Quarterly Investment Review - Ninety One plcInvestment Review 31 March 2020 Previously Investec...

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Quarterly Investment Review31 March 2020

Previously InvestecAsset Management

Contents1. Market review 1

2. SA Balanced

Balanced 9

Managed 12

3. SA Equity

General Equity 16

Value 19

Active Quants 22

Property Equity 24

4. SA fixed income

Dynamic Bond 30

Flexible Bond 33

Triple Alpha Bond 36

Credit Opportunities 40

Money Market 44

5. Quality

Opportunity 48

Cautious Managed 51

6. Alternatives

Africa 55

7. International

Global Strategic Managed 65

Global Multi-Asset total return 68

Global Equity 72

Global Strategic Equity 75

Global Franchise 78

GlobalDiversifiedDebt 80

8. Glossary of terms 83

9. Performance 86

NinetyOnehasamulti-specialistmodel.Individualmanagersapplytheirownspecificprocessandphilosophywithintheirportfolios.Thismayleadtodifferencesintheviewsexpressedinthisdocument.ThisisthecopyrightofNinetyOneanditscontents may not be re-used without Ninety One’s prior permission.

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Market review

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Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.”

Nassim Taleb in his book Antifragile: Things that Gain from Disorder

Global market performance Themarketmoveswitnessedinthefinalmonthofthefirstquarterwere some of the sharpest in living memory. Global markets had initially downplayed the potential impact and the spread of the coronavirus (COVID-19) outside of China. New cases in other regions, however, quickly dispelled that narrative, as the reality of a potential health crisis began to permeate the discourse. Risk assets plunged as the virus forced an unprecedented sudden stop to large swathes of the global economy. Global equities (MSCI ACWI, -21.4%) recorded theirworstquartersincetheglobalfinancialcrisis(GFC).Developedmarket equities (MSCI Developed Market Index) closed 21.1% lower, while emerging market equities (MSCI Emerging Market Index) came worstoff,down23.6%.

In the US, the Dow Jones Industrial Average index (-22.7%), tracking 30 large blue-chip stocks, booked its worst quarter since the ‘Black Monday’ crash of 1987. The US benchmark S&P 500 index fared little better at -19.7%. For these US indices, it was the fastest move into a bear market ever recorded.

In Europe, stock volatility tracked all-time highs as the Euro Stoxx 600 plunged26.7%.InAsia,Chinesefinancialmarketswerelessfragileover the quarter, with mainland China’s CSI300 index down only 11.5% ascapitalcontrols,domesticinvestorresilienceandconfidencethatthe government was on top of the outbreak helped limit losses.

Traditional safe havens (US Treasuries, German bunds, gold, US dollar, Japanese yen and Swiss franc) proved their worth. This was despite weeks of liquidity concerns in the treasury market, bullion experiencing the most severe volatility since the GFC, the greenback recording its worst week since 1985 and bunds coming under pressure from the EU’s failure to rally around a collective economic rescue strategy. The Fed’s unlimited quantitative easing (QE) and pledge to snap up as many government bonds and investment grade credit necessary helped ease some of the pressure on yield-oriented assets. TheBloombergBarclaysAggregateGlobalBondIndexendedflatat -0.3%.

All returns are quoted in US dollars.

Risk assets plunged as the virus forced an unprecedented sudden stop to large swathes of the global economy.

Market review

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Market review

United StatesOn Monday 30 March 2020, the US recorded the biggest daily increase in COVID-19 cases of any country in the world since the outbreak of the virus in December. The “downsiderisks”riskscitedbytheUSFederalReserve(Fed)followingthefirstemergency rate cut on 03 March have fully materialised into a humanitarian and economic crisis in a matter of weeks. Indeed, Fed chair Jerome Powell remarked late in March that the US economy may well already be in a recession. The manufacturing purchasing managers’ indeed (PMI) slid into contractionary territory in March, coming in at 49.2 from 50.7 in February (the 50-mark separates contraction from expansion). Thereadingreflectedthequickestdeteriorationinoperationssincetheglobalfinancialcrisis,althoughaboveconsensusexpectationsof42.9.Inlabourmarkets,USjob claims shot up to a record 3.3 million on the back of the COVID-19 shutdown – the firstrealglimpseofdamagetotheUSeconomyatthetime.

The Fed was quickest out the gates among the leading central banks, and by quarter-end had slashed rates by a cumulative 150 basis points (bps), committed to unlimited quantitative easing (QE) and an unprecedented venture into corporate bond purchasesfollowingcongressionalapproval.Onthefiscalside,theWhiteHouseagreed a $US2 trillion stimulus package in order to shore up the defence against COVID-19. In politics, the Trump administration has come under scrutiny for how it has handled the coronavirus outbreak, given the apparent lack of coherent strategy and messaging since the outbreak, a lack of coordination with local and state leaders as wellasTrumprepeatedlycontradictinghisownhealthexpertsduringpressbriefings,especially in the context of the US becoming the epicentre of the outbreak.

Euro areaEurope’s economic conditions have severely degenerated since the outbreak, with many member states bringing their economies to a halt in order to tackle the health crisis. The infection rate on the continent surpassed 100,000 with around 75% of the cases coming from the four major economies of the region. The manufacturing PMI fell to 44.8 in March, from 49.2 in the previous month, although ahead of consensus expectations of 39.0. This was the sharpest pace of contraction in operations since July 2012.

The European Central Bank (ECB) launched a bigger-than-expected Pandemic Emergency Purchase Programme, which comprises an expansion of quantitative easing by €750 billion over the next nine months, in addition to the €120 billion announced earlier in March. ECB President Christine Lagarde tweeted “there are no limits to our [ECB] commitment to the euro” following the plan’s unveiling. Policymakers are, however, mindful that monetary policy alone will need to be supportedbyacoordinatedfiscalresponsebymemberstates.Thusfar,thelackofany conclusive outcomes from EU meetings highlights the existing deep divisions within the EU regarding the degree to which common resources ought to be deployed to alleviate the economic devastation brought on by the pandemic. Countries such as Germany and other northern states have rejected calls for the issuance of joint debt, which has been dubbed ‘coronabonds’.

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UKEconomicsentimentdroppedsharplyinthefirsthalfofMarchbeforeanationwidelockdowncameintoeffectinanattempttocontainthecoronavirusoutbreak–measures which threatened thousands of jobs. The sentiment indicator dropped to 92 in March from an already low 95.5 in February, paring some of the gains since Prime Minister Boris Johnson’s victory in the general election. While the government and the Bank of England (BoE) have thus far worked closely to coordinate counter measures, the UK economy nonetheless appears to be heading towards a recession inthefirsthalfof2020.Fromafiscalperspective,thechancellorannouncedapackage of £12 billion aimed at COVID-19 spending. On the monetary front, the BoE pledgedtodowhatevernecessarytopreventfinancialmarketdisarray,whichcouldexacerbate the downturn. The Monetary Policy Committee (MPC) left the benchmark policy rate unchanged after exhausting conventional policy responses to boost the economy following two emergency meetings in March and the reduction of the policy rate to the minimum 0.1%. QE has also been rebooted, with an additional £200 billion of sovereign and corporate bonds pledged to be bought. According to the meeting minutes, the central bank’s actions will now turn to minimising disruption and ensuring liquidityandlowercostsofborrowingforfirmsandhouseholdsinthecomingmonths.

ChinaWhile China was initially the hardest hit economy from the deadly spread of COVID-19, the country now seems to be slowly returning to normalcy, following strict and intensive lockdown measures implemented by authorities. As such, the rebound intheofficialPMI(52inMarch)fromrecordlowsinFebruary(35.7)wasnotsurprising,although the magnitude of the recovery surprised ahead of consensus expectations. Thisisanotherexampleofhoweffectivecontainmentmeasurescanleadtoaquickerresumption in economic activity.

China’s recovery has also been supplemented by a ramp up in stimulus measures. That said, the People’s Bank of China (PBoC) has refrained from announcing unlimited QE, a route taken by other central banks in developed markets. During the quarter, authorities have rolled out a series of interventions to limit the damage on the economy. The PBoC reinforced counter-cyclical adjustments to monetary policy via open market operations. The bank also pledged US$173 billion in additional liquidity to money markets, the largest single-day open market operation since 2004. Bank lending rates are being lowered to support companies that have been heavily affectedbythepandemic,especiallysmallandmicrofirmsandthemanufacturingsector. Additional special central bank lending to the tune of ¥300 billion has been directedtowardlargebanks,selectlocalbanksinHubeiandotherheavilyimpactedprovinces. On Monday 30 March 2020, the PBOC reduced interest for banks further just days following Politburo approval for more borrowing.

Market review

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South AfricaIn South Africa, the exogenous shock of the novel coronavirus outbreak has only compounded the idiosyncratic challenges the country is battling through. Before the outbreak, the South African economy had already slipped into its second recession in as many years, shrinking by an annualised 1.4% quarteronquarterinthefinalthreemonthsof2019- much worse than consensus expectations of a 0.1% drop. This was mainly due the worst spate of rolling power outages which severely constrained several industries. The weakness in the local economy will no doubtbefurtherintensifiedbythestrictlockdownmeasures implemented by government on 27 March 2020, which has sent the entire economy into hibernation, barring essential services.

The South African Reserve Bank (SARB) cut the benchmark interest rate by 1% to 5.25% at its 19 March MPC meeting. Following extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support South African government bonds in the secondary market. The SARB, however, emphasised that this as a monetary policy reaction designed to facilitate the transmission of monetary policy – not QE ormonetizationofthedeficit.Inwhatfeltmorelikeasideshow in the midst of the coronavirus outbreak, ratings agency Moody’s unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negative outlook was kept in place, foreshadowing the risk of a further downgrade within the next 18 months. The move meant that South Africa will no longer form part of the FTSE WorldInvestmentGradeBondIndex(WGBI),effective1May 2020.

Commodity marketsReturnsfromcommoditiesoverthequarterreflecttherealisation of initial fears that COVID-19 could severely curtail demand for raw materials, fuel and food supplies worldwide. The Bloomberg Commodities Index ended the month down 23.3%. The big story running parallel to the coronavirus outbreak over the quarter was the oil price shock. Saudi Arabia ignited an oil price war with Russia, following disagreement over production cuts as a response to tackle the decline in oil demand due to the virus. The move by Saudi sent oil prices tumbling c.30% - recording the biggest one-day fall since the 1990s Gulf War. The collapse in the oil price has also dragged soft commodities such as sugar and coffeelowerastheglobalgrowthoutlookquicklydeteriorated.

Commodity Q1 2020 % change (US$)

Brent Crude Oil -65.5

WTI Oil -66.5

Gold 3.9

Copper -19.8

Platinum pot -25.2

Palladium 21.5

Silver -21.7

Iron Ore -7.5

Nickel -17.7

Aluminium 5.1

Zinc -4.5

Source: Bloomberg as at 31.03.20.

Market review

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Domestic market performanceSouth Africa’s equity markets continued to endure severe weakness in line with the worldwideselloffinriskassets.ThebenchmarkFTSE/JSEAllShareIndexerased21.4%ofitsvalueoverthequarter,whiletheCappedSWIXwasworseoff,down26.6%overthesameperiod.Atasupersectorlevel;financials(-39.5%)werethehardest hit, resources extended weakness, falling 25.3% as lockdown measures sapped demand, while industrials outperformed, down only 8.4%. The South African Government bond market, much like most markets globally, unravelled during the monthofMarch,withmostoftherepricingstemminglargelyasareactiontoflowsand a preference for liquidity from foreign bond holders. Local bonds nonetheless faredbetterthantheirequitycounterparts,down8.7%forthequarter.Thefirstthreemonthsoftheyearwerebrutalforthelocallistedpropertysector,withtheFTSE/JSEAllPropertyIndexdownalmost50%inthefirstthreemonthsoftheyearagainstabackdrop of deteriorating domestic growth conditions and external headwinds. Cash waskingovertheperiod,theonlypositivereturnacrossallassetclassesastheSTeFI Index closed +1.7% higher. In currencies, the rand delivered its worst quarterly performance since the GFC, falling 21.7% against the US dollar,19.6% against the euro and 16.1% against sterling.

At the sector level, it was red across the board, with the deterioration in demand dynamics and the growth outlook continuing to exert immense pressure on base and bulk commodities, while gold and palladium were the only green shoots. The diversifiedminers,includingbutnotlimitedtoBHPGroup,AngloAmerican,andGlencore, posted double-digit returns. The turmoil continued for Sasol over the quarter, owing to a myriad of headwinds such as weaker-than-anticipated rand oil prices, a collapse in demand for its chemicals and oil products, as well as idiosyncratic factors such as cost overruns and operational delays at its Lake Charles Chemicals Project in the US.

Sectors that are highly sensitive to the domestic consumer and economy continued toendureweakdomesticgrowthconditionswithdiversifiedfinancials(PSGGroupand Old Mutual) and lenders (Nedbank and Absa Group) ending deep in negative territory on the back of a pummelled local unit and negative rating action. The bleedingcontinuedforthefoodandgeneralretailers,withMassmartrecordingitsfirstfull-yearlosssincelistingontheboursebackin2000andTheFoschiniGroupamong the biggest laggards over the quarter. In consumer services, British American Tobacco was a ray of hope with tobacco one of a handful of industries with resilient sales during the lockdown.

Market review

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Selection of FTSE/JSE All Share Index stock performance

Name Index weight Q1 2020 % return (ZAR)

Naspers 1.1 11.5

British American Tobacco 3.1 2.3

Clicks Group 2.4 1.4

AngloGold Ashanti 2.4 1.4

Growthpoint Properties 0.7 -41.8

The Foschini Group 0.3 -54.7

Nedbank Group 0.6 -61.4

Sasol 0.4 -87.8


Market review

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SA Balanced

8

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Performance reviewFor the quarter, the portfolio outperformed the benchmark, although delivering a negative absolute return in what was an extremely challenging market environment.

Notwithstanding the drop in global equities, the offshorecomponentoftheportfoliowasquiteresilientand contributed positively to absolute performance, largelyowingtoasignificantlyweakerrand.Withintheoffshoreassets,thematerialcashposition(predominantlyUSdollar)wasbeneficial,whiletheexposure to Asian equities (mainly Chinese and unhedged Japanese stocks) cushioned the drawdown as these markets fell less than major global indices.

The small domestic cash holding also added to absolute returns, alongside the positions in the Africa African Palladium Debentures and NewGold exchange-traded funds (ETF) as well as holdings in British American Tobacco, Naspers and Prosus.

The investments in ‘SA Inc.’ companies, including Absa Group,FirstRand,TheFoschiniGroup,MotusHoldings,Sanlam, Standard Bank Group and Truworths International, detracted from absolute performance.

The exposure to resources such as Anglo American, Anglo American Platinum, Impala Platinum, Sibanye-Stillwater and Sasol also dragged on absolute returns. Positions in MTN Group as well as the allocation to local bonds and listed property also weighed on performance.

Market backgroundGlobalstockmarketsfellinaheapinthefirstquarterasthe global spread of the coronavirus (COVID-19) cast a shadow on the global growth outlook — the disruptive nature of the containment measures undertaken by the various countries is negatively impacting economic activity through a demand and supply shock. Against this backdrop, developed market (MSCI World Index -21.1%) and emerging market (MSCI Emerging Markets Index -23.6%) equities fell precipitously as markets factored in a challenging operating environment for most corporates. On the other hand, global bonds (Bloomberg Barclays Global Aggregate Bond Index -0.3%)weremoreresilientasinvestorsflockedtosafety (particularly US Treasuries) given the threat the

pandemic poses to global growth. All returns are quoted in US dollars.

Thedomesticstockmarket(FTSE/JSEAllShareIndex-21.4%) took its cue from global equity markets as the indiscriminateselloffresultedinallsectorscharteringinnegativeterritory—industrials(-8.4%),financials(-39.5%) and resources (-26.7%). Listed property (FTSE/JSEAllPropertyIndex-48.1%)alsopulledbacksharply during the period due to the lockdown implications on rental income as buildings were placed underenforcedshutdowns.Localbonds(FTSE/JSEAllBond Index -8.7%) were initially buoyed by a well-received budget statement, but the positive move was later retraced as emerging market debt fell out of favouramidtheflighttoglobalsafe-havenassets.The sovereigncreditratingdowngradebyMoody’sInvestors Service to one notch below investment grade also weighed heavily on sentiment, leading to significantsellingbynon-residents.Overthequarter,the rand weakened 20.3%, 16.2% and 21.5% against the euro, sterling and US dollar, respectively.

Portfolio activityDuring the quarter, we actioned some trades within the local equity component. We initiated an investment in GoldFieldsaswebelieveitsearningswillbenefitfromexpectedsteadyoperationalperformanceandafirmergold price. We also purchased positions in Anglo American,BHPGroup,BidvestGroupandNetcare.On theotherhand,wereducedtheallocationtoluxurygoods maker Richemont. The company’s earnings will likely disappoint due to falling economic growth, reducedtourismandwaningconsumerconfidence,allof which should weigh on consumers’ propensity to spend on luxury goods. We also trimmed the exposure to Absa Group, Impala Platinum, Sasol, Sibanye-Stillwater and Woolworths. In terms of commodities, we sold the position in the African Palladium Debentures ETF and used some of the proceeds to purchase stakes in the NewGold and NewPlat ETFs.

Regarding asset allocation, we switched some local cash and partial proceeds from the Africa Palladium Debentures ETF sale into domestic bonds. We remainedfullyinvestedoffshore,withmarketmovements resulting in an increased overall allocation versus local assets.

Balanced

Balanced

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Withintheoffshorecomponentoftheportfolio,wereducedtheexposure to equities in February amid the market volatility, before adding back to the asset class towards quarter-end.

Outlook and strategyThefirstquarterof2020wascharacterisedbysignificantmarketvolatility and pullbacks across most asset classes. Meanwhile, the economic prospects that drive long-term asset returns remain highly uncertain. The immediate and direct impact of COVID-19, largely due to the appropriate but drastic curtailment of economic activity both here and globally, is likely to wane when evidence of a reduced rate of infection becomes apparent. This is already the case in some regions globally, but other countries are continuing to grapple with the rising spread of the virus and concomitant slowdown in demand and supply as their respective economies are largely shut down. That said, some form of economic activity normalisation will occur eventually.

In recent quarters, we had raised concerns around the fragility of global growth, high levels of indebtedness and a generally weak starting point for policymakers to enact meaningful policy changes to ensure sustainable growth. COVID-19 has not addressed these concerns, but rather added to them. Stimulus packages and policy measurestostaveoffadeeprecessionhavebeenwidespreadandlarge in size, along with the loosening of regulations to enable counter-cyclicalresponsesfromgovernmentsandfinancialinstitutions.Inourview,thesewilllikelyhavethedesiredeffectintheshort term. Increased liquidity, lower borrowing costs and favourable funding arrangements may well prevent a worst-case scenario in the near term. But we do not believe these measures will come without any costs. In our view, there will likely be serious question marks around what ‘normal’ is when we see some normalisation in economic and market activity.

Ouroffshoreallocationremainsfavourablydisposedtoequities,wherein the exposure is skewed towards Asian and European investments as well as corporates we believe are most likely to provide returns commensurate with the prevalent level of risk over the medium term.ChineseandJapanesemarketscontinuetotradeatsignificantdiscountstotherestoftheworld,whileconcertedpolicyeffortsintherespectivecountriesshouldprovideafillip.Beyondthereturnpotential,thesetwomarketsoffersignificantdiversificationbenefitsgiven their low correlation with the domestic equity market.

Balanced

Top equity holdings % of portfolio

Naspers Ltd 5.0

British American Tobacco

Plc

3.5

Newplat Etf 2.7

Prosus Nv 2.6

Newgold Issuer Ltd-gld

B Deb

2.1

Firstrand Bank Ltd 2.1

Mtn Group Ltd 1.3

ImpalaPlatinumHoldingsLtd 1.2

Sibanye Stillwater Ltd 1.2

Bhp Billiton Plc 1.1

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In Europe, policy is strongly focused on asset price reflationandvaluationsremainwellbelowhistoricalaverages.Regardingthebalanceoftheoffshoreallocation, we continue to prefer cash over global bonds. The asset class acts as an attractive shock absorber in times of heightened market volatility and material market drawdowns.

In the current environment where local economic activity is grinding to a halt in a number of sectors, therearesignificantquestionsaroundwhichcompanies will have the ability to withstand a period of no or very little revenue. As a team, we are performing in-depth stress tests for worst case scenarios (three to six-month disruption period). We are looking at potentialchangesinearningsrevisionsprofiles,butalsothefreecashflowimpactoncompaniesandtheeffectontheirbalancesheets.Forthecompanieswecover,weareflexingourassumptionsforthekeyCOVID-19 uncertainties: duration of trade disruptions andseverityofimpactindifferentregions.Thereisnodoubt corporate earnings forecasts will be revised lower internationally as well as locally. In an environment of broad-based negative earnings revisions,theabilitytofindcorporatesreceivingoverlybearish/bullishexpectationspresentsaninvestmentopportunity set to take advantage of. The bearish investmentenvironmentinwhichwefindourselvestends to lead to behavioural market errors and poorly assessed earnings forecasts that in turn lead to mispriced equities.

Thelocalequitycompositionisdiversified,withsomecapital invested in global cyclical companies geared to the global economic cycle and exhibiting favourable earningsrevisionsprofilessuchasNaspers(andProsus) as well as platinum group metals (PGM) investments, alongside more defensive positions like AngloGold Ashanti, British American Tobacco, Gold Fields and Reinet Investments. We also have exposure to select ‘SA Inc.’ plays with decent relative earnings revisionsprofiles,tradingatreasonablevaluationsandwhere we also have high conviction in terms of balance sheet quality, including FirstRand and Sanlam. We also have an allocation to commodities, namely the NewGold and NewPlat ETFs.

We have maintained the material allocation to local government bonds. The events (including rating downgrades by both Moody’s and Fitch Ratings) of the last few months have had a meaningful negative impact on the local market. The impact that a weak structural backdrop (illustrated by budget and current account deficits),highrelianceonforeignfunderstosupportthe domestic market and the devastating impact of falling global economic activity (and subsequently the local lockdown) can have on domestic growth was painfully exposed over the last few months. The elevatedlocalyieldsandlargepremiumoverpeerswithasimilarriskprofilewerewhollyinsufficienttocompensate investors faced with a collapse in market liquidity and the sharp deterioration in local credit quality.Theselloffseenacrosstheassetclasshasleftus with materially higher yields and even larger potential compensation for the prevalent credit and inflationaryrisks.Weexpectoutsizedabsolutereturnsfrom this asset class, without understating the fact that our assessment of fair value (the appropriate yield to compensate lenders for risk) is now substantially higher. Going forward, we view the returns from local debt as a potentially attractive contributor to overall returns.

Balanced

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Performance review Amid the turmoil, your portfolio’s defensive qualities shonethrough.Performanceforthequarterwasflat,althoughsignificantlyaheadofthepeer-groupaverage, in one of the worst quarters for capital markets in living memory.

Assets such as the gold exchange-traded fund (ETF) and US long-dated bonds proved their worth in a portfolio context. Our holding in cash, particularly the US dollar, aided returns. In contrast, the local bond component yielded a negative return amid the deterioration in risk appetite for emerging market debt.

Stock selection was an important driver of portfolio returns during the quarter. Domestically focussed shares plummeted given the additional pressure on an already-fragile economy. Banks, credit retailers and propertycompaniesborethebruntofthesell-off.The portfoliohadverylowexposuretothesesectors.Although the shares have fallen, we are not interested in buying until there is clarity on the economic outlook. Dividends are highly vulnerable and dividend yields are not to be trusted.

We side-stepped almost all of Sasol’s (-88%) calamitous fall over the quarter, where a geared balance sheet and falling top line is causing earnings to implode.

Thebenefitoftheoffshorecomponenthavingaflexibleasset allocation came through strongly. A short position on the US benchmark S&P 500 amid the broadermarketweaknesswasbeneficialtoreturns.

Rand-hedge shares proved to be the most defensive area, with Naspers and British American Tobacco deliveringpositivereturnsintheextremelydifficultfinalmonth of the quarter.

