Portfolio Construction

At the end of the quarter, net exposure to equities and real estate remained relatively stable compared to last quarter. While portfolio net exposures have remained relatively similar to last quarter, the composition of the underlying investments has changed meaningfully. At the outset of the decline in the US market, we purchased portfolio insurance in the form of index put options that provide downside protection in the event of a protracted bear market. While limiting downside risks associated with existing US exposure, option insurance also provides the confidence to deploy capital into US opportunities with more conviction as the risk-reward equation becomes more favourable. We purchased select US technology names where valuations are now far more compelling, but meaningfully reduced exposure to companies in the Chinese technology space as prospective returns reduced. We increased exposure to South African retailers, banks and insurers in light of more constructive outlooks and attractive valuations.

Macro

Quarterly Performance

Attribution

Internationally, unloved equity markets in Europe and China performed extremely well in the quarter, while much of the previous optimism about the USA waned rapidly on the back of government spending cuts and the prospect of US tariffs. The European rally was mainly valuation-driven. At the same time, the Chinese government continues to stimulate that market with a host of fiscal and monetary tools designed to kick-start an otherwise lacklustre economy. In the USA, the Trump administration appears hellbent on restructuring the US economy by balancing the budget, reducing the long-term cost of borrowing, and resetting global trade rules to drive sustainable and higher economic growth. While it is difficult to forecast how this grand experiment will play out, we are hopeful that the administration will remain pragmatic in its approach toward the management of the world’s largest and arguably most important economy.

The local equity market performed strongly during the quarter, mainly driven by a significant rally of 35% in the resource sector, a significant under-performer in the final quarter of 2024. The likes of Prosus and Richemont, significant components of the index, also contributed strongly to market returns, while the performance of the banking, industrial and retail sectors was more muted. Investors continue to prophesy about the longevity of the GNU given a seemingly intractable impasse on the budget, which may prove to be a deal breaker in the fullness of time. But despite these meaningful risks, local bonds and the Rand have been remarkably stable throughout the period.

Companies in the mining, payments, and e-commerce sectors drove the majority of the positive fund performance, while exposure to industrials, property, and technology sectors detracted from performance in the quarter. Geographically, there was a significant dispersion between China's performance, which outperformed, and the USA's, which came under pressure.

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