the shopping list by glacier research · 2020. 8. 6. · darren is a cfa charterholder and holds a...

A reference guide to superior collective investment schemes in SA

T H I N K W O R L D C L A S S

THE SHOPPING LISTBY GLACIER RESEARCHFebruary 2018 - Review of Quarter 4

THE SHOPPING LIST BY GLACIER RESEARCH - Q4 - FEBRUARY 2018 2

FOREWORD

I am pleased, once again to present the Glacier Research Shopping List – your reference guide to superior collective investment schemes in South Africa.

When the Glacier research team selects funds for the Shopping List, we are looking for quality fund managers who have displayed the ability to produce consistent outperformance over meaningful time periods, and the ability to protect capital in adverse market conditions, relative to peers. We strive to ensure that the most objective and independent selections are made, always keeping our clients in mind. The process focuses on both quantitative and qualitative assessments, but the ultimate fund selection is tilted towards the latter. Please refer to our fund selection process for a better understanding of what we take into account when selecting a fund.

The South African market (FTSE/JSE ALSI) continued to climb during the fourth quarter of 2017, setting a new high and reaching 61,298.60 at its peak. This increase translated into an overall 7.44% return for the quarter, of which the majority of the performance was experienced early on. The SARB kept the repo rate unchanged at 6.75% during the November meeting, over concerns that the December ANC leadership election could have a considerable effect on the exchange rate. These concerns were well-founded as the rand proceeded to rally over the four-day period of the conference and continued to strengthen following the announcement that Cyril Ramaphosa was the new ANC president.

Local fixed-income markets underperformed equities over the quarter, while returns across all fixed income instruments remained positive. The ALBI returned +2.22% with the best-performing fixed-income asset class being the longer end (12+ years) of the yield curve which delivered 2.98%. December was a particularly good month for bonds as the ALBI returned +5.66% for the month. Cash delivered 1.80%, outperforming preference shares which had a particularly bad quarter resulting in a -5.66% return.

2017 was a great year for global assets as the fourth quarter continued the momentum experienced in the second and third quarters. Developed market equities delivered 5.14% in USD (-3.95% in ZAR) while emerging market equities rendered 7.09% in USD (-2.16% in ZAR) for the quarter. This brought

the total 2017 developed market and emerging markets returns to 20.11% (USD) and 34.35% (USD), respectively. The rand rallied against all major currencies in the fourth quarter as it strengthened by -8.64% against the dollar, -7.12% versus the pound and -7.17% against the euro.

We completed 172 interviews and due diligence meetings in 2017 – breaking all previous records! The highlights included our interactions with the Coronation, Fairtree and SIM fixed income teams, as well as global managers Dodge & Cox and FPM. Our interactions with top local and global asset managers provide us with unique qualitative insights which form a significant part of our fund assessment process.

We’d like to thank you for your on-going support and assure you of our commitment to meeting the investment needs of your clients. The team is available to answer any investment-related questions you may have, and offer assistance wherever possible. Please feel free to contact us.

Leigh KöhlerHead: Glacier Research

The rand rallied against

all major currencies in

the fourth quarter as it

strengthened by 8.64%

against the dollar, -7.12%

versus the pound and

-7.17% against the euro.


QUARTERLY ECONOMIC AND FINANCIAL MARKET REVIEW

The South African economy expanded in the third quarter, producing an annualised quarterly growth of 2%. While this positive result outperformed general market expectations (+1.5%), the outcome culminated in a general slowdown when compared to the previous quarter’s 2.8% gain. This reduced quarterly expansion which resulted in the annual GDP growth rate settling at 0.8% per annum as at the end of the third quarter. Agriculture, forestry and fishing continued to be the primary driver of growth delivering 44.2%. It increased 38.7% in the second quarter. Mining continued to expand, generating a 6.6% return, followed closely by manufacturing which yielded 4.3%.

The FTSE/JSE ALSI continued to climb during the fourth quarter, setting a new high of 61 298 at its peak. This increase translated into a 7.44% return for the fourth quarter. Most of this performance was experienced early in the quarter, pulling back -0.34% in December. Mid-caps and the Top 40 were the primary drivers returning 11.58% and 6.71% for the fourth quarter. Small-caps lagged delivering 3.6%. Financials was the best performer returning 15.98%, followed closely by industrials (+15.63%). The worst-performing sub-sector was SA Industrials (including dual-listed companies) (+4.67%). Foreigners were net buyers of equities (+R42bn) over the fourth quarter.

The South African Reserve Bank (SARB) kept the repo rate unchanged at 6.75% in November, concerned that the December ANC leadership election could have a large impact on the exchange rate. This was well-founded. The rand strengthened 6.4% over the four-day conference and continued following the appointment of Cyril Ramaphosa as the new ANC President. The rand strengthened 8.64% against the dollar, 7.12% against the pound and 7.17% against the euro in this quarter.

Local fixed-income markets underperformed equities over the quarter. However, returns across all fixed-income instruments remained positive. The ALBI returned +2.22%. The best-performing fixed income asset class was the longer end (12+ years) of the yield curve, which delivered 2.28%. December was a particularly good month for bonds. The ALBI returned +5.66% for the month. Cash delivered 1.80%. Preference shares had a particularly bad quarter delivering a negative 5.66%. Foreigners were net sellers of bonds (-R32.6bn) over the fourth quarter.

While 2017 was a great year for global assets, rand strength detracted from this performance. Developed market equities delivered 5.14% in USD (-3.95% in rand) while emerging market equities rendered 7.09% in USD (-2.16% in rand) for this quarter. In 2017, developed market equities returned 20.11% in USD (8.6% in rand). Emerging markets returned 34.35% in USD (21.5% in rand). As expected, the Federal Reserve raised interest rates by 0.25% to a range of 1.25%-1.5% in December. Looking ahead, rates could be raised faster than initially anticipated in light of the tax reform signed by Donald Trump in late December 2107. US GDP expanded an annualised 3.2% quarter-on-quarter in the third quarter, ahead of market expectations (+2.6%).

In 2017, developed market equities

returned 20.11% in USD (8.6% in rand).


THE TEAM

Cindy Mathews-De Vries

Cindy holds a MSc (Cum Laude) degree in Computational finance, BSc (Computer science and Mathematics) degree and Associate in Management (AIM). She has 9 years’ financial services industry experience of which seven years were spent as an equity analyst. She started her career as a software developer at Tellumat and later as a quantitative analyst at Futuregrowth Asset Management. Cindy joined Glacier as a Discretionary Fund Manager in January 2017.

Darren Burns

Darren is a CFA charterholder and holds a degree in Investment Management (Stellenbosch University) and a B.Comm (Hons) in Financial Analysis and Portfolio Management from the University of Cape Town. He has completed RE 1, 3 and 5 exams and has the relevant experience as a representative and key individual for both a Cat I and Cat II licences. Darren Joined Glacier from Secure Wealth, where he worked for seven years as a director, financial advisor and analyst. He joined Glacier as a Discretionary Fund Manager in October 2016.

Francis Marais

Francis is a CFA Charter holder and holds a BCom (Hons) degree in Financial Analysis from the University of Stellenbosch. He started his career at Sanlam Employee Benefits as a fund accountant and later on as a review manager. He then spent four years as the Operations and Research manager at Nostic Asset Management (Category 2 Discretionary FSP). Francis joinedGlacier Research in March 2015.

Imraan Khan

Imraan holds a BCom (Finance and Economics) degree and BCom (Hons) degree specialising in Finance and Investment from the University of the Western Cape (UWC). He joined Glacier in 2011 as a Client Service Consultant from a Graduate Program in Santam. Imraan joined the Glacier Research team in November 2016.

Johann-Hendrik Vlok

Jan holds a BComm degree in Investment Management as well as a Post Graduate Diploma in Financial Planning. He has completed all three CFA exams. Jan started his career as an administrator and underwriter at MUA Insurance, he joined MyWealthbook as a trader and later joined Findata Financial Services as a Para Planner. He joins the Glacier Research team in December 2016.

Leigh Köhler

Leigh joined Glacier in 2003 after completing his BCom undergraduate degree in Politics, Philosophy and Economics from the University of Cape Town. He later qualified with a BCom (Hons) in Economics from UNISA. Leigh was previously the head of the Investment Administration team at Glacier before taking up the role as head of Glacier Research in 2012.

Lesego Mogomotsi

Lesego holds a BCom degree in Investment Management as well as a Post Graduate Diploma in Financial Planning from Stellenbosch University. Lesego started her career at RisCura as an analyst in their data services team, before joining PPS as a performance analyst. Lesego joined Glacier Research in January 2018.

Liesl-Mari de Jager

Liesl-Mari holds a BA (Hons) degree in Industrial Psychology (Cum Laude) and MBA (Cum Laude). She has 22 years’ financial services industry experience of which five years were spent as an equity analyst. Liesl-Mari joined Glacier in 2002 and was previously the head of Glacier Risk and Compliance, then head of Glacier Research before taking up the role as head of Discretionary Fund Management.

Luke McMahon

Luke holds a BCom (Acc) degree and BCom (Hons) degree in Business Administration from the University of the Western Cape (UWC). He is completing a Master’s degree in Business Management from UWC. Luke joined Glacier Research in January 2016.

Patrick Mathabeni

Patrick holds a BCom (Finance) degree and BCom (Hons) degree in Business Management (Finance stream) from the University of South Africa. He is currently a Level 2 candidate in the CFA programme. He started his career at Old Mutual, and later joined State Street Global Services. He joined the Glacier research team in January 2018.

Sanusha Gopaul

Sanusha holds a BCom degree specialising in Risk Management from the University of South Africa (UNISA). She has 12 years’ experience in the financial services industry and joined Glacier in 2010 as a client service consultant. Sanusha joined the Glacier Discretionary Fund Management team in December 2015.

Shawn Phillips

Shawn holds a Bcom (Hons) degree in Financial Analysis and Portfolio Management from the University of Cape Town. He also holds a BSocSci degree in Philosophy, Politics and Economics from the University of Cape Town. He has passed level I of the CFA program. Shawn joined Glacier Research in January 2016.


Fund selection process

Fund Index

Glacier Research’s Guide to Portfolio Construction

Annual Returns of Asset Classes, Sectors and Categories

Multi-Asset Portfolio Construction SA - Multi Asset Global Worldwide

Specialist Asset Class Building Block Portfolio Construction SA - Interest-Bearing SA - Real Estate SA - Equity SA - Equity Specialist Global

User Guide (Glossary)


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CONTENTS


FUND SELECTION PROCESS

1INITIAL SCREENING

2QUANTITATIVE ANALYSIS

3QUALITATIVE ANALYSIS

4FINAL SELECTION

Fund size greater than R250 million

Investment Philosophy: Convincing and well-articulated investment philosophy.

Remuneration and incentive structures: Fair and aligned with the investor objectives.

Culture of co-investment: Evidence of investing alongside the clients.

Investment Process: Disciplined, methodical and repeatable investment process with exceptional risk management capabilities.

Stable business: Stable group and management structures. Healthy financial position.

Passion, perspective, purpose and progress: Managers who are highly motivated and intensely competitive are more likely to be focused on excellence in performance results.

Investment Team: An investment team that has been together for a long period of time; with individuals who have relevant experience, proven investment expertise and a track record within the relevant asset class.

Focus on stewardship and long-term investing

Single managersThree-year track record of managing the fund3

Year

Performance analysis using both rolling and cumulative (static) return measures but most emphasis is placed on rolling returns (useful for examining the behaviour of returns for holding periods similar to those actually experienced by investors). We look for funds that consistently display first and second quartile outperformance relative to peers over all periods where possible (one to ten years) with most of the emphasis placed on the longer periods.

Statistical risk measure analysis aimed at understanding the volatility of the fund, which includes standard deviation and downside deviation.

Statistical risk-return measure analysis of the fund aimed at understanding the achieved return per unit of risk taken. This includes Sharpe, Sortino, Treynor, Calmar and Information ratios.

Drawdown analysis aimed at understanding the capital preservation ability of the fund, which includes maximum drawdowns, up-and-down capture.

Consistency: We look for funds that consistently outperform peers across risk, risk-return and drawdown measurements and therefore are ranked consistently above peers over all periods where possible (one to ten years) with most of the emphasis placed on the longer periods.

Correlation analysis aimed at understanding how well the fund can be combined with others in a portfolio.

The quantitative analysis process is conducted quarterly.

The output from the research process, both quantitative and qualitative, is discussed by the Glacier Research investment committee to decide the final composition of the Shopping List. In line with the philosophy of long-term investing, the list of funds will remain fairly stable over time. Any changes will be highlighted in the fund/sector comment. The number of funds appearing per category will be proportionate to the size of the category.

AIM To identify funds that deliver consistent, long-term out-performance and display the ability to protect capital when markets are falling.


Global

Multi-Asset High Equity

Coronation Global Managed

Investec Global Strategic Managed Feeder

Nedgroup Investments Global Flexible

FUND INDEX

Funds suited for multi-asset portfolio construction

Funds suited for specialist asset class building-block portfolio construction

Worldwide

Multi-Asset-FlexibleMulti-Asset-Flexible

Foord Flexible Fund of Funds

SA - Real Estate

SA Real Estate

Catalyst SA Property

SA - Equity

Equity General

Coronation Equity Foord Equity Investec Equity Fund

Global**

Equity General

Glacier Global Stock Feeder

Investec Worldwide Equity Feeder

Old Mutual Global Equity Feeder

Nedgroup Investments Global Equity Fund (Veritas Asset Management)

Real Estate

Catalyst Global Real Estate Feeder

Passive Fund Alternatives

SA Multi-Asset Low Equity

Satrix Low Equity Balanced Index #

SA Multi-Asset High Equity

Nedgroup InvesmentCore Diversified ###

Satrix Balanced Index ##

SA - Multi-Asset

Income

BCI Income Plus

Coronation Strategic Income

Prescient Income Provider

Prudential Enhanced Income

SIM Active Income

Low Equity

Coronation Balanced Defensive*

Nedgroup Stable (Foord Asset Managers)

Prudential Inflation Plus*

SIM Inflation Plus

Medium Equity

Coronation Capital Plus*

Nedgroup Investments Opportunity Fund*(ABAX Investments)

High Equity

Allan Gray Balanced*

Coronation Balanced Plus*

Foord Balanced*

Investec Opportunity*

SIM Balanced*

Flexible

Bateleur Flexible Prescient

Laurium Flexible Prescient

PSG Flexible

Truffle Flexible

SA - Equity Specialist

Mid & Small Cap

Nedgroup Investments Entrepreneur(ABAX Investments)

Financial

Nedgroup Investments Financials (Denker Capital)

Industrial

SIM Industrial

Resources

Investec Commodity

SA - Interest-Bearing

Money-Market

Glacier Money Market

Nedgroup Investments Money Market (Taquanta Asset Managers)

Short-Term

Nedgroup Investments Core Income (Taquanta Asset Managers)

SIM Enhanced Yield

Stanlib Income

Variable Term

Coronation Bond

Stanlib Bond

* Regulation 28 compliant ** Glacier Global Stock Feeder Fund has been added to the Shopping List. Please see the Global Equity General category for commentary.

# Strategic Asset Allocation – Equity: 35%; Property: 5%; Nominal Bonds: 25%; ILBs: 10%; Cash: 25%. Local: 80%; Foreign: 20%

### Strategic Asset Allocation – Equity: 67.5%; Property: 5%; Nominal Bonds: 7.5%; ILBs: 5%; Cash: 7.5%. Local: 75.5%; Foreign: 24.5%

## Strategic Asset Allocation – Equity: 70%; Property: 6%; Nominal Bonds: 13%; ILBs: 6%; Cash: 5%. Local: 80%; Foreign: 20%

Marriott Dividend Growth Prudential Dividend Maximiser PSG Equity

SIM General Equity


GLACIER RESEARCH’S GUIDE TO PORTFOLIO CONSTRUCTION

The key characteristics of this approach include:

• The use of multi-asset funds to construct the investment portfolio• The financial adviser being responsible for the strategic (long-term) asset allocation• Outsourcing of the tactical (short- to medium-term) asset allocation duties to the portfolio or asset manager• Advice risk being less of a concern for the adviser if the portfolio is structured using maximum mandated limits

The five steps involved in constructing a multi-asset fund portfolio

There are a number of approaches that can be followed when constructing investment portfolios for clients. This section focuses on arguably the two most popular approaches, namely the prudential (or multi-asset fund) approach and the building block approach.

Below, we outline the portfolio construction process of each approach, using practical examples where possible. We also highlight some of the key characteristics of each approach to assist you in selecting the best method for you and your clients.

Use the RITA or Oxford tool (or other risk profiling tool) to determine the client’s risk profile.

In this step, the adviser selects the funds for the investment portfolio. An extensive understanding of the funds in the CIS universe is extremely important when it comes to this section of the portfolio construction process to ensure a well-diversified portfolio for the client. The Shopping List and the Glacier Research team can add value and assist the adviser with this step.

When constructing multi-asset fund portfolios, it is important to note that it is not a requirement to only use funds from one ASISA category; the adviser may combine funds from different categories.

The portfolio below is an example of the construction of a moderate investment portfolio and is for illustrative purposes only.

Having constructed the portfolio, the next step is to ensure that the risk profile of the portfolio matches the risk profile of the client.

This process is illustrated in the graph on the following page (ICE risk rating).

When using the prudential or multi-asset fund approach, the adviser is also able to ensure that the portfolio does not breach certain asset-class limits. This is done using the fund’s maximum mandated limits. By doing this, the adviser also eliminates potential portfolio drift and consequent advice risk at the same time.

The example that follows illustrates how to ensure that a moderate risk-profiled portfolio stays within its predetermined asset class limits, with a maximum equity exposure of 60%.

Having determined the client’s risk profile, the adviser can match this profile loosely to the respective ASISA categories. The two tables below illustrate the above-mentioned point.

1MULTI-ASSET FUND APPROACH

STEP 1:Determine the client’s risk profile

STEP 3: Select funds

STEP 4: Ensure risk profiles match

STEP 2:Determine the strategic asset allocation

?ASISA Category

Maximum Equity

Exposure

Maximum Property Exposure

Maximum Foreign

Exposure

SA Multi-Asset Income 10% 25% 25%

SA Multi-Asset Low Equity 40% 25% 25%

SA Multi-Asset Medium Equity 60% 25% 25%

SA Multi-Asset High Equity 75% 25% 25%

SA Multi-Asset Flexible 100% 100% 25%

Type of investorMaximum

Equity Exposure

Maximum Property Exposure

Maximum Foreign

Exposure

Conservative investor 10% 25% 25%

Cautious investor 40% 25% 25%

Moderate investor 60% 25% 25%

Moderately aggressive investor

75% 25% 25%

Aggressive investor 100% 100% 25%

ASISA Category Moderate Portfolio

SA Multi-Asset Medium Equity Coronation Capital Plus (20%)

SA Multi-Asset Low Equity SIM Inflation Plus (20%)

SA Multi-Asset Low Equity Prudential Inflation Plus (20%)

SA Multi-Asset High Equity Allan Gray Balanced (20%)

SA Multi-Asset Medium Equity Foord Conservative (20%)


• The adviser makes the strategic asset allocation calls – the ASISA category limits can loosely be used as a proxy for strategic asset allocation.

• The tactical asset allocation calls are made by an experienced portfolio manager. This relieves the adviser of having to take a view on any particular asset class.

• Diversification is obtained across all asset classes and funds.• Investment advice risk is reduced, provided the portfolio is constructed

using maximum mandated limits.• The adviser requires an extensive understanding of the funds when

constructing a portfolio. Glacier Research can add value by providing the adviser with the necessary fund research and insights needed to construct a well-diversified portfolio for the client.

Factors to consider when choosing this approach:

Reviewing the portfolios regularly is very important. Glacier Research can add value to this step, not only by providing reasons for the respective funds’ performances, but also by providing insights into their positioning, key strengths and weaknesses and their roles in the portfolio. Glacier Research is also able to provide substitute funds if required.

STEP 5: Quarterly review of the portfolio

Ensure risk profiles match (continued)

Conservative Cautious Moderate Moderately aggressive Aggressive

Fund category Fund name Max equity % in portfolio Max Equity (actual) Max foreign Max foreign (actual)

MA Medium Equity Coronation Capital Plus 60% 20% 12% 25% 5%

MA High Equity Allan Gray Balanced 75% 20% 15% 25% 5%

MA Low Equity SIM Inflation Plus 40% 20% 8% 25% 5%

MA Low Equity Prudential Inflation Plus 40% 20% 8% 25% 5%

MA Medium Equity Nedgroup Investments Opportunity 60% 20% 12% 25% 5%

100% 55% 25%

Portfolio Risk rating: 4.18Correlation Risk rating: 3.98

1 5 10

The key characteristics of this approach include:

• The use of asset class specific funds to construct the investment portfolio; and• Assuming responsibility, as the financial adviser, for both the strategic (long-

term) and tactical asset allocation (short and medium-term) of the portfolio.

The seven steps involved in constructing a building-block portfolio

BUILDING-BLOCK APPROACH

Use the RITA or Oxford tool (or other risk profiling tool) to determine the client’s risk profile.

STEP 1:Determine the client’s risk profile

?

Having determined the risk profile, Sanlam Investment Managenent’s recommended bands (right) can be used as a guide to how much of the portfolio should be invested in each of the respective asset classes.

STEP 2:Determine the strategic asset allocation

Conservative Cautious Moderate Moderate Aggressive Aggressive

Equities (%) 0 - 20 15 - 35 30 - 50 45 - 65 60 - 75

Bonds (%) 15 - 35 15 - 35 15 - 30 10 - 25 10 - 20

Cash (%) 40 - 60 30 - 45 15 - 30 10 - 25 5 - 10

Property (%) 5 - 25 5 - 20 5 - 15 0 - 10 0 - 10

Domestic (%) 90 - 100 85 - 95 80 - 90 70 - 85 60 - 80

International (%) 0 - 10 5 - 15 10 - 20 15 - 30 20 - 40

2


• The adviser makes the strategic asset allocation calls –SIM’s recommended bands can assist with this step.

• The adviser also makes the tactical asset allocation calls. This means determining if a particular asset class is looking attractive or not and allocating accordingly.

• The adviser has to be able to allocate between the different asset classes (having an overweight position in a certain asset class, while having an underweight position in another asset class).

• The investment portfolios must be reviewed more regularly to manage portfolio drift, and indirectly, the potential advice risk.

• The adviser needs an extensive understanding of the funds included in the portfolio. Having an extensive understanding of the fund universe allows the adviser to express investment views more effectively.

To be truly effective, the building block method does require more skill, more time, and a more “hands-on” approach when it comes to the management of investment portfolios.

Factors to consider when choosing this approach:

This step is extremely important, especially when following the building-block approach. If the portfolio were left unchecked over the past few years, it would have shifted from a moderate portfolio to a moderately aggressive portfolio, with the consequent advice risk implications for the adviser.

As a result, these portfolios should be reviewed on a quarterly basis and rebalanced when applicable to make sure that the risk profile of the client still matches the risk profile of the investment portfolio.

STEP 7: Quarterly review of the portfolio

In this step, the adviser needs to ensure that the underlying asset exposure of the portfolio falls within SIM’s recommended asset bands per risk profile.

Using the information from the moderate portfolio example above, the graph below shows that the underlying asset exposure in the portfolio does fall within the recommended bands as set out by SIM.

STEP 6:Ensure allocation matches asset bands

Asset Classes Actual % Reg 28 Max %

SIM Sense

Guide %

Equity 34.85% 75% 30 - 75%

Property 5.96% 25% 5 - 15%

Bonds 29.55% 100% 15 - 35%

Cash 29.64% 100% 15 - 30%

Other 0% 100% 0 - 100%

Foreign 10.97% 25% 10 - 20%

Africa 0% 5% 0 - 5%

In this step, the adviser must select the funds to be included in the portfolio and at the same time make sure that they fall within the recommended asset bands on the previous page.

The Shopping List and the Glacier Research team can add value and assist the adviser with this step.

The table below is an example of a moderate portfolio for a discretionary investment, and is for illustrative purposes only.

STEP 4: Select funds

SIM’s Recommended Asset Bands Moderate Portfolio

Fixed Interest Money Market (15% - 30%)

Glacier Money Market - 24%

Fixed Interest Bonds (15% - 30%) Stanlib Bond – 26%

Property (5% - 15%) Catalyst SA Property Equity Prescient – 6%

Equity (30% - 50%) SIM General Equity – 33%

Foreign (10% - 20%)

Investec Worldwide Equity Feeder – 6%

Prudential Global High Yield Bond – 5%

When following the building-block approach, the financial adviser is responsible for the tactical asset allocation calls in the portfolio. This refers to the short to medium calls that are made relative to the strategic asset allocation (SIM’s recommended bands) above.

