The Fund returned 7.3% for the quarter, resulting in a return of 21.5% over the last year. Performance benefited from strong markets, accretive asset allocation decisions and good alpha in the domestic building blocks. The Fund has performed well against its peer group over all meaningful time periods.
It was another strong year for global markets, as the MSCI All Country World Index ended the year up 19% in US dollars. Markets shrugged off the rise in infections caused by the Omicron variant to deliver a 7% rise in the fourth quarter (including 4% in December). Having aggressively increased global equity exposure during the Covid-19 collapse, the Fund is currently underweight, given full valuations and the concerns we have over multiple signs of speculative froth in global markets.
Emerging markets performed poorly, with the MSCI Emerging Markets (EM) Index declining -3% in US dollars over the course of 2021. This was materially impacted by China, where government regulation of the economy has become increasingly intrusive and capricious. While the risks are high, Chinese technology stocks trade at extremely attractive valuations. The Fund is exposed to China through both its global equity allocation and its domestic equity allocation where the Fund holds Naspers/Prosus and commodity stocks.
Expectations for inflation are shifting from transitory to structural. The easing of lockdown restrictions and huge monetary stimulus have created strong demand. Combined with Covid-19-constrained supply, this has resulted in near-term price pressure. The oil price (Brent crude) rose 71% during the year. Longer-term wage pressures are emerging in developed economies with record-low levels of unemployment. High levels of sovereign indebtedness impair the ability of central banks to respond aggressively to inflation. US CPI rose from below 2% to north of 6% during the year. The high levels of sovereign indebtedness, rising inflation and low yields keep us cautious on developed nation sovereign bonds. For the year, the Bloomberg Barclays Global Aggregate Bond Index declined -5% in US dollars.
The South African (SA) economy is recovering after the deep recession of 2020. The economy is forecast to return to its pre-Covid levels in 2022, a year earlier than previously expected. This better economic performance, combined with improved governance and a commitment to fiscal sustainability, should be sufficient for SA to navigate its fiscal challenges for the next few years. The improved fiscal situation was reflected in the upgrade by Fitch ratings of SA’s credit rating outlook from negative to stable. Longer term, economic growth remains critical to avoid a debt trap. Challenges include unstable power supply, structurally high unemployment, a poor education system, declining productivity and slow policy reform. High levels of social inequality and unemployment came to the fore in the third quarter of 2021 (Q3-21) with the outbreak of looting across KwaZulu-Natal. The rand declined -8.5% against the US dollar for the year (-5.8% for Q4-21).
The JSE All Bond Index delivered a return of 8% for the year (3% for Q4-21). The Fund has meaningful exposure to SA bonds, with the long end of the curve offering attractive yields in both absolute terms and relative to other emerging markets and alternatives such as cash. We continuously assess the risks and appropriate positioning. The ANC’s elective conference in late-2022 will be another critical milestone. Our base case is the re-election of President Cyril Ramaphosa, which would be positive for ongoing fiscal discipline.
Like global markets, local markets ended the year strongly, with the JSE Capped SWIX Index delivering 9% in rands in the fourth quarter to end the year up 27%. The Fund’s sell-down in global equities earlier in the year funded an overweight exposure to SA equities. This position sits at a decade-high and is a consequence of the breadth of value that we find across resources, global stocks that are locally listed and domestic shares. There was broad strength, with the resource sector delivering 32% for the year (22% for the quarter), financials 30% (3% for the quarter) and industrials 26% (16% for the quarter) despite the pressure on major constituent Naspers (-18% for the year and -1% for the quarter).
Within the resources sector, holdings in the diversified miners (Glencore +80% for the year and Anglo American +46% for the year) have contributed strongly to performance over the past few years. Strong demand, driven by recovering economies and decarbonisation, along with disciplined capital expenditure have supported tight markets. The diversified miners continue to offer good value with low multiples and solid free cash flow generation. During the year, proceeds from the platinum group metal shares were recycled into gold equities (AngloGold and Goldfields), which offer upside and reasonably priced protection against stretched sovereign balance sheets and the risk of structurally higher inflation. Both have improved their production profiles and geographic diversification. We anticipate a period of increased returns to shareholders under their new leadership teams.