Market background Thefirstquarterwasdominatedbythreeshockstomarkets: the coronavirus (COVID-19) global pandemic; an oil price war between major energy producing nations; and the consequent disorderly price action in markets, creating dislocation across all asset classes. As a result, central banks and governments moved to ease policy aggressively and on an unprecedented scale,tosupportthefunctioningoffinancialmarketsand assist households and businesses.

The US Federal Reserve (Fed) alone, for example, expanded its balance sheet by almost US$1 trillion in thespaceofjusttwo weeks.

Growth assets universally generated negative returns. Oil was by far the worst performing asset, with the oil price falling 70% from its peak due to falling demand and increasing supply. Equities struggled across the board, with almost all major indices posting double-digit losses. Developed market (MSCI World Index -21.1%) and emerging market (MSCI Emerging Markets Index -23.6%) stocks fell precipitously as markets factored in a challenging operating environment for most companies. In the US, the Dow Jones Industrial Average (-22.7%) and S&P 500 (-19.7%) indices recorded their fastest ever shift from bull to bear market. European stocks had to contend with all-time highs in volatility, while in Asia, Chinese stocks emerged on relatively stronger footing, with mainland China’s CSI 300 Index down 11.5%.

Theoverallmarketsell-offwasindiscriminateinnature.Instead of selling positions in very-low-yielding-deposits and money-market accounts, investors sold investment-grade debt in their scramble to raise cash. Short-maturityinvestment-gradefundssoldofffirst,before selling became indiscriminate and fast-paced. Long-dated corporate bonds also saw unprecedented volatility, initially dropping 24% before jumping back up nearly 9%. The ‘run-on-the-funds’ led to a liquidity downdraft – akin to a bank-run – and to major distortioninthemarket.Continuedcapitalinflowsintothe US government bond market saw 10 and 30-year Treasuries rally as their yields dropped to record lows (prices rise as yields fall) before pulling back in the second half of March. The Bloomberg Barclays Global AggregateBondIndexclosedflatat-0.3%.

That said, the US dollar demonstrated ‘safe haven’ characteristics, albeit with some volatility during March. The Japanese yen and gold also performed well in the end, though the latter’s price action proved unstable during the quarter.

Managed

Balanced

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The local equity market was not spared from the turmoil as the indiscriminatesell-offresultedinallsectorsendingthequarterinnegativeterritory–financials(-39.5%),resources(-26.7%)andindustrials(-8.4%).Listedproperty(FTSE/JSEAllPropertyIndex-48.1%) also weakened sharply during the period due to the lockdown implications on rental income, as buildings were placed under enforcedshutdowns.Localbonds(FTSE/JSEAllBondIndex-8.7%)were initially buoyed by a well-received budget statement, but the positive move was later retraced as emerging market debt fell out of favour as investors shifted away from risk assets. The sovereign credit rating downgrade by Moody’s Investors Service to one notch below investment grade also weighed heavily on sentiment, leading to significantsellingbynon-residentinvestors.

Outlook and strategy The global trends of deglobalisation, digitalisation and socialism have been reinforced by the impact of the coronavirus (COVID-19). The longest bull market run came to a screeching halt, with the sudden stop in the global economy culminating in the worst recession in living memory. It is unlikely to be business as usual for a while.

The South African economy was already in Intensive Care before the COVID-19outbreak.Ourbudgetdeficithasbeencontinuouslyworsening and is now forecast to be in excess of 10%. While the South African Reserve Bank (SARB) quickly moved to try to stabilise the bond market by promising liquidity, we are sceptical about the sustainability of this. The corporate credit market is also showing stress. The rand hasweakenedtonewlowsandunlessthedeficitissomehowcontained, it seems as though the path to a much weaker currency is inevitable. A huge IMF package could undo some of the damage, but we think this is unlikely. There is a long queue for help as things stand, and South Africa is unlikely to be at the front of it.

Theconflictbetweenthemedicalneedtolockdownsocietyandthedire impact it has on the economy is hard to resolve. Lockdowns do seem to have a positive impact on smoothing the hospitalisation curve – but not the yield curve. Business models cannot operate with zero revenue. Businesses will go broke quickly without top-line earnings. The longer the lockdown, the harder the road to recovery. Businesses and companies that are digitally based are in a far stronger position. Companies such as software companies, which do not rely on a global manufacturing supply chain, are better placed. Retail and property companies were already struggling globally before everyone got told to stay at home.


Naspers Ltd 4.9


B Deb

4.2



Plc

3.0

Newplat Etf 2.5

Nike Inc 2.4

Wal-mart Stores Inc 1.9

Assore Ltd 1.6

Clicks Group Ltd 1.6

Alphabet Inc 1.5

Balanced

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In terms of positioning, the portfolio had its lowest ever equity weightingintheheightofthesell-off.Wehavesinceincreasedtheequity weighting as market conditions eased on the back of extensive action by the US Federal Reserve (Fed). We were buyers of shares that have some top-line earnings growth and good balance sheets. In otherwords,wearebuyingthebestearningsrevisionswecanfind.The obvious examples are companies operating in the food and pharmaceuticals sectors and some telecoms companies. We are still underweight equities but are likely to remain overweight rand-hedge stocksgoingforward.Earningsrevisionsaresignificantlynegativeforlocal shares.

We will remain underweight local bonds on concerns over the budget deficit.Inflationislowandlikelytoremainsooverthecourseoftheyear.However,inflationisnottheissue.Ourpreferredbondexposureis through the US market, where currency risks are minimal, and the deficitisfundedatsub-2%whichhassinceexpandedinpartdueto stimulus.

It is hard to make the case for local listed property companies. They weresupposedtodeliverincome,butthatisnotgoingtohappenfor a while. The balance sheets are also highly geared.

TheassetallocationoftheportfolioishighlyflexibleandfactorssuchasCOVID-19highlightthedifficultywithhavingadogmaticviewofthemarketsandthebenefitsofdynamismandflexibility.TheliquidityinjectionsbytheFedandSARBhavehelpedmarketstostayafloat.Whilewecouldwellbethroughtheworstforfinancialmarkets,weremain cautious about the upside, so we remain defensively positioned.

Balanced

15

SA Equity3

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Performance reviewFor the quarter, the portfolio outperformed the benchmark.

Market volatility saw many shares and sectors fall out offavouroverthequarterassharepricesreflectedthelower growth reality and higher risk outlook. Not having exposuretoRedefine(-69%)andGrowthpointProperties (-42%) helped relative performance with the listed property sector coming under severe strain due to the lockdown implications on rental income as buildings were placed under enforced shutdowns. The underweightpositioninSasol,whichfellaremarkable 88% over the quarter, also boosted relative gains. Concerns over Sasol’s high debt balance, the lower oil price and the US Lake Charles Chemicals Project (LCCP) continuing to experience operational problems all weighed on the company’s share price. Our overweight positions in British American Tobacco andReinetfulfilledtheirexpecteddefensiveattributesand positively contributed to performance over the quarter.

Overweight positions in Impala Platinum and Anglo Platinum detracted from performance. Other detractors included our underweight positions in Vodacom and Shoprite, two of the handful of stocks that ought to perform well under lockdown conditions.

Market backgroundThe start to the 2020 calendar year will most certainly be an unforgettable moment in time for those that have lived through it. The impact of coronavirus (COVID-19) is heavily impacting economies and societies as it has spread from China to other regions across the globe – at the time of writing, another 209 countries. This unprecedentedperiodisreflectedinfinancialmarket moves seen over the quarter. The Dow Jones Industrial Average Index declined 22.7%, its worst quarter since the ‘Black Monday’ crash of 1987, while US yields fell to new all-time lows. In South Africa, the FTSE/JSEAllShareIndexdeclined21.4%overthequarter [Capped SWIX declined 26.6%], the second worst quarterly performance in 45 years.

While retrospective market comments may seem inapt amidthefluideconomicenvironmentastheworldgrapples with the disease, it still provides an important context of each country’s standing prior to the outbreak and what idiosyncratic considerations may differentiateeachoneinovercomingthecrisisinthecoming months.

In South Africa’s case, the country unfortunately already began 2020 on a weak footing. The economy had already slipped into its second recession in as many years, shrinking by an annualised 1.4% quarter on quarterinthefinalthreemonthsof2019–wellbeloweconomists’ forecast of -0.1% and mainly due to the rolling power outages which constrained several industries.

To add to the weak sentiment, Moody’s Investors Service downgraded South Africa’s sovereign credit rating to sub-investment grade. In the context of the weaker local and international growth outlook due to COVID-19, this did not come as a surprise.

Bothfiscalandmonetarypolicymoveshavebeencommendable amid the outbreak. National Treasury’s budget policy delivered in February had a more realistic outlook on the economy, with a clear target to tackle arguably the most important and challenging issue: public sector wages. This is critical to settle and stabilisethecountry’sbudgetdeficitoutlook–morethan ever before, given the pending growth shock expectedinthefirsthalfofthisyear.Meanwhile,onthemonetary front, the South African Reserve Bank (SARB) took proactive action in cutting the benchmark interest rate by 100 basis points (bps) in March. We expect more supportive policy action to be taken by the SARB in the coming months.

Lastly, perhaps the most commendable action taken by the country’s institutions was in the presidency. The swiftactiontocontaintheCOVID-19diseaseoutbreak in South Africa by announcing a national lockdown (far earlier than developed markets had at similar points) may impact economic growth, but surely avoids a larger economic contraction had the government not taken action at the time it did.

General Equity

SA Equity

17

SA Equity

Portfolio activity Duringthequarter,weboughtGoldFields,whoseearningswillbenefitfromthefirmergold price and expected steady operational performance. We also added to our holdings in British American Tobacco, whose earnings forecast will remain largely intactandwithanearningsrevisionsprofilewhichisattractiverelativetothemarket.We reduced exposure to luxury goods maker Richemont, a global cyclical name whose earnings will disappoint as falling economic growth, less tourism and waning consumerconfidencewillweighonconsumers’propensitytobuyluxurygoods.

Outlook and strategyThese are extraordinary times. Wherever you may be reading this (most likely in your homes) as South Africa’s lockdown period elongates, we are conscious that the impact of COVID-19 could have a lasting impact on how the world conducts business. Currently, the market’s near-term focus is on signs of the pandemic being brought under control and the subsequent outlook scenarios on risk and global growth. Any datashowingaslowdownintheCOVID-19progressionwilllikelymovemarketspositively, and the opposite could see further selling of risk assets. We expect volatility to persist, which now is at its highest levels since the Global Financial Crisis.

Whatisclear,isthattheworldissettoexperienceasignificantshocktogrowthinthefirsthalfoftheyear–particularlyinthesecondquarter,wheresomeestimatesareforglobal growth to contract by as much as 8%. What blurs the economic outlook is that growth is likely to be asynchronous, with each country facing its own recovery timeline back to normalisation. This poses a risk to any forecast of economic growth withhighconfidence.

In South Africa the economic contraction is expected to be more pronounced, with estimates of a 12% contraction in the second quarter leaving the calendar year with negativegrowthofpotentially6%.Allpriorforecastsofthebudgetdeficithavebeenlowered and debt-to-GDP metrics increased.

In such an environment, we believe it is paramount we remain focussed on our disciplined investment process through the cycle (picking stocks with positive earnings revisions at a reasonable valuation) even in the face of such event risks. Our combinationofusingobjectivefactor-basedscreeningwithbottom-upfundamentalresearchallowsustocutthroughmarketinefficiencies.Macroeconomicvariablesandeventriskallhaveasignificantimpactonstockreturns.Itisthustempting to forecast these and position the portfolio accordingly. Our experience, however,isthatthesevariablesandrisksareextremelydifficulttoforecast(evenmoresointhecurrentextremelyvolatileandfluidenvironment),andtheoutcomeistypically binary.

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There is no doubt that corporate earnings forecasts will be revised lower internationally as well as locally. In an environment of broad-basednegativeearningsrevisions,theabilitytofindcorporatesthatarereceivingoverlybearish/bullishexpectationspresentsexcitinginvestment opportunities. The bearish investment environment in whichwefindourselvestendstoleadmanyinvestorstomakebehavioural errors and poorly assessed earnings forecasts that in turn lead to mispriced equities.

“Mispriced” in this environment becomes a critical judgement to make. The concept of reasonable valuation captures many measures and may vary between industries. One of the most pertinent ones at present, in our opinion, is an assessment of balance sheet risk and whether the market has correctly factored that risk into a stock’s valuation or not. This without a doubt applies to all industries. Sadly, such an environment could very well lead to corporate failures across theworld.Avoidingthosestocksisjustasimportantasfindingtheoutperformers.

Both the assessment of earnings expectations and reasonable valuations requires rigorous analysis and scenario reviews – our investment team and investment process are highly experienced and specialised in in this regard. The deep, negative market returns thus far in 2020 is disappointing for all investors. We believe our investment process and philosophy should ensure consistency in our portfolio construction and help us navigate the challenging terrain. Our aim is to continue to deliver alpha over the medium term, including and in-spite of the volatility we have thus far experienced in early 2020.


Naspers Ltd 12.1

Prosus Nv 4.9


Plc

4.2


Anglo American Plc 3.3

Firstrand Bank Ltd 3.0

Sanlam Ltd 2.6

ImpalaPlatinumHoldingsLtd 2.4

Sibanye Stillwater Ltd 2.0

Gold Fields 1.8

SA Equity

19

Value

In particular, underweight positions in FirstRand (-36%), Standard Bank (-39%), Santam (-35%), Nedbank (-61%) bolstered relative returns.

The underweight position in MTN Group (-41%) was also a top contributor to relative performance over the quarter.

Portfolio activityWe concluded our selling of both Impala Platinum and Sibanye-Stillwater at very attractive prices in January. Asthequarterprogressed,wetookprofitsonNetcareand reduced our Standard Bank Group position. We redeployedtheproceedsintoAngloGoldAshantiand DRD Gold (which both initially fell with the market), Sappi (after it had fallen another c.50%) and a new small position in MTN Group at a very attractive level of R30.

Outlook and strategyIn two short months the world and the investment outlookhaschangedquitesignificantly.COVID-19isthe catalyst that will expose the global economy’s Achilles heel – a global debt-to-GDP ratio of 230%, whichhasrisenfrom180%beforethe2008/9GFCandis currently the highest debt-to-GDP ratio in economic history. We have long written and worried about this position, but 12 years of central bank intervention has kept real rates at zero (or below) in the developed world and has not only kept the show on the road but has fueledtheadditionoffurthersignificant debt.

The unexpected arrival of COVID-19 results in a ‘dead stop’ moment for the world’s economy – something it canill-affordgiventhecashflowsthatareneededtosupport the mountain of both corporate and sovereign debt. A 10% fall in global revenues implies a much greaterfallincashflowsasaresultoftheleverageoffixedcosts–afigureofc.30to40%declineinfreecashflowswouldnotbeinconceivable.This30to40%fall in the enterprise value (EV i.e. debt plus equity) implies that the equity ‘slice’ of leveraged corporates is wiped out as the level of debt remains unchanged. This isthekeytonavigatingthenexttwelvemonths–anystockthathassignificantdebtthatneedstoberolled over the next 12 months must be avoided.

SA Equity

Performance reviewAfteroutperformingoverfiveofthelastsevenquartersyour portfolio underperformed its benchmark over the three months of 2020. It was a strange quarter, divided intoabullishfirstthird,overwhichtimetheportfoliolost ground mainly as a result of having sold out of platinum entirely and this sector continuing to run strongly. The last two thirds of the quarter were characterised by a sharp contraction in markets as the coronavirus(COVID-19)pandemicintensified.Globalequities (MSCI ACWI, -21.4%) recorded their worst quartersincetheglobalfinancialcrisis(GFC).Developed market equities (MSCI Developed Market Index) closed 21.1% lower, while emerging market equities(MSCIEmergingMarketIndex)cameworstoff,down 23.6%.

Thesell-offwasindiscriminate(withtheexceptionofNaspers/Prosus).Thiswasmainlydrivenbyanextremeliquidity shortage and as a result your portfolio fell in line with the market during these two months, thus underperformingforthequarter.ThebenchmarkFTSE/JSE All Share Index lost 21% of its value over the quarter, whiletheSWIXwasworseoff,down23%overthesameperiod.Atasupersectorlevel;financials(-39.5%)werethe hardest hit, resources extended weakness, falling 25.3% as lockdown measures sapped demand, while industrials outperformed, down only 8.4%.

Key negative contributions:The largest detractors over the quarter were our holdings in Sappi (which fell 52%), Brait (-60%) and Intu Properties (-84%).

Not holding the largest stock in the index, Naspers (which rose 11%) also contributed materially to underperformance.

Key positive contributions:The defensive attributes of gold helped the portfolio during this extremely challenging market environment. Our overweight positions in DRG Gold (+40%) and AngloGoldAshanti(+1.4%)werebeneficialtoreturns.

Theunderweightexposuretofinancialsalsocontributed,withthesectorsufferingheavylossesover the quarter owing to deteriorating local growth conditions, extended local currency weakness and negative rating action.

20


Sappi Ltd 10.7

Exxaro Resources Ltd 10.2

Anglogold Ashanti Ltd 9.4

Drdgold Ltd 6.8

MassmartHoldingsLtd 5.7

Brait S.a. 4.9

Mtn Group Ltd 4.5

Oceana Group Ltd 4.3

Reunert Ltd 3.2

Truworths International Ltd 2.7

For this reason we hold no banks and property stocks in the portfolio (with the exception of the small Intu Properties holding) – these are the two sectors where leverage is part of the business model and needtobeavoidedintheupcomingdeflationarycollapse,despitetheoptics of attractive (historic) valuations. Our four major positions are discussed below:

Gold-thisisasignificantportionoftheportfolio.Wehaveincreasedour holdings this quarter via purchases of AngloGold Ashanti and DRD Gold.Giventhatthelevelofdebtishigherthan2008/9andtheproblem today (in our opinion) is larger, action from the world’s central banks(monetarypolicy)andgovernments(fiscalpolicy)hastobebigger.Thisisreflectedbythelevelofquantitativeeasing(QE)anddirectfiscalstimulusannouncedbypolicymakersthusfar.Theplan(not unlike before) is for central banks to print unlimited amounts of moneytobuyunlimitedamountofbondstofinanceever-growingbudgetdeficits(nowupto15%ofGDPinsomecountries)atratesthatare substantially below the level they would be if the market was setting them. This QE extends to the corporate debt market, where the printed money will buy bonds in bankrupt companies at narrow spreadstoalreadymispricedsovereignbonds.Theneteffectisthedebasement of paper money of all of the countries involved in these actions – US dollars , euros and yen are the leaders of QE and given thesecurrenciesrepresentsubstantiallyallofthefiatmoneyoftheworld, the world’s paper money will need to devalue against the only other viable currency i.e. physical gold. We therefore see the gold price going substantially higher. And with gold shares not rising so far inthecrisisandtradingataround7timescashflowatspot(atthelowend of their valuation range of the last 10 years), we believe they represent an excellent investment opportunity right now.

Sappi - another sizeable position in the portfolio: Sappi’s share price has fallen 80 percent over the past 18 months and in US dollars is trading at a 30-year low. While Sappi’s relatively high level of debt (3.5 timesdebt/EBITDAcurrently)contrastswithourphilosophyofavoidingindebted companies, we are not concerned as this level of debt to EBITDA is at spot prices where DWP (dissolving wood pulp) is at an all-time low. In addition, two-thirds of Sappi’s debt pile is well termed out bondsatfixedratesandthecompanyhasjustsecureda15-monthrelaxation of the covenants on the remaining shorter-term debt. Lastly, all of Sappi’s plants are still running; 20% of their costs are energy (which has fallen with the oil price) and their two large South Africa-basedmills-whichmakeuptohalfoftheirprofit-arebenefittingfromthe weak rand.

SA Equity

21

SA Equity

Small-cap stocks - these account for a substantial portion of the portfolio: Major holdings are Brait, Oceana Fishing, Reunert, Caxton, Cashbuild,LewisandGemfields.Thesesharesarealldownbetween50 and 95% and are trading at all-time low valuations. While most of themare‘SAInc.‘shares,webelievetheyaresufficientlycheaptoweather the current recession. Note that four of the shares above have net cash and the other two manageable debt positions. Outside of these major holdings, only ArcelorMittal and Intu Properties (c.2% of the portfolio altogether) have too much debt, in our view.

Inconclusion,afteraverysuccessful2019,thefirstquarterof2020hasbeendifficult,withourgoldpositionnotsufficientlyprotectingusand our remaining cheap shares getting cheaper. We have used this opportunity to buy more gold shares and more of the cheap shares we thinkwillmakeitthroughwhatweexpecttobeaverydifficultperiod.In time we fully expect the portfolio’s value to be unlocked.

22

Performance reviewFor the quarter, the portfolio strongly outperformed the benchmark, in an extremely challenging market environment.

The underweight position in Sasol was the biggest contributor to relative performance over the period. The turmoil continued for the company, owing to a myriad of headwinds such as weaker-than-anticipated rand oil prices, a collapse in demand for its chemicals and oil products, as well as idiosyncratic factors such as cost overruns and operational delays at its Lake Charles Chemicals Project in the US. The overweight holding in British American Tobacco was another positive contributor to performance as its defensive attributes shone through, with the tobacco industry one of a handful of industries seeing positive sales during the lockdown. In addition, the overweight positionindiversifiedminerAssore,supportedgainsfollowing news that the Sacco family intends to take the business private. The share rallied 82% on the news.

More negatively, overweight positions in Impala Platinum and Anglo American Platinum were some of the biggest detractors from performance, while not holding AngloGold Ashanti weighed on relative gains asbullioncontinuedtobenefitfromrisk-offsentiment.Furthermore, not holding Vodacom Group and Shoprite (two of the handful of stocks that ought to perform well under lockdown conditions) also detracted from relative performance.

SignificantpurchasesovertheperiodincludedCapitecBankandNaspers,whilesignificantsalesincludedMTNGroup and British American Tobacco.

Market backgroundThe ‘downside risks’ cited by the US Federal Reserve (Fed)followingthefirstemergencyratecuton 3 March 2020 have fully materialised into a humanitarian and economic crisis in a matter of weeks. Indeed, Fed Chair Jerome Powell remarked late in March that the US economy may well be in a recession. The manufacturing PMI slid into contractionary territory in March, coming in at 49.2 from 50.7 in February (the 50-mark separates contraction from expansion). The readingreflectedthequickestdeteriorationinoperationssincetheglobalfinancialcrisis.

Active Quants

US job claims shot up to 3.3 million (6.6 million by end of March) on the back of the coronavirus (COVID-19) shutdown–thefirstrealglimpseofdamagetotheUSeconomy at the time. The Fed was quickest out the gates among the leading central banks, and by quarter-end had slashed rates by a cumulative 150 basispoints(bps),committedtounlimitedquantitative easing (QE) and an unprecedented venture into corporate bond purchases following congressionalapproval.Onthefiscalside,theWhiteHouseagreedaUS$2trillionstimuluspackageinorderto shore up the defence against COVID-19.

Europe’s economic conditions have severely degenerated since the outbreak, with many member states bringing their economies to a halt in order to tackle the health crisis. The infection rate on the continent surpassed 100,000 with around 75% of the cases coming from the four major economies of the region. The manufacturing PMI fell to 44.8 in March, from 49.2 in the previous month, although ahead of consensus expectations of 39.0. This was the sharpest pace of contraction in operations since July 2012 as COVID-19 has led to widespread disruptions to business activity in the area. The European Central Bank (ECB) shocked global markets as it launched the audacious Pandemic Emergency Purchase Programme, which comprises an expansion of quantitative easing by €750 billion over the next nine months in addition to the €120 billion announced earlier in March. Policymakers are, however, mindful that monetary policy alone will need to be supported byacoordinatedfiscalresponsebymemberstates.Thus far, the lack of any conclusive outcomes from EU meetings highlights the existing deep divisions within the EU regarding the degree to which common resources ought to be deployed to alleviate the economic devastation brought on by the pandemic. Countries such as Germany and other northern states have rejected calls for the issuance of joint debt which has been dubbed ‘coronabonds’.