Example:If an adviser is of the opinion that local equities are expensive, an option - based on the strategic asset allocation – is to reduce local equity exposure to 30%, which is at the low end for local equity exposure for a moderate client in a discretionary investment.

At the same time, the adviser may be of the opinion that local property is cheap and sees a significant amount of value in the asset class. The decision can be made to increase the exposure to 15%, which is at the high end for local property exposure in a moderate discretionary investment.

The Glacier Bull & Bear document potentially can assist in making tactical asset allocation calls in a portfolio.

STEP 3: Tactical asset allocation

STEP 5: Ensure risk profiles match

Conservative Cautious Moderate Moderately aggressive Aggressive

Portfolio Risk rating: 5.86Correlation Risk rating: 4.74

1 5 10

After constructing the portfolio, the next step is to ensure the risk profile of the portfolio matches the risk profile of the client.

This can be seen in the graph below (ICE risk rating).

THE SHOPPING LIST BY GLACIER RESEARCH - Q4 - FEBRUARY 2018 1 1

ANNUAL RETURNS OF ASSET CLASSES, SECTORS AND CATEGORIES

Asset Class Returns

2013 2014 2015 2016 2017

Foreign (52.6%) Property (26.64%) Foreign (31.05%) Bonds (15.42%) Equity (20.95%)

Equity (21.43%) Foreign (14.63%) Property (7.99%) Property (10.2%) Property (17.15%)

Property (8.39%) Equity (10.88%) Cash (6.46%) Cash (7.37%) Foreign (12.26%)

Cash (5.18%) Bonds (10.15%) Equity (5.13%) Equity (2.63%) Bonds (10.24%)

Bonds (0.64%) Cash (5.9%) Bonds (-3.93%) Foreign (-4.34%) Cash (7.56%)

Sector Returns

2013 2014 2015 2016 2017

Small Cap J202T (26.31%) Financials J580T (27.28%) Top 40 J200T (7.52%) Resources J258T (34.24%) Top 40 J200T (23.07%)

Top 40 J200T (22.77%) Small Cap J202T (20.57%) Financials J580T (3.91%) Mid Cap J201T (26.89%) Financials J580T (20.61%)

Industrials J520T (21.5%) Mid Cap J201T (19.62%) Small Cap J202T (-3.92%) Industrials J520T (21.55%) Resources J258T (17.90%)

Financials J580T (19.1%) Top 40 J200T (9.17%) Mid Cap J201T (-7.54%) Small Cap J202T (20.9%) Industrials J520T (14.73%)

Mid Cap J201T (12.99%) Industrials J520T (6.99%) Industrials J520T (-10.07%) Financials J580T (5.44%) Mid Cap J201T (7.36%)

Resources J258T (1.38%) Resources J258T (-14.74%) Resources J258T (-36.99%) Top 40 J200T (-1.6%) Small Cap J202T (2.95%)

Bond Returns

2013 2014 2015 2016 2017

1 - 3 Years (4.4%) 12+ Years (12.91%) 1 - 3 Years (4.1%) 12+ Years (17.43%) 3 - 7 Years (11.25%)

3 - 7 Years (1.45%) 7 - 12 Years (8.3%) 3 - 7 Years (0.93%) 7 - 12 Years (15.37%) 7 - 12 Years (11.05%)

7 - 12 Years (-0.21%) 3 - 7 Years (7.9%) 7 - 12 Years (-3.19%) 3 - 7 Years (13.41%) 12+ Years (9.71%)

12+ Years (-0.68%) 1 - 3 Years (6.23%) 12+ Years (-7.04%) 1 - 3 Years (10.06%) 1 - 3 Years (9.64%)


Category Returns

2013 2014 2015 2016 2017

Global Equity General (52.17%)

Global Real Estate General (28.57%)


SA - Equity - Resources (24.57%)

SA - Equity Resources (16.76%)

Global Multi Asset Flexible (43.27%)

SA Real Estate General (25.12%)

Global Interest Bearing Short Term (30.96%)

SA - Interest Bearing Variable Term (12.79%)

SA - Equity - Financial (15.36%)

SA - Equity Industrial (32.72%)

SA - Equity - Financial (22.65%) Global Equity General (29.13%) SA - Equity Mid & Small Cap

(10.69%)SA Real Estate General

(14.10%)

Worldwide - Multi Asset Flexible (32.56%)



SA - Interest Bearing Short Term (8.31%)

SA - Equity - General (12.78%)


Global Equity General (11.96%)

Global Interest Bearing Variable Term (24.64%)

SA Multi Asset - Income (7.91%)


Global Interest Bearing Short Term (23.15%)



SA - Interest Bearing MoneyMarket (7.55%)

SA - Multi Asset - High Equity (9.97%)

SA - Equity Mid & Small Cap (20.07%)

SA - Equity - General (10.31%) SA - Equity Industrial (12.88%) SA Inflation (6.76%) Global Equity General (9.74%)





SA - Multi Asset Medium Equity (9.28%)

SA - Equity - General (19.36%)

SA - Multi Asset - Flexible (9.7%)

SA - Multi Asset High Equity (7.66%)

SA - Multi Asset Low Equity (3.59%)


SA - Equity - Financial (19.04%)


SA - Multi Asset Low Equity (7.6%) SA - Equity - Financial (3.41%) SA - Multi Asset Flexible

(8.69%)



SA - Multi Asset Medium Equity (7.4%) SA - Equity - General (3.12%) SA - Interest Bearing

Short Term (8.67%)



















Worldwide - Multi Asset Flexible (-4.19%)



Global Interest Bearing Short Term (7.28%) SA Inflation (5.23%) SA - Equity Industrial (-6.03%) Global Multi-Asset Flexible

(5.05%)


SA Multi Asset - Income (5.88%) SA - Equity - Financial (1.04%) Global Equity General (-7.43%) SA Inflation (4.70%)

SA Inflation (5.4%)

SA - Interest Bearing MoneyMarket (5.8%) SA - Equity - General (1.01%) Global Multi Asset Flexible

(-8.36%)Global Real Estate General

(0.96%)




Global Interest Bearing Variable Term (-10.13%)

SA - Equity Mid and Small Cap (-1.51)


SA Inflation (5.31%)

SA - Interest Bearing Variable Term (-1.97%)

Global Real Estate General (-13.53%)

Global Interest Bearing Variable Term (-3.54%)

SA - Equity - Resources (0.8%)

SA - Equity - Resources (-3.16%)

SA - Equity - Resources (-12.84%)

Global Interest Bearing Short Term (-13.82%)

Global Interest Bearing Short Term (-4.29%)


FUNDS SUITED FOR MULTI-ASSET PORTFOLIO CONSTRUCTION


SA - MULTI-ASSET - INCOME

Category Analyst: Jan Vlok

These portfolios invest in a spectrum of equity, bond, money market, or real estate markets with the primary objective of maximising income. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolio’s mandate and stated investment objective and strategy. These portfolios can have a maximum effective equity exposure (including international equity) of up to 10% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. Many of the funds that were in the old Fixed Interest Varied Specialist (FIVS) category have subsequently moved to the Multi-Asset Income category. All the former FIVS Shopping List funds now fall under this new category. At present none of these funds intend to amend their mandates.

Shopping list selection: Coronation Strategic Income Fund, SIM Active Income Fund, Prescient Income Provider Fund, Prudential Enhanced Income Fund, BCI Income Plus Fund.

Risk-Reward: 3-Year Annualised

Time Period: 01/01/2015 to 31/12/2017

Std Dev

-1.0 1.0 3.0 5.0 7.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Coronation Strategic Income A SIM Active Income A1 Prescient Income Provider A1

Prudential Enhanced Income A BCI Income Plus C

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turn

Quartile Ranking

As of Date: 31/12/2017

Top Quartile 2nd Quartile 3rd Quartile Bottom Quartile

-2.00.02.04.06.0

YTD 1 year 2 Years 3 years 5 years 7 Years

8.010.012.014.0



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Risk Statistics

Time Period: 01/01/2015 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Coronation Strategic Income A

SIM Active Income A1

Prescient Income Provider A1

Prudential Enhanced Income A

BCI Income Plus C

0.81

1.10

1.36

2.31

1.09

-0.05

-0.42

-2.10

-0.10

97.22

97.22

100.00

91.67

97.22

2.78

2.78

0.00

8.33

2.78

0.95

0.87

2.06

0.09

2.56

Returns

As of Date: 31/12/2017 Source Data: Total Return

YTD 1 year 2 Years 3 years 5 years 7 years

Coronation Strategic Income A

SIM Active Income A1

Prescient Income Provider A1

Prudential Enhanced Income A

BCI Income Plus C

9.31 9.31

8.17 8.17

10.43 10.43

9.29

9.27

8.43 8.43 8.56

9.06

9.71

8.42

8.08

8.80

7.34

9.93

8.01

8.69 8.69 7.47

9.37

7.16

9.14

8.41

9.30

Maximum Drawdown: Monthly

Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-2.5

-2.0

-1.5

-1.0

-0.5

0.0



Rolling 2-Year Returns

Time Period: 01/04/2014 to 31/12/2017

Rolling Window: 2 Years 1 Month shift

04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 126.0

8.0

10.0

12.0



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Key Insights

The fund’s differentiated philosophy and process result in a differentiated performance profile relative to peers at different stages of the cycle. Although Prescient Income Provider, a Shopping List counterpart, also is managed in a quantitative manner, this fund provides something completely different as its foreign component will always be hedged back to the rand. The fund will not take on any duration (it bears an interest-rate risk) as it only holds non-government floating-rate instruments. Therefore, there will not be any foreign currency risk, nor a modified duration in excess of 0.125 years, the maximum for a floating-rate instrument. When compared to their peers, their benchmark is quite high, indicating the belief in achieving a high return with low volatility, without taking on any additional risks.

Fund Use

The fund aims to seek opportunities to deliver a high level of income and long-term capital stability. The differentiation within the fund opens up various portfolio construction applications, either as a stand-alone in a building-block portfolio or diversified holding along with other Shopping List peers.

Qualitative Highlights

The two portfolio managers have been managing this mandate for more than nine years since partnering at RMB and then leaving to join Fairtree in 2013. The fund follows a differentiated strategy, which is highly quantitative and mathematically-focused, rendering it very difficult to replicate. The team is soundly qualified, with analysts having at least a Master’s degree in either maths or engineering, and has not experienced any turnover since the unit’s inception. Although the fund is managed by Fairtree, this team occupies a separate office in Newlands, Cape Town, granting them autonomy in focusing on their core mandates. The philosophy is centred on the central limit theorem, which creates predictability of outcomes when effectively applied to a population. This is underpinned by their six pillars relating to credit: companies can and will default; defaults are random and unexpected; accurately forecasting defaults is unlikely; concentrated portfolios rely on timing; correlation is the enemy of diversification; and highly correlated losses are disastrous. Thus, the main focus is diversification, and the team sees defaults as a given and improbable to predict. Senior portfolio managers also are granted equity in their business unit, which aligns interests with those of their clients. Portfolio manager, Crawford, relocated to the UK, and whilst the fund will be managed in the same manner, he will be in a better position to source offshore credit opportunities for the fund’s allowed 25% foreign exposure.

Quantitative Highlights

On a rolling one-year basis since inception, the fund has outperformed cash 100% of the time, indicating a viable alternative to cash. The fund is mid-range when it comes to volatility, compared to Shopping List peers, but more than compensates for this by producing the best risk-adjusted returns amongst peers since its inception, March 2014. When considering maximum drawdowns, the fund outperforms peers convincingly, with a maximum drawdown of 0.1%. The fund consequently has only experienced one negative monthly return (April 2016), posting positive one-month returns 98% of the time and positive rolling three-month performance 100% of the time since inception. The fund has occupied the top quartile for all static periods since inception as well as outperformed its respective benchmark over these periods.

Current Portfolio Positioning

The fund delivered a stellar return of 2.91% during the final quarter of 2017, the highest amongst Shopping List peers and outperforming cash, as measured by the STeFI Composite Index, by a substantial 1.11%. The fund was also the top performer over the calendar year period, by returning 10.43%, which is 2.87% of what cash returned, and 1.39% above the fund’s specific benchmark, STeFI Call+2%. When looking at how the portfolio composition changed over the last quarter, the only notable change was the 0.90% increase in the exposure to foreign cash, which now is 2.2% of portfolio assets. However, during the previous quarter, the changes were more significant, with local cash being downsized by -6.90%, foreign bonds decreasing -1.69% and subsequently local bond exposure increasing by 7.43% to 63.20% of the total portfolio’s assets. When considering the fund, it is important to note that there is no exposure to vanilla government bonds, as the managers feel that investors are not compensated for the risks. A case in point is the 2017 performance of the ALBI Index,that delivered a good 10.22%. However, the 5.66% return during December proved to be vital in ensuring a real return from this asset class. The portfolio managers currently feel the fund should continue to deliver sustainable alpha with relatively low risk. However, they are aware of the risks of a global spread blow-out and remain optimistic regarding the credit space. Locally, they are willing to move higher in the risk spectrum to produce attractive returns, as they are positive on the Zuma trade unwinding, which could lower domestic interest rates. They feel the fund is poised to deliver around 10.4%-10.9% (after all fees and expenses) for the 2018 calendar year.

Long Term Asset Allocation

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10%

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80%

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100%

Q2

2014

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Non-SA Cash

SA Cash

Non-SA Equity

Non-SA Bond

SA Bond

BCI INCOME PLUS

Fund manager Paul Crawford and Louis Antelme (Fairtree Capital) Consistency (No. of quarters) 03

Benchmark STeFI Call +2% Risk Description Cautious

Role of Benchmark Agnostic Inception Date 12 March 2014

Return Focus Absolute Fund Size (Rm) R1 539

Philosophy Quantitative diversification Fee Description (retail class) Annual management fee

Glacier Risk Rating 1.03 Total Investment Charge 0.64%

Category SA Multi-Asset Income Regulation 28 Yes


Key Insights

The fund has a flexible mandate with no maturity limits for the securities in which it invests. It also has a flexible duration policy to protect capital during times of bond market weakness. Risky assets (property, preference shares, foreign) will be maintained at a combined maximum weight of 25% with zero exposure to equity. Exchange rate risk also is managed actively. The fund’s offshore exposure typically has been below 10% in the past.

Fund Use

The fund aims to provide a higher level of income than a regular money market fund while providing greater diversification. It also adds a layer of capital protection when bond markets decline in a conservative to cautious multi-asset portfolio.


Coronation is a bottom-up investment house that focuses on proprietary research. Interest rate management (duration and yield curve) and security selection (credit and liquidity management) are two of the major focus areas of the fixed-interest team. The fixed income portfolios are positioned with a long-term strategic market view in mind, with short-term tactical opportunities being taken when the market differs from the strategic view. The fixed interest team is headed by Nishan Maharaj and includes 12 investment professionals. Analysts’ research responsibilities encompass numerous industry sectors, giving them better perspectives of the industry as a whole. Latitude is given to allow them to find opportunities that are not fashionable or short-term fads. Adrian van Pallander joined as co-portfolio manager on the Strategic Income Fund and Mark le Roux now fulfils an analyst and portfolio manager role.


The fund has, on a rolling one-year basis since inception, outperformed cash 85% of the time and since February 2009 managed this 98% of the time. The fund consequently consistently finds itself in the top quartile of performers over static periods of longer than one year. Although the fund displays slightly higher volatility than some Shopping List peers, as the second most volatile multi-asset income fund, it has produced attractive risk-adjusted returns, posting a Sharpe ratio of 0.87 since inception. The higher volatility can be seen in the fact that, over six-month rolling periods, the fund has outperformed cash 75% of the time. The fund delivers better drawdowns than many of its category peers and has achieved positive monthly returns 92% of the time since inception, with a maximum drawdown of merely 1.3%, indicating effective capital preservation ability over rolling two-year periods. It also has been able to outperform its benchmark over all periods, exhibiting long-term capability. It has experienced some short-term volatility but it does have the highest exposure to local property of all the Shopping List funds.


The fund returned a solid 2.06% over the final quarter of 2017, comfortably outperforming cash, measured as the STeFI composite index, by 0.26%. The quarterly figure brought the calendar year performance to 9.31%, which is convincingly ahead of what cash delivered, which came in at 7.56%. When looking at how the portfolio’s composition changed over the quarter, most striking was the 8.88% increase in local bond exposure, partly funded through an 8.03% reduction in local cash due to relative value emerging. However, only 4% of this additional allocation was towards government bonds, more specifically the R213 and R2044 issues. The managers have used spikes in yields as buying opportunities, especially to the longer end of the curve, when attractive cash-relative prospects are revealed. Consequently, the fund’s duration is high, relative to Shopping List peers, which was 1.4 years at quarter end. However, investors are compensated with a competitive current yield of 9%. The managers remain neutral on SA sovereigns though, despite market optimism and a muted inflation outlook, citing index exclusion risk on a possible downgrade. The fund cashed in on the Ramaphosa victory at the ANC conference, as put options on the dollar was held, which at face value, reduced the offshore exposure somewhat. The fund, however, has a healthy 10% of foreign assets, which is actively hedged utilising futures when the currency is overbought or oversold, leaving the core positions untouched. The fund’s material property exposure of 7% also contributed to performance as the sector gained 4.21% in December, and although the outlook for property counters are challenging, the managers remain positive on the asset class, preferring holdings with strong income growth and NAV appreciation potential. The managers remain cognisant of risks pertaining to stretched valuations against a backdrop of questionable fundamentals in the local economy, but believe that the current yield is a good gauge of the next 12 months’ return of the fund.


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10%

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Q1

2012

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2017

International Property/Equity

International Bonds

International Cash

SA Other

SA Prefs

SA Property

SA Bonds

SA Cash

CORONATION STRATEGIC INCOME

Fund manager Mark Le Roux and Nishan Maharaj Consistency (No. of quarters) 24

Benchmark 110% STeFi three-month Index Risk Description Conservative

Role of Benchmark Agnostic Inception Date 02 July 2001


Philosophy Fundamental, bottom-up valuation driven Fee Description (retail class) Annual management fee




Key Insights

Even though the fund is benchmarked against the STeFi Call Rate, the managers’ internal targets are to outperform inflation, cash and the ALBI 1-3 Index. The fund focuses heavily on capital preservation and aims to make no capital losses over any rolling three-month period. Prescient has very strong in-house quantitative and derivative capabilities. This fund is highly uncorrelated with the other Shopping List funds, which adds diversification and portfolio-construction benefits. This primarily is due to the higher exposure to credit-linked notes that the fund has relative to its peers. Moreover, the fund won’t have any equity exposure and typically will have a higher offshore exposure in comparison to its Shopping List peers.

Fund Use

The fund, while offering a cash alternative, is highly uncorrelated with other more vanilla-type funds in the Multi-Asset Income category. The fund is exposed to unique instruments that are managed actively, allowing for superior risk-adjusted returns. Furthermore, this fund can be used in a client’s portfolio in order to draw an income.


Prescient follows a quantitative approach to managing money. They focus on what is priced into the markets and make decisions based on asset-pricing. Risk is defined as the probability of not meeting investment objectives, which means that any positions taken in the portfolios are tested mathematically using different scenarios. The fund manages duration actively, using credit default swaps to guide them. Foreign currency exposure is managed similarly, guided by the level of the rand on a PP. The team consists of highly qualified, quantitative individuals, ranging from physicists to engineers, who have extremely strong modelling and derivative capabilities


The fund displayed very low correlations (ranging from 0.01 to 0.15) against the Shopping List peers over the past three years, exhibiting diversification benefits. Although it is, historically, a more volatile fund relative to peers, the fund recently has moved into first quartile volatility and has the lowest average volatility among Shopping List peers on a rolling one-year basis since July 2013. The fund maintains top quartile risk-adjusted returns since inception on a rolling one-year basis. It has outperformed its benchmark by more than 200 basis points since inception, on an annualised basis. The quantitative, risk-focused process that is employed to construct the portfolio also sees it deliver some of the lowest drawdowns in its category. The fund has outperformed its internal target of inflation+3% over the past 10 years, returning an annualised return of 9.29%. Since inception, the fund has produced positive monthly returns 94% of the time, whilst not having any drawdown over rolling three-month periods, showcasing its capital preservation capability.


The fund delivered an average return of 1.77% over the course of the fourth quarter of 2017. This was the second lowest return amongst Shopping List peers for this period and equated to a marginal underperformance of cash, measured as the STeFI Composite Index, by 3 basis points. However, over the calendar year, the fund produced a solid return of 9.37%, which is well ahead of what cash delivered, outperforming by 1.81%. The quarterly underperformance can be attributed by the immense amount of new assets flowing into the fund over the past six months, at R5bn or just under 25% of the fund, which unavoidably created some cash drag in the portfolio. When looking at how the portfolio characteristics changed over the quarter, most notable was the dynamic changed in the duration profile. At the start of the quarter duration was increased and as interest rates moved lower, duration was decreased again slightly, with the managers indicating that it will be increased when rates move higher yet again. However, duration was 0.48 as at year-end as opposed to 0.38 at the end of Q3, with the current yield also ticking up slightly by 4 basis points to 8.94%. Rallying rates close to quarter-end was the main contributor to performance due to the higher duration position as well as the higher yield pickup Regarding fund holdings, the portfolio is dominated by floating rate bank, SOE and corporate bonds and paper, due to the extra yield pick-up on offer. However, local cash assets were increased by 2.02% with international exposure added to with an additional 2.67% as the rand strengthened significantly, in line with forex-linked assets consequently reduced by -0.93% in line with the currency rally. Performance was impacted as an anticipated rally in rates didn’t coincide with that of the currency with weakness in preference shares, which were held at previous weights, detracting further from the quarterly return figure.


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2009

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Fixed Bonds

International

Property

Preference shares

Swap and Option Mkt Val

Inflation Linked Bonds

Floating rate bonds

Credit bonds

Forex Linked

Fixed Paper

NCD's

PRESCIENT INCOME PROVIDER

Fund manager Prescient Interest-Bearing Team Consistency (No. of quarters) 13

Benchmark STeFi Call 110% Risk Description Conservative

Role of Benchmark Agnostic Inception Date 31 December 2005


Philosophy Quants valuation, risk-focused Fee Description (retail class) Annual management fee




PRUDENTIAL ENHANCED INCOME

Fund manager David Knee and Roshen Harry Consistency (No. of quarters) 13

Benchmark STeFi Composite over three-year rolling period Risk Description Cautious



Philosophy Long-term, relative-valuation Fee Description (retail class) Annual management fee



Key Insights

The fund is benchmarked against the ALBI 1-3 year Index but its primary objective is to achieve cash+2%, with no capital losses over rolling one-year periods as its secondary objective. Prudential employs a strategic asset allocation (SAA) approach in their multi-asset portfolios, which offers a different approach to portfolio construction. The SAA is derived from numerous multi-variable efficient frontier analyses with long-run economic forecasts built into the models. The SAA for the Enhanced Income Fund is currently 50% to cash; 10% to inflation-linked bonds; 10% to government bonds; 5% to foreign government bonds; 15% to local corporate bonds; 5% to foreign corporate bonds; 5% to local property; and 0% to local equity. The portfolio managers tactically are also able to allocate within defined limits around the SAA, with the fund being limited to 20% exposure in foreign assets. A differentiator of this fund, compared to Shopping List peers, is the fact that they hold longer-dated bonds, consequently having the highest duration.

Fund Use

The fund will look to achieve a moderate level of capital growth whilst providing a stable level of income return. It may display higher levels of volatility in comparison to its Shopping List peers. The SAA approach should offer diversification benefits when used with other Shopping List funds, despite being highly correlated with these funds.


The team consists of eight highly qualified and experienced professionals, led by David Knee, who recently has been promoted to CIO of Prudential SA following Marc Beckenstrater’s decision to join M&G in the UK to focus on Prudential’s offshore capability. The credit team leverages off the offshore team, M&G, which is based in London, to gain insights on foreign companies that issue local debt. Prudential believes that market prices are broadly efficient over the long term but can be very inefficient over the short term.


The fund consistently has managed to outperform its benchmark since inception on an annualised basis for periods of three years and longer, as per the fund objective. The fund also has been successful in achieving its secondary goal of not incurring negative returns over rolling 12-month periods, even when exhibiting the most volatility amongst Shopping List peers. Although the fund has dropped into the third quartile over a two-year period, mainly due to a below-average 2015 and 2016, it is back in the top half of performers on a three-year basis and remains top quartile for longer periods. This slight variation of returns is due to the fund’s higher standard deviation and drawdowns when compared to its Shopping List peers, as it holds the most risky assets. However, the fund has managed to outperform cash, on a rolling one-year basis since inception, 88% of the time and when removing the period of underperformance during 2015 to mid-2016, it has outperformed cash 95% of the time.


