battle within the ruling ANC. In addition, our trade balance continues to surge on higher commodity prices. Listed property led the way off its very depressed base, delivering 12.12%, nominal bonds (ALBI) rebounded strongly, returning 6.86%, inflation-linked bonds (IGOV) delivered 2.95%, while cash (STeFI) continued to plod along at 0.92% for the quarter. For the quarter, the building block delivered a return of 1.1% compared to 0.9% for the STeFI benchmark. There was no change in the repo rate in the second quarter of 2021, which remains at an historical low of 3.5%. There was only one MPC meeting this quarter in May and its vote was 5-0 in favour of leaving the repo rate unchanged. The traded money market was not as sanguine and interestingly, the forward-rate agreement curve moved up meaningfully to price 1% of hikes in the next year and an additional 1% the following year. These are the most aggressive interest rate expectations by the market seen since the repo rate reached the lows last year. The three-month JIBAR rate was relatively anchored at 3.69%, as there is no immediate threat of interest rates rising, but the one-year interest rate rose an additional 16 basis points to close at 4.79%, which is more than 1% higher than the lows seen in October 2020. Based on these JIBAR rate levels, the total return for the STeFI composite index was 0.92% for the quarter. For the year, the building block delivered a return of 5.1% against the STeFI benchmark of 4.0%. It consistently met its objective of capital preservation, by maintaining positive returns on a one-year rolling basis. Both investment managers had a high exposure to floating-rate notes, which provided a fair degree of liquidity, while also providing above-benchmark yields. Moderate hedge solution building block The moderate hedge solution returned 0.88% for the quarter, bringing the one-year return to 13.78% after the deduction of all fees. This solution is diversified across strategies and within strategies. While all strategies contributed to returns for the past quarter, the fixed income arbitrage component was the biggest contributor to returns for the year. The opportunity set for fixed income arbitrage remained favourable, as monetary policy expectation offered opportunity in the front end of the curve, while relative value spreads throughout the curve remained elevated and also offered opportunities. Aggressive hedge solution building block The equity allocation was further hurt by the exposure to resource shares. The RESI exposure and specifically the PGM basket were big drivers of returns in the past two years and the position remained unchanged. The aggressive hedge solution returned 0.02% for the quarter, bringing the one-year number to 16.88%. The 50%/50% Capped SWIX/STeFI returned 0.80% for the quarter and 15.5% for the last year. Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 5 of 7
Portable alpha solution building block The portable alpha solution returned negative 0.22% for the quarter, bringing the one-year number to 34.14% after the deduction of fees. This compared to the Capped SWIX total return, which returned 0.63% for the quarter and 27.6% for the past year. Global equity building block The global recovery continued to build momentum during the second quarter, driven by developed markets, where vaccine rollout is proving to be decisive in lifting pandemic restrictions. Forecasts for growth this year and next were revised up materially: the IMF is now forecasting global GDP to expand by 6% in 2021, up from its previous forecast of 5.2%; the OECD raised its growth expectation to 5.8% from 4.2%, the Federal Reserve upped its 2021 forecast for US growth to 7% (six months earlier it was predicting 4.2%), while the ECB is now expecting growth in the Euro Area of 4.6% in 2021, compared with its March forecast of 4%. At the same time, inflation has been much higher than earlier expectations. CPI reached 5% in the US in May, while the Fed’s preferred measure of inflation, core Personal Consumption Expenditure, reached 3.4%, which is its highest for almost three decades and well above the Fed’s 2% target. The policy response has been on a scale never seen before in peace time. President Biden’s spending plans, on top of his $1.9 trillion pandemic relief programme, call for more than $6 trillion of spending in infrastructure, healthcare, education, clean energy and the environment, while extending the social safety net and supporting jobs. If enacted in full, it would result in annual fiscal deficits averaging more than $1 trillion, which is 5% of GDP, in the next decade, and is the highest sustained levels of spending since WWII. After a strong quarter and half year for markets, returns are likely to be harder to come by in the months ahead. Recovery is being discounted, at least in part. Nearly all safe-haven bonds offer negative real returns and, in the absence of deflation, are deeply unattractive, even more so if inflation takes hold. The uncertainty and risks surrounding this exceptional economic cycle point to periods of volatility ahead. However, the risks should be kept in perspective. Inflation expectations remain reasonably well anchored. Financial conditions are very easy, and liquidity is abundant. Short-term setbacks are likely but the conditions for a sustained fall in risk asset classes are not evident. Further progress in equity markets and other risk asset classes is therefore likely. Against this backdrop, the global equity building block returned 4.2% and 15% in the quarter and year respectively. Global property building block Global property continued to recover from the fallout experienced in 2020, as the pace of the vaccine rollout and re-opening of more sectors exceeded initial forecasts. Against this backdrop, the global property building block returned 4.5% (in rand terms), marginally above its benchmark, which returned 4.3 % for the same period. Global fixed income building block In contrast to global equities, global bonds endured another tough quarter, as US bond yields rose and breached 1.7% on concerns over possibly higher inflation in the next year. These concerns have in turn led to a number of market participants believing that the US Fed will begin tapering its bond buying programme. Against this backdrop, the global bond building block returned negative 1.8% (in rand terms), outperforming its benchmark, which returned negative 2.7 % for the same period. Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 6 of 7
Conclusion We are confident that our portfolios are well positioned and have factored the potential future returns as well as the underlying market and economic conditions. Our portfolios are suitably diversified across asset classes and strategies, and we will continue to manage the portfolios in a prudent manner. Moment of portfolio facts & figures | Flexible Range quarterly commentary | June 2021 Page 7 of 7
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