While China was initially the hardest hit economy from the deadly spread of COVID-19, the country now seems to be slowly returning to normalcy, following strict and intensive lockdown measures implemented by authorities.

SA Equity

23

Assuchthereboundintheofficialpurchasingmanagers’index(52inMarch)fromrecord lows in February (35.7) was not surprising, although the magnitude of the recovery surprised ahead of consensus expectations. This is another example of how effectivecontainmentmeasuresinacountrycanleadtoaquickerresumptionineconomic activity. China’s recovery has also been supplemented by a ramp up in stimulus measures. That said the People’s Bank of China has refrained from pronouncing unlimited quantitative easing as evidenced by other central banks in developed markets.

InSouthAfrica,theweaknessinthelocaleconomywillnodoubtbefurtherintensifiedby the strict lockdown measures implemented by government on 27 March 2020, which has sent the entire economy into hibernation, barring essential services. The SouthAfricanReserveBank(SARB)cutthebenchmarkinterestrateby1%to5.25% at its 19 March Monetary Policy Committee (MPC) meeting. Following extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support South African government bonds in the secondary market. The SARB, however, emphasised that this is a monetary policy reaction designed to facilitate the transmission of monetary policy–notQEormonetizationofthedeficit.Inwhatfeltmorelikeasideshowamidthe coronavirus outbreak, ratings agency Moody’s unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negativeoutlookwaskeptinplace,foreshadowingtheriskofafurtherdowngrade within the next 18 months. The move meant that South Africa will no longerformpartoftheFTSEWorldInvestmentGradeBondIndex(WGBI)effective1 May2020.

Infinancialmarkets,riskassetsenduredoneoftheworstquartersonrecord.Globalequities (MSCI ACWI) plunged -21.4%, lows last seen during the great recession. Developed market equities (MSCI Developed Market Index) closed 21.1% lower, while emergingmarketequities(MSCIEmergingMarketIndex)cameworstoff,down23.6%.In SouthAfrica,theFTSE/JSEAllShareIndexdeclined21.4%overthequarter[Capped SWIX declined 26.6%], the second worst quarterly performance in 45 years.

Outlook and StrategyThe portfolio’s investment philosophy and process aim to deliver consistent returns for investors. We follow a multi-style investment approach which is dynamically adjusted to ensure that relative risk is actively managed throughout the business cycle. We prefer shares that are trading at a discount relative to the market.

Some of the portfolio’s largest overweight positions include Anglo American Platinum andProsus,whileitssignificantunderweightholdingsincludeStandardBankGroupand FirstRand. In particular, Anglo American Platinum exhibits strong quality attributes, while Prosus is showing strong relative price momentum. In contrast, Standard Bank Group displays poor relative price momentum and FirstRand scores poorly on relative valuations.


Naspers Ltd 10.0

Prosus Nv 9.0

Anglo American Plc 7.9


Plc

7.7


Anglo American Platinum Ltd 4.7

CapitecBankHoldingsLtd 4.0

Clicks Group Ltd 3.6

RmbHoldingsLtd 3.6

Sanlam Ltd 3.5

SA Equity

24

Performance review The market moves witnessed so far this year may well be remembered for the rest of our lives. Global markets had initially downplayed the potential impact and spread of the coronavirus (COVID-19) outside of China. New cases in other regions, however, quickly dispelled that narrative as the reality of a potential health crisis began to permeate the discourse. Risk assets plunged as the virus forced an unprecedented sudden halt to large swathes of the global economy.

Globally, central banks have responded by cutting rates and introducing huge stimulus packages to aid a dwindling global economy. In South Africa, the economic shock has added to what was already a challenging backdrop. Before the outbreak, the domestic economy had slipped into its second recession in as many years, shrinking by an annualised 1.4%quarteronquarterinthefinalthreemonthsof2019. This was mainly due to rolling power outages, severely constraining several industries. The weakness in the local economy will no doubt be further intensifiedbythestrictlockdownmeasuresimplemented by government on 27 March 2020, which have sent the entire economy into hibernation, barring essential services.

In response to the negative growth shock and benign inflationprofile,theSouthAfricanReserveBank(SARB)cut the benchmark interest rate by 1% to 5.25% at its 19 March2020monetarypolicycommittee(MPC)meeting. Following extensive engagement with market participants, the SARB also increased and extended the tenor of its repo operations and took the historic step to support South African government bonds in the secondary market. The SARB, however, emphasised that this was a monetary policy reaction designed to facilitate the transmission of monetary policy – not quantitativeeasingorthemonetisationofthedeficit.

Property Equity

Ratings agency Moody’s Investors Service unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negative outlook was kept in place, foreshadowing the risk of a further downgrade. The movemeantthatSouthAfricawillnolongerformpart of the FTSE World Government Bond Index (WGBI),effective1May2020.

Against this backdrop, global equities (MSCI ACWI -21.4%) recorded its worst quarter since the global financialcrisis(GFC)inUSdollarterms.TheSouthAfricanequitymarketfollowedsuit,withtheFTSE/JSEAll Share Index losing 21.4%. Domestic bonds also retreated, largely on the back of foreign selling which saw the yield on the 10-year government bond spike upwardsbyaround300basispoints,withtheFTSE/JSEAllBondIndexshedding8.7%overthefirstquarter.The listed property market was, however, the worst affectedlocalassetclass,withtheFTSE/JSEAllProperty Index declining 48.1% over the three months.

For the quarter, the portfolio underperformed the benchmark.

Key positive contributions:RedefinePropertiescontributedpositivelytoperformance as we built an overweight position as the stock was bottoming and participated in the rebound in its share price.

The long-standing overweight allocation to defensive German real estate company Sirius Real Estate also added to returns.

Key negative contributions: The largest detractors of the quarter were two overweightpositionsinretail,namelyHypropInvestmentsandHammerson.Retaillandlordsarelikelytoexperiencemoreoftheimmediateadverseeffectsof lockdowns as tenants are unable to trade. Both companies traded well below our fair values before the coronavirus crisis.

SA Equity

25

Portfolio activityWe have been actively trading to reduce risk in certain areas and to take advantage of price dislocations. The market remains very volatile, andaftertheinitialselloff,hasnowmostlydifferentiatedbetweenhigher and lower quality companies. To a large extent, the more defensivecompanieshavenowruntheircourseinourviewandofferless value but more certainty.

OurlargestacquisitionhasbeenRedefineProperties,wherewehavemoved from an underweight to an overweight position. The company hassoldoff79%fromthebeginningoftheyear.Ouranalysisofthecompany balance sheet and earnings prospects, together with its valuationindicatedthiswasunjustified.Factoringinsustainableearnings, together with room to deleverage, we believe the company will re-rate based on the aforementioned factors. As at quarter end, thecounterwasup49%offitslows.

WereducedthepositionsinHypropInvestmentsandHammersonmarginally when the crisis started; however, considering the pace of thesell-off,westoppedsellinggiventhevaluation.Wecontinuetobelievethesecompaniesofferattractiveabsoluteandrelativereturnprospects going forward. Although retail has its challenges, the lockdown has shown consumers’ desire to not do everything from home, and to continue to go to the shops (once allowed) and engage with the rest of society in common-use areas. This plays into the thesis of both companies as they transform from being retail centric to community centric.

Outlook and strategy Thepropertysectorhassufferedfromanumberofsetbacksoverthelast few years, including deteriorating fundamentals, governance and reporting-related concerns, rebasing of earnings, and the introduction of pay-out ratios. Prior to COVID-19, the South African property sector was on a slow road to recovery as many items appeared to be capturedinvaluationsandreflectedexpectationsofmoresustainableearningsprofiles.

The current crisis is, however, unprecedented, particularly for real estate markets where buildings are under enforced shutdowns. In our view, the obvious near-term impact is on the retail and hospitality sectors given the inability of many businesses to trade, but we have no doubt it will impact all sectors over time.

SA Equity


Growthpoint Properties Ltd 14.5

Nepi Rockcastle Plc 11.9

RedefinePropertiesLtd 10.0

Mas Real Estate Inc 6.4

Sirius Real Estate Ltd 5.8

Resilient Prop Inc Fund Ltd 5.4

HypropInvestmentsLtd 5.1

Capital & Counties

Properties

4.9

Investec Property Fund Ltd 4.5

Equites Property Fund Ltd 4.2

26

Beyond the near-term impacts of a forced shutdown, the crisis is boundtohavealonger-termandlastingeffectontheeconomyandallproperty sectors. Demand will be subdued across most occupational markets and will result in muted rental growth prospects. Vacancies arelikelytoincreaseaslowerqualitytenantsfail.Theofficesectorisvulnerable over the medium term, with already high vacancy rates of 12% across the country and 20% in Sandton. Rentals are likely to remain under pressure for some time as supply continues to be digested.

Our initial analysis indicates an approximate 20% fall in earnings for the sector over the next 12 months, which reduces to an 11% drop in earnings for the following 12-month period relative to pre-pandemic estimates. Dividends are likely to be cut by more than earnings over theneartermasthisisthemostefficientwayofpreservingcashanddeleveraging at current valuations. Unsurprisingly, numerous companies have already withdrawn or postponed dividends. This, however,willneedtobeconsideredrelativetotheminimum75%pay-out requirement to preserve the REIT tax status, unless any dispensations are given by the regulators (which are being sought). As thelockdowniseasedandultimatelylifted,weexpectthedefensive characteristics of real estate to come to the fore, owing to the contractual revenue nature and real asset underpin. Notwithstanding a potential short-term income gap, the long-term income-generating ability of the underlying assets remains in place.

During this time, balance sheets are of obvious concern. The sector is at its highest leverage level over the past decade and a half, with an average loan-to-value ratio (LTV) of 37% and interest coverage ratio (ICR) of 3.7x. We have, however, conducted stress testing on all of the companies in the sector. A 20% drop in asset values would raise the sector LTV to 44%, which on average is below covenant levels. These range from 45-70%. Additionally, ICRs remain above covenant levels, which are in most cases 2x. Our analysis also shows limited near-term liquidityorrefinancingissues,andtodate,boththebankingandbondmarkets have remained open and continue to actively provide liquidity. Our analysis does not indicate a systemic debt issue for the sector, and particularly for companies in the portfolio. Although the LTV ratios are high relative to history, they are still within comfortable levels and all companies can continue to service interest payments. Additionally, pay-outratiosand/orskippingofdividendscouldreducedebtlevelsifneed be.

SA Equity

27

Inourview,thepoorfundamentalsareoffsetbyanappealingvaluation. The sector trades on a historical yield of 20% and a 55% discount to net asset value (NAV). Our forecast one-year forward earnings yield is 16%. Our year-two forecast earnings yield is 18%, as rental concessions are rolled out of the base. Dividend yields are likely to be lower given pay-out ratios and, in some instances, dividends may be withheld to retain cash. On a sustainable earnings basis, like-for-like rentalgrowthisforecasttobebelowinflationforthenexttwotothreeyears, while deleveraging will further dampen growth prospects.

Webelievethesectoroffersattractivevalueoveramedium-tolong-term time horizon, primarily underpinned by yield, together with the prospect of the sector re-rating as more clarity on operational and financialmetricsisascertained.Webelievenear-termvolatilityislikelyto persist given current macro conditions. Over the medium term, we remainconstructiveofareturntoearningsanddistributiongrowthoffa sustainable income base as the economy recovers.

Whilemarketsandeconomicconditionsremainfluid,wecontinuetoassess the portfolio risks and actively screen for opportunities that marketdynamicssuchasthesearelikelytooffer.Ultimately,weaimtoprovide our clients’ portfolios with the best risk-adjusted medium- and long-term outcomes.

SA Equity

As the lockdown is eased and ultimately lifted, we expect the defensive characteristics of real estate to come to the fore.

28

SA Fixed Income4

28

29

The ‘downside risks’ cited by the US Federal Reserve (Fed)followingthefirstemergencyratecuton 3 March 2020 have fully materialised into a humanitarian and economic crisis in a matter of weeks. Indeed, Fed Chair Jerome Powell remarked late in March that the US economy may well be in a recession. The manufacturingPMIslidintocontractionaryterritoryin March, coming in at 49.2 from 50.7 in February (the 50-mark separates contraction from expansion). The readingreflectedthequickestdeteriorationinoperationssincetheglobalfinancialcrisis.USjobclaims shot up to 3.3 million (6.6 million) by end of March) on the back of the coronavirus (COVID-19) shutdown–thefirstrealglimpseofdamagetotheUSeconomy at the time. The Fed was quickest out the gates among the leading central banks, and by quarter-end had slashed rates by a cumulative 150 basispoints(bps),committedtounlimitedquantitative easing (QE) and an unprecedented venture into corporate bond purchases following congressionalapproval.Onthefiscalside,theWhiteHouseagreedaUS$2trillionstimuluspackageinorderto shore up the defence against COVID-19.

Europe’s economic conditions have severely degenerated since the outbreak, with many member states bringing their economies to a halt in order to tackle the health crisis. The infection rate on the continent surpassed 100,000 with around 75% of the cases coming from the four major economies of the region. The manufacturing PMI fell to 44.8 in March, from 49.2 in the previous month, although ahead of consensus expectations of 39.0. This was the sharpest pace of contraction in operations since July 2012 as COVID-19 has led to widespread disruptions to business activity in the area. The European Central Bank (ECB) shocked global markets as it launched the audacious Pandemic Emergency Purchase Programme, which comprises an expansion of quantitative easing by €750 billion over the next nine months in addition to the €120 billion announced earlier in March. Policymakers are, however, mindful that monetary policy alone will need to be supported byacoordinatedfiscalresponsebymemberstates.Thus far, the lack of any conclusive outcomes from EU meetings highlights the existing deep divisions within the EU regarding the degree to which common

resources ought to be deployed to alleviate the economic devastation brought on by the pandemic. Countries such as Germany and other northern states have rejected calls for the issuance of joint debt which has been dubbed ‘coronabonds’.

While China was initially the hardest hit economy from the deadly spread of COVID-19, the country now seems to be slowly returning to normalcy, following strict and intensive lockdown measures implemented byauthorities.Assuchthereboundintheofficialpurchasing managers’ index (52 in March) from record lows in February (35.7) was not surprising, although the magnitude of the recovery surprised ahead of consensus expectations. This is another example of howeffectivecontainmentmeasuresinacountrycanlead to a quicker resumption in economic activity. China’s recovery has also been supplemented by a ramp up in stimulus measures. That said the People’s Bank of China has refrained from pronouncing unlimited quantitative easing as evidenced by other central banks in developed markets.

In South Africa, the weakness in the local economy will nodoubtbefurtherintensifiedbythestrictlockdownmeasures implemented by government on 27 March 2020, which has sent the entire economy into hibernation, barring essential services. The South African Reserve Bank (SARB) cut the benchmark interest rate by 1% to 5.25% at its 19 March Monetary Policy Committee (MPC) meeting. Following extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support South African government bonds in the secondary market. The SARB, however, emphasised that this is a monetary policy reaction designed to facilitate the transmission of monetary policy – not QE or monetization of the deficit.Inwhatfeltmorelikeasideshowamidthecoronavirus outbreak, ratings agency Moody’s unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negative outlook was kept in place, foreshadowing the risk of a further downgrade within the next 18 months. The move meant that South Africa will no longer form part of the FTSE World Investment GradeBondIndex(WGBI)effective1May2020.

SA Fixed Income

Market background

30

Performance reviewFor the quarter, the portfolio performed broadly in line with the benchmark.

AfteraprettygoodstartinJanuaryandadecenteffortbyNationalTreasurytodeliver a credible budget in February, March saw a sharp deterioration in risk appetite for emerging market debt (EMD) and currencies as the coronavirus began to take its toll. The positioning adjustment in capital markets was brutal and South African assets werenotsparedinthecarnage.Theunprecedentedselloffingovernmentbondssawthe benchmark JSE ASSA All Bond Index drop 12.2% over the quarter. Our defensive duration positioning helped relative performance. Our option strategies also helped protect some of the capital in the portfolio.

Inflation-linkedbonds(ILBs)gotcaughtinthesamecrosscurrentsandtheytooended up dragging on performance.

The yield-enhancing corporate bond allocation continued to add value over the quarter.

Our portfolio construction tries to avoid quarterly drawdowns and eliminate 6-monthly drawdowns completely. We discuss our views going forward in more detail below,butwithmarketvaluationswheretheyareandtheincomeonoffergoingforward, we anticipate returns improving over the remainder of the year.

Outlook and strategy

GlobalThe global economy remains in critical condition, pummelled by an unrelenting, highly virulent virus which has forced economies into lockdown, and the global economy slidingtowardrecession,withonlythedatanowlefttoconfirmwhatforeveryoneisby now a foregone conclusion. The humanitarian cost has been devastating as the total number of infections topped a million infections globally, with more than 190 countrieswithconfirmedcases,andmorethan100,000deathsatthetimeofwriting.The disruption to labour, business operations and supply chains is unprecedented, and the intensity of this shock to the system will ultimately be a function of containment measures, policy responses by central banks and governments, as well as corporate and consumer behaviour as the pandemic plays out across geographies. At the moment, the implications for world economies remains uncertain given that the depth and duration of the virus remains a moving target. The ‘sudden stop’ in the world economy (which is loosely described as the immediate halt of any economic activity resulting in supply and demand shocks) could see an avalanche of bankruptcies and job cuts which could well undermine the recovery in growth once thecurvebeginstoflatten.Thusfar,thenegativeimpactonregionshasbeenstaggered, starting with China in February, then moving to neighbouring Asian countries in March, and spreading to Europe, the US and the rest of the world. Central bankshavemovedaggressivelytoprovideliquidity,whilegovernmentofficialshavethusfaroperatedwithintheirmeanstoprovidefiscalstimulusandsupporttohealthcare operations.

Dynamic Bond

SA Fixed Income

Our focus as always is more than just on returns, but also carefully looking at the risks and preserving capital.

31

The US stimulus measures rolled out in March have been the largest in the post-war era. Fiscal spending and loans are on track to be in the range of 15% – 20% of GDP (at the time of writing) this year and most governments around the world are likely to experience similar surges in their government debt-to-GDP ratios. The Fed’s balance sheet could also rise by between US$2 – 3US$ trillion this year alone.

Across the Atlantic, Europe became the epicentre of the virus, with the euro economy in freefall as borders, factories and households are forced to padlock. While we expect the ECB to remain true to its commitment to do whatever is necessary, Christine Lagarde will have to navigate scepticism within her own ranks to expand monetary policy further as the crisis deepens. The concern for the euro area remains the deep divisions among EU member states, with countries only focused on their own domestic policy responses to the pandemic. We believe sooner, rather than later, EU memberstateswillhavetoputtheirdifferencesaside,and devise a coordinated policy response alongside monetary policy, if they intend to piece the economy back together after this calamity.

Inemergingmarkets,Chinawasthefirsteconomyforced into lockdown during the outbreak, and now appearsontracktobethefirsttostagearecovery.The measuredreopeningoffactoriesandproductioniscurrently underway and metrics such as real estate sales,coalusedinpowerstationsandtrafficcongestion appears to be picking up, signalling a modest pickup in domestic demand while the rest of the world is in hibernation. Beijing has rolled out an extensive range of measures to counter the massive drag on economic activity since the outbreak. Thus far, thesemeasureshaveprovedeffective,butwedonotexpect a quick V-shaped recovery given the rest of the worldisyettoflattenthecurve.WealsodonotexpectChina to launch a bazooka of stimulus as it did back in 2012, given the amount of debt it has ramped up since, and the priority by Beijing to rein in credit growth. While select emerging markets in Asia will have room to support their economies, other emerging regions such as Latin America and Africa have very little in their arsenal to mount a decent defence.

LocalSouth Africa’s economic situation has severely deteriorated. The exogenous shock to demand from the coronavirus was already having a negative impact in the real economy and this will unfortunately be exacerbated by the lockdown and declaration of a ‘state of disaster’. For the lockdown has already had severe impacts for agricultural exports, the tourism industry, hospitality, and sectors reliant on imports. Although the rating downgrade to sub-investment grade by Moody’s was not overly surprising, it could not have come at a worse time. While structural reforms are needed to boost long-term sustainable growth, the advent of the coronavirus now calls for bothfiscalandmonetarystimulusintheshortterm.South Africa already has very limited room to manoeuvrehere,sofiscalstimulusneedstobetargetedtovulnerablehouseholdsandfirmsinordertoaccelerate and strengthen the recovery in 2021. Unlike most developed countries, South Africa does not have the luxury of issuing bonds at 0%, so the country might need to rely on institutions such as the IMF and World Bank or the BRICS Development Bank to assemble a relief package that will support labour, households and small and medium enterprises. On the monetary front, we believe the SARB still has space to cut interest rates further.Thisfollowsthedisinflationaryimpulsefromthecollapse in the oil price. The only scenario where we forecastinflationthreateningthetopendoftheSARB’s3% – 6% target band is where oil virtually triples and the rand goes to R21 against the US dollar. Most plausiblescenariosshowinflationbelowthemid-pointof the band, and negative growth of between -6% to -7% for the year, depending on how quickly we get systems back up and running. This leaves the SARB with room to cut rates materially from the current level of 5.25%, possibly to below 4%, most likely at the May scheduled meeting, but possibly even sooner.

PositioningThe South African Government bond market, much like most markets globally, unravelled during the month of March. Part of the repricing is a legitimate fundamental deterioration due to the worsening growth outlook and itsnegativeimpactonanalreadystrainedfiscus,butbyfarthemostsignificantpartoftherepricinghasbeenaliquidity shortage emanating from foreign bond holders.

SA Fixed Income

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Maturity bucket allocation

1-3 years, 10.3% 3 - 7 years, 24.4%

7 - 12 years, 19.3% 12+ years, 38.0%

Cash, 8.0%

Source: Ninety One as at 31.03.20.

ThishasnowbeenrectifiedwithswiftactionfromtheSARB. From a duration perspective, we came into the yearwiththedurationpositionflattotheALBI,andmost of it in the front end and belly of the yield curve (this is 10-year maturity or less that is most exposed to SARB rate decisions). Following the February budget announcement by the National Treasury (which we viewed positively), we started to reduce risk due to the deteriorating external environment on the back of COVID-19 and excessive market volatility. We began to reduce our exposure to the long and ultra-dated bonds andshiftedmoreintothebellyasthesewillbenefitfromSARB action in coming months. We have slightly increased duration into the current weakness. Going forward,giventhesignificantvalueonoffer,wewillbelooking to increase the duration of the portfolio – again focusing on buying shorter-dated bonds most tethered to the SARB. R186 bonds (5.5-year maturity) yielding 11% with a repo rate of 5.25% (and soon to be in the 4% region) and the SARB supporting the secondary market seem like good value to us. But volatility and risk management are paramount, and we will only be doing this gradually, erring on the side of being a tad too late than too early. Our focus as always is more than just on returns, but also carefully looking at the risks and preserving capital.

We came into the year not anticipating material rand weakness as we believed the global environment would remain supportive through stabilising growth and accommodative central banks. We were also of the view that the high real interest rates the SARB had been maintaining would remain an anchor for the rand. However,twothingshavechangedmateriallythisyear.Clearly COVID-19 developments have made the growth environment exceptionally hostile, and the rand as a cyclical asset has duly depreciated. Secondly, the SARB began cutting rates in January (25bps) and has since cut by another 100bps to get the repo rate at 5.25% (and we anticipate another 50-100bps before the next scheduled meeting in May). We began to gradually increase our ILB position on the back of the SARB cut in January – which we interpreted as a softeninginthestanceoftheSARBaroundinflation,which would at the margin soften the rand high real rateanchorandpossiblyincreaseinflationrisks.

DespitethefallinoilpricescomingofftheSaudi-Russiadispute and the resultant demand shock, we are maintainingshort-datedILB’sastheyoffersomeprotection against a weaker rand.

