November 2017 Update

CWM Model Portfolios – 5 Year Performance

This monthly wrap-up article brings greetings from the Core Wealth Managers team.  We would like to take this time to express our sincere appreciation for your confidence and loyalty.  We are deeply thankful and extend to you our best wishes for a happy and healthy festive season. Thank you for allowing us to be part of your financial journey.

Making the News

The news headlines have been dominated by the South African Politics and the weak economic growth. The S&P Global rating agency has downgraded the South African long-term local currency sovereign credit rating to sub-investment grade BB+ (stable outlook) from BBB-  and the long-term foreign currency sovereign credit rating to BB (stable outlook) from BB-.

This followed the earlier foreign currency debt downgrade to junk status in April.  Moody’s has left its equivalent ratings at Baa3, but placed the ratings on review for downgrade, implying that if no immediate remedial action is taken, a downgrade will become inevitable after the Budget speech next year.

Digesting the News

The ANC elective conference was a critical juncture for our country and the ANC’s actions, particularly on whether Jacob Zuma is recalled, will have a material impact on the economy and the national election in 2019. As we have mentioned in the past, no one could predict the outcome of the conference (or the market’s response to the outcome), and we had positioned our portfolios moderately without extreme bias to one outcome.

The markets have welcomed Cyril Ramaphosa’s election), our hope is that the government will now take urgent action to implement the cost control that is so desperately needed, and that they start to implement growth-oriented economic policies to drastically reduce unemployment and equality.

Markets in the Month

The domestic equity market, as measured by the FTSE/JSE All Share (ALSI), was up (+1.5%) in November. The Bond Index (ALBI) weakened 1.0% by the end of November while the Listed Property Index (SAPY) ended the month 1.9% up. SA cash was up 0.6% in the same period.

Calendar year to date (YTD), the ALSI continued to outperform all other domestic assets up 21.4%, which has lifted the medium-term (3 Years: +9.3% p.a., 5 Years: +12.7%p.a.) returns to real return levels (CPI +4.0% to +7.2% respectively) that are more in line with our long-term expectations from this asset class.

Despite the downgrade by S&P, the rand strengthened by 2.9% against the US dollar, 1.1% against the Pound and 1.2% against the Euro last month. The rand strength after the downgrade was evidence that the downgrade had already been priced in by the markets.

Impact on Our Portfolios

Considering the rand hedge component of the market and the currency strength during the month, November was not a good month for portfolios. The range of returns across the local CWM Model portfolios was between -1.5% to and 0.02% in November, with CWM Flexible the best performing local strategy. Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were down -2.5% and -2.1% respectively, mainly due to rand strength.

3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies

Given the modest returns delivered by the local equity market and recent Rand strength, the medium-term performance figures in the table above remain modest, although all are ahead of inflation.

The stronger returns from growth assets recently have begun lifting the returns of the longer-term strategies (CWM Retirement Growth and CWM Flexible) relative to the more conservative strategies (CWM Income and Defensive), although remain below our long-term real return expectations for these strategies.

CWM Model Portfolios: 5 Years Since Inception

The improvement in the three year returns above are encouraging and we remain focused on delivering real growth across all of our client portfolios over the long-term. In this regard we are pleased that four of our model portfolios (Income, Defensive, Balanced and Retirement Growth) now have very strong five year track records.

The chart below shows that all four model portfolios have comfortably outperformed inflation of 5.5% p.a. over the last five years.

The CWM Income portfolio which outperformed inflation by +2.6% p.a., also comfortably outperformed its primary benchmark of outperforming money market funds by +1.6% p.a. This remains a very attractive alternative for cash portfolios.

The CWM Defensive, Balanced and Retirement Growth strategies delivered real growth between +4.2% and +6.1% p.a., and pleasingly were all in the top quartile of comparable funds since inception in November 2012.

Looking Forward

In the short-term, markets will be focused on the outcome of the ANC elective conference and the new leadership’s pro-activeness (or lack thereof) to address the many issues currently plaguing government, state owned enterprises (SOEs), and the ailing economy.

Longer-term we would expect fundamentals to drive market performance. Assets that are cheaply priced relative to their true long-term outlook will outperform, while assets richly priced (i.e. with too much good news built into the price) will underperform. How long it takes for the market to accurately reflect the risk and potential rewards for each asset is unknowable, as is the degree to which investors are either rewarded or punished for getting these calls correct.

Our aim is not to try and get these predictions correct (in fact we spend very little time predicting anything) but rather to ensure our client portfolios are constructed in a robust manner (i.e. diversified and valuation focused) that can withstand periods when markets are irrational, and flourish when markets reward patient bottom-up investors.