Market Review

The second quarter of 2017 was filled with economic and political uncertainty. Economically, South Africa is not in a good shape; the country officially went into a technical recession after recording two consecutive quarters of negative GDP growth. Furthermore, domestic growth forecasts continue to be revised downwards and consensus is for slower growth going forward. On the political front, a big fight is brewing on who will ascend to the ANC presidency and ultimately be country’s next president. Fortunately, the rand continues to hold up despite the economic and political uncertainty; the current account deficit continues to improve and the past month saw another downside surprise in inflation. Inflation linkers (IGOV) returned 0.92% whereas cash (SteFI) returned 1.85% in the last quarter. The poor relative performance of this asset class in an environment of lower inflation with reduced appetite for inflation protection is to be expected.

Fund Review

The review of the index in the last quarter saw no inclusions and exclusions from the index. The fund performed in line with the index.

The real yield of the fund increased from 2.34% at end of March 2017 to 2.51% at the end of June 2017. This was due to the re-pricing of the real yields in the inflation linked bond market resulting from lower inflation expectations. The modified duration of the fund decreased from 11.76 at the end of March 2017 to 11.53 at the end of June 2017.

Market Outlook

We believe that the current economic and political uncertainty will continue in the short term and therefore expect subdued market performance. This, together with the re-pricing of the inflation linked bond market on the back of lower expectation on inflation, will make it a challenging period for this asset class going forward. However, the fund remains a key ingredient in any multi asset fund due to the diversification it offers and the inflation protection it could offer should inflation surprise on the upside.

The objective of the portfolio is to track the performance of the JSE ASSA Inflation Linked Government Issued Bonds Index (iGov index) as closely as possible through full replication of the index. The portfolio will invest in all bonds that are represented in the iGov index. The portfolio may also hold cash investments. The portfolio will hold the constituent bonds of the iGov index in their index weightings, as close as possible. The portfolio may differ from the index from time to time due to liquidity constraints of the underlying bonds. The portfolio may also hold listed derivatives from time to time, to effect efficient portfolio management. The portfolio will not invest in off-shore investments.

Fund Review

The STANLIB Inflation Linked Bond Index Tracker Fund is a passively managed fund. The aim is to replicate the performance of the JSE ASSA Inflation Linked Government Issued Bonds Index (the Index) as closely as possible.

The fund is aimed at investors who seek exposure to the South African Inflation linked bond market at a reduced cost. This exposure is achieved by holding the index constituents in their index proportions.

The fund performed in line with the index in the final quarter of 2016. The last quarter saw no inclusions or exclusions to the index. There was however a number of weight changes to various constituent bonds. The fund was repositioned for all these changes.

Looking ahead

We continue to maintain a low tracking error to the index whilst keeping track of and adjusting for index reweightings and reconstitutions as and when they happen.