"When things tend to be ugly and bad, institutions are weakened. We are at a crossroads in South Africa.”

– Mcebisi Jonas, former South African deputy finance minister, March 30, 2017

We have long been concerned about the direction of governance in South Africa. The “management and politics” component of our top-down country-allocation process is designed to capture not only the political environment, but also the competency of the central bank, the robustness of other institutions such as the media and legal system, and governance at both a corporate and a national level.

It is the last of these where South Africa has given us the most concern. Economic policy has tended to be fairly technocratic (although not addressing the country’s painfully low trend rate of GDP growth). The South African Reserve Bank is one of the best central banks in the emerging world. The media and law courts are independent and highly active, and corporate governance is of a high quality. However, our perception of a steady slide into corruption and nepotism in the executive branch has caused us to be negative on management and politics for South Africa since 2010.

That year witnessed a major, but rapidly forgotten scandal in South Africa. Kumba Iron Ore (then a $20 billion company) went to re-register the mineral rights of its massive Sishen iron ore mine with the Department of Mineral Resources, only to discover that, hours before, a shell company had already made the registration. That shell company, it was to transpire, was 50%-owned by Duduzane Zuma, the son of President Jacob Zuma. Three years of court cases subsequently led to the Constitutional Court awarding the mineral rights to Kumba, but we took these events as a seriously negative indicator of the outlook for South African equities.

That view was reinforced in December 2015, when a well-respected finance minister was suddenly replaced by unknown MP David van Rooyen. South African financial markets reacted very badly to the news, leading to the appointment of a third finance minister in five days: Pravin Gordhan. This showed both the vulnerability of South African markets to political events and a lack of understanding of markets at the highest level in South Africa.

Since then, South Africa’s vulnerability has only increased. Sovereign debt is rated at just above non-investment-grade level, and all three major ratings agencies have stressed the importance of fiscal orthodoxy in maintaining those ratings.*

The recent sacking of Gordhan would seem to have accelerated market awareness of political risk in South Africa. The full impact on bond and currency markets may take some time to come out, but risks remain elevated as other investors come around to our view. With real GDP growth having averaged an annual 1.6% over the past 10 years, it is not as though the growth story is compelling. We remain neutrally weighted in South Africa, but hold a company that achieves almost all its economic value from outside South Africa. There is an outside chance that the current crisis will lead to President Zuma’s removal, which might open up the opportunity for desperately needed economic reforms, but until then, we remain cautious on the outlook for the South African economy and domestically focused stocks.

* Standard & Poor’s downgraded South Africa’s credit rating to non-investment grade shortly after the time of writing.

An investor should consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing or sending any money. This and other important information about the Fund can be found in the Fund’s prospectus or summary prospectus, which can be obtained at www.johcm.com or by calling 866-260-9549 or 312 -557-5913. Please read the prospectus or summary prospectus carefully before investing. JOHCM Funds are advised by J O Hambro Capital Management Limited and distributed through FINRA/SIPC member BHIL Distributors, LLC. JOHCM Funds are not FDIC-insured, may lose value, and have no bank guarantee.

RISK CONSIDERATIONS: The Fund invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations.

Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

The small- and mid-cap companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger companies and may be more volatile; the price movements of the Fund's shares may reflect that volatility.

The views expressed are those of the portfolio manager as of April 2017, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.