The Fund has meaningful exposure to several global businesses that are listed in SA. These include Naspers (-18% for the year, -1% for the quarter)/Prosus (-18% for the year, +9% for the quarter), British American Tobacco (+16% for the year, +13% for the quarter), Bidcorp (+26% for the year, +2% for the quarter), Quilter (+6% for the year, +9% for the quarter), Textainer (+103% for the year, +8% for the quarter) and Aspen (+81% for the year, -17% for the quarter). Aspen is negotiating a potentially accretive disposal of its active pharmaceutical ingredients business and a vaccine licensing deal from Johnson & Johnson to supply the African Union. The weaker fourth-quarter return from Aspen reflects high expectations at the onset.
The Fund has a considerable holding in Naspers/Prosus that we believe to be materially undervalued. This is because of the low value being attributed directly to Tencent and the discounts which exist at the holding company level. The investment risk has increased, with China’s regulatory interventions and the threat to foreign capital. Thus far, regulations affecting technology companies are broadly consistent with what we see elsewhere, covering fintech, antitrust law, data security and 'Gig employee' labour protection. Tencent is a formidable company that generates good free cash flows, has a very engaged user base and is growing businesses across multiple verticals. None of the restrictions thus far are expected to meaningfully change Tencent’s prospects. An investment in Naspers/Prosus offers a cheap entry point to Tencent and provides access to an attractive investment portfolio.
Disappointingly, the Fund sold down its investment in MTN (+184% for the year, +21% for the quarter) too early. While we were believers in the operational turnaround, we were very concerned about the outlook for the Nigerian economy and the regulatory risk within Nigerian Telecoms. Improved stakeholder relations and the likely conclusion of a mobile money licence in Nigeria support future earnings growth and we have re-established a holding in the company.
Domestic companies continued to report results ahead of our expectations throughout 2021 due to more resilient economic activity and stringent cost control. We believe attractive stock picking opportunities exist either from businesses with specific opportunities like Dis-Chem (+71% for the year, +20% for the quarter), Rand Merchant Investment Holdings Ltd (RMI [+43% for the year, +21% for the quarter] ) or Transaction Capital (+83% for the year), or even in more mature industries like banking or food retail where those with strong franchises that have continued to invest should benefit from share gain. Shoprite (+54% for the year, +17% for the quarter) demonstrated this during the fourth quarter by surprising the market with the strength of its sales growth. The management team has invested behind the business, building distribution centre capacity, updating systems and embracing digitisation. The team's progress in building out a data-driven business built around the consumer is impressive.
RMI has been restructuring to create a focused property and casualty insurance company. The restructuring initially announced should unlock shareholder value as the unbundling of holdings in Momentum Metropolitan Holdings and Discovery reduces the conglomerate discount and improves investor focus on the underlying assets (specifically OUTsurance). OUTsurance is a quality business that we expect to deliver double-digit earnings growth while generating high returns. The attractiveness of the restructuring proposal was increased during the quarter when RMI received a generous offer for its stake in Hastings. The resultant cash inflow and associated degearing will enable RMI to avoid the rights issue required to achieve the initial unbundling and improve the dividend flowthrough from the very cash-generative OUTsurance business. Despite the share price moves during the quarter, this remains an attractive investment, with the core OUTsurance asset trading at a low look-through multiple relative to its high-quality nature and strong growth prospects, particularly in Australia.
The portfolio has moderate property exposure, preferring to use its risk budget in equities and bonds. While the sector performed strongly during 2021 (+37%), it is still negative (-3% p.a.) over three years. Holdings are predominantly in the A shares, with some exposure to logistics assets. The medium-term outlook for property remains subdued as a weak economy and a structural shift in demand from increasing digital engagement and work-from-home trends undermine rental tension.
While headwinds exist in both global markets and the domestic economy, we believe that cheap domestic assets are well priced for the risks and should offer attractive returns.
Please note that this is for the retail version of the fund. View the Balanced Plus Fund page