The portfolio has maintained a defensive investment grade credit positioning in light of the weak local growth outlook in recent years. We therefore have minimal exposure to the cyclical sectors of the economy, while increasing the allocation to defensives; namely banks, insurers, government- guaranteed state-owned enterprises and large blue-chip corporates with strong balance sheets. A key risk associated with negative rating action is that of credit spreads widening as investors demand a higher return fortakingoncreditrisk.Themacroeffectsofthesovereign downgrade (weaker currency capital outflows,highersovereigncostoffunding)coupledwith continuing uncertainty associated with the possibleeffectsofCOVID-19,willhaveadampeningimpact on the country’s economic growth outlook with adverse implications for credit quality in general. Given the fact that credit spreads have tightened appreciably over past two and a half years, we believe that credit spreadswillbegintoreflectawideningbiasinresponseto weaker economic fundamentals.

SA Fixed Income

33

Performance reviewFor the quarter, the portfolio underperformed the benchmark.

AfteraprettygoodstartinJanuaryandadecenteffortby National Treasury to deliver a credible budget in February, March saw a sharp deterioration in risk appetite for emerging market debt (EMD) and currencies as the coronavirus began to take its toll. The positioningadjustmentincapitalmarketswasbrutal and South African assets were not spared in the carnage.Theunprecedentedselloffingovernmentbonds saw the benchmark JSE ASSA All Bond Index drop 12.2% over the quarter. Our defensive duration positioning on the curve slightly helped relative performance. Our option strategies also helped protect some of the capital in the portfolio.

Inflation-linkedbonds(ILBs)gotcaughtinthesamecross currents and they too ended up dragging on performance.

Listedpropertyasasectorhalvedinvalueinthefirstthreemonthsoftheyearandassuch,wasasignificantdetractor (despite our strategically underweight position).

The yield-enhancing corporate bond allocation continued to enhance gains over the quarter, while returns from listed property added value.

Our portfolio construction tries to avoid quarterly drawdowns and eliminate 6-monthly drawdowns completely. We discuss our views going forward in more detail below, but with market valuations where they are andtheincomeonoffergoingforward,weanticipatereturns improving over the remainder of the year.


GlobalThe global economy remains in critical condition, pummelled by an unrelenting, highly virulent virus which has forced economies into lockdown, and the global economy sliding toward recession, with only the data nowlefttoconfirmwhatforeveryoneisbynowaforegone conclusion. The humanitarian cost has been devastating as the total number of infections topped a million infections globally, with more than 190 countries withconfirmedcases,andmorethan100,000deaths

Flexible Bond

at the time of writing. The disruption to labour, business operations and supply chains is unprecedented, and the intensity of this shock to the system will ultimately be a function of containment measures, policy responses by central banks and governments, as well as corporate and consumer behaviour as the pandemic plays out across geographies. At the moment, the implications for world economies remains uncertain given that the depth and duration of the virus remains a moving target. The ‘sudden stop’ in the world economy (which is loosely described as the immediate halt of any economic activity resulting in supply and demand shocks) could see an avalanche of bankruptcies and job cuts which could well undermine the recovery in growth oncethecurvebeginstoflatten.Thusfar,thenegativeimpact on regions has been staggered, starting with China in February, then moving to neighbouring Asian countries in March, and spreading to Europe, the US and the rest of the world. Central banks have moved aggressively to provide liquidity, while government officialshavethusfaroperatedwithintheirmeanstoprovidefiscalstimulusandsupporttohealthcareoperations.


Across the Atlantic, Europe became the epicentre of the virus, with the euro economy in freefall as borders, factories and households are forced to padlock. While we expect the ECB to remain true to its commitment to do whatever is necessary, Christine Lagarde will have to navigate scepticism within her own ranks to expand monetary policy further as the crisis deepens. The concern for the euro area remains the deep divisions among EU member states, with countries only focused on their own domestic policy responses to the pandemic. We believe sooner, rather than later, EU memberstateswillhavetoputtheirdifferencesaside,and devise a coordinated policy response alongside monetary policy, if they intend to piece the economy back together after this calamity.

SA Fixed Income

34

Inemergingmarkets,Chinawasthefirsteconomyforced into lockdown during the outbreak, and now appearsontracktobethefirsttostagearecovery.The measuredreopeningoffactoriesandproductioniscurrently underway and metrics such as real estate sales,coalusedinpowerstationsandtrafficcongestion appears to be picking up, signalling a modest pickup in domestic demand while the rest of the world is in hibernation. Beijing has rolled out an extensive range of measures to counter the massive drag on economic activity since the outbreak. Thus far, thesemeasureshaveprovedeffective,butwedonotexpect a quick V-shaped recovery given the rest of the worldisyettoflattenthecurve.WealsodonotexpectChina to launch a bazooka of stimulus as it did back in 2012, given the amount of debt it has ramped up since, and the priority by Beijing to rein in credit growth. While select emerging markets in Asia will have room to support their economies, other emerging regions such as Latin America and Africa have very little in their arsenal to mount a decent defence.

LocalSouth Africa’s economic situation has severely deteriorated. The exogenous shock to demand from the coronavirus was already having a negative impact in the real economy and this will unfortunately be exacerbated by the lockdown and declaration of a ‘state of disaster’. For the lockdown has already had severe impacts for agricultural exports, the tourism industry, hospitality, and sectors reliant on imports. Although the rating downgrade to sub-investment grade by Moody’s was not overly surprising, it could not have come at a worse time. While structural reforms are needed to boost long-term sustainable growth, the advent of the coronavirus now calls for bothfiscalandmonetarystimulusintheshortterm.South Africa already has very limited room to manoeuvrehere,sofiscalstimulusneedstobetargetedtovulnerablehouseholdsandfirmsinordertoaccelerate and strengthen the recovery in 2021. Unlike most developed countries, South Africa does not have the luxury of issuing bonds at 0%, so the country might need to rely on institutions such as the IMF and World Bank or the BRICS Development Bank to assemble a relief package that will support labour, households and small and medium enterprises.

On the monetary front, we believe the SARB still has space to cut interest rates further. This follows the disinflationaryimpulsefromthecollapseintheoilprice.Theonlyscenariowhereweforecastinflationthreatening the top end of the SARB’s 3% – 6% target band is where oil virtually triples and the rand goes to R21 against the US dollar. Most plausible scenarios showinflationbelowthemid-pointoftheband,andnegative growth of between -6% to -7% for the year, depending on how quickly we get systems back up and running. This leaves the SARB with room to cut rates materially from the current level of 5.25%, possibly to below 4%, most likely at the May scheduled meeting, but possibly even sooner.

PositioningThe South African Government bond market, much like most markets globally, unravelled during the month of March. Part of the repricing is a legitimate fundamental deterioration due to the worsening growth outlook and itsnegativeimpactonanalreadystrainedfiscus,butbyfarthemostsignificantpartoftherepricinghasbeenaliquidity shortage emanating from foreign bond holders.Thishasnowbeenrectifiedwithswiftactionfrom the SARB. From a duration perspective, we came intotheyearwiththedurationpositionflattotheALBI,and most of it in the front end and belly of the yield curve (this is 10-year maturity or less that is most exposed to SARB rate decisions). Following the February budget announcement by the National Treasury (which we viewed positively), we started to reduce risk due to the deteriorating external environment on the back of COVID-19 and excessive market volatility. We began to reduce our exposure to the long and ultra-dated bonds and shifted more into thebellyasthesewillbenefitfromSARBactionincoming months. We have slightly increased duration into the current weakness. Going forward, given the significantvalueonoffer,wewillbelookingtoincreasethe duration of the portfolio – again focusing on buying shorter-dated bonds most tethered to the SARB.

SA Fixed Income

35

R186 bonds (5.5-year maturity) yielding 11% with a repo rate of 5.25% (and soon to be in the 4% region) and the SARB supporting the secondary market seem like good value to us. But volatility and risk management are paramount, and we will only be doing this gradually, erring on the side of being a tad too late than too early. Our focus as always is more than just on returns, but also carefully looking at the risks and preserving capital.

We came into the year not anticipating material rand weakness as we believed the global environment would remain supportive through stabilising growth and accommodative central banks. We were also of the view that the high real interest rates the SARB had been maintaining would remain an anchor for the rand. However,twothingshavechangedmateriallythisyear.Clearly COVID-19 developments have made the growth environment exceptionally hostile, and the rand as a cyclical asset has duly depreciated. Secondly, the SARB began cutting rates in January (25bps) and has since cut by another 100bps to get the repo rate at 5.25% (and we anticipate another 50-100bps before the next scheduled meeting in May). We began to gradually increase our ILB position on the back of the SARB cut in January – which we interpreted as a softeninginthestanceoftheSARBaroundinflation,which would at the margin soften the rand high real rateanchorandpossiblyincreaseinflationrisks.DespitethefallinoilpricescomingofftheSaudi-Russiadispute and the resultant demand shock, we are maintainingshort-datedILB’sastheyoffersomeprotection against a weaker rand.

We have maintained a strategically underweight position in listed property over the past few years – only increasing it tactically around valuation-driven events. Our allocation has almost halved since the middle of the quarter owing partly to sales and market moves. We believe value is starting to emerge in the higher-quality names, but given the direct impact that social distancing and lockdowns will have on the property sector, we remain very cautious in increasing the position materially.

The portfolio has maintained a defensive investment grade credit positioning in light of the weak local growth outlook in recent years. We therefore have minimal exposure to the cyclical sectors of the economy, while increasing the allocation to defensives; namely banks, insurers, government- guaranteed state-owned enterprises and large blue-chip corporates with strong balance sheets. A key risk associated with negative rating action is that of credit spreads widening as investors demand a higher return fortakingoncreditrisk.Themacroeffectsofthesovereign downgrade (weaker currency capital outflows,highersovereigncostoffunding)coupledwith continuing uncertainty associated with the possibleeffectsofCOVID-19,willhaveadampeningimpact on the country’s economic growth outlook with adverse implications for credit quality in general. Given the fact that credit spreads have tightened appreciably over past two and a half years, we believe that credit spreadswillbegintoreflectawideningbiasinresponseto weaker economic fundamentals.


1-3 years, 11.1% 3 - 7 years, 29.7%

7 - 12 years, 15.9% 12+ years, 28.5%

Cash, 14.8%


SA Fixed Income

36

Performance reviewFor the quarter, the portfolio marginally outperformed the benchmark. Our duration strategy lagged, while the corporate bond and relative value strategies outperformed.

For our duration strategy, March saw a sharp deterioration in risk appetite for emerging market debt (EMD) and currencies as the coronavirus began to take its toll. The positioning adjustment in capital markets was brutal and South African assets werenotsparedinthecarnage.Withtheunprecedentedselloffingovernmentbonds, even our small duration position detracted from performance. Our option strategies did, however, protect some of the capital in the portfolio.

In terms of our corporate bond strategy, the Fund’s enhanced yield over the JSE ASSA All Bond Index (ALBI) continues to generate outperformance. Duration positioning on the curve enhanced returns as shorter-dated bonds outperformed longer-dated bonds in a rate-cutting environment. Spread widening (predominantly across senior and subordinated bank debt) detracted from returns.

In terms of our relative value strategy, the Fund outperformed the performance comparison index over the period. The Fund’s overweight position in short-dated bonds relative to long-dated bonds has been the predominant factor of the outperformance. Rate cuts coming through from the South African Reserve Bank (SARB)enhancedreturnsonshort-datedbonds,whilefiscaldeteriorationimpactedlong-dated yields.

Market background The‘downsiderisks’citedbytheUSFederalReserve(Fed)followingthefirstemergency rate cut on 03 March 2020 have fully materialised into a humanitarian and economic crisis in a matter of weeks. Indeed, Fed Chair Jerome Powell remarked late in March that the US economy may well be in a recession. The manufacturing PMI slid into contractionary territory in March, coming in at 49.2 from 50.7 in February (the50-markseparatescontractionfromexpansion).The readingreflectedthequickestdeteriorationinoperationssincetheglobalfinancialcrisis.USjobclaimsshot up to 3.3 million (6.6 million) by end of March) on the back of the coronavirus (COVID-19)shutdown–thefirstrealglimpseofdamagetotheUSeconomyatthetime. The Fed was quickest out the gates among the leading central banks, and by quarter-end had slashed rates by a cumulative 150 basis points (bps), committed to unlimited quantitative easing (QE) and an unprecedented venture into corporate bondpurchasesfollowingcongressionalapproval.Onthefiscalside,theWhiteHouseagreedaUS$2trillionstimuluspackageinordertoshoreupthedefenceagainst COVID-19.

Triple Alpha Bond

SA Fixed Income

37

Europe’s economic conditions have severely degenerated since the outbreak, with many member states bringing their economies to a halt in order to tackle the health crisis. The infection rate on the continent surpassed 100,000 with around 75% of the cases coming from the four major economies of the region. The manufacturing PMI fell to 44.8 in March, from 49.2 in the previous month, although ahead of consensus expectations of 39.0. This was the sharpest pace of contraction in operations since July 2012 as COVID-19 has led to widespread disruptions to business activity in the area. The European Central Bank (ECB) shocked global markets as it launched the audacious Pandemic Emergency Purchase Programme, which comprises an expansion of quantitative easing by €750 billion over the next nine months in addition to the €120 billion announced earlier in March. Policymakers are, however, mindful that monetary policy alone will need to be supported byacoordinatedfiscalresponsebymemberstates.

Thus far, the lack of any conclusive outcomes from EU meetings highlights the existing deep divisions within the EU regarding the degree to which common resources ought to be deployed to alleviate the economic devastation brought on by the pandemic. Countries such as Germany and other northern states have rejected calls for the issuance of joint debt which has been dubbed ‘coronabonds’.

While China was initially the hardest hit economy from the deadly spread of COVID-19, the country now seems to be slowly returning to normalcy, following strict and intensive lockdown measures implemented byauthorities.Assuchthereboundintheofficialpurchasing managers’ index (52 in March) from record lows in February (35.7) was not surprising, although the magnitude of the recovery surprised ahead of consensus expectations. This is another example of howeffectivecontainmentmeasuresinacountrycanlead to a quicker resumption in economic activity. China’s recovery has also been supplemented by a ramp up in stimulus measures. That said the People’s Bank of China has refrained from pronouncing unlimited quantitative easing as evidenced by other central banks in developed markets.

In South Africa, the weakness in the local economy will nodoubtbefurtherintensifiedbythestrictlockdownmeasures implemented by government on 27 March 2020, which has sent the entire economy into hibernation, barring essential services. The SARB cut the benchmark interest rate by 1% to 5.25% at its 19 MarchMonetaryPolicyCommittee(MPC)meeting.Following extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support South African government bonds in the secondary market. The SARB, however, emphasised that this is a monetary policy reaction designed to facilitate the transmission of monetary policy – not QE ormonetizationofthedeficit.Inwhatfeltmorelikeasideshow amid the coronavirus outbreak, ratings agency Moody’s unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negative outlook was kept in place, foreshadowing the risk of a further downgrade within the next 18 months.

The move meant that South Africa will no longer form part of the FTSE World Investment Grade Bond Index (WGBI)effective1May2020.

The South African Government bond market (ALBI, -8.7%), much like most markets globally, unravelled during the month of March, with most of the repricing stemminglargelyasareactiontoflowsandapreference for liquidity from foreign bond holders. Listedproperty(FTSE/JSEAllPropertyIndex-48.1%)also weakened sharply during the period due to the lockdown implications on rental income, as buildings were placed under enforced shutdowns. Cash was king over the period, the only positive return across all asset classes as the STeFI Index closed +1.7% higher. In currencies,theranddelivereditsworstquarterlyperformance since the GFC, falling 21.7% against the US dollar,19.6% against the euro and 16.1% against sterling.

SA Fixed Income

38

SA Fixed Income

Thelocalcreditmarketbegantosignificantlyrepricetowards the end of the quarter, driven largely by the moreliquidfinancialsector.Bankseniorspreadswidened on average 10 – 50bps across the curve. 5-year wholesale bank deposits (NCDs) currently middle at 1.5% above cash rates. Subordinated debt and alternative tier-1 (AT1) paper showed the most significantmovesonaverage,repricing150-200bpsand 200-270bps respectively. In addition to the measures put in place by the SARB to facilitate liquidity in the bond market, the prudential authority announced various measures of relief to the banking sector in terms of capital and liquidity requirements and relief in terms of Risk Weighted Asset requirements on “COVID-19 related restructures”.

The corporate sector has been slower to react as the firstrushforliquidityinthemarketflowedthroughthefinancialsector,howeverastheeconomicimpactsofthe local lockdown begin to be realised, we expect corporatespreadstoreflectthisintheirpricing.e-owned enterprises (SOE) spreads have remained relatively stable, having not participated in as much of the spread compression over the past 2 to 3 years.

After a reasonable month of issuance in February, where the banks, Vukile, Transnet and DBSA all placed paper in the market, March showed a marked decline with just under R4 billion of auctions being cancelled. Investec Bank, Growthpoint Properties, Mercedes-Benz SA and Netcare managed to privately place R5.5bn of bonds in the market over the month. Looking forward,weexpectrefinancerequirementstodrive the majority of issuance, with a likely increase in fundingrequirementsofthebanksdrivingfinancialissuance higher as a result of an increase in non-performing loans.

The saga at Eskom is ongoing, with its funding plans back in the headlines as COSATU presented proposals to the government to use the PIC to fund the utility earlier in the quarter. No further developments have been seen in this regard, while in interim the courts ruled against Eskom’s urgent application to have NERSA’srulingontariffhikesincreased.

The utility implemented intense load shedding in early March but has cited a decrease in demand for electricity as a result of the local lockdown taking furtherloadsheddingoffthetablefornowuntilnormaldemand levels return. The spread on Eskom’s government-guaranteed bonds continue to tighten marginally as investors favour the additional yield for government credit risk.

Outlook and strategyDuration strategy: Part of the repricing in the local bond market is a legitimate fundamental deterioration due to the worsening growth outlook and its negative impactonanalreadystrainedfiscus,butbyfarthemostsignificantpartoftherepricinghasbeenaliquidity shortage emanating from foreign bond holders.Thishasnowbeenrectifiedwithswiftactionfrom the SARB. From a duration perspective, we came into the year with the duration position close to 1.5 years,andmostofitinthefrontendandbellyoftheyield curve (this is 10-year maturity or less that is most exposed to SARB rate decisions). Following the February budget announcement by the National Treasury (which we viewed positively), we started to reduce risk due to the deteriorating external environment on the back of COVID-19 and excessive market volatility. We thus reduced our duration to 0.6 yearsandshiftedmostofittotheveryfrontend(because we thought that was the safest place to be with the SARB cutting rates) – we have not been this low on our interest rate risk since the ANC elective conference in December 2017. Going forward, given thesignificantvalueonoffer,wewillbelookingtoincrease the duration of the portfolio closer to neutral allocation of around 1.25 years – again focusing on buying shorter-dated bonds most tethered to the SARB. R186 bonds (5.5-year maturity) yielding 11% with a repo rate of 5.25% (and soon to be in the 4% region) and the SARB supporting the secondary market seem like good value to us. But volatility and risk management are paramount, and we will only be doing this gradually, erring on the side of being a tad too late than too early. Our focus as always is more than just on returns, but also carefully looking at the risks and preserving capital.

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South African listed credit spreads (basis points)

Source: Rand Merchant Bank, Ninety One as at 31.03.20.

0

100

200

300

Jan-05 Jan-08 Feb-11 Feb-14 Mar-17 Apr-20

AAA AA A

SA Fixed Income

Relative value strategy: Whilewehavetakensomeprofitontheposition, we maintain the overweight allocation in the front end of the yieldcurveasweexpectthedynamicoflowinflationandweakgrowthtoelongateundertheCOVID-19pandemicandresultanteffectsofthenationwide lockdown on the economy.

Corporate bond strategy: A preference for liquidity characterised the market towards the end of the quarter in both the government bond and credit market. As a result of the volatility and cheapening of thesovereignbonds,wehaveseenbankseniorfixed-ratebondstrading at yields tighter than government debt. We used this opportunity to reduce bank senior debt, switching into government bonds and increasing the yield for no additional duration risk. Over the quarter, we also reduced shorter-dated corporate and subordinated debt, thus creating cash and capacity to take advantage of opportunities going forward. Our bottom-up views remain consistent with a preference over assets with defensive credit qualities; our preferred sectors remain banks and insurance, while looking for companies displaying strong asset quality, valuation, contractual cash flowandconservativemanagement.Wehavebecomemoreconstructive on the state-owned enterprise (SOE) sector as valuations are compelling, looking for opportunities to lend into entities with improving governance and sound fundamentals. we are holding back liquidity, waiting for opportunities to deploy into higher-yielding paper to our preferred sectors and counterparties. We expect opportunitiestoaddsignificantyieldtotheportfoliointhecurrentenvironment, while remaining conservative in sector and name selection.

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We are mainly exposed to large companies, banks and well-structured asset-backed investments.

Performance reviewOverthefirstquarterof2020,theFundmateriallyunderperformedthetargetofcashplus5%.Thecoronavirus(COVID-19)outbreakcatalysedaworldwidesell-offinriskassetsandflightto‘safe-haven’assets,whiletriggeringafundamentalshockfollowing varying degrees of economic lockdown. The full impact of COVID-19 will be determined over the next few quarters as the real economic impact materializes in fundamentals. Less liquid credit asset prices are expected to follow those in the listed space that have already adjusted, despite the latter having begun to stabilize and establishafloorinthefirstweekofApril2020.TheFundisrelativelywell-positionedwith higher-quality credit risk and enough liquidity.

Market backgroundThefirstquarterof2020hasbeencharacterizedbythehumanitarianandeconomiccrisis currently ongoing as a result of COVID-19. Global markets were fast to react to changing economics, while globally, governments and central banks have been quick to implement measures to address the economic impacts of extended periods of lockdowns. The US Federal Reserve (Fed) was quickest out the gates as it slashed rates by a cumulative 150 basis points (bps) during the quarter, while also committing to unlimited quantitative easing (QE) and an unprecedented venture into corporate bondpurchasesfollowingcongressionalapproval.Onthefiscalside,theWhiteHouseagreedaUS$2trillionstimuluspackageinordertoshoreupthedefenceagainst the economic impact of COVID-19. While China was initially the hardest hit economy, the country now seems to be slowly returning to normality, following strict and intensive lockdown measures implemented by authorities. To add to the volatility, the Saudi-Russia oil price dispute saw the oil price drop to US$22 amid an unprecedented demand shock of c.25 million barrels per day, which was further compounded by storage constraints.

Foremergingmarkets(EM),thefirstquarterwasreminiscentofthefirstquarterof2009 when credit markets experienced a severe liquidity squeeze as market participants liquidated assets at distressed levels to meet liquidity obligations. African sovereign and corporate bonds more than doubled their spread over swaps from 300-400bps to 1100bps. You need to go back nearly 20 years to the early 2000’s emergingmarketcrisistofindsimilarelevatedlevels.ThedifferencesinthisEMcrisis,comparedto2009,wasthespeedofthesell-off,whichwasmuchfaster(2-3weeks)and the subsequent coordinated, accelerated liquidity response from G20 and EM policymakers.InthefirstweekofApril2020,creditmarketsfoundaflooratelevatedcredit spreads, with some support as markets begin to see through the COVID-19 crisis, while also supported by the liquidity provided by the Fed and other central banks.

Credit Opportunities

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InSouthAfrica,theweaknessinthelocaleconomywillnodoubtbefurtherintensifiedby the strict lockdown measures implemented by government on 27 March 2020, which has sent the entire economy into hibernation, barring essential services. The SouthAfricanReserveBank(SARB)cutthebenchmarkinterestrateby1%to5.25% at its 19 March Monetary Policy Committee (MPC) meeting. Following extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support South African government bonds in the secondary market. Ratings agency Moody’s unsurprisingly downgraded South Africa’s sovereign credit rating to one notch below investment grade at Ba1. The negative outlook was kept in place, foreshadowing the risk of a further downgrade within the next 18 months. The move meant that South Africa will nolongerformpartoftheFTSEWorldInvestmentGradeBondIndex(WGBI)effective1 May2020.