The fund delivered a paltry return of 1.29% over the last quarter of 2017, underperforming cash, measured by the STeFI Composite Index, by 0.51%, as well as being the worst performer amongst Shopping List peers over this period. For the calendar year, however, the fund has outperformed cash by 0.91%, through returning a modest 8.47%. The biggest changes on portfolio asset allocation over the quarter, was a 1.52% increase in property exposure, to 8.30% - the highest of all Shopping List funds in this category. Property was the biggest contributor to performance over the period, although the selection underperformed the index, where the exposure is gained through the Prudential Enhanced Property Tracker Fund. Inflation-linked bonds still occupy almost 10% of the allocation, unchanged from the previous quarter, and was one of the main detractors from both relative and risk-adjusted performance, by delivering below 3% over the course of 2017. The other main detractor from returns were the fund’s offshore holdings, with international cash, giving up -8.38% at a weight of 4.91%, being the decisive factor in ensuring underperformance. Furthermore, the asset allocation remained largely unchanged, with local cash still representing the majority of the fund, currently at 46.34%, followed by local bonds (ex-ILB’s) at 25.74% of portfolio assets. Successful cash positioning ensured positive contribution by delivering a 0.52% active return over the benchmark return, whilst bond (ex-ILB’s) positioning detracted from performance by underperforming the benchmark 0.56%. The fund’s current yield of 6.6% is amongst the least of peers. However, the fund invests in non-yielding assets, including foreign equity, which will decrease the yield on an absolute fund perspective basis.


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International Property

International Cash

International Bonds

International Equity

SA Equity

SA Cash

SA Inflation Linked Bonds

SA Bonds

SA Property


Key Insights

The portfolio manager has an internal mandate never to include equity in the fund. He also leverages off the Sanlam Investments credit team quite heavily as they provide a formidable competitive advantage. The portfolio manager, Melville du Plessis, a fixed interest specialist, adds to the credit capability of the fund and has no intention of including offshore assets or equities going forward, continuing the conservative nature of the fund. The fund is invested in local assets only. Barring one quarter in September 2009, the fund has never been below 60% cash and money market assets. When compared to the SIM Enhanced Yield, this fund will typically be invested in higher quality credit instruments.

Fund Use

The fund is a money market alternative that is consistently able to add extra yield relative to cash, while providing very low levels of volatility and drawdowns. The fund delivers a very stable return profile and will not give investors any unwelcome surprises. In times of adverse market conditions, this fund will protect capital very well and thus is very suitable in a building-block portfolio for regular income withdrawals.


Melville du Plessis is the sole portfolio manager of this fund. He continues to utilise the expertise and knowledge of the fixed interest team at Sanlam Investments (SI). The credit process in the fixed interest team is one of the outstanding competitive advantages for this fund and of SI as a whole. This, combined with Du Plessis’ particular expertise in credit, provides a competitive edge. The Fixed Interest Model Portfolio Group (MPG) within SI, which used to consist of Chris Hamman, Philip Liebenberg and Gerhard Cruywagen, determines the strategic direction of the fixed interest portfolios and houseview. However, as of 1 August 2016, this picture changed as Hamman left SI and his replacement from Argon Asset Management, Mokgatla Modisha joined as head of Fixed Interest. As of 1 July 2016, Cruywagen also left the MPG as he shifted his focus from retail to institutional portfolio management for the Sanlam Group. At the departure of Liebenberg during June 2017, the MPG, consisted of du Plessis, Johan Verwey and Donovan van den Heever. The changes over the past two years in the MPG have raised some concerns and will be monitored closely going forward. However, the MPG is there merely to provide guidance to the direction for fixed-income assets, but as the sole portfolio manager, du Plessis will maintain his ability to manage his portfolios as he sees fit.


The fund has done well over longer periods, outperforming its benchmark over five and ten years and the SA African Multi-Asset Income category average over all periods. The fund is heavily allocated to cash and money market instruments (primarily floating rate notes and fixed rate NCD’s) and is one of the lowest volatility funds in the category, while delivering some of the lowest drawdowns. The fund is a top quartile performer for rolling one-year periods from July 2013 to quarter end. Also on a rolling one-year basis, the fund, since inception, has outperformed cash 93% of the time, and has outperformed CPI+3% 54% over the same period. It also has maintained first and second quartile risk-adjusted performance over all periods whilst ensuring a smooth-return profile.


The fund finished 2017 with a relatively strong performance, delivering 4.23% over the last 6 months and 1.92% for the final quarter ending December 2017. The fund ultimately returned 8.69% for the year, meaningfully outperforming cash (SteFI composite) and CPI+3% over these periods. These performances were generated against a backdrop of deteriorating government finances and a downgrade by S&P of South Africa’s local currency debt to junk, while lowering the rating of South Africa’s foreign currency debt further to BB, and deeper into junk territory. In terms of asset allocation, the fund has a high weighting towards liquid cash and money market instruments, primarily floating rate instruments (approximately two-thirds) and some fixed rate NCD’s. The fund has some exposure to listed fixed bonds (8.25%), primarily towards the one to three-year region of the curve with inflation-linked bonds (4.33%) and property (2.42%) making up the balance of the fund’s investments. Overall the fund is cautiously positioned, cognisant of potential market weakness on the back of events such as the Budget speech and Moody’s credit rating review in Q1. Part of this positioning also includes a healthy exposure to liquidity in order to take advantage of opportunities as they present themselves.


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2017

International

Equities

Property

Interest Bearing Investments


Cash and Money Market Assets

SIM ACTIVE INCOME

Fund manager Melville du Plessis Consistency (No. of quarters) 38

Benchmark STeFi Composite + 1% Risk Description Conservative

Role of Benchmark Agnostic Inception Date 03 November 2006


Philosophy Bottom-up pragmatic value approach Fee Description (retail class) Annual management fee




SA - MULTI-ASSET LOW-EQUITY

Category Analyst: Luke McMahon

Funds in this sector display reduced volatility relative to general equity funds, with a strong focus on capital preservation and a netequity exposure (including international equity) that typically would not exceed 40% of the portfolio. Funds in this sector are mostlyfund of funds and consequently are not considered for the Shopping List. That said, the number of single-manager funds has increasedsubstantially and this sector is becoming increasingly competitive.

Shopping List selection: Coronation Balanced Defensive Fund, Nedgroup Investments Stable Fund, Prudential Inflation Plus Fund, SIMInflation Plus Fund


Time Period: 01/01/2015 to 31/12/2017

Std Dev

0.0 2.0 4.0 6.0 8.0 10.0 12.00.0

2.0

4.0

6.0

8.0

10.0

12.0

Prudential Inflation Plus A Coronation Balanced Defensive A Nedgroup Inv Stable A

SIM Inflation Plus (ASISA) South African MA Low Equity

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


-2.00.02.04.06.0

YTD 1 year 2 Years 3 years 5 years 7 Years

8.010.012.014.016.0

Prudential Inflation Plus A Coronation Balanced Defensive A Nedgroup Inv Stable ASIM Inflation Plus (ASISA) South African MA Low Equity

Ret

urn

Returns

As of Date: 31/12/2017 Source Data: Total ReturnYTD 1 year 2 Years 3 years 5 years 7 Years

Prudential Inflation Plus ACoronation Balanced Defensive ANedgroup Inv Stable ASIM Inflation Plus(ASISA) South African MA Low Equity

10.0611.36

8.799.91

6.597.48

5.836.90

7.80 7.8010.29 10.29

8.449.979.86

7.969.548.65

6.517.936.20

5.966.453.68

8.39 8.398.26 8.267.09 7.09

Risk Statistics

Time Period: 01/01/2015 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

RatioPrudential Inflation Plus ACoronation Balanced Defensive ANedgroup Inv Stable ASIM Inflation Plus(ASISA) South African MA Low Equity 3.46 -1.66 66.67 33.33 -0.18

-0.130.07

33.3338.89

66.6761.11

-2.46-2.51

4.344.74

0.22-0.20

27.7833.33

72.2266.67

-1.78-4.12

3.574.71


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-4.5

-3.8

-3.0

-2.3

-1.5

-0.8

0.0

Prudential Inflation Plus A Coronation Balanced Defensive A Nedgroup Inv Stable A

SIM Inflation Plus (ASISA) South African MA Low Equity

Rolling 2 Year Returns

Time Period: 01/01/2013 to 31/12/2017


2015

01 02 03 04 05 06 07 08 09 10 11 12

2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 120.0

5.0

10.0

15.0

Prudential Inflation Plus A Coronation Balanced Defensive A Nedgroup Inv Stable ASIM Inflation Plus (ASISA) South African MA Low Equity

Ret

urn


Key Insights

Coronation has, arguably, one of the best research teams and broad-asset class capabilities in the industry. The fund has an internal maximum limit of 40% exposure to risky assets, including total equity and property. Hence, the fund at all times, will have a minimum of 60% allocated to fixed-interest assets. Given the fund’s 40% risky asset (property and equity) exposure limit, the fund can be viewed as a less aggressive option when compared to more traditional funds in its category – where risky asset exposure can reach a maximum of 65%. Furthermore, the fund’s offshore exposure typically will be accessed through Coronation global funds where the portfolio managers have the discretion to add any stock-specific ideas.

Fund Use

The fund is suited to a cautious portfolio with an absolute return focus and a strong emphasis on capital preservation. As the fund will not have more than 40% risky asset exposure, it would blend well with a more moderately aggressive fund to temper overall portfolio volatility. This fund can be used as a core holding in a cautious risk, absolute return-focused portfolio, with the aim of outperforming inflation by 2-3% over a three-year period or longer.


The fund is managed by Charles de Kock and Duane Cable. De Kock has over 30 years of investment experience, ten of which have been at Coronation, while Cable is head of SA equity and has over ten years’ investment experience, also at Coronation. Cable was announced as co-manager in August 2015. The investment team includes three former Coronation CIOs. The culture remains one of ownership and accountability, and is client-focused. Given that staff ownership is 25%, the interests of the managers and clients are well-aligned. De Kock has stated that the fund has two levels of conservatism, the first being asset allocation and the second, stock selection. Their asset allocation is a bottom-up valuation process and they make use of a proprietary asset allocation tool implemented in 2007. A team of key individuals determines the macroeconomic variables that will be the inputs to the proprietary models used at Coronation. Key macro drivers are used as inputs, such as interest rates, inflation and also expected return. While the model guides asset allocation decisions, each manager is responsible for the management of the fund given the risk budget of that fund. De Kock and Cable, thus, are responsible for the asset allocation weighting and stock selection of the fund. Proprietary research is the foundation of their investment proposition. From this platform, they construct portfolios that meet the varying risk and return objectives. All portfolios reflect the same Coronation DNA which comprises Coronation’s best investment ideas, leveraging off the same investment process. The fixed-interest instruments selection is managed by the portfolio managers. They interact with and leverage off the fixed interest team headed by Nishan Maharaj. There is no formal houseview portfolio, as flexibility is encouraged amongst portfolio managers.


Although the fund has underperformed its benchmark over a three-year period, it consistently has achieved the target returns over the longer term by delivering 8.79% over five years and 10.06% over seven years. The fund also has delivered consistently better than the category average, three-year rolling, risk-adjusted returns since inception, despite displaying second quartile volatility. Since inception, on a rolling two-year basis the fund is, however, the least volatile amongst Shopping List peers and has outperformed the SA Multi-Asset Low-Equity category average 100% of the time on the same rolling basis. It is important to note that virtually all the underperformance was experienced up to the three-year period ending 31 August 2011. The fund has also delivered positive returns over every 12-month period since inception and maintained first or second quartile rolling three-year performance since inception. The fund has displayed a favourable drawdown profile compared to some Shopping List and category peers, with a maximum drawdown of merely 2.6% since inception, showcasing the absolute focus of the fund.


December marked a surprising end to an already eventful year, with the occurrences of the Steinhoff debacle and the ANC presidential election. The outcome of both ended up hurting the portfolio in some way. While the price of Steinhoff International plummeted 92.25% over the quarter, the fund only experienced a mild detraction as its exposure prior to the share price collapse was only 0.6%. In terms of the ANC election, the rand rallied against global peer currencies as Cyril Ramaphosa was elected leader of the political party. The strength in the rand towards year-end had a greater negative impact on performance as it impacted the value of the fund’s offshore holdings totalling 25% of the portfolio, as well as many of the large equity holdings such as British American Tobacco, Richemont, ABI, Mondi and other rand hedge stocks. The Coronation Global Opportunities Equity Fund was amongst the largest detractors falling 3.19% in ZAR over the quarter due to rand strength, despite the underlying offshore fund returning an impressive 5.59% in USD. Even the fund’s exposure to emerging markets through the Coronation Global Emerging Markets Fund struggled under the rand’s strength, despite a stellar performance of the fund in USD over the quarter (+2.83%) and year (+38.56%). Nonetheless, despite these events, the fund managed to return 0.42% during Q4 2017, which amounted to a modest annual return of 7.80%, marginally outperforming its SA CPI%+3% benchmark which returned 7.61%. The majority of the fund’s performance during the year was driven by asset allocation, as opposed to stock selection. SA equity contributed 1.13%, SA fixed income (bonds and cash) contributed 1.21%, with duration of the fund only 1.34 (much less than some Shopping List peers such as Prudential Inflation Plus). Foreign assets, however, detracted 1.65% from performance. Property as a hybrid asset class remains an important feature in delivering absolute returns for the fund. The exposure of the fund to this asset class at quarter-end was 8.58%. Notably, listed property company Intu is a stock the portfolio managers have held for many years and has received much attention as rival company Hammerson made a bid to buy the company. The combined portfolio of Hammerson and Intu will make it the largest holder of prime retail shopping centres in the UK and the portfolio managers fully support the buy-out action.


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Foreign Pref Shares & Other

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SA Bonds

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Foreign Property

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Foreign Equity

CORONATION BALANCED DEFENSIVE

Fund manager Charles de Kock and Duane Cable Consistency (No. of quarters) 33

Benchmark CPI+3% Risk Description Cautious

Role of Benchmark Agnostic Inception Date 01 February 2007


Philosophy Fundamental, bottom-up, valuation-driven Fee Description (retail class)Annual management fee (1.4%) with reduced

fees (0.75%) should the fund lose capital over any 12 -month period


Category SA Multi-Asset Low-Equity Regulation 28 Yes


NEDGROUP INVESTMENT STABLE

Fund manager Foord Asset Management, (Dave Foord, William Fraser and Nick Balkin) Consistency (No. of quarters) 24

Benchmark Inflation+4% over a rolling, three-year period Risk Description Cautious



Philosophy Top-down, bottom-up, valuation-driven approach Fee Description (retail class) Annual management fee with 2.50% max performance fee



Key Insights

The fund’s stock selection applies an absolute overlay to Foord’s strong fundamental process, meaning stocks in the portfolio need to have a large margin of safety. Therefore, the fund has a low probability of capital loss, which is how Foord defines risk. The team has limited fixed-interest capabilities relative to Shopping List peers. Thus, the fund will look to use vanilla instruments to express their fixed-income views. The relative weakness in fixed-income capabilities is largely offset by Foord’s excellent equity capabilities. The fund can take on higher risky asset exposure and does not have any internal mandate limits. With the introduction of the multi-counsellor approach in 2011, keyman risk has been reduced significantly. The house feels quite strongly about not having committees required to approve decisions, which will lengthen implementation time causing sub-optimal investment execution.

Fund Use

This fund can be used as a core holding in a cautious or moderate risk, absolute-return, focused portfolio with the aim of outperforming inflation by 3%-4% over a three-year period or longer. This fund gives an investor exposure to Foord Asset Management’s strong macro views and stock selection capability, in terms of local and international equity. This will blend well with Coronation Balanced Defensive or Coronation Capital Plus in a cautious or moderate portfolio solution, as these funds are more bottom-up, valuation-driven. Across the risk spectrum this fund will also blend well with the PSG Flexible Fund which is a more aggressive fund with an absolute-return focus. Historically PSG Flexible has a strong SA domestically-focused stock selection bias, with a large cash tilt, offering good diversification benefits when used in conjunction with the Nedgroup Investments Stable Fund.


The fund has been managed using a multi-counsellor approach since late 2011, with Dave Foord, Dane Schrauwen, William Fraser and Nick Balkin each managing a portion of the assets with each individual accountable for that portion. Since January 2017, Dane Schrauwen has been on sabbatical to focus on his health and family. He has decided to take early retirement, but will remain associated with the firm on a non-executive basis. Arrangements to supplement the multi-counsellor team were made last year at this eventuality. Foord believes that meaningful investment returns are not earned by making incremental decisions, but that superior long-term returns are generated by identifying and taking advantage of economic cycles, and that buying at the right price is crucial. They do not take benchmarks into consideration when constructing portfolios, as they are often representative of what is simply big or in vogue. Guided by asset allocation parameters, each manager is allowed flexibility in the portion of the portfolio they manage. Their asset allocation style is predominantly top-down, value-orientated, but incorporates bottom-up portfolio construction. All research, both on equities and fixed interest, is done in-house and portfolio managers also undertake research. They place an intrinsic valuation on the company and assess to what extent the market is pricing that valuation. Foord looks for stocks with good management teams and are willing to pay for what they deem fair value for quality businesses. The fund has relatively low turnover, which is a result of being a concentrated portfolio with a few good ideas that will only be replaced when a better opportunity arises. The fund combines a top-down, macroeconomic view for asset allocation with a bottom-up analysis of stocks in portfolio construction. Foord has a dedicated offshore team in Singapore which manages the equity fund that forms part of the offshore exposure in the Foord Balanced Fund.


The fund has produced top quartile performance over longer investment periods of five years and longer, whilst occupying top half performance for all periods longer than one year. Since inception, on a rolling two-year basis, the fund has delivered better than category-average, risk-adjusted returns 97% of the time. Consequently, it has produced the best Sharpe ratio amongst Shopping List peers, and also has achieved its performance objective of inflation plus 4% over the past seven years. The fund has been the least correlated to other funds on the Shopping List in the low-equity category. However, during the financial crisis, the fund experienced a greater drawdown than the peer average but at a lower down-percent ratio. Since inception, the fund has managed to maintain a smooth alpha-generating profile compared to peers, which speaks to its stock selection capabilities. This equates to outperformance of the SA Multi-Asset Low-Equity category average 100% of the time since inception, on a rolling two-year basis.


The fund delivered a dismal quarterly return of -0.80%, underperforming the category average by a substantial 2.34%, and its SA CPI+4% benchmark by an even further 2.63%. On an annual basis, the fund delivered 7.09%, again lagging the category average and benchmark by a material 1.30% and 1.52%, respectively. Short-term rand strength resulted in a negative performance contribution for the portfolio from foreign assets and rand-hedge domestic investments when measured in rands. However, balance in the portfolio in the form of the listed property counters and a large SA government bond position provided some offset with the rally in bonds after the ANC electoral conference in December. The relatively low weight in SA equities detracted given the FTSE/JSE All Share Index strength into year-end (up 20.95% for the year). Within equities the underweight position in Naspers (+71.83%) and cyclical commodities as well as the rand hedge bias were the main detractors from relative performance. Needless to say, the fund’s exposure to Steinhoff International compounded this underperformance as the stock plummeted 92.25% over the quarter and detracted -1.42% from the performance of the fund’s equity component. Other notable detractors were large rand hedge counters such as Richemont (-9.07%) and Aspen Pharmacare (-7.74%). The most notable shifts in asset allocation were an increase of 0.72% in high coupon government bonds which benefitted from the strong rally in bond prices and SA property also by 0.72%. Select listed property counters were increased within the fund where valuations were compelling. The largest position within this sector being Capital & Counties Properties (3.3%), which also was adversely affected by the rand strengthening. The fund continues to hold large ETF position in gold (5.8%) as a “natural hedge” against adverse market conditions to risk assets (6.9%).


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Global Cash

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Equities


PRUDENTIAL INFLATION PLUS

Fund manager Michael Moyle, David Knee, Duncan Schwulst and Johny Lambridis Consistency (No. of quarters) 14

Benchmark CPI+ 5% p.a. over a rolling three-year period Risk Description Cautious / Moderate

Role of Benchmark Agnostic Inception Date 01 June 2001


Philosophy Relative value Fee Description (retail class) Annual management fee



Key Insights

The fund is managed according to a strategic asset allocation (SAA) process which is the cornerstone of the investment process. This differs from how the other low-equity funds on the Shopping List are managed. The fund has a high strategic allocation to ILBs and thus will have a higher duration relative to peers. It also is slightly more aggressive given its performance objective of CPI+5% and is a more risky option in the low-equity category, but has achieved its risk benchmark 95% of the time since inception. The house has very good asset allocation, equity and fixed-income capabilities and leverages off strong offshore capabilities at M&G, Prudential’s international parent company. Furthermore, the fund’s offshore exposure will be outsourced to Marc Beckenstrater who will allocate the respective offshore allocation to Prudential building-block offshore funds.

Fund Use

This fund can be used in a cautious or moderate risk, absolute return-focused portfolio with the aim of outperforming inflation by 3% to 4% over a period of three years or longer. This fund would complement a portfolio of extremely cautious funds such as SIM Active Income Fund and SIM Inflation Plus Fund. It can also be used in a moderate solution, given its slightly more aggressive nature and performance objective. Across the risk spectrum the fund can also be used with more aggressive funds. The fund’s historically high allocation to SA bonds, inflation-linked bonds and property will blend well with other higher risk-profiled category funds such as those in the SA Multi-Asset Flexible category. The PSG Flexible and Bateleur Flexible Prescient Funds, with their low allocations to bonds and property and high allocations to cash and SA equity, will complement this fund well in a moderate aggressive absolute-return solution.


The fund is Prudential’s flagship real-return offering and has a primary performance objective of CPI+5% per annum over rolling three-year periods. Secondly, it aims to not incur any capital losses over a rolling one-year period. This speaks to the fund’s real-return focus. Prudential follows a strong value-based approach using historical and current factual information, rather than forecasting to determine the fair value of an asset class. When constructing portfolios, they are always cognisant of risk. They will assess the relative value of an asset by looking at its current valuation and comparing that to its own historical valuation range and alternative assets within the investment universe. Instrument selection within each asset class is outsourced to the relevant specialist teams. The local AA team, in conjunction with Prudential’s global teams, decides on exposure to individual markets, government versus corporate bonds and currencies. Weekly meetings and intra-quarterly teleconferences are held, as well as a quarterly meeting in London. When constructing real-return portfolios, an internal long-term strategic asset allocation is established. The SAA of the Prudential Inflation Plus Fund is set at 26.3% ILBs; 22.5% local equity; 15% local bonds; 7.5% local property; 3.8% local cash; 12.5% foreign equity; and 12.5% foreign bonds. Tactical asset allocation (TAA) calls are made relative to the SAA within a range of 0% to 10% to adjust the exposure to asset classes, and these decisions are made using valuation-based techniques. The TAA calls are made with both the fund’s risk and return objectives in mind. Once the TAA calls have been made, instruments are selected within each asset class through active stock-picking in equities, listed properties and bonds using the prudent value philosophy. The fund leverages off each specialist team for instrument selection. Marc Beckenstrater who was previously a manager on the fund, as well as the CIO, relocated to the UK in March 2017. As of 1 July 2016, David Knee was appointed as the CIO. He will retain his responsibilities but systematically start reallocating duties to other fixed interest team members. Michael Moyle, who was previously the head of absolute return now serves as the head of multi-assets. These changes will be closely monitored and we are comfortable that no changes will be made to existing processes.


Given the fund’s more aggressive performance objective, we do expect a relatively higher volatility profile when compared to peers. Over a rolling two- and three-year basis the fund has had the highest standard deviation of all the Shopping List funds in this category. However, it has compensated for this in performance and has produced above-category-average, risk-adjusted returns over 94% of the time on a rolling two-year basis. The fund also retains top-quartile or better performance over annual periods from four to ten years and outperformed the CPI+5% benchmark by 3.2% since inception. The fund has been successful in reducing risk of capital loss and delivered positive returns more than 90% of the time over 12-month rolling periods. On a rolling two-year basis, the fund has outperformed the SA Multi-Asset Low-Equity category average 85% of the time, and 96% of the time since August 2008. Due to its high strategic allocation to riskier assets, the fund typically will experience larger drawdowns when compared to Shopping List peers as well as the category average. This is evidenced in the drawdown figures where the fund experienced a maximum drawdown of 8.6% against the category average of 2.7% over the 2008-2009 period, while the next lowest Shopping List fund had a maximum drawdown of 4.2%. However, this has been compensated for as the fund has produced the best returns compared to peers on a common inception basis.


