Over the past year, the Fund returned 4.5% versus inflation that averaged 3.8%. While preserving capital and beating inflation, the performance relative to bank deposits has been disappointing. As much as periods of underperformance are a feature of our approach to investing, we recognise that they can be uncomfortable for our clients. The key detractor over the past year was stock selection both locally and offshore. South African and Namibian holdings returned 1.7% and offshore assets 3.1%. The NSX Local Index returned 3% over the period and the JSE 12%. In South Africa, larger shares continued to outperform smaller shares. The 40 largest JSE-listed companies gave an average return of 11%. The average return for companies numbered 81 – 120 (in terms of size), was -10%.

South African equity returns of 10.9% p.a. over the past 10 years held up better than we may have expected given higher asset prices in 2009, but the South African landscape has deteriorated markedly since 2010. Outstanding government debt has quadrupled in absolute terms, numerous state-owned enterprises (SOEs) are on the brink of collapse and unemployment is endemic – not surprising then that the last 10 years are colloquially referred to as a “lost decade”. The long-term repercussions of these and other ailments on social stability, economic growth and future investment returns are deeply concerning.

Locally, our economy faces similar challenges: an unemployment rate of 33%, debt to GDP of 49% and regular bailout requests from SOEs. GDP growth continues to look anaemic with negative growth in the past four quarters. The weak performance of the economy resulted in a further downgrade by Moody’s.

However, South African and Namibian asset valuations are, on average, more reasonable since the market’s expectations are muted, leaving us more excited about the return potential for our portfolio of shares. A challenging economic outlook does not necessarily hinder the ability to achieve decent returns but treading with caution is advised.

The Fund continues to hold a wide range of real assets, including a substantial holding in inflation protected bonds (“linkers”). Buying these government issued “linkers” today offers a return greater than 5.7% above inflation over their respective lifetimes. A 5.7% real return compounded over the next decade, means that an investor will have increased their purchasing power by more than 70%. The high level of certainty of achieving this inflation-beating return is attractive.

Money market instruments carry low risk of default and capital loss in a scenario where inflation increases. These make up 20% of the Fund and yield 7.2%, currently. Namibian fixed rate government bonds carry risks, but the 10-year bond, at 9.8%, is 5% higher than the average consumer inflation rate over the past five years. We continue to be cautious and retain a short duration.

The future is always uncertain, however, we remain optimistic about the Fund’s prospects.