Thelocalcreditmarketbegantosignificantlyrepricetowardstheendofthequarter,drivenlargelybythemoreliquidfinancialsector.Bankseniorspreadswidenedonaverage10–50bpsacrossthecurve.5-yearwholesalebanknegotiablecertificatesof deposit (NCDs) currently middle at 1.5% above cash rates. Subordinated debt and alternativetier-1papershowedthemostsignificantmovesonaverage,repricing150-200bps and 200-270bps, respectively. In addition to the measures put in place by the SARB to facilitate liquidity in the bond market, the prudential authority announced various measures of relief to the banking sector in terms of capital and liquidity requirements and relief in terms of Risk Weighted Asset requirements on “COVID-19 related restructures”. The corporate sector has been slower to react as thefirstrushforliquidityinthemarketflowedthroughthefinancialsector.However,as the economic impacts of the local lockdown begin to be realised, we expect corporatespreadstoreflectthisintheirpricing.Newissuancehasbeenseverelyaffectedandthemarketislikelytoremainclosed.

Lookingforward,asthelocallockdownelongatesandwestarttoseethefinancialimpactsfilterthroughintotheeconomy,weexpectallsectorstoexperienceanunprecedented fundamental deterioration. Balance sheet strength and strong managementwillbethecreditdifferentiatoramidthevolatilityanduncertainty.

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Portfolio activity and positioningAs previously reported, the Fund began its divestment phase in Q3’2019, returning 7% and is expected to release a further 5-10% in the coming quarter. Given the impact of COVID-19, the speed and size of distributions is likely to slow as secondary market tradesremaindifficultandcostly.Weexpectareturntonormalitylaterintheyearandfor quality credits to once again trade at fair value. Apart from a small portion of tail assets, the capital and interest will be returned within the two-year divestment period as investments mature and liquid instruments are sold.

Despite prevailing conditions, we are relatively comfortable with the Fund positioning and investments. We hold around 63 counterparties with an average position of c.1.5%.Wearewell-diversifiedbysectorandcounterparty.Wearemainlyexposedtolarge companies, banks and well-structured asset-backed investments. These positions performed well in the previous crisis and should largely survive the current crisis due to their credit fundamentals.

Sector exposure


SA Fixed Income

Financials, 33.0%

Industrials, 18.0%

Materials, 11.5%

Sovereigns, 6.6%

Consumer Discretionary, 5.8%

Real Estate, 4.9%

Utilities, 4.7%

Communication Services, 3.7%

Information Technology, 3.5%

Energy, 2.7%

Consumer Staples, 0.6%

Cash, 5.0%

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To get a sense of the portfolio exposure to COVID-19, we have stratifiedtheportfolioasfollows:

SA Fixed Income

ɽ Low risk about 46%; ɽ Low-Medium risk 23%; ɽ Medium-Highrisk17%; ɽ Highrisk14%

In terms of credit concerns and areas of special focus captured in the high-risk bucket:

ɽ Names previously mentioned include Busby, Cell C, CIG, Afrisam, Real People and Persianas, accounting for 4.5%

ɽ Names at high risk given the impact of COVID-19 account for 9.8% include the following:

ɽ Eskom – Exposed is senior secured, but the ability of sovereign to support has been reduced;

ɽ EtL – Subordinated debt position in Pan-African bank, expectingcapitalbufferstobemateriallyreduced;

ɽ KPLC – Electricity transmission company in Kenya facing short-term liquidity demands;

ɽ Landbank – Ability of sovereign to support has been reduced and facing short-term liquidity constraints;

ɽ Petra – Senior position ahead of bonds, but business facing demand and supply shock;

ɽ Tsebo – ZAR weakness and lockdown causing shareholder support to reduce, discussing debt for equity swap.

We are taking the crisis very seriously as emerging markets will be more acutely impacted than developed markets and South Africa was already weak going into the crisis. We are currently reviewing each portfolio company and assessing the impact of COVID-19 on businesses and the valuations.

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Performance reviewThefirstquartersawadeteriorationinriskappetiteforemerging market debt and currencies as the coronavirus began to take its toll. The positioning adjustment in capital markets was brutal and South African assets were not spared in the carnage. The SouthAfricanGovernmentbondmarket(JSEASSAAll Bond Index, -8.7%), much like most markets globally, unravelled during the month of March, with most of the repricingstemminglargelyasareactiontoflowsandapreference for liquidity from foreign bond holders. One-yearfixed-ratenegotiablecertificatesofdeposit(NCD’s) rallied 1.29% (from 7.64%) over the quarter, mostly on the back of the bigger-than-expected 100bps cut in the repo rate at the South African Reserve Bank’s (SARB) 19 March MPC meeting to close at6.35%.Bankfloating-ratenote(FRNs)spreadswidened towards the end of the quarter as heightened liquidity concerns became the focus, with bank FRN bid/offerspreadsinitiallywideningto25bpsandthenwidening further to 40bps. Fortunately, we saw bold action from the SARB as it stepped in to support the market towards the end of the quarter as liquidity concerns overtook any market valuations. As a result of the SARB actions, market liquidity was substantially improved with some stability returning to markets and NCDbid/offerspreadsnarrowingbackto25bps.Cashas measured by the STeFI Composite Index gained 1.69% and was the only positive performance across all asset classes.

For the quarter, the portfolio outperformed the benchmark.

Key positive contributions:We were well-positioned for the rally, having locked intolongerdatedfixedrateinstrumentsathigherlevels.

The portfolio is invested in FRNs at attractive spreads, and the excess yield over benchmark rates was a positive contributor to performance over the quarter.

Money Market

Key negative contributions:Giventhemarketvolatilityandunprecedentedselloffinfixedincomeassetsduringthequarter,wepositionedthe portfolio more defensively and built up additional liquiditybufferstoensureampleliquidityshouldtheneed arise. This, however, negatively impacted performance.

Portfolio activity Over the quarter, we selectively added duration by increasingexposuretolonger-datedfixedrateNCDs.Wecontinuedtoaddfloating-ratenotes,particularlyin themiddleofthecurvewherespreadsremainattractive.


GlobalThe global economy remains in critical condition, pummelled by an unrelenting, highly virulent virus which has forced economies into lockdown, and the global economy sliding toward recession, with only the datanowlefttoconfirmwhatforeveryoneisbynowaforegone conclusion. The humanitarian cost has been devastating as the total number of infections topped a million infections globally, with more than 190 countries withconfirmedcases,andmorethan100,000deathsat the time of writing. The disruption to labour, business operations and supply chains is unprecedented, and the intensity of this shock to the system will ultimately be a function of containment measures, policy responses by central banks and governments, as well as corporate and consumer behaviour as the pandemic plays out across geographies. At the moment, the implications for world economies remains uncertain given that the depth and duration of the virus remainsamovingtarget.The ‘suddenstop’intheworldeconomy (which is loosely described as the immediate halt of any economic activity resulting in supply and demand shocks) could see an avalanche of bankruptcies and job cuts which could well undermine the recovery in growth once the curve begins to flatten.

SA Fixed Income

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Thus far, the negative impact on regions has been staggered, starting with China in February, then moving to neighbouring Asian countries in March, and spreading to Europe, the US and the rest of the world. Centralbanksandgovernmentofficialshavemovedaggressivelytoprovideliquidity,whilegovernmentofficialshavethusfaroperatedwithintheirmeanstoprovidefiscalstimulusandsupporttohealthcareoperations.


Across the Atlantic, Europe became the epicentre of the virus, with the euro economy in freefall as borders, factories and households are forced to padlock. While we expect the ECB to remain true to its commitment to do whatever is necessary, Christine Lagarde will have to navigate scepticism within her own ranks to expand monetary policy further as the crisis deepens. The concern for the euro area remains the deep divisions among EU member states, with countries only focused on their own domestic policy responses to the pandemic.

We believe sooner, rather than later, EU member states will have to put theirdifferencesaside,anddeviseacoordinatedpolicyresponsealongside monetary policy, if they intend to piece the economy back together after this calamity.

Inemergingmarkets,Chinawasthefirsteconomyforcedintolockdown during the outbreak, and now appears on track to be the firsttostagearecovery.The measuredreopeningoffactoriesandproduction is currently underway and metrics such as real estate sales,coalusedinpowerstationsandtrafficcongestionappearstobepicking up, signalling a modest pickup in domestic demand while the rest of the world is in hibernation. Beijing has rolled out an extensive range of measures to counter the massive drag on economic activity sincetheoutbreak.Thusfar,thesemeasureshaveprovedeffective,

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but we do not expect a quick V-shaped recovery given therestoftheworldisyettoflattenthecurve.Wealsodo not expect China to launch a bazooka of stimulus as it did back in 2012, given the amount of debt it has ramped up since, and the priority by Beijing to rein in credit growth. While select emerging markets in Asia will have room to support their economies, other emerging regions such as Latin America and Africa have very little in their arsenal to mount a decent defence against the economic impact of COVID-19.

LocalSouth Africa’s economic situation has severely deteriorated. The exogenous shock to demand from the coronavirus was already having a negative impact in the real economy and this will unfortunately be exacerbated by the lockdown and declaration of a ‘state of disaster’. For the lockdown has already had severe impacts for agricultural exports, the tourism industry, hospitality, and sectors reliant on imports. Although the rating downgrade to sub-investment grade by Moody’s was not overly surprising, it could not have come at a worse time.



SA Fixed Income

0 - 7 days, 19.3%

8 - 30 days, 14.3%

31 - 60 days, 10.5%

61 - 90 days, 9.5%

91 - 120 days, 1.6%

121 - 150 days, 8.4%

151 - 180 days, 6.9%

Over 181 days, 29.5%

While structural reforms are needed to boost long-term sustainable growth, the advent of the coronavirus now callsforbothfiscalandmonetarystimulusintheshortterm. South Africa already has very limited room to manoeuvrehere,sofiscalstimulusneedstobetargetedtovulnerablehouseholdsandfirmsinordertoaccelerate and strengthen the recovery in 2021.

Unlike most developed countries, South Africa does not have the luxury of issuing bonds at 0%, so the country might need to rely on institutions such as the IMF and World Bank or the BRICS Development Bank to assemble a relief package that will support labour, households and small and medium enterprises. On the monetary front, we believe the SARB still has space to cutinterestratesfurther.Thisfollowsthedisinflationaryimpulse from the collapse in the oil price.

We came into the year not anticipating material rand weakness as we believed the global environment would remain supportive through stabilising growth and accommodative central banks.

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SA Fixed Income

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We were also of the view that the high real interest rates the SARB had beenmaintainingwouldremainananchorfortherand.However,twothings have changed materially this year. Clearly COVID19 developments have made the growth environment exceptionally hostile, and the rand as a cyclical asset has duly depreciated. Secondly, the SARB began cutting rates in January (25bps) and have since cut by another 100bps in March to get the repo rate at 5.25%.

Theonlyscenariowhereweforecastinflationthreateningthetopendof the SARB’S 3% – 6% target band is where oil virtually triples and the rand goes to R21 against the US dollar. Most plausible scenarios show inflationbelowthemid-pointoftheband,andnegativegrowthofbetween 6% to -7% for the year, depending on how quickly we get systems back up and running. This leaves the SARB with room to cut rates materially from the current level of 5.25% (at the time of writing), possibly to below 4%, most likely at the May scheduled meeting, but possibly even sooner.

From a positioning standpoint, we believe valuations are attractive and we will cautiously look for opportunities in the market but remain aware that there is likely to be a lot more volatility to come.

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Quality5

49

Market background It is astounding to think that in the previous quarter’s commentary we were musing over how the US’s continued economic expansion was the longest uninterrupted period of growth in its history. Things certainly have changed a lot in a very short space of time.

The coronavirus (COVID-19) has turned the world upside down. With the majority of the world under some form of lockdown, the global economy has ground to a halt, while economists scramble to gauge the severity of this sudden stop on the global economy. Will the global economy shrink by 3% or 10% in 2020? There is a lot of uncertainly and no one with all the answers. What we do know is that the toll is going to be high, not only in crude economic terms but also in terms of our humanity, with many losing loved ones and even more losing their livelihoods.

The response of governments and central banks has been immense. Central banks have led the charge, slashing rates and pumping liquidity into capital markets to ensure their smooth operation. Earlier in March,theUSFederalReserve(Fed)offproceedingswithanemergency0.5%ratecut–thefirstsinceOctober2008attheheightoftheglobalfinancialcrisis (GFC). Governments have also brought out the heavyartillery,fiscally-speaking.TheUSaloneisplanning to spend US$2 trillion as part of its economic rescuepackage.Thetotalextraglobalfiscalstimulusisestimated to be greater than what was doled out during the GFC. To fund this stimulus, government debt levels aresettosoartouncharteredlevels.Howthisdebtisgoing to be repaid is a question few are asking.

Financialmarketsreflectthisturmoilinthewidereconomy.Equitymarketshavefallenbysignificantamounts. The US benchmark S&P 500 Index fell by 20% over the quarter in US dollars, with investors flockingtotheperceivedsafetyofgovernmentbonds.The yield on the US 10-year Treasury dropped below 1% forthefirsttime,endingthequarterat0.7%(yieldsfallas prices rise).

Opportunity

South Africa has not been spared from the carnage. In additiontothepaininflictedbytheCOVID-19pandemic,thecountrysufferedanadditionalblowasMoody’s Investors Service downgraded the country’s sovereign credit rating to one notch below investment grade. As a result, South Africa will no longer form part of the FTSE World Investment Grade Bond Index (WGBI) as of 1 May 2020. After starting the year yielding 9%, the yield on the benchmark SA 10-year government bond spiked to 13% before pulling back to end the quarter at 11%. The JSE ASSA All Bond Index closed 9% lower for the quarter. Local equities were leftreeling,inlinewiththeworldwideselloffinriskassets.TheSouthAfricanbenchmarkFTSE/JSEAllShare Index lost 21% over the quarter, while the Capped SWIX closed even lower, down 27% for the quarter. It was a brutal three months for the listed property sector, which almost halved in value.

Performance review It is precisely during these challenging times when the merits of the Quality investment philosophy manifest. While the portfolio delivered a negative absolute return, we are pleased with how it held up amid the turmoilinglobalfinancialmarketsoverthequarter.

Offshoreequitiesandgoldprovideddouble-digitreturns in rands, and outperformed broader market indices as well as returns in excess of local cash.

Withintheoffshoreequitycomponent,absoluteperformance was largely driven by quality companies such as Microsoft, Nestlé and Verisign.

Locally, listings such as Assore, Naspers and British American Tobacco also contributed to performance. In addition, a depreciating rand resulted in an extra boost ingainsforouroffshoreandrand-hedgeholdings.

DiversifiedminerAssore,deservesspecialmention.The position has been in client portfolios for more than 20 years, and has been an impeccable example of capitalallocation,asoundfinancialmodelandsecularoutperformance despite being in the cyclical resource sector. The company will delist in May from the Johannesburg Securities Exchange with management taking the business private.

Quality

50

Quality



B Deb

5.3


Plc

4.2

Assore Ltd 3.7

Naspers Ltd 2.7

Cie Financiere Richemont

SaADR/GDR

2.7

Mondi PLC 2.1

Santam Ltd 2.1

Bid Corp Ltd 1.5

Mediclinic International Plc 1.1

BerkshireHathawayIncClB 1.0

Our meaningful commodity holding in the NewGold exchange-traded fund (ETF) provided counter-correlated performance as bullion benefittedfromtherisk-offenvironment.Thecashholdingintheportfolio also added value.

Thesepositivegainsweremorethanoffsetbythenegativeperformance of our local equity holdings, namely; Sasol, Bid Corp, StandardBankGroupandDistell.Thesignificantsell-offoflocalbondsover the period also resulted in our bond component detracting from absolute performance.

Portfolio activity We are not short-term traders. Instead, we prefer owning positions in highqualitycompaniesthatoffergoodvalue.Typically,thesepositionsare held over long periods of time. During this quarter we opportunistically added to existing positions in Naspers, Mondi, PSG and Bid Corp. The small remaining position in Sasol was sold.

The movement in bond yields surprised us to the upside with record realyieldsonoffer.Weusedthespikeinbondyieldsasanopportunityto increase the portfolio’s holding in South African government bonds.

Outlook and strategy Theunfoldingturmoilinfinancialmarketshashighlighted,amongmanythings, the merit in our investment philosophy’s deliberate avoidance ofcompanieswithalotofdebt.Highlyindebtedcompaniestheworldover, have come under pressure and many have been forced to withhold dividends.

Ourpreferredassetclassremainsglobalequities.However,as-bottomup stock pickers, we are highly selective in the individual assets we hold. Our preference is for what we perceive as high-quality companies that have enduring competitive advantages, form barriers to entry and provide pricing power. This in turn enables these companies to generate long-term growth and generate sustainably highlevelsofprofitability.Theglobalequitieswehold,whiletradingonsimilar valuation metrics to the MSCI All Countries World Index, collectivelygeneratesignificantlyhigherreturnsoncapitalthantheother companies in the market.

The outlook for the South African economy has worsened further. While it may be convenient, South Africans should be careful of laying the blame for our troubles solely on COVID-19. Long before COVID-19 reached our shores, South Africa’s economy was already in recession. ThefiscalsituationinSouthAfricahadbeendeterioratingsteadilyoverthe past decade. Coronavirus was merely the straw that broke the camel’s back.

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The sovereign credit rating downgrade by Moody’s, relegating South African bonds to junkstatus,isastrongsignalthatwearefastapproachingafiscalcliff.Governmentdebt is rising to dangerous levels. The South African economy is crying out for structural reforms that will spur growth and curtail expenditure. Factors such as policyuncertainty,aninflexiblelabourmarketandthelackofareliableelectricity/watersupplydonotinspireinvestorconfidence.Businessconfidenceisatmulti-decadelowsandconsumerconfidence,too,isonthedecline.COVID-19isamassivesetback for the economy. GDP in 2020 will likely shrink by more than 5%.

Despite this low growth outlook and despite the South African Reserve Bank (SARB) cutting interest rates by 1% at March’s policy meeting, South Africa’s real interest rates (theinterestratesaftersubtractinginflation)remainamongthehighestintheworld.Given these high real rates, the weak outlook for economic growth and the low inflationexpectations(helpedinpartbythecollapseintheoilprice),weremainoftheview that there is room for the SARB to cut interest rates further.

Locally, we believe the best opportunity remains South African government bonds. Withyieldsofaround11%,theseinstrumentsofferhigherrisk-adjustedreturnpotentialthan most South African stocks. While we have been increasing our allocation to domestic equities, we remain cautious and believe the local equity market may not be adequately pricing in the risks that companies may face in the coming months.

The correct forecasting of complex global macroeconomic outcomes is almost impossible (as evidenced by recent events). Even if it were, positioning an investment portfolio precisely for such an outcome is even more challenging. We thus do not believe it appropriate to position the portfolio for any particular event. Instead, we maintainabalanceofexposureswhichoffersprotectionagainstarangeofpotentialoutcomes. As always, we remain unwavering in our commitment to growing your capital in a judicious and discriminate manner.

Quality

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Quality

Cautious Managed

Market background As we write this, we are in the midst of a 21-day lockdown to help stem the spread of the coronavirus (COVID-19) in South Africa. The US-China trade spat of the previous year is a distant memory of a less volatile time. It has been replaced by fears of a global pandemic and its unforecastable economic consequences.Asaresult,thefirstquarterof2020has been abysmal for markets; the worst we have experienced since the Global Financial Crisis (GFC). To add to the gloom, ratings agency Moody’s Investors ServicefinallydowngradedSouthAfrica’ssovereigncredit to sub-investment grade.

Policy responses from governments across the world have been swift. Entire countries are on lockdown or have severely limited movement, while both monetary andfiscalstimulusarebeingutilisedtopropupeconomies, prevent businesses and individuals going bankrupt, and to provide much needed liquidity to fragilefinancialmarkets.However,wearefirstandforemost dealing with a health crisis that has completely suppressed consumption (other than staples). Stimulus may prevent the collapse of institutions and individuals, but we expect growth will be severely impacted by the complete cessation of global economic activity.

Infinancialmarkets,riskassetsenduredoneoftheworst quarters on record. Global equities (MSCI ACWI) plunged -21.4%, lows last seen during the GFC. Developed market equities (MSCI Developed Market Index) closed 21.1% lower, while emerging market equities(MSCIEmergingMarketIndex)cameworstoff,down 23.6%. Yield-oriented assets fared relatively better, helped by the US Federal Reserve’s (Fed) rollout of unlimited quantitative easing (QE) and pledge to snap up as many government bonds and corporate bonds as necessary. The Bloomberg Barclays Global AggregateBondIndexendedthequarterflatat-0.3%.

In South Africa, the JSE All Share Index was down 21.4%, with the All Bond Index down a disappointing 8.7%. While the rand was initially resilient, it weakened 21.7% over the period.

Performance review In this extreme environment, your portfolio delivered a slightlynegativeabsolutereturn,laggingitsinflation-plusbenchmark.However,moreimportantly,itmaintained a positive absolute return over the 18 months to the end of March 2020, the period over which we target capital preservation.

Performance over the quarter was largely driven by positivecontributionstheoffshoreequitycomponent,notably, high-quality names such as Microsoft, Nestlé and Verisign. Locally, British American Tobacco and the NewGold exchange-traded funds (ETF) added value. DiversifiedminerAssorewasthestandoutcontributorfollowing the announcement that the Sacco family intend to take the business private. The share rallied 82% on the news.

Thesegainswerepartiallyoffsetbynegativecontributions from our small property component (Capital & Counties and Growthpoint Properties), as well as exposure PSG Group, Standard Bank Group and Distell.

The portfolio’s local bond component was the biggest detractor from absolute performance. Interestingly, yields rose before the Moody’s rating downgrade as investors sought capital amid a liquidity freeze. The downgrade itself seemed to have little impact on the local bond market.

Portfolio activity We are not short-term traders. Instead, we prefer to buy what we perceive to be high-quality companies thatoffergoodvalue,andweholdthesepositionsoverthe medium to long term. As such, activity over the quarter was muted.

We added slightly to the South African government bond allocation on the back of more attractive valuations. In equities, we made small reductions to holdings in luxury goods maker Richemont and food service operator Bid Corp.

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Quality

Outlook and strategyThe question on most investors’ minds seems to be: Is it time to buy depressed assets? Our concern is that it is almost impossible to determine if asset prices are depressed if there is uncertainty around thefuturecashflowsofcompanies.Atthebestoftimes,forecastsaredifficult;inthecurrentenvironment,they’realmostimpossible.Ultimately,growthandprofitswilldependontheextentofthepandemic and the length of time that economies remain under lockdown. The spread and impact of COVID-19 has been far worse than most anticipated. But the slowdown in economic activity is self-imposed as governments have curtailed movement, and therefore only we as a global collective can determine when the infection rate has been reduced and contained to the extent that it is safe enough to return to our normal, productive lives. In the short term, we are therefore preserving cash in the portfolio and will only deploy it if we findattractiveopportunities.

Looking beyond the medium-term uncertainty, there are further risks that we will need to navigate. The pandemic may accelerate deglobalisation as nations become increasingly inwardly focused. SupplychainsmayneedtobediversifiedawayfromChina.Comparativeadvantagemayhavetosuffertoensurethesecurityofsupply. Some industries may be permanently impacted by changed patterns of consumption. And a steady diet of increasing leverage among corporates in a low interest rate world may have to be reassessed in light of plummeting revenues.

This medium -to-longer-term uncertainty highlights the importance of focusing on Quality, especially in a low-risk portfolio. At its core, Quality investing means buying businesses with low leverage that produce goods and services that are fundamental to society. When balanced with appropriate income-generating assets, this creates a safe harbour portfolio that is able to weather extreme movements in markets,whilegeneratinginflation-beatingreturnsoverthemediumtolong term. On this basis, the best driver of growth in the portfolio remains what we perceive as high-quality global businesses with limited sensitivity to the economic cycle. We favour those businesses that generate high and sustainable returns on invested capital in excessoftheircostsofcapital.Thesebusinesseshavenotsufferedtothe same extent as the rest of the market and have provided South African investors with positive returns once the depreciating rand is accounted for.