The year ended on a high, both locally and globally, with key political and economic factors driving asset prices higher. Global growth remained strong, inflation relatively subdued and monetary policies supportive for the quarter. In the US, the promulgation of the Republican tax-cut package bolstered market optimism further and saw US equities reach record highs. In South Africa, it was a surprisingly positive month for investors, with markets dominated by the election of market-friendly Cyril Ramaphosa as president of the ANC. As a result, the fund produced a strong quarterly return of 3.28%, amounting to an annual performance of 10.29%. This equated to an outperformance of the category average by 1.73% and 1.89% over the quarter and on an annual basis, respectively. Although the fund struggled in the first half of 2017, the subsequent rally in SA equity and bonds in the second half of the year ensured that the fund exceeded its primary target of beating SA CPI+5%. Contributors to performance over the quarter were holdings in SA equity (23.04%), property (15.51%) and bonds (13.80%). This was backed up by positive contributions by foreign holdings in international equity (14.63%) and bonds (7.41%). International cash detracted substantially from the portfolio’s return (-5.36%) on an absolute basis, but relative to the benchmark, the contribution was marginally positive (+0.04%). Notable changes in asset allocation were highlighted by a 1.44% reduction in local equity to 23.04% of the fund, as well as a 1.37% reduction in international equity (excluding property), which is only 14.63% of fund assets. Changes to SA bonds (+1.30%) and international multi-assets (+2.58%) were the most notable upward shifts. Subsequently, the duration of the modified fund has increased to 3.68 as a result of the larger holding in inflation-linked and nominal government bonds.


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International Bonds


International Equities

Cash (Domestic & Offshore)

Domestic ILBs

Domestic Bonds

Domestic Property

Domestic Equities


Key Insights

The fund is managed by Natasha Narsingh through utilising the different capabilities at Sanlam Investments (SI); leveraging the research done in the respective units; engaging with the various unit heads; and then applying an absolute overlay in constructing the Inflation Plus portfolio. The departure of Philip Liebenberg resulted in 6 months of intense scrutiny of the fund, but we are confident that the team-based nature and ongoing involvement of Narsingh will keep the fund in good stead. The team has recently added a co-manager, with a fixed-income background, to supplement Narsingh’s equity background and to limit keyman risk within the management of the portfolio. A keen eye will, however, be kept on the team dynamic and risk-adjusted performance going forward. The equity carve-out will not be different to the houseview equity carve-out: moderate SWIX portfolio. The fund is managed with a strong absolute mindset and the managers will be very active in the derivative space, especially with the addition of derivatives specialist, Ralph Thomas, to assist the team in this regard. There is a strong focus on where the managers can add value, specifically fixed interest, asset allocation and derivatives, with the emphasis on a team-based approach ensuring effective succession going forward.

Fund Use

The fund can be used in a cautious to moderate risk, absolute return-focused portfolio with the aim of outperforming inflation by 3%-4% over a three-year period. It can also be used as a core fund in a portfolio. The fund is the most conservative option relative to Shopping List peers. With its track record of lower volatility and drawdowns and superior risk-adjusted returns, it can be used to temper the volatility of more aggressive funds such as Prudential Inflation Plus Fund within an absolute-return, cautious or moderate solution.


Following Liebenberg’s departure, the fund will be managed by Natasha Narsingh, who has been a co-manager since 2009. The fund has a strong absolute focus, with a great deal of emphasis on capital preservation. This ties in with the fund’s explicit risk benchmark of no negative returns over rolling, 12-month periods. Investment decisions at SI are team-based with Narsingh leveraging off SI’s houseview on asset allocation. We believe that the collaboration between the two previous managers ensured significant skills transfer in co-managing for over eight years, further bolstered by Narsingh successfully managing various institutional absolute-return mandates. Going forward, a support manager, Lethabo Leoka, has been added to the absolute-return team. Prior to joining Sanlam, Leoka spent six years at Libfin (part of the Liberty Group) as a credit portfolio manager and a transactor in the credit origination team. During this time, he spent six months on secondment at Wells Fargo Asset Management in London. Leoka holds a MSc in Finance from the University of London, a BCom Honours degree from the University of the Witwatersrand, as well as a BCom in economics and finance. Leoka is also a CFA charter holder. His capability and experience give comfort in SI’s efforts to reduce keyman risk within the absolute-return franchise and build on the skill set required for managing absolute mandates. In terms of portfolio construction, asset-allocation is directed by the asset allocation model portfolio group (AA MPG), although the fund manager has discretion on the size of his over- or underweights given the objective of the mandate. Fixed-interest decisions are guided by the fixed income model portfolio group (FI MPG) that has been headed up by Mokgatla Madisha since 1 August 2016, following the departure of Chris Hamman. Cruywagen is responsible for the equity selection of the fund and direction is given by the equity model portfolio group (EQ MPG). The equity carve-out of the fund will look similar to that of the “moderate SWIX” houseview portfolio. Offshore exposure is obtained through investments in CIS funds, investing mainly in Satrix Tracker funds and supplemented by actively managed Sanlam Global funds, whilst offshore property exposure is gained through the Sanlam Global Property Fund as well as selected single property counters. From a risk management perspective, the managers will make use of derivatives to protect the portfolio from adverse market movements when necessary.


On a rolling three-year basis, the fund has consistently delivered above-category average returns since the three-year period ending 31 July 2011. It has also managed to achieve this at lower volatility (on a rolling three-year basis) than all of the Shopping List funds. Since 2009, the fund’s volatility of returns has significantly decreased and this coincides with the management changes. Although the fund is lagging its CPI+4% target over one and three years, it is ahead of the target for periods longer than five years and well ahead of the category average over all relevant periods. The fund has managed to remain in the top quartile for risk-adjusted return since inception as well as top quartile drawdown figures. Since January 2014 it has delivered the lowest volatility compared to Shopping List peers as well as category average and has experienced the least down-periods and the best risk-adjusted return figure. It is important to note that, since Philip Liebenberg, Narsingh and Gerhard Cruywagen took over management in 2009, the fund has achieved its objective of no negative returns over any one-year rolling-period, 100% of the time. The fund also remains in the top two quartiles for rolling three-year performance since inception.


The SIM Inflation Plus Fund delivered a mild return of 0.49% for the final quarter of 2017, underperforming the ASISA South African Multi-Asset Low-Equity category average (+1.54%) by quite a margin, 1.05%. Furthermore, which is more disappointing, is the underperformance of the fund against its absolute benchmark, SA CPI+4%, by 1.27% over this period. On an annual basis, however, the fund produced a more respectable return of 8.26%, slightly behind peers (+8.39%), and lagging the ambitious absolute benchmark by 0.35%. It must be noted though that a key feature of this fund is its excellent risk-adjusted returns over the long-term. However, the fund experienced a sharp spike in volatility in the last quarter of the year. This elevated the annual standard deviation to 3.80% for 2017, above the annualised three year figure of 3.57% and resulted in the fund producing a lower Sharpe ratio (0.35) relative to the category average (0.45) in 2017. This will be monitored closely going forward. Broadly on asset allocation level, the fund has shifted exposure more to cash (+1.55%) and short duration SA bond (+1.25%) instruments and reduced exposure to three to seven-year SA bonds (-1.26%), local equity (-1.08%) and offshore equity (-1.08%). Local equity remains diversified across sectors with the main sectors represented being media (5.72%), basic resources (2.93%) and banks (2.78%). On a stock level, Naspers still occupies the largest single stock position at 5.72% which benefitted the portfolio over the year as it returned 71.83%. Steinhoff was a detractor in the portfolio following the news of the accounting irregularities scandal. The view going forward for the SA equity market is that it will be a stock-picker’s market with selective stocks showing attractive value and offering reasonable upside. Given the current market valuation, together with the fund’s rolling 12-month capital protection target, the portfolio manager believes it is prudent to continue the strategy of placing derivative overlays on certain positions for protection. On the international front, the portfolio manager retains preference for equities and property over fixed-income assets with developed market bonds not offering much value. She also holds a favourable bias to European assets from a relative valuation perspective. US equity markets are deemed to be overpriced on most valuation metrics while European equities remain relatively cheaper on several key valuation metrics. Therefore, the portfolio reflects a positive outlook and fund position with respect to Europe through the global equity and property allocation.


SIM INFLATION PLUS

Fund manager Natasha Narsingh Consistency (No. of quarters) 24

Benchmark CPI+4% over a rolling three-year period Risk Description Cautious

Role of Benchmark Agnostic Inception Date 01 April 1999


Philosophy Pragmatic value approach Fee Description (retail class) Annual management fee



0%10%20%30%40%50%60%70%80%90%

100%

Q1

2009

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2009

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Interest Derivatives

Cash/MM

Interest Bearing 12+ years

Interest Bearing 7 - 12 years





SA - MULTI-ASSET - MEDIUM EQUITY

Category Analyst: Cindy Mathews-DeVries

These portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to display average volatility, aim for medium- to long-term capital growth and can have a maximum effective equity exposure (including international equity) of up to 60% and a maximum effective property exposure (including international property) of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolio’s mandate and stated investment objective and strategy.

Shopping List selection: Coronation Capital Plus Fund, Nedgroup Investments Opportunity Fund

Risk-Reward: 3 Years Annualised

Time Period: 01/01/2015 to 31/12/2017

Std Dev

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

13.0

Coronation Capital Plus Nedgroup Inv Opportunity A (ASISA) South African MA Medium Equity

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


0.02.04.06.08.010.012.014.016.018.020.0

YTD 1 year 3 years 5 years 7 years 10 Years


Ret

urn

Returns



Coronation Capital Plus

Nedgroup Inv Opportunity A

(ASISA) South African MA Medium Equity 9.28 9.28 6.02 8.058.54 8.54

6.87 6.87

2.97 2.97

5.24

5.68

9.238.03 8.03

9.36 9.36

Risk Statistics

Time Period: 01/01/2015 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

Ratio

Coronation Capital PlusNedgroup Inv Opportunity A(ASISA) South African MA Medium Equity 5.17 -3.37 63.89 36.11 -0.21

5.68 -3.43 58.33 41.67 -0.336.97 -6.69 58.33 41.67 -0.21


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0



Time Period: 01/01/2013 to 31/12/2017


01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 120.0

5.0

10.0

15.0


Ret

urn


0%10%20%30%40%50%60%70%80%90%

100%

Q1

2007

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2007

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2007

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2008

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Foreign FI

Foreign Other

Foreign Commodities

Foreign Preference Share

Foreign Equity

Foreign Property

SA Property


CORONATION CAPITAL PLUS

Fund manager Charles de Kock and Duane Cable Consistency (No. of quarters) 50

Benchmark CPI+4% Risk Description Low to Medium

Role of Benchmark Benchmark - Agnostic Inception Date 02 July 2001


Philosophy Fundamental, bottom-up, valuation-driven Fee Description (retail class)Annual management fee with reduced fees

should the fund lose capital over any 24- month period.

Glacier Risk Rating 4.99 Total Investment Charges 1.75%

Category SA Multi-Asset Medium-Equity Regulation 28 Yes

Key Insights

The fund has an internal risky asset (equity and property) limit of 70%. This limit was raised from 60% in October 2017 and still remains well below the 85% limit (60% equity and 25% property) of its peers. Therefore, it can be viewed as a less aggressive option when compared to a more traditional fund in its category. The dual mandate of no negative 12-month returns has been adjusted to 18 months. This tweak in mandate is indicative of the manager’s view that one will need to take on more risk to get similar returns as in the past. Noticeably, the equity portion in this fund is slightly more aggressive when compared to the equities in a fund such as the Coronation Balanced Defensive Fund. The Capital Plus Fund makes use of derivatives to hedge certain currency and equity exposures. Due to the conservative nature of this fund, its single share positions are limited to a maximum of 3% of the value of the fund. Coronation has extensive experience and capabilities across all asset classes, which is a key advantage in the management of this multi-asset fund.

Fund Use

Due to Coronation’s extensive expertise across all asset classes, this fund can be used as a core holding in a cautious to moderate risk, absolute, return-focused portfolio with the aim of outperforming inflation by 4% over a three to five-year period. The fund’s dual mandate of no negative returns over any 18-month period and 4% real return, will work equally well for a retiree with a slightly higher risk appetite, or a discretionary investor with a slightly lower risk appetite.


Charles de Kock started managing the Coronation Capital Plus Fund in January 2014 together with Henk Groenewald. De Kock and Groenewald managed the fund until August 2015. Subsequently, Duane Cable, whom De Kock holds in high regard, has been appointed to co-manage the fund with De Kock. De Kock has 31 years’ investment experience, 12 of which have been spent at Coronation. Duane Cable is the head of SA Equity and co-manager for all the absolute-return strategies. This fund was previously managed on a junior (Cable) and senior (de Kock) portfolio manager basis. However, it is now managed on a 50/50 decision-making and ideas-generation approach. Should no consensus be reached between the two managers, de Kock will make the final decision. Cable previously co-managed the absolute return portfolios with Louis Stassen and Groenewald (for two years) and is deemed skilled to manage this fund. Having joined Coronation in 2006 as an investment analyst, he is well-groomed with first-rate experience. Coronation has a highly skilled and experienced investment team, consisting of three former Coronation CIOs. The culture remains one of ownership and accountability that is client-focused. This is evident in the fact that staff owns 25% of the holding company of the South African and international operating subsidiaries. The single investment philosophy and process together with the research platform ensure that changes made on their portfolios have minimal impact on investments and clients’ experiences. Coronation has developed a proprietary central research system which is available to all analysts and portfolio managers. Each analyst, on average, researches 12 to 15 shares at any point in time. Coverage is rotated from time to time, thereby ensuring that each company is covered by more than one analyst. This approach yields generalists and avoids the development of bias. Coronation believes in conducting comprehensive research on a company rather than just analysing it. The analysts spend a vast amount of time looking at different ways of trying to understand a company and its operating environment for that insight that the market may be missing.


The fund has outperformed its benchmark of CPI+4% consistently over longer, more meaningful periods. It tends to achieve this with slightly higher levels of volatility relative to peers, but protects capital well in times of adverse market conditions. This fund will not deliver massive outperformances due to its more conservative nature. When comparing this fund to its peers in the medium equity category, one should be cognisant of the internal limit of 70% to risky assets (its peers’ limit is 85%). The fund has been very consistent in implementing its dual mandate of no negative, 18-month returns and CPI+4% over rolling three-year periods. Since inception, the fund has outperformed its CPI+4% benchmark 61.3% of the time while outperforming its average peers 63.4% of the time. On a risk-adjusted returns basis, using the Sharpe and Sortino ratios, this fund delivers lower risk-adjusted returns when compared to peers, especially its Shopping List peer. De Kock has been the main portfolio manager on this fund since January 2014. The return profile of the fund in the four years has been more volatile compared to the previous four-year period. If one observes the four-year period, 1 January 2014 to 31 December 2017, the fund returned 5.95% with a standard deviation of 5.06%. From 1 January 2010 to 31 December 2013, the fund managed to return 13.33% with a standard deviation of 5.42%. Clearly, under previous management the fund produced significantly greater returns at marginally lower volatility when compared to the last four years. The fund’s drawdowns under the stewardship of de Kock are more prolonged. This means the time to recovery is longer and the opposite is true in the previous period. Besides the gradual increase in property (with a preference to A-class shares) and decrease in local cash, there has not been any significant change in the fund’s asset allocation over these periods. The fund provides access to emerging markets albeit at a limited exposure. The fund has a bias towards quality companies as opposed to the value bias of the previous manager, Louis Stassen.


The last three months of 2017 have been a gripping quarter. The ANC elected its new president, the rand strengthened by 8.6% against the US dollar and Steinhoff admitted to accounting fraud along with the resignation of its CEO and its inability to produce audited results. The fund returned 0.24% for the quarter, underperforming its benchmark and the SA Multi-Asset Medium Equity category by 1.56% and 1,52%. On a relative basis the fund’s overweight positions in local equity, property and bonds added to performance. Its underweight position in local cash detracted from performance. Also detracting from performance were its overweight positions in foreign equity, bonds and cash. This was due to the stronger rand over the period. Equity remains the preferred asset class to deliver inflation-beating returns, and the fund remains fully exposed offshore as the rand strengthened by 9.6% against the US dollar during 2017. This is based on long-term valuations and diversification benefits. The domestic equity exposure remained largely unchanged. The fund has exposure to Steinhoff where the share price dropped by 92.3% over the quarter. This collapse detracted from fund performance; however, the impact of the loss was limited as the portfolio held only 1.2% at the beginning of the quarter where the fund has a 3% maximum limit to single share positions. This risk measure has bode well for Coronation when compared to its Shopping List peer. The Nedgroup Investments Opportunity Fund had significant exposure to Steinhoff (8.97% holding) which significantly detracted from fund performance in 2017. The fund managers are of the opinion that markets have run hard towards the end of 2017 and expect some pullback. Prior to the Medium Term Budget Policy Statement the fund had extremely short modified duration. However, the fund increased its longer-dated government bond exposure as bond yields fell due to the market’s disappointment in the poor MTBPS. Contributors to performance included Naspers, Standard Bank, MTN and Anglo American. Detractors from performance were Steinhoff, Aveng, Mondi and British American Tobacco.



Key Insights

Abax places emphasis on return modelling and establishing expected returns for asset classes and securities. As input to this return modelling, attention is paid to sell-side research, which potentially could be seen as a possible weakness. However, the strength of Abax lies in how they use this sell-side research as well as their asset allocation, modelling abilities and portfolio implementation. Their investment process seems very effective in incorporating this research and delivering strong investment returns. With the addition of Rashaad Tayob in 2012, Dean Marks in 2013 and recently, Phillip Liebenberg (former manager of the SIM Inflation Plus Fund and previous Shopping List manager), Abax has expanded their fixed income capabilities extensively. Abax defines risk as drawdowns and uses this as input in their portfolio optimisation process. While the multi-asset team is responsible for formulating the asset class views, Omri Thomas, the lead portfolio manager, is responsible for implementing the asset allocation view. Tayob and Dean Marks are responsible for the fixed income portion of this fund. Thomas is responsible for the equity portion of the fund. Abax makes use of derivative strategies to construct asymmetrical payoff profiles. The equity portion in this fund may be similar to the Nedgroup Investments Rainmaker Fund, but it is not their carve-out of the fund. While names of holdings may be similar, their weightings may be different.

Fund Use

This fund is an excellent choice for an investor who prefers a broad exposure to multiple-asset classes, where the asset manager has the responsibility of both strategic and tactical asset allocation. This is a benchmark-agnostic fund with an absolute return mind-set. This fund is suitable for a client with a moderate risk profile seeking no more than 60% equity exposure (equity + property < 85%). The fund has a low correlation to its peers. This, together with its low volatility profile, will add excellent diversification benefits and lower the overall volatility profile of a portfolio.


Abax’s investment philosophy is brought to fruition through a well-defined, proprietary investment process that has allowed this fund to deliver excellent risk-adjusted returns. Its absolute return mind-set is clearly visible in its performance figures. The team is made up of highly-experienced and well- qualified individuals. Dean Marks and Dylan Oelofse have been added recently as assistant portfolio managers to help Tayob with respect to the fixed income part of the portfolio, which is a positive development. This will help build additional skills in the team as well as bring some continuity and help negate possible key-man risk. The offshore capability of the team has been expanded with the recent addition of Adam Spagnoletti. The Opportunity Fund’s offshore equity exposure is gained through investing in the Abax Global Equity Fund managed by Steve Minnaar. They will also buy direct offshore counters should they want an undiluted exposure to a particular stock and will search for stocks with asymmetric return profiles. Minnaar is supported by Campbell Parry and the newly appointed analyst, Adam Spagnoletti, on the offshore research side. However, everyone in the research team has international research responsibility. This significantly adds to the team’s offshore capability, which was a previous concern for our team. There is very little to fault in terms of investment philosophy and process and this fund is a good alternative in the multi-asset medium equity space.


The Nedgroup Investments Opportunity Fund is a top performer in its category and has outperformed its CPI+5% mandate over any rolling three-year period since its inception, with the exception of the recent rolling three-year period ending December 2016 and December 2017, where this fund’s performance was in line with CPI+4%. The fund’s volatility has trended upwards recently, but this is in line with its peers. However, over the shorter period, the fund’s volatility has improved slightly when compared to its long-term trend. It also has managed to compensate the investor sufficiently for these higher levels of volatility by delivering higher returns and subsequently maintaining its superior risk-adjusted returns as measured by its Sharpe ratio. The fund’s focus on downside protection also has translated into a superior Sortino ratio when compared to its peers, with its overall volatility mainly stemming from its upside performance. The volatility profile does seem to be characterised by larger-than-average drawdowns as opposed to a consistently high level of volatility. This indicates a susceptibility to unforeseen tail risk, and is confirmed by a consistently higher rolling VAR measure, since December 2015. This VAR profile has, however, improved to be more in line with its Shopping List peer, the Coronation Capital Plus Fund, even though it is still below the category average. On average, from December 2012, this fund captures 59.2% of the upside movement of the JSE All Share, and only 37.9% of the downside, reflecting an asymmetrical performance profile which is so important for an absolute-focused portfolio.


The Nedgroup Investments Opportunity Fund performed well for most of the year in 2017. However, the performance during the last month of the year was hindered by its large position in Steinhoff. The fund returned -3.31% for the quarter, underperforming its benchmark and the SA Multi-Asset Medium Equity category by 5.1% and 5.4%. On a relative basis, the fund’s overweight positions in local equity, foreign equity and property added to performance. Its underweight positions in local property, bonds and cash, detracted from performance. Also detracting from performance were its overweight positions in foreign bonds and cash. This was due to the stronger rand over the period. The local cash position was reduced 1.8% quarter-on-quarter and 9.1% year-on-year. This cash was used to buy local equities and preference shares. The fund had a large position in Steinhoff where the share price dropped by 92.3% over the quarter. This collapse significantly detracted from fund performance, with Steinhoff being the largest detractor from performance. The fund’s exposure to Steinhoff has dwindled from 8.97% to 1.93% of the portfolio. In contrast, the largest contributor to performance was the fund’s largest holding (10.6%) in Naspers. The fund managers remain cautiously optimistic on the prospects for SA growth, with the fund positioned accordingly. They foresee positive changes in South Africa with the election of Cyril Ramaphosa as ANC president and potentially president of South Africa.


0%10%20%30%40%50%60%70%80%90%

100%

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

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2012

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2013

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2013

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Commodities

Offshore Bonds

Offshore Cash

Equities: International

Equities: Domestic

Property

Convertible Bonds

Preference Shares


NEDGROUP INVESTMENTS OPPORTUNITY

Fund manager Abax Investments: Rashaad Tayob and Omri Thomas Consistency (No. of quarters) 9

Benchmark CPI+5% over a rolling three-year period Risk Description Moderate

Role of Benchmark Agnostic Inception Date 27 June 2011


Philosophy Bottom-up, fundamental research Fee Description (retail class) Annual management fee


Category SA Multi-Asset Medium-Equity Regulation 28 Yes


SA - MULTI-ASSET - HIGH EQUITY

Category Analyst: Jan VlokThese portfolios invest in a spectrum of investments in the equity, bond, money, or property markets. These portfolios tend to have anincreased probability of short-term volatility, aim to maximise long-term capital growth and can have a maximum effective equityexposure (including international equity) of up to 75% and a maximum effective property exposure (including international property)of up to 25% of the market value of the portfolio. The underlying risk and return objectives of individual portfolios may vary asdictated by each Portfolios-mandate and stated investment objective and strategy.

Shopping-list selection: Allan Gray Balanced Fund, Coronation Balanced Plus Fund, Foord Balanced Fund, SIM Balanced Fund, Investec Opportunity Fund


Time Period: 01/01/2015 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0

-3.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Allan Gray Balanced A Coronation Balanced Plus A Foord Balanced R

SIM Balanced R Investec Opportunity R

Re

turn

Quartile Ranking

As of Date: 31/12/2017


-2.5

0.0

2.5

5.0

7.5

YTD 1 year 3 years 5 years 10 years

10.012.5

15.0

17.5

20.0

22.5



Re

turn

Returns


YTD 1 year 3 years 5 years 10 yearsAllan Gray Balanced ACoronation Balanced Plus AFoord Balanced RSIM Balanced RInvestec Opportunity R

11.01 11.0112.69 12.696.89 6.89

10.84 10.848.83 8.83

9.846.984.917.17

7.98

12.3111.279.17

10.219.58

10.8411.0410.019.02

10.37

Risk Statistics

Time Period: 01/01/2015 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Allan Gray Balanced A

Coronation Balanced Plus A

Foord Balanced R

SIM Balanced R

Investec Opportunity R

6.85

8.51

7.35

6.55

6.13

-3.58

-5.54

-6.48

-3.79

-6.08

63.89

55.56

58.33

61.11

63.89

36.11

44.44

41.67

38.89

36.11

0.40

-0.02

-0.30

0.01

0.14


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-8.0

-6.0

-4.0

-2.0

0.0




Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

0.0

5.0

10.0

15.0


SIM Balanced R Investec Opportunity R (ASISA) South African MA High Equity

Re

turn


ALLAN GRAY BALANCED

Fund manager Duncan Artus, Andrew Lapping, Simon Raubenheimer, Ruan Stander and Jacques Plaut Consistency (No. of quarters) 36

Benchmark ASISA SA Multi-Asset High Equity category mean (excluding Allan Gray Balanced Fund) Risk Description Moderate / Aggressive

Role of Benchmark Agnostic Inception Date 01 October 1999


Philosophy Fundamental, bottom-up, value, contrarian approach Fee Description (retail class)Annual management fee with performance

component, maximum annual fee 1.50% (excl. VAT)


Category SA Multi-Asset High-Equity Regulation 28 Yes

Key Insights

Property is not viewed as a separate asset class at Allan Gray. As a result, property needs to compete with equities for a place in the portfolio. Historically, the fund has been able to protect capital, which compares well with some of its peers (as in 2008/2009, for example). Using futures also makes it easier for Allan Gray to increase or decrease equity exposure without having to buy or sell the actual underlying equity. The hedged equity portion of the portfolio can also limit losses if there is a market correction, but will detract from performance in rising markets. Fixed income capabilities are not as strong as its Shopping List peers, and thus allocation is relatively vanilla-flavoured. Allocating assets to fixed income is a consequence of not finding enough attractive equity opportunities. Allan Gray has strong offshore capabilities in Orbis. The fund is considerable in size and thus manoeuvrability in terms of selling or buying sizeable positions in certain stocks, is hampered.

