Fund performance summary – Q4 2018
- Obsidian SCI Balanced Fund | -3.2%
- Obsidian SCI Equity Fund | -4.5%
- Obsidian SCI Multi Asset Retail Hedge Fund | -3.4
- Obsidian SCI Long Short Retail Hedge Fund | -3.6%
How we were positioned
Equity remained our favoured asset class over the period, but it was reduced slightly in favour of bonds within our multi asset portfolios.
Within equity we continued to prefer domestic interest rate sensitive counters (Chart 1) complimented by a smattering of resource plays.
The fundamentals of our domestic government bonds see us happy to hold a meaningful fixed income position in our multi asset portfolios, and adds to our conviction around the material interest rate sensitive equity bet we have across our product suite.
Our offshore exposure is still predominantly biased toward emerging market assets. These investments have similar characteristics to the domestic portion of our portfolios, namely a value underpin and that they will flourish when their respective currencies and bonds perform well.
In summary, our portfolio construction needs the following dynamics to play out in order to generate real returns; 1) a stronger rand and subdued domestic inflation drivers, ditto for emerging markets; 2) improving expectations around domestic equity earnings; 3) avoidance of a global economic recession; 4) benign global equity performance.
Changes made during the quarter
The most significant change made during the quarter was a reduction of our holding in domestic resource counters. Most of our picks in this corner of our equity market performed well in an environment where the supporting fundamentals have softened. Their valuations still remain very attractive, but without the reinforcement from our longstanding macro indicators, we felt it prudent to reduce our bet.
With global economic indicators slowing (Chart 2) and a poor domestic corporate earnings outlook, the proceeds from RESI went into our domestic bonds, and funded our entry into US 10-year Treasuries. In our equity centric portfolios these proceeds were recycled into a mixture of cheap defensive and interest rate sensitive counters.
Our thoughts going forward
A slowdown in global growth became apparent during 2018, but we don’t foresee a widespread recession in 2019. Under this scenario we believe there are select asset classes that can generate real returns given the prevailing valuations in play.
A certain amount of ambiguity still characterises the macroeconomic environment, but we draw comfort from the fact that the assets we hold have a significant valuation underpin on their side.
Chart 1 – The fair value of Standard Bank
Source: INet, Obsidian Capital, Jan 2019
Standard Bank is cheap when the black line (SBK share price) is below the red line (SBK fair value based on dividend growth). We owned SBK from early 2016 until it reached its fair value in 2018 after which we zeroed the holding. We included the share again late last year as it moved back into deeply undervalued territory. We believe interest rate sensitive equity like SBK will be supported by a stronger rand and falling SA bond yields.
Chart 2 – Why we want bonds when growth slows
Source: INet, Obsidian Capital, Jan 2019
The latest reading from the Obsidian Global Economic Indicator (in red) indicates that global growth is slowing. Overlaid in blue is the yield on the US 10-year Treasury which falls (good for bonds) under a lower growth scenario. Our domestic bonds are well correlated to the US bond market, forming part of our decision to increase our existing exposure to this asset.
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Obsidian fourth quarter commentary – 2018