B Deb

2.3


Plc

1.4

Santam Ltd 1.1

Mondi PLC 0.9

Assore Ltd 0.8

Capital & Counties

Properties

0.7

Jse Ltd 0.5

AVI Ltd 0.4

Cie Financiere Richemont

Sa ADR/GDR

0.3

Standard Bank Group Ltd 0.3

54

Quality

On the income front, the best opportunity remains South African government bonds generating real returns just north of 6% over 10 years.Alackofgloballiquidityhaspushedlocalbondstotheselevels,withsomereliefnowonofferintheformofQEfromtheSouthAfrican Reserve Bank. It is easy to be pessimistic about local bonds giventhefiscalandgrowthoutlooksandresultantrisingdebt-to-GDPratio.However,atcurrentlevels,yieldsaremore-thanpricinginthisrisk and provide far greater certainty than businesses that are only exposed to the local economy. Given that interest rates in South Africa have been cut by 1% (and there are expectations of more cuts tocome)andinflationexpectationscontinuetofall(especiallygiventhe fall in oil prices), bonds remain a core holding.

Considering property’s high correlation to bonds and the non-existent prospects for rental growth in the near term, exposure in the portfolio remains low. We continue to maintain a small holding in the highest quality stock in South Africa, Growthpoint, as well as exposure to the undervalued Capital & Counties.

Wemaintainabalanceofexposuresintheportfoliothatofferprotectionindifferentinvestmentenvironments.Inlightofprevailingrisksinthisfluidenvironment,wedonotbelieveitisappropriatetoposition the portfolio for a particular outcome. As always, we remain unwavering in our commitment to growing your capital in a judicious and discriminate manner.

55

Quality

Alternatives6

56

Performance reviewThe portfolio delivered a negative absolute return for thequarter(-16%)butsignificantlyoutperformeditscomparison index, the MSCI EFM Africa Ex-ZA Index (-28%). The portfolio is down 18% when measured over the past 12-months, also 2% ahead of the benchmark. Over a three-year period, the portfolio has outperformed the comparison benchmark by 2.5% per annum (p.a.), generating a return of -0.9% p.a. in USD.

Key positive contributions:Theglobalsell-offinriskassetsoverthequarterleftfew positive contributors for the portfolio. The relatively defensive positioning helped limit losses, with manyofthelow-leverage,highcashflow-generatingcompanies in the portfolio experiencing comparatively resilient share price performance.

Our telecommunications investments in North, East and West Africa all delivered relatively resilient returns as equity investors sought refuge in one of the few sectorsexpectedtopotentiallybenefitfromthedisruption caused by the coronavirus (COVID-19) pandemic.

Our holdings in a Nigerian consumer company continuedtobenefitasNigerianauthoritiesofferedsupport to domestic producers through various economic measures.

Key negative contributions:Allbutahandfulofourportfolioholdingssoldoffduring the quarter. The prices of Nigerian cement, bank and consumer discretionary stocks were among the most severely impacted as the market discounted the impact of substantially lower oil prices on that country’s economy.

Our holdings in Egyptian consumer discretionary and defensive companies also came under pressure over the quarter. We consider these companies to be relatively well-positioned for the current economic environment.However,whiletheircashflowsareexpected to prove resilient during the COVID-19 related economic disruption, the share prices retreated asmarketseffectivelydiscountedthesecashflowsatincreasedratesduetotheamplifiedglobaleconomicuncertainty.

Africa

3-month 12-month3-year

annualised

MSCI World - excl. EM -21% -10% 3%

MSCI Emerging Markets -24% -17% -1%

MSCI Frontier Markets -32% -29% -8%

MSCI EFM Africa ex-ZA -28% -20% -3%

Africa Equity Market Returns in context


Market backgroundThe 28% decline in the MSCI EFM Africa ex-ZA index over the quarter was broad-based as investors sought to reduce equity risk given the negative impact of COVID-19 on the global economy. The Nigerian market tumbled on concerns about the impact of the oil-price rout on that country’s economy. The Moroccan and Kenyanmarketssoldoffasinvestorsfocusedontheanticipated negative impact on those economies from the expected disruption to export, remittance and tourism receipts. Similar concerns drove the Egyptian market lower.

The BRVM market was most resilient, closing 18% lower, while the Mauritian market was the biggest laggard, down 33% over the period. The Nigerian market fell 30%, the Egyptian market dropped 27% and the Kenyan market shed 22%. Currency movements impacted the reported returns, with the naira and Kenyan shilling depreciating by 7% and 5%, respectively. The Egyptian pound appreciated by 2% over the quarter.

ThetablebelowreflectstheperformanceoftheMSCIAfrica ex-ZA Index, together with other relevant MSCI indices. Emerging market equities have underperformed developed markets over the past quarter, year and three years. While African equity markets have underperformed emerging market equities, they have fared somewhat better than frontier markets.

Alternatives

57

Alternatives

When considering the performance of African equity markets relative to frontier, emerging and developed markets, it is instructive to note the current valuation metrics, as illustrated in the table below.

It is of course important to consider various compensatory factors in comparing overall valuation metrics. On a high level, we note the higher price-to-book ratio (which compares a company’s current market value to its book value) of African equitymarketsrelativetootheremergingandfrontiermarketsisjustifiedbythehigher return on equity (ROE) reported by African companies. This higher return on equity results in lower price to earnings ratios for African Equities, despite the higher price-to-book. African Equity markets are priced to deliver a substantially higher dividendyieldthanglobalandemerging markets.

Price-to-Book (x) ROE (%) PE (x)

Dividend Yield (%)

MSCI World - excl. EM 2.0 12.0 16.3 2.9

MSCI Emerging Markets 1.2 7.3 12.0 3.3

MSCI Frontier Markets 1.3 13.4 9.7 4.6

MSCI EFM Africa ex-ZA 1.7 21.4 8.4 5.8

Africa Equity Market valuation metrics


Portfolio activityOur investment philosophy – identifying high-quality companies that are attractively priced to deliver appropriate risk-adjusted returns on a long-term investment horizon – results in low trading activity in the portfolio. Our trading activity this quarter was somewhat higher than normal as we sought to tactically rebalance the portfolio given thesignificantchangeintheglobaleconomicoutlook.

In Nigeria we reduced our holdings in a bank and a cement company, given the deteriorating near-term economic outlook in that country. We also trimmed our holdings in an Egyptian consumer discretionary company that earns a substantial portion of its revenue from exports to Europe. Given the impact of social distancing on near-term revenues, we lightened our holding in an East African beer and liquor company. We deployed some of these proceeds to increase our holding in a West and North African Gold mining stock.

58

Alternatives

We remain confident that Africa-listed equities present an attractive investment opportunity to patient long-term investors.


NigeriaNigeria delivered its strongest quarterly growth in the fourth quarter of 2019 since the 2016 recession. GDP growth of 2.6% was underpinned bytheoil&gas,financialservicesandtelecommunicationssectors.The 2016 recession was caused by the substantial terms-of-trade shock that emanated from the decline in oil prices from mid-2014 to late 2016. Nigeria’s recovery is now expected to reverse in 2020, as the country likely falls back into recession given current global oil market conditions.

Nigerian authorities have implemented several measures to contain the spread of COVID-19. These include the closure of international airports, public and private schools, universities, stores and markets, and the suspension of public gatherings. A two-week “lockdown” has been declared in Lagos, Abuja and Ogun states. While these measures certainly create economic disruption, the predominant impact of COVID-19 on Nigeria is through the exogenous impact of reduced oil pricesonNigeria’stermsoftradeandfiscalrevenues.

Oil revenues are c.55% of federal government revenue and over 80% of Nigeria’s exports. The dramatic fall in oil prices leaves the federal governmentofNigeriawithlimitedfiscalcapacity.Whileafiscalstimulus package in the form of a COVID-19 intervention fund of N500 billion(US$1.4billion)hasbeenapprovedtosupporthealthcarefacilities, provide relief for taxpayers, and incentivize employers to retainandrecruitstaffduringthedownturn,thegovernmenthasalsoannouncedplanstocut/delaynon-essentialcapitalspendingbyN1.5trillion (close to 1% of GDP).

The Nigerian authorities have focused on monetary and macro-financialmeasurestosupporttheeconomyinthewakeoftheoutbreak. These measures are aligned with existing policies, focused on developing domestic industrialisation and ultimately import substitution. These include cutting the interest rates and increasing and extending existing ‘intervention facilities’ provided to support domestic production.

Nigeria plans to raise as much as US$6.9 billion from multilateral lenderstohelpfundeffortstostopthespreadofCOVID-19andtosupport the economy. These funds will be particularly vital in alleviating pressure on Nigeria’s balance of payments.

59

Alternatives

We are optimistic that the country will navigate the current downturn substantially better than it did the 2014 – 2016 episode. The scrapping of petroleum subsidies, engagementwithmultilaterallendersandflexibilityalreadyevidentintheexchangerate are a substantial departure from the previous economic response.

Oil receipts are clearly a key factor in the Nigerian economy, but it is important to note that the oil & gas sector is just c.10% of Nigeria’s GDP. The agriculture sector is double the size of the oil & gas sector and employs roughly 45% of the Nigerian workforce. Services, trade and manufacturing are also substantial economic activities in the country.

Estimated to be over 200 million, the Nigerian population is sizeable. While consumer spendinghasbeenconstrainedinrecentyearsashighinflationandlimitedeconomicgrowthhaveerodedaffordability,theNigerianconsumeropportunityisvast.Indeed,global consumer businesses including Anheuser-Busch InBev, Kelloggs, Salim Group and Olam International have invested hundreds of millions of dollars in Nigeria in recent years.

We believe that Nigeria presents a very attractive investment opportunity to businesses that can navigate the hurdles created by poor infrastructure and unconventional government policy. Technological advancement in communications, logistics and payments substantially improve corporate’s route-to-market. The development of plant and equipment from Asia that is more appropriate for the Nigerian environment has substantially improved the economics of addressing the large,low-incomemarket.Operatorswhosebusinessmodelseffectivelycapitaliseonthe opportunity presented by the large market tend to earn substantial returns on invested capital.

AheadoftheCOVID-19outbreak,thedifficultmacroeconomicbackdropinNigeriahad already led to negative investor sentiment. Nigerian asset prices have been depressedforthepastfiveyears,effectivelydiscountinganexceptionallyhighcostof capital. Over this period, many Nigerian corporates have continued to build their businesses, generating attractive returns on invested capital and paying healthy dividends.We expectourholdingsinNigeriatoproveattractiveoverthemediumtolong-term as these companies perform well despite the current environment. This is largely due to what we consider to be their superior business models and the continuedexecutionthereof,affordingthecompaniesacompetitiveadvantageandcommensurateprofitabilitythatisnotreflectedintheir valuations.

60

EgyptWe remain constructive on the Egyptian equity market in the long term. This view is underpinned by the country’s continued macro-economic reform programme, an attractivecommercialenvironmentandseveralcompellingstock-specificequityinvestment opportunities. We note that the IMF expects the Egyptian economy to be one of the more resilient global performers in the wake of COVID-19. We are, however, cautious of the impact of the virus on Egyptian economic activity.

The Egyptian authorities have sought to balance the need to contain the spread of COVID-19,withthecountry’ssocialandeconomiccircumstances.The countryhasthus not entered a complete lockdown, but has implemented an overnight curfew, reduced the operating hours of some activities (e.g. opening hours for banks) and ordered the closure of all commercial stores over weekends. Schools, universities and places of worship have been temporarily closed. While certainly somewhat disruptive, this approach allows much of Egypt’s domestic activity to continue.

TheexogenousimpactofthecoronavirusispotentiallysignificantforEgypt.Theabrupt decline in foreign tourist activity and likely substantially reduced worker remittances are key concerns. The weaker demand in the global market will also reduce Egypt’s exports as well as earnings from the Suez Canal.

The central bank and the government are actively implementing measures to contain economic implications of the pandemic. These include stimulus and support measures targeted at the most vulnerable members of society and certain economic sectors.A substantialportionofthestimulusisaimedatthetourismsector,whichcontributes c.12% of GDP, c. 10% of employment, and almost 4% of GDP in terms of foreign receipts. The policy rate has been cut substantially but remains in the high mid-singledigit territory.

The Egyptian macroeconomic environment is expected to continue to support corporate activity in the medium-to-long term as the country continues the economic reform process that started in 2016 under the three-year IMF programme. Indeed, economic activity improved substantially over the past three years as a result ofthemonetary,macro-financialandfiscalreforms.Mid-singledigitinflationisnowarealisticexpectationinEgypt,substantiallylowerthanthedouble-digitinflationthatEgyptian consumers experienced in recent years. While set to increase in the short-term due to the COVID-19 economic shock, unemployment reached a 20-year low in 2019, further highlighting the achievements of the reforms undertaken.

Alternatives

61

Alternatives

We believe we are realistic in our expectations for continued economic recovery in Egypt in the long term, but are mindful that the current global economic backdrop will dampen the pace of the recovery in the near term. This will impact many Egyptian corporates’ earnings as both consumption and investment are likely to come under short-term pressure.

The long-term opportunities in the market remain compelling. Egypt is a highly underpenetrated market, in many instances addressed by informal and fragmented industries. Technology, innovation and a strong entrepreneurialspiritaffordwell-runcorporatesasignificantopportunityto scale-up and capitalise on the large Egyptian market. We continue to identify attractive investments here. We expect the business models of our core Egyptian holdings and their continued successful execution to affordthesecompaniesacompetitiveadvantageandcommensurateprofitabilitythatisnotreflectedintheirvaluations.

Egypt is a highly underpenetrated market, in many instances addressed by informal and fragmented industries.

62

KenyaOur optimistic view of Kenya’s long-term growth potential remains, underpinned by attractive demographics, continued government-led infrastructure investment and anticipatedforeigndirectinvestment.However,ourlong-standingconcernsregardingKenya’scurrentaccountandfiscaldeficitsareunfortunatelyheightenedbythe impact of COVID-19 on the global economic outlook.

The Kenyan authorities have adopted a number of containment measures in response to the pandemic, including a dusk-to-dawn curfew, the closure of schools, the banningofpublicgatherings,andthesuspensionofinternationalpassengerflights.Several economic support measures have also been put in place, including personal and corporate tax relief, a reduction in the VAT rate; and substantial monetary policy loosening.

While domestic supply chains and local production will most likely be disrupted by Covid-19, most sectors of the Kenyan economy have not been directly impeded by government’sresponsetothepandemic.However,thetourismandhorticulturesectorshavealreadybeenimpactedsignificantly,withthehorticulturesectorreliantoninternationalpassengerflightstoexportitsproduce.Thesesectorsarebothmajoremployers as well as leading sources of foreign exchange for the country. Remittances from Kenyans living abroad are likely at risk in the current global economic environment, potentially placing further strain on the country’s current account.

The IMF has drastically cut its 2020 GDP growth forecast for Kenya owing to the locust infestation and COVID-19 implications. Together with many other emerging markets, we expect Kenya to seek the assistance from the IMF, the World Bank and otherdevelopmentfinanceinstitutionsincounteringthesocioeconomicimpactofCOVID-19. This support will be crucial in helping Kenya to navigate the current global economic environment, given the country’s existing reliance on foreign capital marketstofundthefiscalandcurrentaccountdeficits.

The Kenyan banking system continues to contend with a weak lending environment as assetqualitychallengeshavenodoubtbeenamplifiedbythedeterioratingeconomicenvironment. The agriculture sector faces potential near-term headwinds from the worst locust infestation in decades. The depth and duration of COVID-19 related disruptions are uncertain, with particularly limited visibility on the recovery of the tourismandhorticulturesectors.Despitethesubstantialsell-offinKenyanequitiesover the past quarter, we remain cautious in our positioning in the country.

Alternatives

63

Alternatives

Attractive, quality investments remain in African opportunity set WeremainconfidentthatAfrica-listedequitiespresentanattractiveinvestmentopportunity to patient long-term investors. We expect the progression of African societiesandeconomiestocontinuetooffersignificantgrowthopportunitiestobusinesses operating on the continent. Our long-term expectations are underpinned by the structurally attractive economic prospects in most markets as economic policy reform, infrastructural development, new technologies and supportive demographic trends continue to advance. That said, this multi-decade growth potential will likely continue to be punctuated by periods of severe volatility. The exogenous shock weighing on many African economies as a result COVID-19 is clearly one of these periods. The predominant impact on African economies is expected to see reduced tourism, remittance and export receipts.

We believe our long-term strategy of owning high-quality businesses with sustainable competitive advantages and competent management teams remains very well positioned. We expect many of the business that we are invested in to gain market share in this environment as they navigate the challenging landscape better than their weaker competitors.

We expect the progression of African societies and economies tocontinuetooffersignificantgrowthopportunitiestobusinesses operating on the continent.

64

International7

65

Performance reviewFor the quarter, the portfolio delivered negative absolute returns, underperforming its benchmark.

The portfolio produced a negative absolute return in US dollars, gross of fees , underperforming its benchmark. The equity allocation detracted, with markets globally entering a turbulent period driven by the combined impact of the coronavirus pandemic and an oil price war between Saudi Arabia and Russia. These shocks contributed to dislocations in credit markets, one of the most rapid declines in developed market equities in the past century, and what is set to be a sharp contraction in global growth. As a result, central banks and governments have moved to ease policy aggressively in seeking to support the functioningoffinancialmarketsandtoassistthehousehold and business sectors through what is set to be a very. challenging period. This helped markets regain some ground in the second half of March. The largest detractions came from US equities and from the financialsectorinparticular,withUSmortgageinsuranceandlargecapbankexposuresufferingnotable weakness. Asian equity positions fared somewhat better as China showed signs of recovery as the early onset of the virus and associated economic shutdown began to abate by the end of the period, with digital consumption names such as Alibaba and Netease performing relatively well.

Returncontributionsfromtheportfolio’sfixedincomepositions were also mixed as developed market bonds rallied following emergency rate cuts by central banks in light of a deterioration in growth outlooks. A long position in Canadian short dated government bonds added to performance, while positions in curve steepeners neither contributed, nor detracted over the period.Positionsinemergingmarketdebtsoldoffdriven by a stronger dollar and a pickup in global recession fears, with notable weakness in South AfricanandRussianpositions.In contrast,theportfolio’s position in gold added to returns as it appreciated over the period

Global Strategic Managed

International

Market backgroundThefirstquarterwasdominatedbythreeshockstomarkets: the coronavirus (COVID-19) global pandemic; an oil price war between major energy producing nations; and the consequent market weakness resulting in disorderly price action and dislocation across all asset classes. As a result, central banks and governments moved to ease policy aggressively in seekingtosupportthefunctioningoffinancialmarketsand assist the household and business sectors to an unprecedented scale. The US Federal Reserve (Fed) alone, for example, expanded its balance sheet by almost US$1 trillion in the space of just two weeks.

Growth assets universally generated negative returns. Oil was by far the worst, falling 70% from peak due to falling demand and increasing supply. Equities across the board struggled with almost all major indices posting double-digit losses and UK and emerging market equities among the worst performers. Chinese equities were the relative best performer. Real estate stocks fell, while an exodus from emerging market assets saw yields on sovereign debt rise as prices fell leading to double-digit losses for both local and hard currency debt. Credit spreads rapidly widened towards the latter half of the quarter leading to 10-20% falls across credit and an implied default rate several times higher than that seen in a typical recession.

Traditionaldefensiveassetsofferedlimitedshelter,withdeveloped market bonds delivering a small positive return as yields fell, although not consistently. ContinuedflowsintotheUSbondmarketsawthe10and 30-year Treasuries rally as their yields dropped to record lows yet again before pulling back in the second half of March. The US dollar demonstrated ‘safe haven’ characteristics although with some volatility during March. The Japanese yen and gold performed well, though the latter’s price action proved unstable. Investment grade credit was a notable underperformer, driven by investors’ rush to raise liquidity.

66

Portfolio activityThe portfolio had been positioned for an emerging economic recovery entering 2020 and we saw strong return potential from the portfolio over a two to three-year horizon based upon the balance between attractive valuations versus strong underlying fundamentals in the portfolio’s active positions. As such, the portfolio entered this turbulent period with an overweight equity position and an underweight exposure to developed market government debt, due to extended valuations, but with a high cash balance.

Although uncertainty about the future remains high, thesell-offanddislocationsinfinancialmarketshavenow created compelling investment opportunities for medium-term investors, in our view. So far, we have usedthissell-offinmarketstobegintodeploytheportfolio’s cash balance – buying the shares of companies we have wanted to own in the past, but had been held back by prior elevated valuations, and adding to existing positions, as well as building exposure to developed market credit where dislocations have been particularly stark.

Postthesell-offinmarkets,weaddedtopositionsinhigh quality companies, many with defensive characteristics. In addition, we believe the largest dislocationinfinancialmarketsappearedindevelopedmarket credit, with investment grade credit spreads having widened materially and disproportionately versus other asset classes, while high yield debt markets haven’t been too far behind. As a result, we used some of the portfolio’s cash balance to build a position in investment grade credit.

Outlook and strategyThe current macro environment displays a high degree of uncertainty and there is a risk of a more pronounced economic downturn that would likely weigh on equity andcreditmarketsfurther.However,wetakesomeencouragement from the patterns relating to the lockdowns of populations and containment of new infection cases. In addition, we are also encouraged by the steps that authorities have taken in seeking to limit the economic damage from containment measures.

On the former, the pattern in China and South Korea has been for new cases to peak and then decline two-three weeks after the implementation of stringent social distancing measures. Similar evidence is starting to emerge in Europe. On policy, the speed and magnitude of the measures being announced and implementedisunprecedented.Thisdifferssomewhatfrom the major economic crises of the past, such as 2008 where it was authorities letting Lehman Brothers collapse that caused trust between banks and businessestobreakdownandbroaderconfidenceacross the economy to evaporate, amplifying the downturn. It was only in the months after this that central banks and governments then implemented significantmeasures,amountingtoc.22%ofGDPinthe US, to backstop the system. There were also delays in the 1930s, but it took years rather than months for authorities to respond with adequate measures.

Weestimatethatthesumofmonetaryandfiscalpackages announced as at 31 March 2020 in the US, eurozone and the UK are 53%, 50% and 36% of GDP, respectively. We believe the aggressive and rapid natureofthisactionsignificantlyreducesthetailriskofa more pronounced, prolonged downturn, and it should aid a faster bounce back in activity when the time comes.

Financial markets are likely to remain highly volatile in the coming quarters as investors weigh up the economicimpactfromeffortstocontainthecoronavirus outbreak, the results and progress of containment measures in supressing the spread of the virus,andtheimpactofmaterialmonetaryandfiscalstimulus.Thatsaid,webelievethesignificantexpansionin risk premia and depressed valuations present opportunities for medium-term investors and we will continue to take advantage of compelling opportunities as and when they are presented by volatilemarkets,whilemaintainingtheflexibilitytohedge exposure if we see the likelihood of a more pronounced downturn materialising.

International

67

Asset allocation

Regional allocation

Currency allocation

Source: Ninety One as at 31.03.20.Composite benchmark: 60 MSCI_NR spliced MSCI_ACWI + 40 Citigroup.


Source: Ninety One as at 31.03.20.Composite benchmark: 60 MSCI_NR spliced MSCI_ACWI + 40 Citigroup.

64.7%

13.2%

22.1%

60.0%

40.0%

0%

20%

40%

60%

80%

Equities Bonds Cash

Mar-20 Benchmark

9.7

1.53.8 3.1 3.2

0.8

36.0

4.5 5.4 7.0

11.3

0.5

9.0

- 0.9 - -3.3

0

5

10

15

20

25

30

35

40

US UnitedKingdom

Europe Japan Far East EmergingMarkets

Cash Equity Bonds

44.1

7.0

17.1 13.9 14.5

3.4

52.6

4.7

20.2

11.88.6

2.1

0

20

40

60

Dollar UK Euro Japenese Yen Asian OtherCurrencies

Mar-20 Benchmark

International

68

Performance reviewFor the quarter, the portfolio delivered negative absolute returns.

The equity allocation was the largest detractor, with markets globally entering a turbulent period driven by the combined impact of the coronavirus pandemic and an oil price war between Saudi Arabia and Russia. These shocks contributed to dislocations in credit markets, one of the most rapid declines in developed market equities in the past century, and what is set to be a sharp contraction in global growth. As a result, central banks and governments have moved to ease policy aggressively in seeking to support the functioningoffinancialmarketsandtoassistthehousehold and business sectors through what is set to be a very challenging period. This helped markets regain some ground in the second half of March.