Fund Use

The fund is suited for use in a portfolio with the aim of minimising drawdowns in down-markets as well as a strong focus on real return. It is managed with a CPI+5% benchmark in mind, tilting it more towards an absolute focus. Its actual benchmark, the ASISA SA Multi-Asset High-Equity category mean (excluding Allan Gray Balanced Fund), is merely used to calculate performance fees, and the fund is therefore benchmark-agnostic. The fund’s focus on capital protection further aids to temper overall volatility in a portfolio, particularly in adverse market conditions. It can be used in a moderate or moderately aggressive risk, absolute or relative return-focused portfolio with the aim of out-performing either inflation by 5%, or the category average of the SA Multi-Asset High Equity category over a five to ten-year period. It can be paired with more benchmark-cognisant funds like the SIM Balanced Fund, and can also be used in conjunction with funds which have strong fixed-income capabilities, like the Coronation Balanced Plus Fund.


The fund is managed on a multi-counsellor basis, with each fund manager effectively managing a separate balanced portfolio, and thus each deciding upon the asset allocation and stock selection. Allan Gray’s investment philosophy is value-orientated, with their research efforts focused on identifying good-quality assets that are priced below intrinsic value. A rigorous and disciplined process is applied and investments usually are made with a four-year view. Thus, portfolio turnover tends to be low. First and foremost on Allan Gray’s list of priorities is absolute risk. Therefore, short-term performance will sometimes be sacrificed to try and mitigate this risk. The domestic equity committee, called the Share Policy Group (SPG), makes use of a voting system in order to determine which counters appear on the ranking table. Each manager still has full discretion over which counters they buy and there is no house-view portfolio. Allan Gray follows a bottom-up equity selection process. The SPG determines the broad margins within which the portfolio managers are required to asset allocate. Asset allocation is a consequence of the availability of attractively-valued equities relative to the other asset classes within the set parameters. The fixed income portion, including duration, is managed by the fixed income team. However, this is done at the request of the relevant multi-counsellor who allocates capital to the fixed income manager and also dictates what duration s/he wants. This is managed accordingly by the fixed income team. The multi-counsellors also have the discretion to allocate to different fixed income managers and therefore the fixed income portions could vary between the various portfolio managers’ “slices”. The offshore portion is managed by Orbis. Following the passing of Simon Marais, Ian Liddle stepped down as CIO and relinquished portfolio manager responsibilities to assume the position of chairman. Andrew Lapping assumed the CIO position in March 2016. These are changes that we will monitor closely, as Liddle, one of the most experienced portfolio managers, has been managing a large portion of the Balanced Fund. The associate portfolio managers, Ruan Stander and Jacques Plaut, were promoted to portfolio managers in November 2015.


The fund has delivered above-category average, risk-adjusted returns since 2002, but tends to lag over the shorter term. Over the same measurement period on a five-year rolling basis, the fund has experienced no negative returns. The fund has protected capital well in down-markets, particularly in the period 2007 to 2009 when the market fell 40% and the average balanced fund lost 17%. Over the same period, the Allan Gray Balanced Fund was down 10%. Over five-year rolling periods since inception, the fund has achieved its risk benchmark of CPI+5% 84% of the time and consistently delivered above category average returns. Historically, the fund has had the lowest volatility amongst Shopping List peers, but since the five-year period ending June 2014, the Investec Opportunity Fund has had the lowest volatility. The fund has been seeing decreased alpha generation capability, and this could be attributable directly to size and the fund’s ability to take meaningful positions in certain counters.


Over the final quarter of 2017, the fund returned a solid 3.18%, the highest quarterly figure amongst Shopping List peers and outperforming the category average by 0.96%. The strong end to the year bolstered the calendar year return to 11.01%, which is 1.04% ahead of what the category average delivered. The biggest change in portfolio composition over the course of the quarter, was the 1.49% decrease in offshore equities, with offshore exposure in aggregate (excluding Africa ex-South Africa) decreasing by 2.33%, as offshore cash was also decreased by 0.57%. On the other hand, local equities were increased by 1.26% with some of the proceeds from offshore exposure taken off the table, whilst local cash was increased by 1.64% to reach the highest allocation in over a year, possibly indicating a lack of opportunities in the face of local political and fiscal uncertainty. Capital was, however, deployed into a depressed Woolworths during the quarter. The portfolio was positioned neutrally going into the December ANC conference, not taking a view on the outcome. However, preferring undervalued shares, suffering from negative sentiment, such as select retailers, Mr Price and Foschini as well as Standard Bank, the portfolio benefitted as they experienced post-elective conference rallies. The top contributors to the quarterly performance were headlined by top two holdings, Naspers (+18.18%) and Sasol (+14.95%) as well as Standard Bank (+23.98%), which was consequently trimmed at the end of December, following the Ramaphosa-driven run. Counters detracting most were Investec (-7.28%) and Blue Label Telecoms (-14.86%), whilst the fund’s offshore vehicle, Orbis Global Equity (-0.54%), outperformed on a relative basis despite significant rand strength over the quarter.


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Africa ex-SA

Offshore MM/Cash

Offshore Bonds

Offshore Property

Offshore Hedged Equity

Offshore Net Equity

Commodities

SA MM/Cash


Key Insights

This fund is managed by Karl Leinberger, the CIO of Coronation, along with Sarah-Jane Alexander and Adrian Zetler. The house, arguably, has one of the best research teams in the industry and has strong capabilities in all asset classes. However, the size of the fund may become an issue going forward. A strength of the fund is Coronation’s process – its “DNA”. Leinberger has the backing of a strong team, and various individuals who have co-managed the fund before.

Fund Use

This fund can be used in a moderate-aggressive risk, relative return-focused portfolio with the aim of outperforming the category average of the SA Multi-Asset High-Equity category over a seven to ten-year period. The aim of the fund is to achieve long-term capital gains with moderate income generation over time.This fund has a high down-capture ratio, exposing it to adverse market movements, which should be offset by less market-dependent funds. It also has heightened levels of volatility and therefore would benefit from diversification into funds which show low correlation to this fund, like the Investec Opportunity and Allan Gray Balanced Funds.


The fund is managed by Karl Leinberger, with Sarah-Jane Alexander named as a co-manager. Leinberger is the current CIO and has over 16 years’ investment experience, spent almost exclusively at Coronation. Karl Leinberger started in January 2005, with Louis Stassen as co-manager of the fund. Leinberger took lead of the fund from June 2009. He is supported by one of the largest and most experienced investment teams in SA. Duane Cable was formerly a co-manager on this fund, but was announced as co-manager of Coronation Balanced Defensive and Coronation Capital Plus Funds alongside Charles de Kock in August 2015. Quinton Ivan, the head of SA Equity Research, was also co-manager from June 2009 to December 2013. During 2016, Sarah-Jane Alexander was added as a co-manager on the Balanced Plus Fund. More recently, Adrian Zetler has also been added. The co-managers do not manage pieces of the portfolio. Rather, they contribute to idea generation and spark debate when there are conflicting investment views. These co-managers are also being groomed to reduce keyman risk, and ideally should be able to take over seamlessly in any unfortunate circumstances. The investment team includes three former Coronation CIOs. The culture remains one of ownership and accountability and is client-focused. Given that staff ownership is 25%, the interests of the managers and clients are well-aligned. Asset allocation is a bottom-up valuation process and they make use of a proprietary asset allocation tool implemented in 2007. A team of key individuals determines the macroeconomic variables that will be the inputs to the proprietary models used at Coronation. The key macro drivers used as inputs include interest rates, inflation and also expected return. While the model will guide asset allocation decisions, each manager is responsible for the management of the funds, given the risk budget of the fund. Leinberger is thus responsible for the asset allocation and stock selection of the fund. Coronation has developed a proprietary central research system which is available to analysts and portfolio managers at all times. Proprietary research is the foundation of their investment proposition. From this platform, they construct portfolios that meet the varying risk and return objectives. All portfolios reflect the same Coronation DNA, which comprises Coronation’s best investment ideas, leveraging off the same investment process. All portfolio managers also have analyst responsibilities. Analysts are assigned cross-sector and this provides them with the tools to ‘price-profit’ across sectors. The managers are style-agnostic and take a long-term view by attempting to see through the business cycle in an attempt to identify intrinsic value. They are bottom-up investors and ignore market timing and catalysts. Fixed interest exposure is leveraged off the research by Mark le Roux’s fixed interest team. The fund’s offshore exposure is obtained through investing in a combination of Coronation’s offshore fund offerings.


On a rolling five-year basis, the fund has delivered consistent above-category, average, risk-adjusted returns since 31 July 2004, except during a brief stint from May to July 2016. The fund tends to have drawdowns greater than the category average and its peers. Over the last three years it had a maximum drawdown of 5.54%, while the category average had a maximum drawdown of 4.13% over the same period. The fund also tends to have a higher volatility when compared to its Shopping List peers. Coronation, as a house, tends to focus on longer term periods (five years plus) when evaluating equities, and since it has had an average exposure to equities of 66% since March 2007, it should also be judged according to this longer, more meaningful period. The fund has had no negative returns over any five-year period since inception. However, it only managed to outperform the category average 82% of the time on this basis, which is actually lower than the 83% success rate over rolling three-year periods. Within the Coronation house, it is a concern that the Balanced Plus Fund has only marginally outperformed the Balanced Defensive Fund - only 70 basis points per annum over a ten-year period. However, this period does overlap with the 2008 financial crisis, and with the fund’s higher allocation to risky assets, the performance makes sense. Since inception, the performance is more in line with the risk budget, delivering 15.2% on an annualised basis, versus the 10% of the defensive fund. This outperformance comes at a high-risk cost, more than tripling the Defensive Fund’s volatility – 13.3% versus 4.1%. The maximum drawdown paints the same picture, with 34.3% versus 2.6% over the same period.


The fund delivered a good return of 2.45% over the last quarter of 2017, slightly outperforming the category average by 0.23%. After the good quarter, the annual return for 2017 came in at a solid 12.69%, which is a convincing 2.72% ahead of the category average and the best performer amongst Shopping List peers. Regarding the asset mix in the portfolio, foreign equity exposure changes were most notable, dropping by 2.03%, whilst local equities were also reduced, but only slightly by 0.29%. The most notable shift in asset allocation was, however, a 2.52% increase in SA bonds, partly funded by a reduction in SA cash (-1.59%). The deployment was not towards government bonds, but corporates, and thus the duration of the fixed income assets remains relatively low at 0.34 years. The lack of government bond holdings as well as the large offshore exposure detracted from performance over the quarter due to sentiment spikes reflective in bond yields and the rand. The low fixed rate exposure is partially offset by increased higher quality property counters (+0.89%), which contributed positively over the quarter, especially through top holdings Fortress (+8.29%) and Intu Properties (+3.57%). Equities, which is dominated by industrials, contributed significantly to performance over the quarter, which were added to through additions of Spar, Netcare, Famous Brands, Curro and Pick n Pay. Regarding the top contributors, index heavyweight Naspers (+18.18%) bolstered performance most, followed by MTN (+9.82%). Over the calendar year, Discovery was one of the biggest contributors and consequently exposure was trimmed, with the domestic rally causing buying opportunities in relatively attractively-valued rand hedge stocks.


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Foreign Pref Shares & Other

Foreign FI & Cash


SA Bonds

SA Cash

Property

Foreign Equity

SA Equity

CORONATION BALANCED PLUS

Fund manager Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler Consistency (No. of quarters) 31

Benchmark Composite Benchmark (52.5% equity, 22.5% bonds, 20% international, 5% cash) Risk Description Moderate Aggressive


Return Focus Relative Fund Size (Rm) R90 620

Philosophy Fundamental, bottom-up valuation-driven approach Fee Description (retail class) Annual management fee




Key Insights

Foord is an equity-focused house. The fund’s stock selection applies an absolute overlay to Foord’s strong fundamental process, meaning stocks in the portfolio need to have large margins of safety. Therefore, the fund has a low probability of capital loss, which is how Foord defines risk. The team has limited fixed-interest capabilities relative to Shopping List peers. Hence, the fund will use vanilla instruments to express their fixed-income views. With the introduction of the multi-counsellor approach in 2011, keyman risk has been reduced significantly.

Fund Use

This fund can be used in a moderate aggressive-risk, absolute or relative return-focused portfolio with the aim of outperforming either inflation by 5% or the category average of the SA Multi-Asset High-Equity category over a seven- to ten-year period. Over the intended investment horizon, the fund will have a high correlation to the category average and its peers on the Shopping List. However, in the shorter term, the fund tends to be the least correlated. This provides good diversification benefits in the short term.


The fund has been managed using a multi-counsellor approach since late 2011, with Dave Foord, Dane Schrauwen and Daryll Owen each managing a portion of the assets. However, during May 2017, Dane Schrauwen took early retirement and was eventually replaced by William Fraser in the multi-counsellor approach, after responsibilities were assumed by Dave Foord in the interim. Nick Balkin is also a manager on the fund as he is now dedicated to local mandates after relinquishing his Global duties. Foord believes that meaningful investment returns are not earned by making incremental decisions. Rather, they hold the view that superior long-term returns are generated by identifying and taking advantage of economic cycles. Furthermore, buying at the right price is crucial. They do not take benchmarks into consideration when constructing portfolios, as Foord believes that they are often representative of what is simply big or in vogue. Guided by asset allocation parameters, each manager is allowed flexibility in the portion of the portfolio they manage. Their asset allocation style is predominantly top-down, value-orientated, but incorporates bottom-up portfolio construction. Their asset allocation process is forward-looking and does not make use of any form of mean variance optimisation. They believe that it is possible to form a good directional view on the interest rate cycle. As opposed to larger houses, Foord does not have formalised investment committees and meetings. They cite this as an advantage, in that they are able to reposition and implement changes within the fund quickly. They have daily meetings where markets and company-specific information are discussed. The entire team is located in close proximity to each other and this facilitates timeous and constant information-sharing. All research, on both equities and fixed interest, is conducted in-house, and portfolio managers also undertake research. The analysts maintain a stock-ranking table that covers all the relevant forward-looking metrics across all the shares in their research universe. They place an intrinsic valuation on the company and assess to what extent the market is pricing that valuation. Foord looks for stocks with good management teams and is willing to pay for what is deemed fair value for quality businesses. The fund has relatively low turnover which is a result of being a concentrated portfolio with a few good ideas that will be replaced only when a better opportunity arises. The fund combines a top-down, macroeconomic view for asset allocation with a bottom-up analysis of stocks in portfolio construction. The house has limited fixed-interest capabilities and thus will invest in vanilla instruments. Foord has a dedicated offshore team in Singapore which manages the equity fund that forms part of the offshore exposure in the Foord Balanced Fund.


From a quantitative performance perspective, this fund has performed well, but this should be considered over a more meaningful period – at least five years. On a rolling five-year basis since inception, the fund has consistently outperformed the category average. The fund tends to underperform over shorter-term periods and consequently, over rolling three-year periods, the fund has outperformed peers 94% of the time, with all the underperformance occurring over the past two years. This speaks to Foord’s philosophy of getting broader directional trends right, and being buy-and-hold investors with a longer-term focus. However, the fund has recently underperformed, with the consequence that it has underperformed its benchmark over static, one, three and five-year periods and only delivering an average annualised return of 10% over the past 10 years.


The fund produced a disappointing return of -1.55% over the last quarter of 2017, which was by some margin, the worst performer amongst Shopping List peers. The quarterly performance equated to underperformance of the category average by -3.77% and brought the annual calendar year return to a paltry 6.89%, which is -3.08% behind the peer group average. It is concerning that after a year of delivering 1% (2016), the fund only managed to marginally deliver a real return in the subsequent year. There were some significant changes to the portfolio make-up during the quarter, most notably, increases in local equity and bond exposure of 4.32% and 3.86% respectively, subsequent to a reduction in local cash assets of -4.43%. On the foreign side, equity exposure decreased by 2.11% whilst cash reduced by 1.74%. Another change has been the consistent increase in the fund’s fixed interest duration over the past year, which increased to 4.53 from 3.40 in the previous quarter, as the managers continue to see value in the SA government R186 bond, currently the top fund holding at 14.7% of portfolio assets. When looking at what drove fund returns during the quarter, local equities detracted -0.8% due to the fund favouring rand-hedge counters, which struggled due to sentiment shifts and a strong local currency, over domestically-focused shares. In this space Aspen (-7.74%), Steinhoff (-84.65%) and Richemont (-9.07%) had negative impact, with the fund’s offshore vehicle, Foord Global Equity (-4.74%) ensuring negative contribution from foreign assets. The managers took the opportunity to add to non-resource rand-hedges as their outlook for the rand remains negative on stressed public finances and growth is seen to remain subdued. Asset classes delivering a positive contribution were led by bonds due to favourable politics as well as local property, which was headlined by heavy holding, Capital & Counties (+11.65%).


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Domestic Property

FOORD BALANCED

Fund manager Dave Foord, Daryll Owen, Nick Balkin and William Fraser Consistency (No. of quarters) 36

Benchmark ASISA SA Multi-Asset High-Equity category mean (excluding Foord Balanced Fund) Risk Description Moderate Aggressive

Role of Benchmark Agnostic Inception Date 01 September 2002


Philosophy Top-down, bottom-up, valuation-driven approach Fee Description (retail class) Annual management fee with a performance fee, on both out-and underperformance




INVESTEC OPPORTUNITY

Fund manager Clyde Rossouw Consistency (No. of quarters) 37

Benchmark CPI+6% Risk Description Moderate-Aggressive

Role of Benchmark Agnostic Inception Date 02 May 1997


Philosophy Fundamental bottom-up, valuation-driven approach with a key emphasis on quality companies Fee Description (retail class)

Annual management fee with a performance component on both out- and under-

performance, maximum annual fee of 2.25%



Key Insights

The team focusing on quality companies leverages off the capabilities of a strong specialist team. Clyde Rossouw has a wealth of experience in managing multi-asset portfolios. The fund has the potential to generate alpha when markets are falling, but may struggle relative to peers when markets are buoyant and driven by high-beta stocks with little regard for quality, as in the case of a momentum-driven market. The team has taken on more responsibility over time, relying less on outsourcing. They have their own analysts who now focus purely on the “quality” process and philosophy, covering local and global opportunities. There are currently only approximately 45 companies that are of interest to the SA quality team. However, the larger the universe they cover, the faster they are approaching approximately 60 shares. This includes businesses that are in a transformation period. There are also stabilisers included in the fund such as gold and platinum, which also act as natural hedges.

Fund Use

This fund can be used in a moderate-aggressive, absolute return-focused portfolio with the aim of outperforming inflation by 6% over a longer term of ten years or more. The absolute-return focus, together with the fund’s defensive positioning, benefits a portfolio by lowering volatility, particularly in adverse market conditions. It is also because of this defensive positioning that the fund should underperform in strong, upward-trending markets. However, it will have a lower drawdown, relative to peers, in tough markets. The ideal market for this fund to outperform is an oscillating market with returns ranging between 0% and 10%. The fund can be used successfully as a risk/return diversifier when used in conjunction with funds that are more benchmark-cognisant, like the SIM Balanced Fund.


Clyde Rossouw is head of quality at Investec Asset Management and focuses on multi-asset, absolute-eturn, low-volatility, real-return equity investing. He has managed the opportunity strategy since 2003, having joined the firm in 1999, initially as an asset and sector allocation strategist. The fund has a primary focus on investing in good-quality companies with a secondary focus on buying them when they are priced attractively. Rossouw is responsible for the fund’s asset allocation, which is determined by following a bottom-up, relative-valuation approach. Asset classes are thus bought on merit while taking into account the relevant risk. Asset allocation starts with equities, and the fund follows a structured and systematic process. The equity holding will usually be concentrated with low turnover. The majority of the team is based in the UK and they have added two new analysts to the Cape Town team, both of whom are relatively inexperienced. They will also leverage off the research conducted by Chris Freund’s equity team. The quality team makes the final decision on the fixed-interest portion, and, while not aligned with the fixed income team, they draw on the expertise and experience of the analysts and portfolio managers of the fixed income team, both locally and internationally. Offshore exposure is obtained via investing in two non-retail offshore funds. Both funds are managed by the quality team. They bolstered their offshore capability with the addition of ex-Threadneedle analysts and portfolio managers in 2014.


The Investec Opportunity Fund has delivered returns in excess of 14% per annum since inception. However, performance has slowed with both five and three-year annualised returns being considerably less at approximately 8.7% and 7.6%, respectively. The fund has also underperformed its absolute return benchmark of CPI+6% over three, five and ten-year periods. However, it has outperformed its peers while experiencing a very similar level of volatility. The fund has outperformed peers on a rolling five-year basis since inception consistently and 96% of the time on a rolling three-year basis. These lower levels of volatility have led to excellent risk-adjusted returns as measured by its Sharpe ratio. This fund tends to perform well during times of high market volatility and provides capital protection in negative markets. However, the opposite also holds true and it has a tendency to underperform in strong markets which can be attributed to the more conservative nature of the fund relative to peers.


The fund delivered a positive, though below-average, return of 1.12% over the last quarter of 2017, consequently underperforming peers by 1.09%. The calendar year figure also came in short the peer average performance, returning 8.83% versus 9.97% of peers. Major changes in the asset allocation of the fund over the period was a significant -3.9% reduction in local cash assets, which was partly redirected to increase (+2.1%) local equity exposure, but more notable to increase (+2.4%) local bond holdings, where an additional 2% position in the R2030 government bond was initiated. When looking at sector positioning, the fund decreased overall consumer goods exposure by 4.2%, as it sold Steinhoff Africa Retail holdings, locking in profits, and subsequent to a lender’s presentation mid-December, sold completely out of Steinhoff holdings. On the other hand, basic materials and financials were increased by 2.3% and 2.2%, respectively. When looking at what drove returns over the quarter, Assore (+30.56%) was the top contributor, followed by financials RMB (+26.89%), Standard Bank (+23.98%) and Sanlam (+28.86%), whilst Steinhoff (-92.25%) led the detractors, followed by rand hedge counters as well as the fund’s offshore vehicle, Investec GSF Global Franchise Fund (-3.4%), mainly due to sharp rand strength. The portfolio manager feels that there is a lot of good news priced into local assets at this point in time and, despite the short-term performance, will continue to prefer high-quality global equities over local bonds and domestically-focused companies.


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Local Assets Property (listed)

Local Assets Equities

Local Assets Commodities

Local Assets Cash / Money Market (incl FX)

Local Assets Bonds

Foreign Assets Property (listed)

Foreign Assets Equities

Foreign Assets Commodities

Foreign Assets Cash / Money Market (incl FX)

Foreign Assets Bonds


Key Insights

This is a benchmark-cognisant fund that will resemble Sanlam Investments’ (SI) best view of all underlying asset classes and instruments. As of June 2016, Gerhard Cruywagen relinquished the management of the fund, with this responsibility transferred to Fred White, who has been an integral part of the asset allocation committee. Ralph Thomas will assist with the management of the fund as a co-manager. Going forward, White will make use of SI’s houseview moderate SWIX portfolio, as opposed to managing equities against the institutionally-focused Alexander Forbes Large Manager Watch (LMW). From our interactions with White, it is clear that he will increase the risky asset exposure in the fund and will now aim to compete directly with the traditional large retail high-equity managers, as opposed to the balanced strategy’s institutional peers. White has indicated that more focus will be placed on risk management through the use of derivatives, which is a new innovation to the existing process. He has employed Ralph Thomas, to assist him in this regard. Our initial view is that these changes are material and that the return signature will be different to Cruywagen’s Balanced Fund going forward. However, it is also our view that most of the intended changes will be positive. White’s main responsibility will be asset allocation and managing these exposures, either by means of derivatives or physical exposures. Underlying instrument selections such as equities, fixed income, property and offshore securities will be the responsibility of the various specialist teams within the broader SI group. The fund, therefore, will seek to leverage off the strengths of these various specialist teams, ultimately resembling a blend of the best views of these teams. From extensive engagements with White and senior management, it is clear that the intention is to create a highly competitive fund in the retail CIS, SA multi-asset, high-equity space. From a return perspective, we can expect the fund to be more competitive going forward, with risk actively managed through the use of derivatives. It is comforting to know that the lead portfolio manager, White, will be substantially invested alongside clients.

Fund Use

This fund can be used in a moderate aggressive risk, relative return-focused portfolio with the primary aim of delivering long-term capital growth for investors, while also adhering to Regulation 28 limitations. The fund will add additional diversification benefits when combined with its peers. The fund will work well when combined with more concentrated, quality-focused funds such as the Investec Opportunity Fund. Typically, the fund will complement benchmark-agnostic peers like the Allan Gray Balanced, Investec Opportunity or Foord Balanced Funds. However, this is more accurate for smaller funds that are able to take more meaningful positions outside of the top 10 positions of the index. .


Patrice Rassou provides input on the equity selection, drawing from his wealth of experience in the industry. The Balanced Fund is the best reflection of SI’s houseview. There is a strong focus on following SI’s pragmatic value philosophy and process. Valuations are based on a belief that long-run average returns are mean reverting within asset classes. There are three key committees, or model portfolio groups (MPG’s), that impact the Balanced Fund. Previously, Cruywagen constructed his own equity building-block, in line with the equity MPG view. Going forward, White will make use of the houseview moderate SWIX portfolio. Similarly, property, bond and cash exposure is also managed by leveraging off the asset class MPG’s, and allocations are made according to the mandate and portfolio construction process. The decisions have to be carried through by all managers although they are allowed some flexibility. The direction must be the same, but the magnitude of over- or underweight can differ within the various funds. The incumbent manager has a more aggressive style when compared to his predecessor, aiming to achieve maximum risk-adjusted returns and deliver superior capital growth over the longer term. Due to the diversification benefits, the fund will always be at full offshore exposure, or as close to it as possible. Offshore equity exposure currently is gained primarily through unit trusts, index funds or ETFs. White has indicated that more focus will be placed on risk management through the use of protection, and SI successfully has balloted for the inclusion of derivatives in the fund. Ralph Thomas has been appointed as the dedicated resource in this regard.


The fund is benchmark-cognisant, and has delivered consistent first or second quartile performances. It has delivered these returns with volatility levels higher than its peers. Amongst Shopping List peers the fund experienced the greatest drawdown during the global financial crisis of 2008 (-24.0%, while the average balanced fund experienced -15.7%). It is important to note that this was prior to White managing the fund. Given the fund’s relative focus, we expect to see drawdowns similar to its Shopping List peers. Since the new management team took over the responsibility of the fund, the fund has delivered strong performances, outperforming all its Shopping List peers on both return, risk and consequently, risk-adjusted returns. Over this period the fund also delivered the lowest drawdowns, well above those of its peers and that of the average fund in its category (-3.30% versus-4.13%). When compared to its peers, the fund’s rolling one-year tracking error relative to its peers has increased, with a slightly decreasing information ratio, which should be monitored closely, especially over longer, more meaningful periods.


The fund finished the year in the midst of the Steinhoff debacle and an ANC elective conference that saw the rand appreciate strongly against most major currencies. Both of these events detracted from performance. The majority of the fund’s performance was delivered in the latter half of 2017, more specifically the third quarter. Despite a challenging December, the fund managed to deliver 1.49% during the last quarter of 2017 and 10.11% for the year. The fund’s benchmark returned 9.97%, while CPI+5% was 9.61% over the same period. This speaks to diversification and, together with a long-term focus, is an excellent hedge against absolute loss of capital. As at 31 December 2017, the fund had 69% exposure to equities and an 11% exposure to property. The fund is more favourably positioned towards growth assets, as opposed to fixed-interest assets. Globally, the fund favours European equities above US equities. Locally, the fund’s fixed-interest exposure is divided between both longer-dated government bonds and shorter-dated credit instruments, with an overall moderate exposure to local fixed-interest assets. Over the quarter, the fund has also selectively added to its local property exposure, by buying a combination of Growthpoint, Redefine and Hyprop. These are the three largest and most liquid SA Reits and offered some value as they were sold down on the back of increased political uncertainty in SA. Risks, as perceived by the managers, include the speed of global interest rates normalisation as well as our local government finances. Therefore, the fund continues to hold a healthy cash balance at 9.89%.The fund will also continue to actively make use of derivative structures to manage risk.


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Preference Shares

International Assets

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Property



Cash and Money Market Assets

SIM BALANCED

Fund manager Fred White and Ralph Thomas Consistency (No. of quarters) 51

Benchmark ASISA SA Multi-Asset High-Equity category mean Risk Description Moderate Aggressive

Role of Benchmark Cognisant Inception Date 01 February 1995


Philosophy Bottom-up and top-down, pragmatic value approach Fee Description (retail class) Annual management fee with performance fee component




SA - MULTI - ASSET - FLEXIBLE


These portfolios invest in a flexible combination of investments in the equity, bond, money and property markets. The underlying riskand return objectives of individual portfolios may vary as dictated by each portfolio’s mandate and stated investment objective andstrategy. These portfolios may be aggressively managed with assets being shifted between the various markets and asset classes toreflect changing economic and market conditions, and the manager is accorded a significant degree of discretion over asset allocationto maximise total returns over the long term.

Shopping List selection: PSG Flexible Fund, Truffle MET Flexible Fund, Bateleur Flexible Prescient Fund, Laurium Flexible PrescientFund


Time Period: 01/01/2015 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0-3.0

0.0

3.06.0

9.0

12.0

15.018.0

PSG Flexible Truffle SCI Flexible A Bateleur Flexible Prescient A1

Laurium Flexible Prescient A1 (ASISA) South African MA Flexible

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


-10.0-5.00.05.010.015.020.025.0


PSG Flexible Truffle SCI Flexible A Bateleur Flexible Prescient A1Laurium Flexible Prescient A1 (ASISA) South African MA Flexible

Ret

urn

Returns

As of Date: 31/12/2017 Source Data: Total ReturnYTD 1 year 3 years 5 years 7 years

PSG FlexibleTruffle SCI Flexible ABateleur Flexible Prescient A1Laurium Flexible Prescient A1(ASISA) South African MA Flexible

6.99 6.999.98 9.98

11.56 11.5611.57 11.57

10.756.749.228.39

14.9212.0113.53

13.85

8.70 8.70 5.36 8.61 8.27Risk Statistics

Time Period: 01/01/2015 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

RatioPSG FlexibleTruffle SCI Flexible ABateleur Flexible Prescient A1Laurium Flexible Prescient A1(ASISA) South African MA Flexible

7.488.308.658.24

-6.50-7.56-6.60-5.18

66.6758.3363.8955.56

33.3341.6736.1144.44

0.48-0.050.240.15

6.64 -5.51 61.11 38.89 -0.27


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-8.0

-6.0

-4.0

-2.0

0.0

PSG Flexible Truffle SCI Flexible A Bateleur Flexible Prescient A1

Laurium Flexible Prescient A1 (ASISA) South African MA Flexible


Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 120.0

7.5

15.0

22.5

PSG Flexible Truffle SCI Flexible A Bateleur Flexible Prescient A1Laurium Flexible Prescient A1 (ASISA) South African MA Flexible SA CPI + 5%

Ret

urn


Key Insights

One of the key strengths of the Bateleur Flexible Fund is the fund’s consistent returns, with low levels of risk, as measured by volatility and maximum drawdowns, consequently leading to excellent risk-adjusted returns. The two main portfolio managers, Kevin Williams and Charl Gouws have a wealth of experience, and while the team is still relatively small, it is comforting to see that Bateleur is investing in their process and expanding their team. Galen Hossack has been with Bateleur since 2012 and recently has been made portfolio manager of the Bateleur Equity Fund. This will contribute further to experience and a reduction in keyman risk. They have added three additional analysts since 2014. Kevin Williams stepped down as a member of the Ranmore Fund Management investment committee and as co-portfolio manager of the Ranmore Global Equity Fund (RGEF) at the end of December 2016. This change resulted in the Bateleur Flexible Prescient Fund commencing a process to reduce its exposure to the RGEF and as at 31 January 2017, the fund exposure had reduced to 3.3% of the fund NAV. Subsequently, it now holds 0% in the RGEF. Bateleur is an equity-biased house, preferring to run the Flexible Fund as an equity (including property) cash fund. Cash exposure is gained by investing in the Prescient Money Market Fund. Bateleur combines a macro, top-down approach with its bottom-up fundamental research. They spend a fairly significant part (±30%) of their research process discussing the macro-environment, and this sets them apart from the more bottom-up focused flexible funds such as the PSG Flexible and the Truffle MET Flexible Funds.

Fund Use

The Bateleur Flexible Prescient Fund will work well in an absolute return-focused, multi-asset portfolio, which seeks a real return of between 4% and 5%. It is an equity-biased fund, typically moving between equity and cash, depending on the availability of real-return opportunities. This fund will work well in combination with other multi-asset flexible funds such as the PSG Flexible and Truffle Flexible Funds. The fund is ideal for people seeking a slightly more aggressive real-return profile, but who are sensitive to capital losses, and who prefer a benchmark-agnostic approach. While the fund does tend to have a higher exposure to equity than either the PSG or Truffle Funds, it achieves these exposures at lower levels of systemic risk, delivering a lower risk profile overall. Consequently, this fund works well in a wide variety of portfolios, ranging from slightly conservative to more aggressive, as it materially lowers overall portfolio risk.


The Bateleur Flexible Fund has delivered excellent returns since its inception while taking on minimal risk. This was particularly evident during 2015, a volatile year in terms of investment performances. During this period the FTSE/JSE All Share TR Index returned 5.13%, with the Bateleur Flexible Prescient Fund returning 21% for the 12 months ending 31 December 2015. Over the past five years, the Bateleur Flexible Prescient Fund has managed to share, on average, 74.56% of the upside, and on average 33.37% of the downside when compared to the FTSE/JSE All Share TR Index. This type of asymmetrical return profile is what a flexible fund should exhibit, with Bateleur having one of the most consistent and prevalent asymmetrical return profiles when compared to some of its peers. However, it must be noted that this asymmetrical profile has somewhat deteriorated over the last three years. The fund previously had one of the lowest volatility profiles as reflected by its three-year standard deviation but has recently displayed an increased volatility profile over the last two years.


The Bateleur Flexible Fund has delivered excellent returns since its inception while taking on minimal risk. This was particularly evident during 2015, a volatile year in terms of investment performances. During this period the FTSE/JSE All Share TR Index returned 5.13%, with the Bateleur Flexible Prescient Fund returning 21% for the 12 months ending 31 December 2015. Over the past three years, the Bateleur Flexible Prescient Fund has managed to share, on average, 81% of the upside, and on average 29% of the downside when compared to the FTSE/JSE All Share TR Index. This type of asymmetrical return profile is what a flexible fund should exhibit, with Bateleur having one of the most consistent and prevalent asymmetrical return profiles when compared to some of its peers. The fund has one of the lowest volatility profiles as reflected by its three-year standard deviation.


The fund had a relatively solid performance for 2017, despite a large dip in December which saw a detraction of 4% from the calendar year performance. This was largely as a result of the Steinhoff debacle and the sharp strengthening of the rand, post Cyril Ramaphosa’s ANC election win on the 18th December 2017. This detracted from the fund’s large offshore and rand-hedge exposure. The annual return (+11.55%) of the fund outperformed its SA CPI+4% benchmark (+8.33%) along with the peer group average (+8.69%). However, relative to the FTSE/JSE All Share Index which returned 20.95%, it underperformed by some margin. The fund’s Q4 performance (+1.72%) was clearly a detractor, coming in lower than the benchmark (+1.86%) and category average (+2.03%). The fundamental drivers of the annual return were the core long domestic holdings which contributed 8.5% and the core long foreign holdings which contributed 3%. Asset allocation remains firmly positioned toward risky assets (equity and property: 59%) with no bond exposure, and a significant weight in domestic cash (24%) to allow for capital protection as equity valuations are above trend both globally and in South Africa and also for optionality should opportunities present themselves early in 2018. On a sector level the fund’s largest exposure (20.98%) is to technology which returned 9.21% over the quarter and 39.27% over the calendar year. This was mainly attributed to Naspers which rallied 71.83% over the year and was the top holding (11.5%) in the fund despite exposure being reduced by 1.8% at year-end. Financials were also a strong contributor toward performance with holdings such as Barclays Group Africa (up 30.26%), Firstrand (up 32.17%) and Old Mutual (up 10.30%), rallying significantly over the quarter on the back of the ANC electoral conference. The largest detractor to the fund’s performance was undoubtedly Steinhoff International which plummeted 92.25% over the quarter. Subsequently, the portfolio manager no longer holds any exposure to the counter. Going forward, the portfolio manager holds a positive view on selective domestically-focused industrial and financial stocks which are set to benefit from improved domestic business and consumer confidence in South Africa.


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Cash

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Domestic Equity

BATELEUR FLEXIBLE PRESCIENT

Fund manager Kevin Williams Consistency (No. of quarters) 7

Benchmark CPI+4% Risk Description Medium-High

Role of Benchmark Benchmark agnostic Inception Date 01 July 2010


Philosophy Bottom-up stock-picking, with a top-down macro overlay Fee Description (retail class) Annual management fee with an

additional performance-based fee


Category SA Multi-Asset Flexible Regulation 28 N/A


Key Insights

The fund has an absolute-return mandate, but the managers are cognisant of the broader FSE/JSE All Share Index as well as their peers. The fund is therefore slightly more relatively managed than its peers with a similar mandate. Laurium has a definite bias towards equity with exposure to other asset classes being opportunistic, or as a result of not finding sufficient opportunities in locally-listed shares. Offshore exposure will be gained primarily through ETFs. Fundamental research in offshore stocks is limited to competitors of local counters, and could be included in the portfolio should they offer compelling value. The inclusion of direct offshore holdings is therefore as a result of local fundamental research as opposed to looking actively for offshore opportunities. Laurium also has strong African investment capabilities, and should opportunities avail themselves, they will be included in their local SA portfolios. These opportunities will be fundamentally researched. The investment team at Laurium has a strong accounting background and places an emphasis on financial analysis of companies when conducting fundamental research. Furthermore, the team at Laurium places an emphasis on interactions with leaders in the SA business environment for idea generation and as part of their research.

Fund Use

This is a SA multi-asset flexible fund, with a bias towards equity. Other asset classes such as money market instruments, bonds and property will be added opportunistically. The fund aims to deliver a real return of 5%. However, the fund is more relatively-focused than a pure absolute-return fund, with the managers trying to outperform the broader SA equity market as well as their peers. This is an ideal fund for investors that seek long-term real growth. The fund will work well in a slightly more aggressive multi-asset portfolio, especially with funds such as the Truffle Flexible Fund, which is a strictly absolute, bottom-up focused fund, which more readily invests in other asset classes. It also can be used alongside the PSG Flex Fund if the investor wants to diversify a cash/equity portfolio, with low correlations between the two, tempering overall portfolio volatility.


Laurium has been managing hedge and long-only funds investing across Africa since 2008, when it was founded by Murray Winckler and Gavin Vorwerg. They have had the benefit of an extended bull run, but the senior members of the investment team bring with them years of experience accumulated throughout the market cycle. The investment team has won numerous hedge fund awards, while the long-only flexible fund has delivered impressive returns since its inception when compared to the broader FTSE/JSE All Share TR Index. Murray Winckler and Gavin Vorwerg have over 26 years’ and 17 years’ investment experience respectively, while Craig Sorour and Paul Robinson, as the two heads of research (local and Africa respectively), have over 16 years’ and 11 years’ experience, respectively. The team has been relatively stable with only two analysts leaving and being replaced since the firm’s inception. Subsequently, Brian Thomas has been the latest appointment to the investment team as a co-portfolio manager and analyst in 2017. Furthermore, an interesting development in the team dynamic is Vorwerg, who has moved to Cape Town permanently to establish a Cape Town office along with Thomas. This move is seen as positive by the portfolio managers as it will allow them to further develop their networks across the country. The team is able to articulate clearly their philosophy and process, and based on their extensive experience, we believe this team to be of a high calibre. Laurium is well-positioned to take advantage of African opportunities, should it be suitable for their SA portfolios.


The fund delivered consistent first quartile returns over a rolling three-year period. This fund has exhibited excellent, positive asymmetric returns as measured by the fund’s up- and down-capture ratios versus the FTSE/JSE All Share TR Index. It is a strong generator of excess returns. Despite the fact that the fund has an absolute-return benchmark, it is managed on a more relative basis, with the team cognisant of outperforming the JSE and also its peers. On a relative basis, the fund’s volatility tends to be slightly higher than its peers, albeit significantly less than the overall market.


Over the 2017 calendar year, the fund performed well relative to its benchmark and category peers, largely driven by the fund’s asset allocation. Stock selection was trickier during the year as three critical events impacted the SA market, namely, the downgrade of South Africa’s credit rating to junk status by S&P Global, the Steinhoff accounting scandal and the election of Cyril Ramaphosa as ANC president. On a quarterly basis, the fund returned 2.27% versus the CPI+5% benchmark which returned 2.07% and average peers of 2.02%. For the 12 months ended December 2017, the fund was up 11.56%, outperforming the benchmark’s return of 9.61%, as well as the category average of 8.69%. The main driver of performance over the quarter was the fund’s equity holdings, spearheaded by technology and financial services which contributed 3.11% and 2.78% respectively to the performance of the equity component. Sectors which detracted from performance were healthcare (-0.57%) and consumer cyclicals (-2.52%). The rand strengthened 10.25% against the USD over the course of December, making it by far the best-performing EM currency over that time. Most of the gain came after Cyril Ramaphosa’s victory on 18 December. This significant rand strength was a drag on the fund’s offshore holdings with the US ETF returning -2.60% and detracting -0.32%. On a stock level, the main talking point for the quarter was Steinhoff. The fund held 2.6% in Steinhoff International before the news broke of accounting irregularities. The portfolio managers’ rationale for holding Steinhoff was premised on Steinhoff consolidating the fragmented European furniture market; a recovery in European GDP/PMI; strong growth in the Eastern European general merchandise business; and what appeared to be a very compelling valuation. Subsequently to the debacle, they cut the exposure to Steinhoff in half and as at end Q4 2017, only held 0.2%. On the contrary, the fund’s largest equity holding, Naspers, returned 18.18% (contributing 3.11%) over the quarter and returned a staggering 71.83% (contributing 8.33%) over the 2017 calendar year.


0%10%20%30%40%50%60%70%80%90%

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Property

Foreign Bonds

Foreign Equity

Equity

Cash

Bond

Africa Equity

LAURIUM FLEXIBLE PRESCIENT

Fund manager Gavin Vorwerg, Murray Winckler Consistency (No. of quarters) 7


Role of Benchmark Some benchmark-cognisance Inception Date 01 February 2013

Return Focus Absolute, with a relative bias Fund Size (Rm) R1 857

Philosophy Bottom-up stock-picking, with a top-down macro overlay Fee Description (retail class) Performance fee


Category SA Multi-Asset Flexible Regulation 28 N/A


PSG FLEXIBLE

Fund manager Paul Bosman and Shaun le Roux Consistency (No. of quarters) 33

Benchmark CPI+6% Risk Description Medium to High

Role of Benchmark Benchmark - Agnostic Inception Date 02 November 1998


Philosophy Fundamental, bottom-up, value approach with a key focus on MOAT, management and margin of safety Fee Description (retail class) Annual management fee plus

performance fee


Category SA Multi-Asset Flexible Regulation 28 No

Key Insights

The fund typically will be invested only in cash or equity, and will not include other asset classes such as fixed income securities (longer duration bonds) or property. This is a fully flexible fund and the manager is prepared to invest a large amount of the fund in cash, should he feel that equities offer little value. Conversely, the fund may also invest up to 100% in equities as far as practically possible from a liquidity perspective and margin of safety. This is currently the largest fund in the multi-asset flexible category. The fund is benchmark- and peer-agnostic, generating returns from specific shares which are chosen due to their MOAT, management and margin of safety. This differentiation drives the fund’s performance during different periods when compared to peers, leading to a low correlation between performances. The cash in this fund will be enhanced with a weighted average duration of approximately 194 days, mainly through the use of NCD instruments.

Fund Use

This is a flexible fund which shifts between cash and equity, depending on where the manager sees value. The manager can shift to cash, should he feel equities are expensive, and vice versa. Holding more cash should result in less risk, decreasing overall fund volatility, but this could also lead to lower returns. This is a good option for investors that would like to take advantage of the manager’s ability to allocate capital between cash and equity. It can also bring a sense of dynamism to a static portfolio split between equity and fixed income, overweighting equity in times when it is deemed to be inexpensive, or overweighting fixed income instruments or cash in high-risk environments. Furthermore, it is ideal to use in an absolute-focused, moderate to aggressive portfolio. Due to the fund’s unique counter-specific positioning, it can add diversification when used with the Truffle MET Flexible or Bateleur Flexible Prescient Funds.


The investment team, comprising both equity and fixed income, consists of 17 members. The fund was managed by Jan Mouton until 29 February 2016. From 1 March 2016, the management of the fund was taken over by Paul Bosman and Shaun le Roux. Paul Bosman has 13 years of investment experience, and is the manager of both the PSG Stable and the PSG Balanced Funds, and has assisted Mouton for 11 years in managing the PSG Flexible Fund. Shaun is the portfolio manager of the PSG Equity Fund and has 21 years of investment experience, 18 of which have been spent at PSG. Paul has extensive multi-asset management as well as asset allocation experience, while Shaun has a wealth of equity management experience, particularly when it comes to idea generation. Jan Mouton continued to function as chairman of the equity investment committee until June 2016. Subsequently, he has decided to focus on his personal endeavours. Greg Hopkins, CIO, has taken over as head of the equity committee. These changes were effective as of July 2016. We believe this transition was transparent and well-managed. Hence, we have maintained our favourable stance on this fund. The portfolio managers and team are co-investors in this fund and therefore the clients’ and managers’ interests are aligned. The investment process is well-articulated and structured to ensure that idea generation takes place effectively and that these ideas are vetted and brought to fruition in a timeous manner. The asset management arm of PSG is part of the wider PSG group and can leverage off the group’s extensive resources and experience should the need arise. As a result, a culture of strong corporate governance is evident with respect to the structuring of investment committees.


The fund has a 15-year performance track record, one of the very few funds in the multi-asset flexible category that offers such a long history. The fund has low correlations with its peers and the category as a whole. The fund’s excess returns are generated mainly through its ability to generate alpha as opposed to the interaction between the fund and the general market (beta). The fund’s risk profile as measured by standard deviation and drawdowns improved markedly since 2008, and is one of the less risky funds in the flexible space today. The fund has delivered consistent first and second quartile returns. PSG’s investment process lends itself to stock selections that are slightly more contrarian in nature than most peers. This, together with their tendency to move into certain mean-reverting stocks early, may lead to periods of underperformance.


The fund managed to return double-digit figures in 2017 (+10.0%) despite not holding the year’s best-performing stock on the FTSE/JSE All Share Index, Naspers, which was up 71.83% and having an average cash holding of 30.54%. Subsequently, the fund marginally underperformed its SA CPI+6% benchmark which returned 10.6% over the calendar year. Not surprisingly though, the majority of the fund’s returns came in Q4 as it returned 5.14% on the back of SA domestic-focused stocks rallying. On a sector level, the fund’s large exposure (21.28%) to financials was the major driver of returns. Discovery Holdings was the top contributor over the quarter, returning 32.75% in Q4 and contributing 2.91% to the performance of the fund’s equity component. Other notable positions were in L Brands, Old Mutual and Glencore, which returned 34.32%, 10.30% and 5.42%, respectively, over the quarter. After the major ANC political event in December and the subsequent moderate rerating thereafter, the portfolio managers classify many SA domestic-focused shares as materially undervalued and see them as having strong upside potential in the foreseeable future. It must be noted though, that their investments in domestic companies have not been based on a prediction around political outcomes, but rather a willingness to use poor sentiment to acquire good businesses at a wide margin of safety. The opportunity set within less liquid companies on the JSE is particularly attractive and bodes well for long-term returns. On a global front, global stock valuations are at elevated levels and the portfolio managers have been finding fewer high-conviction global stock opportunities and instead have been taking profit in some US stocks that have seen strong price appreciation. Subsequently, the fund is now conservatively positioned, with 30% of fund value in cash (5% offshore and 25% domestically held). This cash level is higher than historic averages and is reflective of valuation levels within the broader opportunity set. They continue to hold their large offshore positions in Brookfield Asset Management and Babcock International Group. Brookfield Asset Management returned 20.95% in 2017 despite the sharp strengthening of the rand over the year and was one of the fund’s largest contributors to performance.