The largest detractions came from US equities and fromthefinancialsectorinparticular,withUSmortgage insurance and large cap bank exposure sufferingnotableweakness.Asianequitypositionsfared somewhat better as China showed signs of recovery as the early onset of the virus and associated economic shutdown began to abate by the end of the period, with digital consumption names such as Alibaba and Netease performing relatively well. Return contributionsfromtheportfolio’sfixedincomepositions were also mixed as developed market bonds rallied following emergency rate cuts by central banks in light of a deterioration in growth outlooks. A long position in Canadian short-dated government bonds added to performance, while positions in curve steepeners neither contributed, nor detracted over the period. In contrast, positions in emerging market debt soldoffdrivenbyastrongerdollarandapickupinglobal recession fears, with notable weakness in South African and Russian positions. The position in gold added to returns over the period.

Global Multi-Asset Total Return

Market backgroundThefirstquarterwasdominatedbythreeshockstomarkets: the coronavirus (COVID-19) global pandemic; an oil price war between major energy producing nations; and the consequent market weakness resulting in disorderly price action and dislocation across all asset classes. As a result, central banks and governments moved to ease policy aggressively in seekingtosupportthefunctioningoffinancialmarketsand assist the household and business sectors to an unprecedented scale. The US Federal Reserve (Fed) alone, for example, expanded its balance sheet by almost US$1trn in the space of just two weeks.


Traditionaldefensiveassetsofferedlimitedshelter,withdeveloped market bonds delivering a small positive return as yields fell, although not consistently. ContinuedflowsintotheUSbondmarketsawthe10and 30-year Treasuries rally as their yields dropped to record lows yet again before pulling back in the second half of March. The US dollar demonstrated ‘safe haven’ characteristics although with some volatility during March. The Japanese yen and gold performed well, though the latter’s price action proved unstable. Investment grade credit was a notable underperformer, driven by investors’ rush to raise liquidity

International

69

Portfolio activityThe portfolio had been positioned for an emerging economic recovery entering 2020 and we saw strong return potential from the portfolio over a two to three-year horizon based upon the balance between attractive valuations versus strong underlying fundamentals in the portfolio’s positions. As such, the portfolio entered this turbulent period with a higher exposure to growth assets than we would have liked, given the magnitude of declines in equity and credit markets. The portfolio held close to 60% in equities, c.10% in select emerging market debt positions and 5% in gold, but also with a high allocation to cash (25%).

Although uncertainty about the future remains high, thesell-offanddislocationsinfinancialmarketshavenow created compelling investment opportunities for medium-term investors, in our view. So far, we have usedthissell-offinmarketstorotateoutofanumberoflower conviction positions into higher conviction positions, with the latter seeing larger declines in many instances, and we have begun to deploy the portfolio’s cash balance – buying the shares of companies we have wanted to own in the past, but had been held back by prior elevated valuations, and adding to existing positions, as well as building exposure to developed market credit where dislocations have been particularly stark.

Postthesell-offinmarkets,werebalancedtheportfolioaway from a passive equity position in Japanese equities into higher-conviction stock positions, due to their relative valuations becoming more attractive. Existing positions that have been added to include UnitedHealth,Axfood,JPMorganChase,PartnersGroup,HomeDepot,Visa,S&PGlobal,NorthropGrumman, American Express, Rio Tinto and Netease. We also increased the portfolio’s exposure to equities through the purchase of higher quality, relatively defensive businesses that have been discounted toward trough valuations, such as Philip Morris, Johnson and Johnson, Unilever, Tate & Lyle, GlaxoSmithKline, Novartis and Coca Cola European Partners. The portfolio held closer to 65% in equities at quarter end as a result of these changes.

International

Webelievethelargestdislocationinfinancialmarketshas appeared in developed market credit, with investment grade credit spreads having widened materially and disproportionately versus other asset classes, while high yield debt markets haven’t been too far behind. As a result, we used some of the portfolio’s cash balance to build a c.7% position in developed market credit across US investment grade, US high yieldandEuropeanhighyield.Elsewhereinfixedincome, we exited the portfolio’s positions in Turkish local currency and longer dated dollar bonds, as well asIndonesianlocalcurrencybondsprethesell-offinmarkets.Thisfollowedasignificantcompressioninriskpremium through late 2019 and early on this year.

Outlook and strategyThe current macro environment displays a high degree of uncertainty and there is a risk of a more pronounced economic downturn that would likely weigh on equity andcreditmarketsfurther.However,wetakesomeencouragement from the patterns relating to the lockdowns of populations and containment of new infection cases. In addition, we are also encouraged by the steps that authorities have taken in seeking to limit the economic damage from containment measures. On the former, the pattern in China and South Korea has been for new cases to peak and then decline two-three weeks after the implementation of stringent social distancing measures. Similar evidence is starting to emerge in Europe. On policy, the speed and magnitude of the measures being announced and implementedisunprecedented.Thisdifferssomewhatfrom the major economic crises of the past, such as 2008 where it was authorities letting Lehman Brothers collapse that caused trust between banks and businessestobreakdownandbroaderconfidenceacross the economy to evaporate, amplifying the downturn. It was only in the months after this that central banks and governments then implemented significantmeasures,amountingtoc.22%ofGDPinthe US, to backstop the system. There were also delays in the 1930s, but it took years rather than months for authorities to respond with adequate measures.

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International

Weestimatethatthesumofmonetaryandfiscalpackagesannouncedasat31March2020 in the US, eurozone and the UK are 53%, 50% and 36% of GDP, respectively. Webelievetheaggressiveandrapidnatureofthisactionsignificantlyreducesthetailrisk of a more pronounced, prolonged downturn, and it should aid a faster bounce back in activity when the time comes. Financial markets are likely to remain highly volatile in the coming quarters as investors weigh up the economic impact from effortstocontainthecoronavirusoutbreak,theresultsandprogressofcontainmentmeasures,andtheimpactofmaterialmonetaryandfiscalstimulus.Thatsaid,webelievethesignificantexpansioninriskpremiaanddepressedvaluationspresentopportunities for medium-term investors and we will continue to take advantage of compelling opportunities as and when they are presented by volatile markets, while maintainingtheflexibilitytohedgeexposureifweseethelikelihoodofamorepronounced downturn materialising.

Wehaveusedthissell-offinmarketstorotateoutof a number of lower conviction positions into higher conviction positions.

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International

Asset allocation

Regional allocation

Currency allocation


94.9

0.5

-20.2

8.5 13.5 2.8

-30

-10

10

30

50

70

90

US Dollar UK Euro JapeneseYen

Asian OtherCurrencies

Cash Equity Bonds

25.8

0.1

-5.5

2.3 3.70.0 0.8

27.3

6.4 3.0

6.6

16.6

-2.3

9.1

- - - -

-11.4

13.3

-20

-10

0

10

20

30

US UnitedKingdom

Europe Japan Asia Far East EmergingMarkets

-20%

0%

20%

40%

60%

80%

62.2

Equities

11.0

Bonds

27.2

Cash

-0.4

Forwards



72

International

Market backgroundThefirstquarterofthenewdecadesawanumberofeconomicandgeopoliticaleventsimpactingmarkets.HeightenedtensionsintheMiddleEast,bushfiresinAustralia,thesigningofthe‘PhaseOne’tradedeal between China and the US, and the eventual departure of the UK fromtheEuropeanUnionoccupiedattentionforthefirstfewweeksofthe quarter. Ultimately, it was the shocks related to the coronavirus (COVID-19) outbreak that dominated markets overall. An estimated one third of the world’s population went into lockdown by the end of the month and many regions closed their borders.

This human crisis and the associated demand shock coincided with the outbreak of an oil price war, led by Saudi Arabia and Russia. The fall in the oil price to an 18 year low added to the stress in markets already evident from the COVID-19 related fall in global demand.

Market weakness itself became another shock, as investors desperately sought to raise cash and de-lever. The three shocks combined resulted in disorderly price action and dislocation across all assetclasses.Equitymarketsacrosstheglobefellsignificantly,whilethe VIX – the market’s fear gauge – exceeded what were considered extremelevelsoftheglobalfinancialcrisis.Theapparentsilverliningwas the speed and the quantum of the policy response, as policymakers globally announced widespread stimulus measures to add necessary support to their respective economies.

With commodity prices falling precipitously over the quarter it should be no surprise that energy and materials were among the worst performing sectors. Financials priced in a global recession. Other economically sensitive sectors like industrials also did poorly. More defensive sectors such as healthcare and consumer staples fared better, but all sectors saw double-digit falls.

Performance reviewFor the quarter, the portfolio marginally underperformed the benchmark.

The collapse of the oil price made energy exposure a negative for relative performance. Despite the portfolio’s underweight position here,stockselectionwasasignificantdrag,withtheAustralianoilandgasproducerSantos,andtheUSrefinerValeroEnergyamongthemostsignificantdetractorsovertheperiod.

Global Equity


Microsoft Corp 5.5

Alphabet Inc 3.6

Amazon.com Inc 3.3

Apple Inc 3.0

AlibabaGroupHoldingLtd 2.6

Samsung Electronics Co Ltd 2.4

RocheHoldingAG 2.3

Mastercard Inc 2

Iberdrola SA 1.9

Fidelity National Information

Services Inc

1.9

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As a result of the coronavirus pandemic, lower interest rates and alarm at the prospect of widespread defaults have had a negative impact on financialsacrosstheworld.Consequently,boththeUSbankinggiantCitigroup and credit card provider Discover Financial Services performed poorly over the quarter.

Raytheon,theUSaviationanddefencecompany,soldoffonthedeteriorating outlook for the company’s aerospace business given fleetgroundingsandnationallockdownsinresponsetoCOVID-19.Similarly, Delta Airlines was severely impacted by the halt in air travel.

On the other hand, the US software giant Microsoft proved to be the top performer over the quarter. The high proportion of recurring software subscription revenue should allow for a less acute demand impact. Furthermore, certain services such as virtual desktops, gaming,anditscloudbusiness,Azure,willbenefitfromincreasedremote working activity and widespread lockdowns.

Stockselectionintheconsumerdiscretionarysectorsignificantlyboosted relative returns. Chinese e-commerce giant Alibaba also benefitedfromsomanypeopleconfinedtotheirhomes.Goodresultsand comments that the business was normalising post the disruption caused by COVID-19 also helped performance. Likewise, more people gaming at home helped Chinese online gaming company NetEase. In a periodwhendefensivestocksoutperformed,theportfoliobenefitedfrom stock selection in communication services and its underweight to materials.

Other positives came from some of the Strategy’s health care holdings. Pharmaceuticals are generally more insulated than most sectors from COVID-19 risk from both a supply chain and product demand perspective. Roche, the Swiss drug company, owns Actemra which has produced promising results in the treatment of critical COVID-19 patients in China and Italy. Roche also produces testing equipment that has been approved to test for COVID-19. Testing and equipmentmanufacturerThermoFisherScientificwasalsoperceivedtobeabeneficiaryofwidertestingforthevirus.

International

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Outlook and strategyPeering out from under the table, with a tin hat on, across the rubble of the global equity market, green shoots are hard to spot through the smoke. Without any clear line of sight on the pandemic duration, the totalimpactonglobalcorporatecashflowcannotbedefinitivelyassessed. With current estimates of the vaccine development pipeline stretching out into 2021, damage to balance sheets and to going concern status could be considerable. Central banks have thrown everything they can at the market at an unprecedented rate and stimulus packages are still being ramped to the combined extent of more than 12% of global GDP so far and counting.

The dash for cash is well underway with corporates willing to raise equity at deep discounts and pay higher rates for bond issuance to deepen their near-term liquidity resources. Given the very uncertain environment,wehaveseenanumberofcompaniesacrossdifferentsectors suspend forward guidance, share buyback programmes and dividends. Investor preference is likely to continue to focus on those companies with the resources to see them through a protracted demandshutdownandperceivedfinancialweaknesswillcontinuetobe punished until some of those green shoots appear. We have been meticulouslyevaluatingdifferentscenariosandmonitoringthestressthat such events have on the credit worthiness of our holdings, namely balance sheet strength, a key component of our ‘Strategy’ analysis.

There is some comfort to be taken from the Far East and particularly China, which seems to be restarting its manufacturing and getting back to work. The West has a way to go and legitimate questions around the ability of democratic governments to enforce the levels of social discipline needed to halt the virus spread are being asked. However,anyevidenceofsuccessinthisglobalbattleislikelytobegreeted by a surge in risk appetite. There are clear long-term bargains available across markets and asset classes, which would respond to the prospect of a recovery and it will be important for us to stay nimble and alert to a rapidly changing landscape where there are large risks to both the up and downside.

As a long-term investor, our approach has captured opportunities that canbenefitfromcompellingseculartrends,someofwhichthecoronavirus outbreak has accelerated. One example being the shift to anything with an online channel due to home-working and social distancing.Wethereforehavenotmadesignificantchangestoportfolio positioning. We continue to focus on new opportunities emerging from market volatility and ensure our portfolio is positioned towards high quality companies with strong balance sheets and sustainable earnings. In our view, it is in such tumultuous times that a consistent, repeatable approach can help to guide us.

International

75


In a period when defensive stocks outperformed, the portfolio sufferedfromitslimitedexposuretosectorssuchasutilitiesandconsumer staples. The collapse of the oil price made energy the worst performing sector. Both the portfolio’s overweight position here and stockselectionwereasignificantdrag,withtheAustralianoilandgasproducerSantos,andtheUSrefinerValeroEnergyamongtheworstcontributors over the period.

US timeshare company Wyndham Destinations underperformed along withthebroadertravelandleisuresector.However,thecompanyhasresortandfinancingfeeswhicharemoreresilientrevenuestreams.With much of the global airline industry at a standstill, aeroplane productionandafter-marketsalesaresufferingaccordingly,leadingtoearnings downgrades for UK aeronautics company Meggitt, the most significantdetractorfromrelativeperformanceoverthequarter.

Stock selection in cyclically sensitive sectors such as industrials and financialsheldbackperformanceasthemarketdiscountedtheabruptcessation of economic activity. In addition, lower interest rates and alarm at the prospect of widespread defaults, particularly among consumers,wereasevereheadwindtofinancials.TheUSbankinggiantCitigroupwasamongthoseaffected.Giventheeconomicdownturn, delinquent debt could increase for US lender Ally Financial, putting its earnings under pressure. Consequently, the company cancelled its share buyback programme.

On the other hand, the US software giant Microsoft proved to be the top performer over the quarter. The high proportion of recurring software subscription revenue should allow for a less acute demand impact. Furthermore, certain services such as virtual desktops, gaming,anditscloudbusiness,Azure,willbenefitfromincreasedremoteworkingactivityandwidespreadlockdowns.Withasignificantpartoftheglobalpopulationconfinedtotheirhomes,onlineretailerAmazonisalsobenefitingfromthepandemic.CallcentreoperatorTeleperformance outperformed as the company’s earnings, while impacted by COVID-19, look resilient relative to others in the market.

Another leading contributor to performance was Chemed Corporation, the US provider of palliative care, where earnings upgrades from results in February continued into March. Chinese constructionequipmentmakerSanyHeavyIndustry,anewstockinthe portfolio, recovered as the Chinese government started an infrastructure stimulus programme and demand for equipment was seentobenormalising.GoldminerPolymetalInternationalbenefitedfrom resilient gold price, which made materials the strongest performing sector.

Global Strategic Equity

InternationalInternational


Microsoft Corp 5.7

Amazon.com Inc 4.2

Alphabet Inc 3.7

Samsung Electronics Co Ltd 3.5

Teleperformance 3.1

UnitedHealthGroupInc 2.5

Chemed Corp 2.3

Facebook Inc 2.2

Keysight Technologies Inc 2.1

MMC Norilsk Nickel PJSC 2.0

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Market backgroundThefirstquarterofthenewdecadesawanumberofeconomicandgeopoliticaleventsimpactingmarkets.HeightenedtensionsintheMiddleEast,bushfiresinAustralia,thesigningofthe‘PhaseOne’tradedeal between China and the US, and the eventual departure of the UK fromtheEuropeanUnionoccupiedattentionforthefirstfewweeksofthe quarter. Ultimately, it was the shocks related to the coronavirus (COVID-19) outbreak that dominated markets overall. An estimated one third of the world’s population went into lockdown by the end of the month and many regions closed their borders.

This human crisis and the associated demand shock coincided with theoutbreakofanoilpricewar,ledbySaudiArabiaandRussia.The fallin the oil price to an 18 year low added to the stress in markets already evident from the COVID-19 related fall in global demand.

Market weakness itself became another shock, as investors desperately sought to raise cash and de-lever. The three shocks combined resulted in disorderly price action and dislocation across all assetclasses.Equitymarketsacrosstheglobefellsignificantly,whilethe VIX – the market’s fear gauge – exceeded what were considered extremelevelsoftheglobalfinancialcrisis.Theapparentsilverliningwas the speed and the quantum of the policy response, as policymakers globally announced widespread stimulus measures to add necessary support to their respective economies.

With commodity prices falling precipitously over the quarter it should be no surprise that energy and materials were among the worst performing sectors. Financials priced in a global recession. Other economically sensitive sectors like industrials also did poorly. More defensivesectorssuchashealthcareandconsumerstaplesfared better, but all sectors saw double-digit falls.

Portfolio activity SignificanttransactionsduringthequarterincludedUShardwaretechnology company, Keysight Technologies. This US testing equipment manufacturer operates across a range of industries including5Gnetworksandsohassignificantgrowthpotential.Managementhaveupgradedits2020financialexpectationsandpainted a strong medium-term growth path. There are around 60 operatorsworkingtodeploy5Gnetworkstodayandthatnumbershould expand to more than 300 in coming years to the company’s benefit.

International

77

SignificantsalesincludedShanghaiInternationalAirport.Thedownturninhighermarginglobaltrafficwilldamageprofitabilityaswillweakness in advertising and duty-free sales. With low visibility as to the duration of the travel lockdown, earnings expectations are likely to further deteriorate in the near term while there is considerable uncertainty as to how long it will take for air travel volumes to recover to pre-virus levels.

Outlook and strategyPeering out from under the table, with tin hat on, across the rubble of the global equity market, green shoots are hard to spot through the smoke. Without any clear line of sight on the pandemic duration, the totalimpactonglobalcorporatecashflowcannotbedefinitivelyassessed. With current estimates of the vaccine development pipeline stretching out into 2021, damage to balance sheets and to going concern status could be considerable. Central banks have thrown everything they can at the market at an unprecedented rate and stimulus packages are still being ramped to the combined extent of more than 12% of global GDP so far and counting.

The dash for cash is well underway with corporates willing to raise equity at deep discounts and pay higher rates for bond issuance to deepen their near-term liquidity resources. Investor preference is likely to continue to focus on those companies with the resources to see themthroughaprotracteddemandshutdownandperceivedfinancialweakness will continue to be punished until some of those green shoots appear. There is some comfort to be taken from the Far East and particularly China, which seems to be restarting its manufacturing and getting back to work. The West has some way to go and legitimate questions around the ability of democratic governments to enforce the levels of social discipline needed to halt the virus spread are being asked.

However,anyevidenceofsuccessinthisglobalbattleislikelytobegreeted by a surge in risk appetite. There are clear long-term bargains available across markets and asset classes, which would respond to the prospect of a recovery and it will be important for us to stay nimble and alert to a rapidly changing landscape, where there are large risks to both the up and downside. We do know what we face today; the public, policymakers and our health workers are clear in what we need to do. To borrow from Winston Churchill: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.

International

Theportfoliosufferedfromits limited exposure to sectors such as utilities and consumer staples.

78

Performance reviewFor the quarter, the portfolio delivered negative absolute returns, but strongly outperformed the benchmark.

Stockpickinginfinancials–particularlynotholdingbanks – overweight exposure to IT and avoiding the underperformingenergysectorallprovedsignificantcontributors over the period. Software maker Microsoft delivered the biggest relative returns. The company did reduce its quarterly outlook for its ‘More Personal Computing’ segment due to coronavirus-related supply chain issues, but broader positive sentiment remained intact, in part related to persistent demand for the company’s cloud-based solutions, especially Azure.

Internet domain registration company VeriSign also contributed.Two keymetricsinthecompany’sresults– renewal rates and regulatory changes – provided support that the business model remains intact and the business continues to reinvest in the very same infrastructure which underpins its competitive advantage. In addition, the company announced an amended agreement in March that allows it to increase the maximum price of .com domain name registrations.

HealthcarecompanyRocheoutperformed,withitsdiagnosticsbusinessexpectedtobenefitfromCOVID-19testing.Thiscomesafterthefirmdeliveredstrong fourth-quarter results, and its outlook suggested plenty of opportunity still exists for future growth, whether that be product innovation in the current in-market drugs, new indications for existing drugs or entirely new drugs. Margins were very strong on a core basis.

Credit rating agency Moody’s contributed to returns. Recent results beat consensus estimates, and the company also raised its quarterly dividend by 12%, in addition to January’s announcement that it plans to buy back about US$1.3 billion of stock in 2020. Despite the fact Visa shares were heavily sold in the early stagesoftheCOVID-19sell-off–themoreprofitablecross-border aspect of the global payment provider’s business was hit by the travel restrictions – its strong performance earlier in the quarter meant it was an outperformer and contributor to relative returns.

Global Franchise

International


Visa Inc 8.6

Microsoft Corp 6.3

Moody's Corp 5.6

Verisign Inc 5.4

RocheHoldingAG 5.0

Nestle SA 4.5

BookingHoldingsInc 4.4

Philip Morris International 4.0

Johnson & Johnson 3.9

ASMLHoldingNV 3.8

InJanuary,VisaannouncedtheUS5.3 billionpurchaseofPlaid,markingafurtherlinkintothefintechindustry.

More negatively, stock selection within consumer discretionary and communication services proved the largest detractors to relative performance. Shares in onlinebookingportalBookingHoldingscameunderpressure due to the coronavirus outbreak. Management said bookings were tracking ahead of expectations up until early-February, before slowing after widespread concerns became a global issue. The companyhasannouncedarangeofactionstostem cash burn, including salary reductions, cutting events and marketing spend. We continue to believe Bookinghasenoughfinancialflexibilityinitsfinancialmodeltonavigatethedifficulttravelenvironment.

Amadeus, which provides IT software to the global travel and tourism industry, has been heavily impacted by the coronavirus outbreak. Global travel volumes are expectedtodeclinesignificantlythisyearandpotentially only recover to only half of 2019’s level by next year. We believe management have been prudent inshoringupthecompany’sfinancialposition,andAmadeus is likely to emerge from this period of uncertainty in a stronger competitive position, especially given many rivals are more levered, and have lessflexiblebusinessmodels.

79

WealthmanagerSt.James’sPlacehadadifficultquarteramidthecoronavirussell-offandaccompanyingshocktoinvestorconfidence.Thedecline in equity markets negatively impacts St James’s Place assets under management and therefore expected revenues. Media company Fox Corporation also detracted from returns, as investors perceived some cyclical risk to the company’s advertising revenues amid uncertainty regarding the impact of coronavirus on US cable subscribers.

Drinks company Anheuser-Busch InBev also came under pressure. Following its forecast in February that first-quarterearningswoulddrop10%,itsrelativelyhigh leverage came into focus, with the current environmentlikelytoweighoncashflowsandtheirability to pay down debt.

Market backgroundThe year started positively, as the US and China signed intoeffect‘phaseone’oftheirtradedeal.However,before long, news of the worsening coronavirus (COVID-19) outbreak in China began to drive fear into markets. Then came an oil price war, as cooperation within OPEC+ broke down. As COVID-19 spread outside of Asia, progressing to pandemic status, the global economyineffectfrozeasgovernmentsacrosstheboard restricted movement to combat the virus, promptingoneofthefastesteversell-offsinanumberof asset classes.

Equity investors shifted away from cyclical sectors as the global economic outlook worsened. Defensive spaces including health care, consumer staples and utilitiessignificantlyoutperformedthewidermarket,withenergyandfinancialsnotablelaggards.