0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

100.00%

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Foreign Cash, Derivative, Money Market

Foreign Equities

Cash, Derivative & Money Market

Domestic Real Estate

Domestic Industrials

Domestic Financials

Domestic Resources


Key Insights

The fund’s primary objective is to deliver absolute returns of CPI+5% over the longer term at the risk of shorter-term volatility. The way Truffle views risk is unique, as they place a great deal of emphasis on quantifying the possible downside of any potential investment. Should the possible downside be acceptable and the investment’s expected return is greater than CPI+5%, it will be considered as a possible candidate for inclusion in the portfolio. Asset allocation is primarily as a result of the bottom-up valuation process. The fund is willing to invest in bonds and property, with the latter, however, needing to compete with equities to justify its inclusion in the portfolio. The fund will make use of option strategies to hedge positions in the portfolio should the costs justify them. All investment team members invest alongside their clients in the most expensive fee classes, and no personal trading accounts are allowed.

Fund Use

The fund is ideal for investors that target an absolute return of at least CPI+5%. These investors are typically able to take on more risk, either to save for retirement or as part of a diversified retirement portfolio to provide longer- term capital growth. Flexible funds are unique in that they offer an investor the opportunity to participate in a rising market, but also the opportunity to revert to more conservative asset classes should the manager feel valuations are stretched. Consequently, the investor does not need to share in the downside. The Truffle MET Flexible Fund is focused on delivering an asymmetrical return profile, with time being spent trying to quantify the possible downside to any investment included in the portfolio. This is a good fund to use in combination with the PSG Flexible, or Bateleur Flexible Funds, which traditionally have been managed with a cash/equity bias, as the Truffle Flexible Fund will include, more readily, other asset classes such as property and bonds. It will also work well with a fund such as the Laurium Flexible Fund that is managed on a slightly more relative basis and historically, has included a bigger exposure to risky assets.


The named portfolio managers are Iain Power, Jonathan du Toit and Saul Miller. Power has over 25 years’ investment experience, and began his career at RMB Asset Management in 1993. During this time Power managed various mandates, including balanced mandates and segregated aggressive equity funds. He started the RMB Mid- & Small-Cap Fund which he ran for three years. He was part of the asset allocation committee, head of industrials, and finally, head of equities. Du Toit is a qualified CA (SA) and CFA charter holder. He completed his articles at Deloitte and Touche from 2003 to 2006, and joined Allan Gray/Orbis at the end of 2006, where he was primarily responsible for global financial stocks. Du Toit joined Truffle in August 2010. In Q4 2017, Saul Miller (19 years’ experience) became a named portfolio manager. He is a qualified actuary and received a Master of Business Science degree from the University of Cape Town. Previously, he worked as head of equity at Argon Asset Management for over four years, and was responsible for managing the equity team and equity portfolios.Nicole Agar, a senior investment professional with 19 years of experience, joined in 2015, while an additional member, Sophie Marie van Garderen (25 years’ experience) also joined from Argon Asset Management during Q2 2016. The team now boasts considerable skill and expertise, with a good mix between senior and junior team members. Truffle has a clearly-defined, fundamental, bottom-up value philosophy and a well-defined, unique investment process that places emphasis on trying to quantify the downside of a potential investment.


The fund continues to deliver consistent first and second quartile performance over rolling three-year periods. However, its short-term performance has become a concern as it has failed to outperform its SA CPI+5% benchmark on a three-year annualised basis. However, on a five-year basis, it still manages to outperform the benchmark. On average, the fund has captured 83% of the upside on the FTSE/JSE All Share, and approximately 33% of the downside. This confirms the team’s unique approach to risk management and quantifying the potential downside of an individual investment. Despite this, the fund’s volatility used to be relatively low when compared to its peers. However, volatility has spiked over a one- and three-year basis. This has been commensurately met with higher drawdowns over both these periods than peers.


Relative to peers, this fund had a disappointing 2017. Despite a notable resurgence in the performance of SA and global equity in 2017, the fund only returned 6.98%, underperforming its SA CPI+5% benchmark (+9.61%), the category average (+8.69%), the FTSE/JSE All Share Index (20.95%) and even the STeFI composite (+7.56%). A large detractor from performance was the fund’s direct offshore holdings which struggled under the strengthening of the rand, along with large rand-hedge counters, Naspers, British American Tobacco and Compagnie Financière Richemont. Not to mention the average 3.15% holding over the quarter in Steinhoff International, which plunged 92.25% and detracted 3.94% from the fund’s performance. As a spill-over to this debacle, the fund also holds Steinhoff Africa Retail (1.01%) which fell 27.89% and detracted -0.23% from performance. On an asset class level the fund has a 43.93% holding in SA equity, with exposure to banks being 6.37%, which returned 30.14% over the quarter. The largest stock in this sector for the fund is Barclays Africa Group (2.56%) which returned 33.19% and contributed 0.75% to the fund’s overall quarterly performance, the most from any single security. Domestically-focused industrial and resource counters contributed positively, 0.12% and 0.14%, respectively, as SA Inc. rallied after the election of Cyril Ramaphosa as president of the ANC in December. Direct foreign equity holdings were at 14.99% at the end of Q4 and returned a negative performance of -2.85%, with the largest holding, Indiabulls Financial Services (4.49%), returning -6.74% and detracting -0.27% from overall fund performance. Fixed income offered some respite for the fund with domestic fixed income returning 3.79% and contributing 0.51% to overall returns. This exposure is largely gained through holdings in three to five-year corporate bonds with SA’s four largest banks. The fund holds a relatively sizeable position in property relative to peers on the Shopping List, most notably foreign property (5.82%) which returned -2.16% and detracted -0.15% from overall performance. Schroder European Real Estate was the largest laggard (-6.03%) on performance. Local property (2.42%), however returned 4.24% and contributed 0.12% to performance. Equites Property Fund was the largest contributor in this regard, returning 5.23% over the quarter.


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100%

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Foreign Fixed Income Holdings & Money Market

Foreign Equity

Domestic Cash

Domestic Fixed Income Holdings

Domestic Property

Domestic Equity

TRUFFLE MET FLEXIBLE

Fund manager Iain Power, Jonathan du Toit and Saul Miller Consistency (No. of quarters) 9


Role of Benchmark Benchmark - Agnostic Inception Date 01 January 2011


Philosophy Bottom-up, stock-picking, relative-valuation process Fee Description (retail class) Annual management fee plus performance fee


Category SA Multi-Asset Flexible Regulation 28 No


GLOBAL - MULTI-ASSET - HIGH - EQUITY

Category Analyst: Imraan Khan

These portfolios invest in a spectrum of investments in the international equity, bond, money, or property markets. These portfolios tend to havean increased probability of short-term volatility, aim to maximise long-term capital growth and can have a maximum effective equity exposure ofup to 75% and a maximum effective property exposure of up to 25% of the market value of the portfolio. The underlying risk and returnobjectives of individual portfolios may vary as dictated by each portfolio’s mandate and stated investment objective and strategy. Most of thefunds in this newly-created category were previously in the Foreign Asset Allocation Flexible category.

Shopping List selection: Investec Global Strategic Managed FF, Coronation Global Managed FF


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

Investec Global Strategic Managed FF B Coronation Global Managed [ZAR] FF A (ASISA) Global MA High Equity

Re

turn

Quartile Ranking

As of Date: 31/12/2017


-2.5

0.0

2.5

5.0

7.5

YTD 1 year 3 years 5 years 7 years 10 years

10.0

12.5

15.0

17.520.0

Investec Global Strategic Managed FF B Coronation Global Managed [ZAR] FF A

Re

turn

Returns



Investec Global Strategic Managed FF B

Coronation Global Managed [ZAR] FF A

(ASISA) Global MA High Equity 15.16 9.198.03 15.074.20 4.20

5.66 5.66

3.94 3.94

8.25

7.56

15.16

15.64

14.75

16.97

9.51

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Investec Global Strategic Managed FF B

Coronation Global Managed [ZAR] FF A

(ASISA) Global MA High Equity 13.66 -11.08 61.67 38.33 0.63

13.82

14.78

-11.49

-12.10

65.00

66.67

35.00

33.33

0.63

0.62


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0



Time Period: 01/01/2013 to 31/12/2017

Rolling Window: 1 Year 1 Month shift

2014

01 02 03 04 05 06 07 08 09 10 11 12

2015

01 02 03 04 05 06 07 08 09 10 11 12

2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

-20.0

0.0

20.0

40.0

60.0


Re

turn


CORONATION GLOBAL MANAGED FEEDER

Fund manager Louis Stassen and Neil Padoa Consistency (No. of quarters) 10

Benchmark 60% MSCI All Country World Index and 40% Barclays Global Bond Aggregate Risk Description Aggressive

Role of Benchmark Agnostic Inception Date 29 October 2009


Philosophy Bottom-up, valuation-driven Fee Description (retail class) Annual management fee

Glacier Risk Rating 9.99 Total Investment Charge 1.79% (excl. VAT)

Category Global Multi-Asset High-Equity Regulation 28 No

Key Insights

The fund is managed according to the Coronation DNA. This embraces a common-sense, valuation-driven process of identifying mispriced assets that are trading at a discount to their long-term value. The fund is biased towards equities, and primarily invests in developed economies (including the US, Europe and Japan) although the fund is mandated also to invest in emerging markets. The fund has a maximum limit of 75% to equity and 10% to property. The equity component of the Coronation Global Managed Fund also reflects Louis Stassen’s best view in the Coronation Global Equity Select Fund. Equity counters included in this fund typically will be high-quality global companies where a specific focus is placed on companies’ incentive scheme structures, management quality, MOAT and capital structure. In addition to this, the members of Stassen’s seven-member team express their high-conviction views by making use of derivatives and ETFs in the Coronation Global Managed Fund. Stassen’s team also leverages off research conducted by Gavin Joubert’s GEM (Global Emerging Markets) team should they want to increase their exposure to emerging markets. The fixed interest research is conducted by the fixed interest and property team, headed by Nishan Maharaj. Stassen’s team leverages off this research to implement their view in the fixed interest component of the CGM. Furthermore, Stassen makes use of a merger arbitrage bucket, which essentially can be seen as an alternative to cash where it does not exceed 10% of the portfolio. The merger arbitrage bucket historically has never been greater than 4.5% of the fund and has contributed positively to performance in the past.

Fund Use

The fund provides exposure to managed growth-oriented offshore multi-assets. Unlike the Investec Global Strategic Managed Fund (its Shopping List peer), this fund is a more traditional global balanced fund and is biased towards equity counters, with the remainder in cash. The fund is mandated to invest in bonds, cash, equity, property and commodities. The intent is to keep the parent fund fully invested offshore at all times. The fund’s exposure will be in a variety of currencies, primarily the US dollar, British pound, euro and yen. This fund is suitable for investors who are looking to add developed markets and emerging markets exposure with relatively low volatility to their portfolios.


Coronation’s proprietary research is centralised, and the management of this fund leverages off a house-view and valuation-driven research process of picking stocks from a bottom-up approach. The asset allocation is determined by Coronation’s long-term risk-adjusted returns proprietary model based on underlying fundamentals. With the backing of Coronation’s senior management’s deliberation on asset allocation, Stassen is well-positioned to implement active asset allocation to express his strong convictions in the multi-asset portfolio. Regional allocation is merely a result of Coronation’s fair-value rankings. Qualitative research follows after the quantitative research, where some of the potential securities are flagged by the proprietary ranking table. The portfolio leverages off Gavin Joubert’s GEM team and Nishan Maharaj’s team. Since the team is based in South Africa, they would lean towards industries with which they are comfortable. This fund is a more traditional multi-asset fund with an inclination towards equities. However, it is worth mentioning that this fund has expanded its asset allocation offering to include gold as a hedge against global uncertainty and merger arbitrage i.e. companies involved in corporate transactions where the deal may favour patient investors. They have also increased their exposure to alternative asset managers.


Coronation’s proprietary research is centralised, and the management of this fund leverages off a house-view and valuation-driven research process of picking stocks from a bottom-up approach. The asset allocation is determined by Coronation’s long-term risk-adjusted returns proprietary model based on underlying fundamentals. With the backing of Coronation’s senior management’s deliberation on asset allocation, Stassen is well-positioned to implement active asset allocation to express his strong convictions in the multi-asset portfolio. Regional allocation is merely a result of Coronation’s fair-value rankings. Qualitative research follows after the quantitative research, where some of the potential securities are flagged by the proprietary ranking table. The portfolio leverages off Gavin Joubert’s GEM team and Nishan Maharaj’s team. Since the team is based in South Africa, they tend to lean towards industries with which they are comfortable. This fund is a more traditional multi-asset fund with an inclination towards equities. However, it is worth mentioning that this fund has expanded its asset allocation offering to include gold as a hedge against global uncertainty and merger arbitrage i.e. companies involved in corporate transactions where the deal may favour patient investors. They have also increased their exposure to alternative asset managers.


The Coronation Global Managed Feeder Fund underperformed its composite benchmark and the category average for Q4 2017, returning -5.82% in ZAR (2.72% in USD) while its benchmark returned -4.67% in ZAR (3.98% in USD). For the year ending 31 December 2017, the fund underperformed its composite benchmark and the category average, returning 3.94% in ZAR (14.82% in USD) in comparison to its benchmark’s return of 6.22% in ZAR (17.34% in USD). Over a more meaningful period of five years, the fund has outperformed its benchmark, returning 15.64% in ZAR (7.22% in USD) while its benchmark returned 14.80% in ZAR (6.45% in USD). The overall asset allocation detracted from performance over the quarter, as the fund was positioned too defensively in terms of equity exposure ending around 55%. However, good stock selection in terms of property add relative value yielding 23%, while the funds credit selections delivered underperformance relative to the Global Bond index which is in line with their conservative position. The fund’s physical gold holding (used as a form of protection or diversification) of 1.9%, detracted from performance. Moreover, equity exposure (including the merger arbitrage allocation) has decreased by 1% over the quarter, from 56.40% to 55.40%. This remains positioned very defensively relative to the composite benchmark equity weight of 60.00%.Bond exposure has increased by 3.60%, from 6.40% to 10.00%, while cash has decreased from 25.60% to 20.30%. Property exposure was increased by 2.70% from 9.80% to 12.50%. Notable winners over the quarter, were L Brands, FOX, Amazon and Spirit Airlines, while Altice NV, Allergan, Newell Brands and Walgreens detracted from performance. Overall credit exposure remains very low as they believe credit markets are discounting a benign outcome in terms of corporate defaults.


0%10%20%30%40%50%60%70%80%90%

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Merger Arbitrage

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Commodities

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INVESTEC GLOBAL STRATEGIC MANAGED FEEDER

Fund manager Phillip Saunders and Iain Cunningham Consistency (No. of quarters) 10

Benchmark 60% MSCI AC World NR, 40% Citigroup World Government Bond Index Risk Description Aggressive


Return Focus Relative to AC MSCI World Fund Size (Rm) R2 900

Philosophy Fundamentals, valuation and market behaviour Fee Description (retail class) Annual management fee

Glacier Risk Rating 9.99 Total Investment Charge 2.41% (excl. VAT)

Category Global Multi-Asset High-Equity Regulation 28 No

Key Insights

The investment approach – where investment ideas are generated across a wide range of traditional and non-traditional assets and strategies – is one of the key differentiators. All opportunities are assessed on the team’s three “compelling forces”, namely fundamentals, valuation and market price behaviour. Appropriate levels of diversification are attained by categorising assets and strategies into growth, defensive or uncorrelated categories based on their expected behaviour. This is done to ensure more robust portfolio construction. The sources of alpha are equity selection, bond selection, asset allocation, thematic positions, pair trades and currency management. Philip Saunders, one of the co-managers, is also the head of Investec Asset Management’s global asset allocation committee. The asset allocation is based on absolute and relative values. The benchmark is not considered for asset allocation but it is utilised to define the risk budget

Fund Use

The Investec Global Strategic Managed Feeder Fund is not a typical global balanced fund and provides investors with access to broadly diversified global multi-assets. These include both traditional and non-traditional (alternative) investments – private, unlisted equity, closed-ended funds and infrastructure. Both the asset allocation and currency decisions allow the Global Multi-Asset team to express evolving strategic views, exploit tactical opportunities and protect against market events. This fund also aims to provide equity-like returns with relatively lower volatility. The long-term strategic asset allocations are as follows: 30-75% in equity, 0-25% in cash and 15-70% in bonds. The tracking error to the reference benchmark is expected to range between 3% and 8%. Meanwhile, the fund has an outperformance target of 2% over a rolling three-year period relative to its benchmark (gross of fees). Despite the three-year outperformance target, the portfolio managers encourage an even longer investment horizon of more than five years. This portfolio reduces the volatility when blended with a more equity-biased global balanced portfolio.


The core global equity selection component is managed through Investec’s 4Factor global core equity strategy. Strategy, value, earnings and technical expertise are the pillars. The 4Factor team overseeing this strategy looks for high-quality stocks with attractive valuation, displaying improved operating performance and increasing investor attention. The Global Multi-Asset’s thematic selection is an expansion of the investment opportunity set. Positions can include bonds, equities and alternative asset classes, which are held on a multi-year basis. The Global Multi-Asset team has an average of 34 investment professionals based in London and three based in Cape Town. The specialist teams broadly can be classified as equities, fixed income and alternative investments teams. The team is further divided into seven specialist research groups focusing on macro, equities, forex and rates, credit, commodities, property, infrastructure and private equity, and lastly, alternative risk premia. Members of the respective specialist research groups are encouraged to attend other specialist group meetings. The Global Multi-Asset team is integrated while the open-plan setting ensures that individuals can leverage off each other while being able to conduct research in a specialist and focused manner. Max King retired from Investec Asset Management on 30 June 2017, thereby relinqishing his role as co-portfolio manager, and Iain Cunningham joined Saunders as co-portfolio manager from September 2016. Cunningham joined from Schroders where he was responsible for the management of a number of multi-asset funds and mandates focused on dynamic asset allocation and income. Furthermore, the managers are highly experienced investment professionals, and Saunders has been managing this fund since 2004.


Since 2010, the Investec Global Strategic Fund has captured less of the upside (low up-capture ratio) where the benchmark performance rose, but more of the downside during periods where the benchmark fell (high down-capture ratio). The volatility of the fund, on a rolling three-year basis, is in line with the category average, ranging between 9% and 12.5%. Moreover, the fund experienced major drawdowns in the second half of 2008, between 2012-2014, and in June 2016 with a drawdown of 11.49%. On a rolling three-year basis over the past 10 years (as at 30 June 2017), the fund has outperformed the Global Multi-Asset High-Equity category on average 63.53% of the time.


The Investec Global Strategic Managed Feeder Fund outperformed its composite benchmark and the Global Multi-Asset High-Equity category average over Q4 2017, returning -4.64% in ZAR (+4% in USD), while its benchmark returned -4.69% in ZAR (+3.96% in USD). For the year ending 31 December 2017, the fund underperformed its composite benchmark, but outperformed the category average, returning 5.67% in ZAR (16.71% in USD) in comparison to its benchmarks return of 6.26% in ZAR (17.38% in USD). Over a more meaningful period of five years, the fund has outperformed its benchmark, returning 15.16% in ZAR (6.77% in USD) while its benchmark returned 14.99% in ZAR (6.62% in USD). Over the quarter, with regards to equites, the fund’s overweight positions in US, Japanese and emerging market equities contributed positively to performance, as well as its overweight positions within the technology, financials and North American railways sectors. Fixed income exposures had a strong bias towards long-dated US treasuries, which added positively to performance as 30-year treasury yields declined, while short- to medium-term treasury yields rose. Some of the equity exposure has been hedged to the US dollar, thereby adopting a cautious stance as central banks turn their attention to financial stability risks. In terms of currency, a short position in the New Zealand dollar made a positive contribution,while a small long position in the Turkish lira detracted from returns. Finally, equity exposure at the end of December 2017, was at 53.5%; the fund’s duration is 3.8 years, with a preference for US treasuries. The fund is biased towards the US dollar (37.8%), followed by allocations to Japanese yen (23.7%), Euro (22.5%) and the pound sterling (7.4%).


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Local Bonds

Local cash

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Multi-Asset

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Bonds

Equity


GLOBAL-MULTI-ASSET-FLEXIBLE


These portfolios invest in a flexible combination of investments in international equity, bond, money, or property markets. The portfolios have complete or stipulated limited flexibility in their asset allocation both between and within asset classes, countries and regions. These portfolios are often aggressively managed with assets being shifted between the various markets and asset classes to reflect changing economic and market conditions to maximise total returns over the long term.

Shopping List selection: Nedgroup Investments Global Flexible Feeder Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0 21.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Nedgroup Inv Global Flexible FF R (ASISA) Global MA Flexible

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


-10.0-5.00.05.010.015.020.025.030.0

YTD 1 year 3 years 5 years 7 Years


Ret

urn

Returns


YTD 1 year 3 years 5 years 7 YearsNedgroup Inv Global Flexible FF R(ASISA) Global MA Flexible 5.05 5.05

-1.22 -1.227.147.35

14.1415.21

14.3615.08

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

Ratio

Nedgroup Inv Global Flexible FF R(ASISA) Global MA Flexible 13.46 61.67-12.97 38.33

14.78 -11.73 58.33 41.67 0.590.57


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0



Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 120.0

7.5

15.0

22.5

30.0


Ret

urn


NEDGROUP INVESTMENTS GLOBAL FLEXIBLE

Fund manager First Pacific Advisors LLP Consistency (No. of quarters) 3

Benchmark 60% MSCI World; 30% JPM Global Bond; 10% USD Libor Risk Description Moderate Aggressive



Philosophy Bottom-up, value-contrarian Fee Description (retail class) Annual management fee of feeder is 0%; fee charged in the offshore fund


Category Global Multi-Asset Flexible Regulation 28 No

Key Insights

This is a very concentrated portfolio that typically will hold between 35 and 50 stocks. The managers follow a strong value-contrarian approach, with an absolute-return mindset – absolute, and not relative valuations are considered. This fund is managed fundamentally bottom-up and no macro views are incorporated in the fund. The asset class exposure of this fund can also have a large allocation to cash (the tactical holding ranging between 5% and 60%) if the portfolio managers can’t find enough attractive investment opportunities. This also speaks to their absolute-return focus. They will not be invested fully just because the mandate allows them to be invested fully in equity. They follow a very structured investment process that screens out stocks with a market cap less than $1bn. This allows the fund managers to identify opportunities in the small-cap space. Global equity mandates are one of the key strategies that the company focuses on and comprises the majority of FPA’s AUM. Managers’ interests are aligned in that they invest in their own funds alongside clients’.

Fund Use

The Nedgroup Global Flexible Fund is suitable for multi-asset portfolios if an investor is looking for more of a concentrated, absolute return-focused, global, multi-asset fund. The fund primarily invests in developed market equity (the majority being allocated to the US), with little emerging market exposure. It also predominantly will utilise US treasury bills and developed market government bonds for fixed income, if valuations are attractive. Therefore, the fund can be used in numerous risk-profiled portfolios seeking global developed market exposure. The fund is bottom-up, valuation-driven and offers good diversification to other global funds that adopt a top-down macro approach, such as the Foord Flexible Fund of Funds, and funds that are growth-oriented such as the Coronation Global Managed Fund. The Nedgroup Global Flexible Fund also can be used in a more aggressive offshore portfolio, and will blend well with pure global equity funds such as the Old Mutual Global Equity Fund, which is a quantitatively managed fund.