Outlook and strategyWhat the world is facing now is genuinely unprecedented, with a distinct lack of past experience to take guidance from. Forecasts are even more prone to error than normal, as a result, with traditional models made redundant and the range of variables and possible outcomes too wide to predict with any kind of accuracy. The myriad inputs and factors prioritised by differentmarketparticipantshasresultedinvolatilitynotseen since 2008. Patchy and inconsistent data on the coronavirus itself has also contributed to uncertainty.

International

We acknowledge the decisive nature with which governments have acted in the face of this crisis. The speedandmagnitudeoffiscalandmonetaryresponseshave been encouraging against a backdrop of plunging economic activity. That being said, even in the best case recovery scenarios, we expect this crisis will have multiple second and third order impacts on industries, some of which may not become apparent for some time;nottomentionthefinancingandinvestmentimplicationsofrapidcapitalflowsandextremeassetprice moves we have seen in recent weeks.

Rather than attempt to make top-down forecasts, our assessment of the macro and market environment is typically made at the underlying stock level. We have been fastidious in our analysis of portfolio companies’ ability to navigate these challenging times, assessing their ability to emerge from the crisis in positions of strength with business models intact. Overall, we are comfortable that the Quality attributes we seek (enduring competitive advantages, dominant market positions, strong balance sheets, lower cyclicality, low capital intensity, sustainable cash generation and disciplined capital allocation) are all well suited to both current conditions and for any structural changes sparked by this crisis.

The Quality businesses we seek in our portfolios have historically proved resilient in times of uncertainty and have often led the recovery following indiscriminate sell-offs.Thesecompaniesmaybewellplacedtocapturesignificantupsideatsomepointinthefutureas investors once again recognise their Quality fundamentals. Additionally, given the substantial moves wehaveseeninshareprices,significantopportunitieslikely lie ahead. We continue to monitor the situation very closely and remain front-footed in terms of portfolio positioning.

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Thefirstquarterof2020wasdominatedbythemarketreactiontotheglobalspreadof the coronavirus (COVID-19) virus and the unprecedented shut down of large parts oftheglobaleconomyinanefforttocontainit.Allassetswiththeexceptionofhigh-qualitygovernmentbondssold-offsharplyasinvestorsbegantoassessthedamage to growth, with price dislocations exaggerating the moves in some relatively defensive areas such as investment-grade credit. Over the quarter, high yield and investment grade spreads widened by around 489 basis points and 174 basis points respectively. Emerging market bond yields rose by about 56 basis points. The target return fund closed most risk down in a timely way but was still impacted to some extent by the sharp dislocation in market pricing.

Market backgroundThefirstquarterwasdominatedbythreeshockstomarkets:theCOVID-19globalpandemic; an oil price war between major energy producing nations; and the consequent market weakness resulting in disorderly price action and dislocation across all asset classes. As a result, central banks and governments moved to ease policyaggressivelyinseekingtosupportthefunctioningoffinancialmarketsandassist the household and business sectors to an unprecedented scale. The US Federal Reserve (Fed) alone, for example, expanded its balance sheet by almost US$1trn in the space of just two weeks.


Traditionaldefensiveassetsofferedlimitedshelter,withdevelopedmarketbondsdelivering a small positive return as yields fell, although not consistently. Continued flowsintotheUSbondmarketsawthe10and30-yearTreasuriesrallyastheiryieldsdropped to record lows yet again before pulling back in the second half of March. The US dollar demonstrated ‘safe haven’ characteristics although with some volatility during March. The Japanese yen and gold performed well, though the latter’s price action proved unstable. Investment grade credit was a notable underperformer, driven by investors’ rush to raise liquidity.

Global Diversified Debt

International

81

Portfolio activity and positioningWe increased the portfolio’s allocation to credit significantly,liftingthecredithedges,totakeadvantageofthesell-offandattractiveentrypoints.

In credit, we are investing in bottom-up opportunities thatweestimatetohavesoldofftoomuchrelativetothe quality of their fundamentals, and which we believe have the resilience to weather the current economic storm. As spreads have moved meaningfully wider over the period, we have taken the opportunity to selectively add high-yield risk in our portfolio to seek to take advantage of the more attractive spread levels. As always,ourbottom-upanalysisisthedrivingforcebehind such moves. To allow us to make these investments, we have sold out of positions in areas of the credit market that have held up relatively well amid the recent market pressure. Investment-grade debt is the segment of the global credit market that has seen particularly aggressive selling in recent weeks, as investors have sought to free up cash. We have increased our exposure to investment-grade debt, aiming to take advantage of the relatively high credit qualityofferedbyselectopportunitiesinthisuniverseatparticularly attractive valuations, given historically high spread levels. We have also rotated our positioning within individual credit market sub-segments to seek to takeadvantageofinvestmentsofferingsimilarcreditqualitybutatbetterspreadlevels(i.e.offeringbettercompensation for the level of risk taken).

Within emerging markets, the portfolio was relatively defensively positioned, especially with little exposure to high volatility currencies, such as the Colombian peso, Mexican peso, Brazilian real, South African rand and Turkish lira, and bond markets in Latin America and the Middle East and Africa. Following the oil shock, we were quick to reduce exposure to Mexico, Colombia and Malaysia, but have retained the position in Peruvian and Russian assets. We think that emerging market currencies will continue to come under pressure in coming months, partly due to dollar strength, and that cautious positioning here is the right approach for our defensive strategy. Although the recent performance of hard currency bonds has been disappointing, we believe that these assets will recover and that further opportunities in this space are opening up.

International

The March moves in hard currency yield spreads are beginningtorivalpreviousmarketsell-offssuchastheAsianandglobalfinancialcrises.

InTargetReturn,riskwasscaleddownsignificantlyinJanuaryaswetookprofitonaproportionofourcoremarket themes including positions in high yield credit, emerging market currencies and emerging market hard currency exposures. The portfolio’s underweight position in the US dollar was neutralised early on in the quarter. The long dollar position then increased as we concentrated the best expression of our market themes directly through FX exposure within the portfolio. Defensive global duration exposure within the portfolio was gradually closed as developed market government bond yields priced in an extremely bearish global growth scenario. As the coronavirus lockdown took centre stage in March, we took prompt action and reduced credit exposure further, to c.15% of the portfolio (remaining exposure is in investment grade developed market credit) and we are currently sitting c.85% in cash, at the lower end of typical fund volatility, creating a strong position to capture deep value opportunities in a measured way once multiple shocks this quarter are fully discounted by the market.

Outlook and strategyThe dislocation in market pricing during March has createdsignificantvalueopportunities,mostnotablywithin credit following the rapid widening of yield spreadsinmid-March,whichwasdrivenbysignificantforced selling. Opportunities are also increasing within emerging market debt, but these look somewhat less compelling on a relative basis, given increasing strains in a number of these economies.

Our central case scenario is that following a severe shock to growth, the policies of isolation coupled with the rapid and meaningful response by policymakers will prevent a protracted recession; however there is much uncertainty given the high probability of a risk case in which rolling shutdowns are required across the West which lead to a prolonged dampening of activity and the lack of historical precedent for riskier assets recouping losses in a straight line after such sharp losses. We believe it is prudent to rebuild exposure gradually, with an eye on signs that risks are diminishing.

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Glossary of terms

8

82

83

Bond: Simply put, a bond is an IOU (abbreviation for I oweyou)issuedbyaborrower,normallyagovernment or a corporate, to a lender. The borrower promises to pay back to the bondholder the principal debt, which is the capital sum borrowed, as well as interest, normally paid in regular instalments (the coupon) throughout the life of the bond. When interest rates rise the prices of bonds usually decline and when interest rates fall the prices of bonds usually increase.

Carry trade: This refers to the strategy whereby investors borrow money cheaply (at low interest rates). They then use this ‘cheap’ money to invest in assets wheretheycanearnahigheryield/return.Itoftenentails borrowing money in one country where interest ratesarerelativelylowandinvestingitintheassets/currency of another country.

Consumer Price Index (CPI): This measures consumer inflation.Itreplacestheoldinflationindicator,theCPIX,asatargetofmonetarypolicy.TheCPIreflectstherateof increase in the prices of a pre-determined basket of consumer goods and services in urban areas and incorporates an estimated cost of occupation. The South African Reserve Bank regards CPI as a key indicatorofinflation.

Credit: In investment terms this refers to corporate bonds that are issued by companies when they wish to raisecapital.

Credit spread: Thedifferenceinyieldbetweendifferentbondsduetodifferentqualityratings.

Current account: The current account of a country’s balanceofpaymentsreflectsthenetpositionwithregard to the value of trade and services with the rest oftheworld.Acountrywithacurrentaccountdeficitimports goods and services of a greater value than it exports.

Deleveraging: This refers to the process of reducing debt.

Dividend: Some public listed companies distribute part oftheirprofitstoshareholders,whichisknownasa dividend.

Dividend yield (DY): The dividend yield is the share of profitsdistributedtoshareholdersdividedbythecurrent share price.

Dovish: With regard to monetary policy, it refers to the viewthatinflationisexpectedtofallandinterestrates may start to decline.

Duration: This tells us how much the price of a bond will increase or decline if interest rates move.

Earnings per share (EPS):Thisdefinesthetotalprofitsofacompanyoveraspecificperiod–usuallyaperiodof six or twelve months – divided by the total number of sharesinissue.EPSgrowthreferstothechangeinprofitspershareoveraspecificperiod.

Equities: This refers to the shares issued by a company, which is listed on a stock exchange. Sometimes investors refer to equities as stocks or shares.

Fixed income market: This refers to the market where interest-paying assets are traded such as bonds and cash.

Gross Domestic Product (GDP): This is a measure of a country’seconomicoutput.GDPgrowthreferstotherate at which a country’s economic activity (production of goods and services) increase.

Hawkish: With regard to a central bank’s monetary policy, it refers to an approach where a central bank willnothesitatetoraiseinterestratestocurbinflation.

Inflation: This refers to the rate at which the prices of goodsandservicesincreaseoveraspecificperiod.

Inflation target band: The South African Reserve Bank (SARB) introduced a target range of 3% – 6% for inflation.TheSARB’sintentionistoensurethatinflationdoes not exceed the upper band of this range, i.e., 6%. The overnight bank repurchase (repo) rate is the only tool at the disposal of the monetary authorities. Therefore,tohelpcurbinflationtheSARBmayraisethe reporate.

Glossary of terms

84

Listed property: This refers to shares in property companies or units in property trusts, listed on a stock exchange.

Long-dated and short-dated bonds: This refers to the dateofmaturity(orexpiry)ofabond.Forinstance,a long-dated bond has a maturity of ten years or more, while a short-dated bond has a maturity of up to three years.

Price earnings ratio (PE): This is one of the key ratios when assessing the value of a company. This ratio measures a company’s share price over the company’s profits.APEmultipleindicatesthepriceinvestorsarepayingforthecompany’searnings(profits).

Producer Price Index (PPI): This is a measure of inflationpertainingtoproducersormanufacturers.It reflectstherateofincreaseinthepricesofapre-determined basket of producer goods and services. If the prices of goods and services being manufactured locally are increasing at a very rapid rate, this will usually lead to a higher rate of increase in the prices of consumer goods and services.

Quantitative easing:Thisreferstoeffortsbya country’scentralbanktostimulatetheeconomybyreducing the cost of capital. The traditional monetary policy tool of reducing short-term interest rates has largely been exhausted. The US Federal Reserve (the Fed) has opted to apply unconventional policy, such as quantitativeeasing.TheFedhasfocusedonpurchasing short- to medium-duration (5-10 year area) governmentbonds,therebyinflatingthepriceandreducing the yield commensurately. Flows to bond holders (sellers) are not sterilised, thereby increasing the money supply to the economy.

Recession: A period of zero growth or negative economic growth.

Reflationarypolicy:Agovernmentaimstostemfallingassetpriceswithareflationarypolicybyincreasingthemoney supply, cutting interest rates and increasing public spending. Essentially these measures are used to improve economic growth by stimulating demand.

Stagflation: This describes an environment of zero growthornegativegrowthandacceleratinginflation.

Tracking error: This is a measure of how closely a portfolio follows its benchmark.

Yield curve: The yield curve shows the relationship betweeninterestratesandvariousfixed-incomeassetssuchasbondswithdifferentmaturitydates.Marketanalysts study the shape of the yield curve as it can help to predict future interest rate changes and economic activity. Normally longer-dated bonds would offerahigheryield(interestrate)toinvestorsthanshorter-dated bonds to compensate for the increased riskovertime.However,therearetimeswhenshorter-datedyieldsofferhigherinterestratestoinvestorsthanlongermaturitybonds.Thisisreflectedintheshapeofthe yield curve, which is described as being inverted. Whentheyieldcurveflattens,shorterandlongertermrates are usually moving closer to each other.

Glossary of terms

85

Performance9

86

PerformanceInvestment Capability Investment Strategy 3 month % 1 year %

3 years p.a. %

5 years p.a. %

10 years p.a. %

SA Equity And Multi-Asset

SA Balanced Ninety One Balanced -12.8 -8.1 2.0 3.3 9.9

*AF Global LMW MedianTM -13.5 -9.8 0.7 2.4 8.7

Ninety One Managed 0.5 8.2 8.9 9.1 12.6

(ASISA)SouthAfricanMAHighEquity -13.5 -10.4 -0.7 0.9 6.5

SA Equity Ninety One General Equity -25.4 -21.3 -4.8 -1.6 8.3

Ninety One Active Quants -19.5 -15.3 -1.2 -0.8 8.6

CAPPED SWIX | SWIX pre 011117 -26.6 -24.5 -6.3 -3.0 7.1

Ninety One Property Equity -48.5 -49.1 -22.6 -12.7 3.7

ALPI (J803) | J253 pre 011018 -48.1 -48.9 -24.2 -14.3 2.4

SA Value

Ninety One Value -35.0 -25.0 -9.3 -0.6 3.0

ALSI -21.4 -18.4 -2.1 -0.1 7.7

SA Fixed Income

Cash Ninety One Money Market 1.9 8.0 8.1 8.0 7.1

STeFI 3M 1.6 6.8 6.9 6.9 6.2

Bond Ninety One Flexible Bond -10.5 -4.4 5.3 5.6 7.9

Ninety One Triple Alpha Bond -8.5 -2.0 6.3 6.4 8.3

ALBI -8.7 -3.0 5.3 5.2 7.4

NinetyOneHighIncome 1.8 9.0 9.6 9.5 8.6

NinetyOneDiversifiedIncome 0.5 6.7 8.7 8.8 9.0

STeFI 1.7 7.2 7.3 7.2 6.7

Credit Ninety One Credit Opportunities -1.7 8.1 10.4 11.4 10.7

Ninety One Credit Income 1.6 9.0 9.8 9.5 8.9

STeFI 3M 1.6 6.8 6.9 6.9 6.2

Ninety One Corporate Bond -8.3 -1.1 7.4 7.6 9.3

ALBI -8.7 -3.0 5.3 5.2 7.4

Quality

South Africa Ninety One Opportunity -2.0 2.0 5.7 6.8 10.7

CPI Lagged+6% 3.0 10.7 10.2 11.2 11.1

Ninety One Cautious Managed -0.9 5.0 7.4 7.6 9.6

CPI Lagged+4% 2.5 8.7 8.2 9.2 9.1

Performance

87

Source: Ninety One as at 31.03.20. All returns are in rands and periods greater than one year are annualised. WM Reuters 16h00 London exchange rates have been used to convert international strategies from base currency to rands. The value of your investment may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Performance is shown gross of fees with gross income reinvested. A schedule of fees and charges andmaximumcommissionsisavailableonrequestfromthecompany/scheme.

Investment Capability Investment Strategy 3 month % 1 year %3 years p.a. %

5 years p.a. %

10 years p.a. %

Alternatives

Pan Africa Ninety One Africa 7.8 1.6 9.1 -0.5 5.1

MSCI EFM Africa EX

ZA|10YR+6%|LIBOR+4%

-7.6 0.5 8.5 10.6 13.1

International

Multi-Asset Global Strategic Managed 7.2 14.1 11.9 10.7 15.0

60% MSCI AC World + 40% WGBI 11.8 18.7 13.2 11.5 14.3

Global Multi-Asset Total Return 8.8 14.2 12.7 10.6 14.2

7%p.a.&CompBmkHistorySplice 29.9 32.5 20.8 16.0 16.8

GlobalDiversifiedGrowth 9.2 15.3 9.0 7.7 -

US CPI + 5% 30.9 33.1 18.1 15.7 -

4Factor EquitiesTM Ninety One Global Equity 0.0 7.7 11.0 9.5 15.8

Ninety One Global Dynamic Equity -4.0 3.1 9.6 8.9 15.7

Ninety One Global Strategic Equity -3.4 2.7 10.5 9.8 16.8

MSCI AC World 0.4 9.9 11.7 11.1 15.6

Quality Ninety One Global Franchise 11.8 22.5 18.7 17.5 20.3

MSCI AC World 0.4 9.9 11.7 11.1 15.8

Performance

88

Total expense ratios

Source: Ninety One. The total expense ratio (TER) does not include transaction costs. A higher TER ratio does not necessarily imply a poor return, nor does a low TER implyagoodreturn.ThecurrentTERcannotberegardedasanindicationoffutureTERs.TheTERreflectsthe36monthsending31.03.20.

Performance

Fund name Fund class TER Performance fee % Transaction cost %

Ninety One Absolute Balanced Fund UTB 1.40 0.00 0.05

Ninety One Absolute Balanced Fund UTZ 0.02 0.00 0.05

Ninety One Active Quants Fund UTB 1.17 0.17 0.42

Ninety One Active Quants Fund UTZ 0.03 0.00 0.42

Ninety One Africa Fund UTZ 0.24 0.00 0.16

Ninety One Cautious Managed Fund UTB 1.72 0.00 0.02

Ninety One Cautious Managed Fund UTZ 0.03 0.00 0.02

Ninety One Commodity Fund UTB 1.76 0.00 0.24

Ninety One Corporate Bond Fund UTZ 0.03 0.00 0.01

Ninety One Corporate Money Market Fund UTZ 0.01 0.00 0.00

NinetyOneDiversifiedIncomeFund UTZ 0.02 0.00 0.02

Ninety One Emerging Companies Fund UTB 1.74 0.00 0.45

Ninety One Emerging Companies Fund UTZ 0.02 0.00 0.45

Ninety One Equity Fund UTB 1.23 0.23 0.34

Ninety One Equity Fund UTZ 0.02 0.00 0.34

Ninety One Gilt Fund UTB 1.17 0.00 0.00

Ninety One Gilt Fund UTZ 0.02 0.00 0.00

Ninety One Global Franchise Feeder Fund UTB 2.09 0.00 0.00

Ninety One Global Franchise Feeder Fund UTZ 0.06 0.00 0.00

Ninety One Global Multi-Asset Income Feeder Fund UTB 1.78 0.00 0.40

Ninety One Global Multi-Asset Income Feeder Fund UTZ 0.09 0.00 0.40

Ninety One Global Strategic Managed Feeder UTB 2.13 0.00 0.06

Ninety One Global Strategic Managed Feeder UTZ 0.10 0.00 0.06

NinetyOneHighIncomeFund UTB 0.93 0.00 0.00

NinetyOneHighIncomeFund UTZ 0.02 0.00 0.00

Ninety One Managed Fund UTB 1.94 0.73 0.69

Ninety One Managed Fund UTZ 0.02 0.00 0.69

Ninety One Money Market Fund UTB 0.30 0.00 0.00

Ninety One Money Market Fund UTZ 0.01 0.00 0.00

Ninety One Opportunity Fund UTB 1.39 0.34 0.02

Ninety One Opportunity Fund UTZ 0.05 0.00 0.02

Ninety One Property Equity Fund UTZ 0.02 0.00 0.10

Ninety One SA Equity Fund UTZ 0.03 0.00 0.42

Ninety One STeFI Plus Fund UTB 0.70 0.00 0.00

Ninety One STeFI Plus Fund UTZ 0.02 0.00 0.00

Ninety One Value Fund UTB 2.23 1.14 0.33

Ninety One Value Fund UTZ 0.04 0.00 0.33

Ninety One Global Strategic Equity Feeder UTB 2.09 0.00 0.06

Ninety One Global Strategic Equity Feeder UTZ 0.05 0.00 0.06

Ninety One Worldwide Flexible Fund UTZ 0.23 0.00 0.25

89

Index returns

*South Africa CPI lagged by one month. Source: FactSet. All returns are in ZAR (excluding exchange rates).

Performance

3 months % 6 months % 1 year % 3 years p.a. %

5 years p.a. %

10 years p.a. %

Equities

Local FTSE/JSEALSI -21.4% -17.7% -18.4% -2.1% -0.1% 7.7%

FTSE/JSESWIX -23.3% -19.6% -20.9% -4.6% -1.9% 7.6%

FTSE/JSECappedSWIX -26.6% -22.7% -24.5% -7.4% -3.8%

Listed Property -48.1% -47.5% -48.9% -24.2% -14.3% 2.4%

International MSCI ACWI 0.4% 0.9% 9.9% 11.7% 11.1% 15.7%

MSCI World 0.8% 1.0% 11.0% 12.1% 11.6% 16.5%

S&P Composite 2.5% 3.0% 14.5% 15.0% 14.6% 20.0%

Fixed income market

Local ALBI -8.7% -7.1% -3.0% 5.3% 5.2% 7.4%

STeFI composite 1.7% 3.5% 7.2% 7.3% 7.2% 6.5%

International WGBI 30.3% 19.7% 31.5% 14.7% 11.3% 11.7%

Barclays Global Aggregate 27.3% 18.0% 29.0% 13.9% 10.9% 12.0%

Libor USD 1m 28.2% 18.8% 26.3% 12.1% 9.5% 10.1%

Currencies

USD/ZAR 27.7% 17.8% 23.8% 10.0% 8.1% 9.3%

USD/EUR 2.3% -0.6% 2.3% -0.8% -0.4% 2.1%

USD/GBP 6.8% -0.6% 5.1% 0.3% 3.7% 2.0%

Local inflation rate (YTD)

Inflation* 1.5% 1.9% 4.6% 4.2% 5.2% 5.1%

Important information

Wedonotguaranteethattheinformationprovidedisintheformatrequiredforaspecificreportingpurpose.We endeavourtoprovideaccurateandtimelyinformationbutmakenorepresentationorwarranty,expressor implied,withrespecttothecorrectness, accuracy or completeness of the information provided. Should you be aware of any errors reported in this document please inform Ninety One SA Proprietary Limited immediately, failing which Ninety One will not be liable or responsible for any losses or damages of any nature.

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individualorentity.Wearenotactinganddonotpurporttoactinanywayasanadviserorin a fiduciarycapacity.Nooneshouldact upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate.Anyrepresentationoropinionisprovidedforinformationpurposesonly.Intheeventthatspecificcollectiveinvestmentschemesinsecurities(unittrusts)and/ortheirperformanceismentionedpleasereferto therelevantfactsheetinorder to obtain all the necessary information in regard to that unit trust. Past performance of investments is not necessarily a guide to future performance. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Ninety One will not be held liable or responsible for any direct or consequential loss or damage sufferedbyanypartyasaresultofthatpartyactingonorfailingtoactonthebasisoftheinformationprovidedinthisdocument.This document may not be amended, reproduced, distributed or published without the prior written consent of Ninety One. Life fundsareofferedunderthelifelicenceofNinetyOneandtheassetmanagementisoutsourcedtoNinety OneSAProprietaryLimited.

The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not beusedasabasisfororacomponentofanyfinancialinstrumentsorproductsorindices.NoneoftheMSCIinformationisintendedtoconstituteinvestmentadviceorarecommendationtomake(or refrainfrommaking)anykindofinvestmentdecisionandmaynotbereliedonassuch.Historicaldataandanalysisshouldnotbetakenasanindicationorguaranteeofanyfutureperformance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumestheentireriskofanyusemadeofthisinformation.MSCI,eachofitsaffiliatesandeachotherpersoninvolvedinor relatedtocompiling,computingorcreatinganyMSCIinformation(collectively,the“MSCIParties”)expresslydisclaimsallwarranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantabilityandfitnessforaparticularpurpose)withrespecttothisinformation.Withoutlimitinganyoftheforegoing,innoevent shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation,lostprofits)oranyotherdamages.(www.msci.com)

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