FPA has been appointed as fund manager of the Nedgroup Investments Global Flexible Fund since 17 June 2013. The FPA Crescent Fund, which serves as a model portfolio for the Nedgroup Investments Global Flexible Fund, has a track record of more than two decades with its inception in 1993. The Nedgroup Investments Global Flexible Fund has a 95% overlap with the FPA Crescent Fund. FPA is based in Los Angeles, United States. It was founded in 1954 and is independently owned. The staff complement is 77 including 28 investment professionals. The asset manager operates three core strategies with a total AUM of $30bn. Steven Romick is the founder of the FPA contrarian value strategy and works with Brian Selmo and Mark Landecker daily to monitor and construct the strategy’s portfolios, including the Nedgroup Global Flexible Fund. In 2008 and 2009, Brian Selmo and Mark Landecker joined FPA and served as research analysts with Romick for this strategy. In 2013 both Selmo and Landecker were named portfolio managers of the contrarian value strategy. Since then, all three play an active role in portfolio construction and management and two of the three are needed for any relevant investment decision. Selmo is director of research and oversees the allocation of resources across the contrarian value team. The objective of the fund is to provide an equity-like return over the long term with less risk than the stock market, while avoiding permanent impairment of capital. Underpinning the team’s investment philosophy, is the belief that they can earn equity rates of return with less risk than the equity market over complete market cycles, by identifying absolute value opportunities across the capital structure. The fund has strong qualitative attributes. It has a stable and experienced team with a long track record, and a demonstrated ability to invest across the capital structure. The investment team also has a core skill in managing global flexible mandates. The investment process is rigorous and thorough and involves extensive fundamental analysis. The entire process also is augmented by regular travel when required, but it is not a prerequisite before making an investment. The team regularly meets with company management teams when they pass through Los Angeles Angeles to meet with the investor community.


Over the last five years, on a rolling three-year basis, the fund has struggled to beat its benchmark. However, it does show signs of outperformance when markets are falling generally. This can be attributed to the fund’s preference for holding large allocations in cash, as opposed to bonds, over time. The rolling three-year, risk-adjusted return of the fund is also mostly lower than its benchmark even though the fund has a lower standard deviation than its benchmark. When looking at performance of this fund, one needs to look further than one to three-year performance figures and rather through the cycle, five to seven-year performance figures. This is largely due to the nature of the stocks the fund holds, along with the large exposure, on average, to cash and short-dated, fixed-income instruments in the portfolio.


December capped a stellar year for the S&P 500, which recorded its first-ever year of having delivered a positive performance in every single month, setting more than 48 new records along the way. Unfortunately, the Nedgroup Investments Global Flexible Fund did not participate in much of this upside. The underlying fund returned 2.1% in USD in Q4 of 2017, whereas the S&P 500 returned 6.6% and the MSCI World Index returned 5.5%. Over 12 months, the fund returned 10.1% net of fees, less than half of the S&P 500 (+21.8%) and the MSCI World Index’s (+22.4%) calendar performances. The Nedgroup Investments Global Flexible Feeder Fund’s performance (-1.2%) was dismal, largely as a result of the underlying fund lagging the broader market and the significant rand strength against the US dollar over the year, which detracted from performance. In terms of positioning, the fund’s annual average asset allocation was 13.2% to cash which contributed 0% to performance over the year. 32.72% was allocated to fixed income, which contributed 0.39% and 54.45% allocated to equity, which contributed 11.44% (representing almost all of the fund’s performance). The portfolio managers openly admit that what has proven more important than their security selection over this market cycle, is that the fund’s exposure to long equities and other risk assets has been too low in retrospect. There is no hiding from the fact that this underweighting has reduced the benefits of the excellent performance. On a stock level, the stock which contributed the most to positive performance over the quarter was Mylan (+0.44%), followed by Bank of America (+0.41%), Microsoft (+0.34%) and TE Connectivity (+0.29%). In terms of detractors, the fund’s average equity exposure (1.12%) to General Electric was the largest detractor over the quarter (-0.28%) and year (-0.61%). The thesis behind holding this stock in the portfolio did not pan out as expected and the portfolio managers, at a loss, sold out of this position completely in December.


0%10%20%30%40%50%60%70%80%90%

100%

Q3

2013

Q4

2013

Q1

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Property

Government bonds

Equity United Kingdom

Equity Pacific ex. Japan

Equity North America

Equity Multi-Regional

Equity Japan

Equity Europe ex. UK


WORLDWIDE - MULTI-ASSET - FLEXIBLE

Category Analyst: Shawn Phillips

These portfolios invest in a flexible combination of investments in the equity, bond, money, or property markets. The portfolios havecomplete or stipulated limited flexibility in their asset allocation both between and within asset classes, countries and regions. Nominimum or maximum holding applies to South African or offshore investment. These portfolios often are managed aggressively withassets being shifted between the various markets and asset classes to reflect changing economic and market conditions to maximisetotal returns over the long term.

Shopping list selection: Foord Flexible FoF


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0 21.0

-2.0

2.0

6.0

10.0

14.0

18.0

22.0

26.0

Foord Flexible FoF R (ASISA) Wwide MA Flexible

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


-10.0-5.00.05.010.0

YTD 1 year 2 Years 3 Years 5 Years 7 Years

15.020.025.030.0


Ret

urn

Returns


YTD 1 year 2 Years 3 years 5 years 7 YearsFoord Flexible FoF R(ASISA) Wwide MA Flexible

5.58 5.587.79 7.79 1.62

0.486.98 12.416.79 12.57 14.80

12.45

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

Ratio

Foord Flexible FoF R(ASISA) Wwide MA Flexible

10.30 -7.98 66.67 33.33 0.599.58 -8.15 65.00 35.00 0.62


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-10.0

-8.0

-6.0

-4.0

-2.0

0.0


Rolling 3-Year Returns

Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 125.0

10.0

15.0

20.0

25.0


Ret

urn


Key Insights

The portfolio is an unconstrained fund. It reflects Foord Asset Management’s best investment views over all asset classes, domestic and foreign, and across all regions. Three Foord funds make up the Flexible Fund of Funds. The Foord International Fund and Foord Global Equity Fund deliver the offshore exposure while the Foord Absolute Return Fund is a local institutional fund that is only utilised to balance the overall portfolio of the Flexible Fund of Funds. The Foord International Feeder Fund has been closed to new investments since 1 February 2016. The fund’s strategic effective asset allocation, as determined by the CIO and the investment team, has been changed with commodities up 2% to 3%. SA is property up 1% to 2%, and SA bonds are down to 0% from 1%. Money market allocation dropped from 14% to 10%, while SA equities and foreign assets remain at 20% and 65%, respectively. The team aims to keep costs low, avoiding excess turnover, but works on an uncapped performance fee basis.

Fund Use

The worldwide, unconstrained nature of the fund means that it is highly volatile at times due to its ability to invest 100% in any single asset class. The Flexible Fund of Funds would be ideal for discretionary investors who do not need to comply with the Regulation 28 limits. The fund can be considered to be more conservative relative to peers, as it tends to hold a larger amount of cash on hand for optionality in the markets.


Foord’s asset allocation style is “top-down” and “bottom-up” portfolio construction, with a “growth at reasonable prices” approach. Dave Foord’s style of managing money – looking for earnings visibility and growth – is key to the success of the asset management house. There are currently two investment teams in Foord Asset Management. The local team has 13 professionals, of which four also conduct international research. There are nine members in the offshore team in Singapore, which is home to the second biggest mutual fund industry in the world. The house has an extremely strong research team, with analysts from all over the world.


The fund has an absolute-return focus and has proven itself to be one of the best-performing funds in the Worldwide Multi-Asset Flexible category whilst being able to protect capital well over longer periods. The fund has a more stable rolling-return profile than most of its peers, being positioned more defensively due to higher cash positions. This means that when markets run, the fund’s performance should lag its peers slightly. When markets decline it should be able to protect capital well. This was evident during the 2008 financial crisis, where the fund lost 12.20% in comparison to the category average which surrendered 22.70%. It has delivered better risk-adjusted returns than most peers over most periods and has also displayed better drawdowns than many of its peers over these periods. The fund consistently has remained within the first and second quartile of performance over a rolling five-year period. Over the shorter term, up to one year, this fund struggles to outperform its benchmark. As we look over longer periods, the fund’s outperformance of the benchmark and peer group average becomes larger and larger.


The Foord Flexible Fund of Funds had a tough quarter, slipping 4.45%, underperforming both its CPI+5% benchmark and the category average, which returned 2.07% and -1.42% respectively. The rand strengthened considerably against the US dollar over the quarter, which would have dampened performance as 71% of the portfolio is exposed to offshore holdings. Over a one-year period, as at 31 December 2017, the fund once again underperformed its benchmark and the category average, returning 5.58%, in comparison to the CPI+5% benchmark and the category average returns of 9.61% and 7.79% respectively. The fund’s local equity exposure was increased as the All Share futures position was closed out and some counters were added to. The SA government R186 bond was added on weakness leading up to the ANC Electoral Conference, currently the fund’s biggest holding of 7.4%. The fund’s asset allocation has changed over the quarter. Some notable moves were foreign equities increasing by 8%, from 54% to 62%; local equity increasing by 4%, from 12% to 17%; while foreign cash was decreased by 7%, from 14% to 7%; and local cash was decreased by 6%, from 7% to 1%.


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80%

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100%

Q2

2008

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2008

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2008

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2017

SA Cash

SA Commodities

SA Gov Bonds

SA Corp Debt

SA Property

SA Equity

Foreign Cash

Foreign Commodities

Foreign Gov Bonds

Foreign Corp Debt

Foreign Property

Foreign Equity

FOORD FLEXIBLE FUND OF FUNDS

Fund manager Dave Foord Consistency (No. of quarters) 15

Benchmark CPI+5% Risk Description Aggressive



Philosophy Top-down, bottom-up, valuation-driven approach Fee Description (retail class) Annual management fee + performance fee (uncapped)


Category Worldwide Multi-Asset Flexible Regulation 28 No


FUNDS SUITED FOR SPECIALIST ASSET CLASS BUILDING-BLOCK PORTFOLIO

CONSTRUCTION


SA - INTEREST-BEARING - MONEY MARKET

Category Analyst: Patrick Mathabeni

These portfolios seek to maximise interest income, preserve the portfolio’s capital and provide immediate liquidity. This is achieved byinvesting in money market instruments with a maturity of less than 13 months while the average maturity of the underlying assets may notexceed 120 days. The portfolios are typically characterised as short-term, highly liquid vehicles.

Shopping List selection: Glacier Money Market Fund and Nedgroup Investments Money Market Fund

Risk-Reward: 1 Year

Time Period: 01/01/2017 to 31/12/2017

Std Dev

-0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Glacier Money Market B Nedgroup Inv Money Market C (ASISA) South African IB Money Market

Re

turn

Quartile Ranking

As of Date: 31/12/2017


4.0

6.0

8.0

10.0

12.0


14.0

16.0


Re

turn

Risk Statistics

Time Period: 01/01/2017 to 31/12/2017

Std DevSharpe

Ratio

Glacier Money Market B

Nedgroup Inv Money Market C

(ASISA) South African IB Money Market

0.07

0.08

3.39

6.63

0.08 2.09

Returns



Glacier Money Market B

Nedgroup Inv Money Market C

(ASISA) South African IB Money Market

7.81 7.81

8.07 8.07

7.33

7.58

6.64

6.86

7.10

7.22 6.52 7.117.72 7.72

Investment Growth

Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017100.0

107.5

115.0

122.5

130.0

137.5

145.0



Time Period: 01/01/2013 to 31/12/2017


2014

01 02 03 04 05 06 07 08 09 10 11 12

2015

01 02 03 04 05 06 07 08 09 10 11 12

2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

5.0

6.0

7.0

8.0

9.0


Re

turn


GLACIER MONEY MARKET

Fund manager Donovan van den Heever and Johan Verwey Consistency (No. of quarters) 34

Benchmark Stefi Composite Risk Description Conservative



Philosophy Bottom-up, pragmatic-value approach Fee Description (retail class) Annual management fee


Category South Africa - Interest-Bearing - Money Market Regulation 28 Yes

Key Insights

The fund is a money market investment with competitive yields, with a large focus on capital security. The fund seeks to maximise interest income while preserving capital and providing immediate liquidity through investment in high-quality money market instruments. The fund will include investment grade (BBB- or better) instruments only and will not include subordinated debt. The fund is managed by an experienced Sanlam Investments (SI) fixed-income team. It boasts a new head of fixed interest, Mokgatla Madisha. He joined Sanlam Investments from Argon Asset Management, and has more than 16 years’ industry experience. Furthermore, the team continues to leverage off one of the most extensive and disciplined fixed-interest and credit processes in the industry. The team believes that the direction of interest rates, expressed in the form of modified duration and convexity is the single largest determinant of outperformance. Thus, the emphasis placed on the direction of interest rates, embodied by modified duration and convexity, is their primary driving force in the construction of their portfolios. They take a longer term fundamental view on the market and express this view by duration management and yield curve positioning. In terms of importance the factors are ranked according to three variables namely: duration management; credit quality management; and yield curve positioning.

Fund Use

The Glacier Money Market Fund is a low-risk, conservative fund and can be used in a building-block portfolio to reduce volatility. This fund is aimed at investors with a short-term investment horizon looking to park their cash in order to meet short-term cash flow requirements. The Glacier Money Market Fund is a well-managed fund that will offer capital protection, high levels of liquidity and protection against volatility. The fund aims to provide returns above cash. The fund achieves capital preservation through diversification across a variety of high- yielding assets. The fund can be used in most risk-profiled portfolios.


Since inception, the fund has been managed by the Sanlam Investments (SI) fixed-interest team. The team places tremendous emphasis on risk management as SI follows a pragmatic value-investment approach. This approach allows the managers to make rational decisions based on in-depth research. Hence, emotional bias is removed. The team believes that investment returns are non-linear and investment recommendations are independent of time. They place emphasis on fact and not on forecast. The team values bonds with respect to realistic expectations. The investment philosophy is contrarian by nature, and follows an approach where bonds are bought below intrinsic value and sold above intrinsic value. The factors of the philosophy are based on exploiting fear and greed, mean reversion and time horizon. The team utilises a four-step, fixed-interest investment process and the four-step credit process. The fixed-interest investment process involves screening, fundamental analysis, portfolio construction and risk monitoring. Within the initial screening step, the investable universe is screened with both listed and unlisted normal bonds, ILBs and fixed-interest derivatives. They examine the classification of fixed-interest assets according to the ratings class, industry group and maturity band. This provides a decision support system for all factors in the screening process. The second step, which is the fundamental analysis, involves analysing yield curve valuation (level and curvature). The credit spreads are evaluated relative to the historical norm. The credit investment process follows. In the third step of the fixed-interest investment process, the portfolio construction occurs, in which the position sizes are based on valuation relative to appropriate long-run yield. Credit limits are determined by rating and/or mandate. The last step involves risk monitoring which is conducted by the fixed-interest team. The positions are presented and debated monthly by a peer group. The monitoring is done by SI Compliance. The rigorous and experienced credit committee is a key advantage of the fund.


The fund has a conservative mandate and the key objective of the fund is to preserve capital. This has been evident from the fund’s consistent performance in line with the benchmark, with relatively lower risk. The standard deviation of this fund was consistently below that of the benchmark based on rolling standard deviations over the long term. The Glacier Money Market Fund has consistently delivered returns that have been in line with the benchmark. However, the fund slightly underperformed its peers during 2009 and 2011.


On a long-term basis (three years), the fund has posted a healthy performance, delivering +7.3% relative to its benchmark of +7.13% and the associated category average of +7.22%. Over the last quarter of 2017, the fund continued to rally at +1.87% relative to the benchmark (+1.8%) and the category average (+1.84%) as the MPC kept rates unchanged and political events loomed due to the ANC elective conference in December. In Q4, the fund held significant instruments in banks and corporate institutions which accounted for 55% and 23% respectively with banking exposure having been down by approximately 8% in Q3. The fund’s main constituent types (in terms of instrument types that have significant holdings) are NCDs, bonds, roll-over notes, and floating-rate securities, while other types of money market instruments have relatively lower weightings. The fund is heavily invested in NCDs whose exposure decreased by 4.19% to 23.86% from Q3 to Q4, while bond exposure also decreased by 1.95% to 18.76% from Q3 to Q4. Exposure to floating-rate notes was aggressively reduced from 30.91% to 15.65% from Q3 to Q4, while roll-over notes were slightly reduced from 17.42% to 16.59% from Q3 to Q4. Parastatals were slightly reduced from 1.92% to 1.71% from Q3 to Q4. The general reduction of exposures came at a backdrop of SA’s fiscal weakening as reflected by budget deficits and political uncertainty during Q4. 2017


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Q1

2009

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2009

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2009

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2009

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Total


Money Market Gilts

Fixed deposit NCDs Accept Bills

Call Deposits

Cash in Settlement Account


NEDGROUP INVESTMENT MONEY MARKET

Fund manager Taquanta Asset Managers Consistency (No. of quarters) 15

Benchmark SteFi Call Deposit Risk Description Conservative

Role of Benchmark Agnostic Inception Date 01 August 2008


Philosophy Top-down, bottom-up, contrarian value Fee Description (retail class) Annual management fee


Category South Africa - Interest-Bearing - Money Market Regulation 28 Yes

Key Insights

The Nedgroup Money Market Fund is part of Nedgroup’s best-of-breed strategic offerings. The fund has been managed by Taquanta Asset Managers, since inception and according to a team-based approach. The team consists of eight senior managers with two trainee portfolio managers. The team’s investment philosophy is to extract the liquidity risk premium embedded in money market assets via the structuring and purchasing of unique assets that will create outperformance against benchmarks over the life of the fund. Their investment strategy and process for shorter-dated, fixed-income money market funds are to protect these strategies as much as possible against adverse interest rate movements by investing in floating-rate instruments or converting fixed rates to floating for all assets with maturities longer than 18 months. They concentrate their efforts on managing the liquidity and spread risk in money market assets, thereby providing consistent returns above the chosen benchmark, through all interest rate cycles. The team has been instrumental in the development of step-up notes which makes up 32.10% of the long-term asset allocation of the fund. The fund’s rating, according to Global Ratings, is AA+. The Nedgroup Money Market and Core Income Fund are managed very similarly, with the Money Market differing in terms of having a shorter duration and more liquidity with constant NAV pricing. It has an average term to maturity of 120 days, and a term to final maturity on any instrument of 13 months.

Fund Use

The Nedgroup Money Market Fund is a low-risk fund that can be used in all risk-profiled portfolios. This type of fund should specifically be used in a building-block portfolio to reduce volatility. It is aimed at investors with a short-term investment horizon who are looking to park their cash in order to meet short-term cash-flow requirements. The Nedgroup Money Market will offer investors capital protection, high levels of liquidity and protection against volatility.


The Taquanta team has a fervent history for managing fixed income. This team is seen as specialists in managing cash mandates on the institutional side. Loss of capital due to liquidity is seen as the key indicator of risk in the fund and the managers aim to maintain a close relationship with large clients in order to manage liquidity optimally. Senior members of the investment team are ex-Treasury professionals and they leverage off this skillset and experience extensively in negotiating the structuring of instruments. The team prides itself in using a risk continuum of enhanced cash management. They consider liquidity risk, credit risk, interest rate and price risk when managing the client’s portfolio, as the number one rule is capital preservation.


The aim of this fund is to maximise interest income while protecting the initial capital and providing immediate liquidity to investors by investing in short-term money market instruments. Since inception, the fund has outperformed its benchmark over a rolling 12-month period. Over the short and long term, the fund has consistently outperformed its benchmark and peers while also delivering an attractive risk profile.


The Nedgroup Investments Money Market Fund is appropriately invested for a flat to rising interest-rate cycle. The fund holds most of its instruments from the domestic banks. From the third to the fourth quarter, the fund’s local money market exposure was reduced by 2.95% to 84.82% while local bond exposure added 1.81% from zero. The fund’s cash exposure increased 3.85% to 9.09% and foreign assets exposure dwindled 3.85% to 4.28% in the fourth quarter. Local banks continue to dominate the sector allocation, as exposure to banks increased by 3.2% to 92.9% in the fourth quarter against a 4.71% decrease in the third quarter. Corporate debt exposure in the fund was slightly decreased by 0.2% to 5.33%, while Government and conduits were reduced by 2.92% to 0.02% in the fourth quarter after having been increased from 0% to 2.94% in the third quarter. Exposure to parastatals marginally decreased by 0.08% to 1.75% after a preceding 0.13% decrease in the third quarter. From a bucket maturity allocation point of view, the fund is highly exposed to 0-3-month instruments which have decreased by 10% in the third quarter and increased by 5.45% to 49.17% in the fourth quarter, followed by the second largest exposure of 28.5% (Q3) and 21.22% (Q4) in 6-12-month instruments. The 3-6-month and call instruments have exposures of 20.52% and 9.09%, respectively, in the fourth quarter. The fund’s weighted average maturity increased by 8 in the third quarter to 131.85 and decreased by 30.75 in the fourth quarter to 101.10, while the weighted average duration decreased by 15.12 to 46.68 in Q3 and further decreased to 34.17 in Q4.


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60.00%

70.00%

80.00%

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100.00%

Q1

2012

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Foreign Assets

Cash

Local Bonds

Local Money Market


SA - INTEREST-BEARING - SHORT-TERM


These portfolios invest in bonds, fixed deposits and other interest-earning securities which have a fixed maturity date and either havea predetermined cash flow profile or are linked to benchmark yields, but exclude any equity securities, real estate securities orcumulative preference shares. To provide relative capital stability, the weighted average modified duration of the underlying assets islimited to a maximum of two years. These portfolios are less volatile and are characterised by a regular and high level of income.

Shopping List selection: SIM Enhanced Yield Fund, Stanlib Income Fund, Nedgroup Investments Core Income Fund

Risk-Reward: 1 Year Annualised

Time Period: 01/01/2017 to 31/12/2017

Std Dev

-0.1 0.2 0.5 0.8 1.1 1.4 1.7

0.0

3.0

6.0

9.0

12.0

15.0

18.0

SIM Enhanced Yield B3 STANLIB Income R Nedgroup Inv Core Income B

(ASISA) South African IB Short Term

Re

turn

Quartile Ranking

As of Date: 31/12/2017


5.06.07.08.09.0


10.011.012.013.014.0



Re

turn

Risk Statistics

Time Period: 01/01/2017 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

SIM Enhanced Yield B3

STANLIB Income R

Nedgroup Inv Core Income B

(ASISA) South African IB Short Term 0.22 100.00 0.00 5.14

0.13 100.00 0.00 4.97

0.47

0.47

100.00

100.00

0.00

0.00

5.16

2.69

Returns



SIM Enhanced Yield B3

STANLIB Income R

Nedgroup Inv Core Income B

(ASISA) South African IB Short Term 8.67 8.67 7.81 6.806.90 6.90

8.21 8.21 7.70 6.88 6.886.69

10.00 10.00

8.81 8.81

9.20

8.16

8.21 8.21

7.15 7.157.18

Drawdown

Time Period: 01/01/2016 to 31/12/2017

2016 2017-10.0

0.0




Time Period: 01/01/2013 to 31/12/2017


2014

01 02 03 04 05 06 07 08 09 10 11 12

2015

01 02 03 04 05 06 07 08 09 10 11 12

2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

4.0

6.0

8.0

10.0

12.0



Re

turn


Key Insights

The Nedgroup Investment Core Income Fund is a conservatively-managed fund in the SA Short-Term Interest-Bearing category which is evident from the shorter duration over time. The fund’s primary concern is liquidity, capital preservation and duration, therefore slightly riskier instruments may be included in the fund if they are priced correctly and if they comply with the fund’s liquidity and duration requirements. Moreover, instruments are included in the fund with the intention of holding them to maturity. The fund is managed on a team-based approach and mainly will hold longer-dated, floating-rate notes, especially if longer-dated instruments are included in the portfolio. These notes must also be tradable or negotiable. This reduces the level of interest rate and credit risk. Liquidity is seen as the key indicator of risk and the manager’s aim is to maintain a close relationship with large clients in order to manage liquidity optimally. Furthermore, the income fund is managed in the same manner as the Nedgroup Investments Money Market Fund with the exception of taking on a bit more duration risk.

Fund Use

This fund has an enhanced cash mandate and is relatively conservative (cash-type) in the short-term, interest-bearing category. However, this mandate is more flexible and the average portfolio duration will be longer than that of a traditional money market fund. The fund aims to produce returns in excess of those offered by money market funds while capital preservation and liquidity are the overriding principles. Like a money market fund, this fund can also be used to park funds when risky assets are less favourable. The fund can be used as a fixed-income, shorter-duration component in a building-block approach to constructing a multi-asset portfolio. Moreover, the fund offers relatively more capital protection, especially in a rising interest rate environment as the funds in this category are allowed a maximum modified duration of up to two years. Investors can also utilise this fund to draw income within a diversified portfolio. Furthermore, this fund is more conservative in comparison to its Shopping List peers.


The team has a strong history of managing cash mandates in the institutional space. The senior members are former Treasury professionals and also leverage off relationships built with debt issuers and SA bank treasuries to source and negotiate the structure of instruments. Compliance is performed both internally and externally. Fitch ratings are accorded on the basis of liquidity strategy and credit risk management. Consequently, the fund’s investible universe comprises of rated liquid instruments with a minimum credit rating of A-. The credit team is experienced and the executive management team is also part of the credit committee. This team has a consensus-based approach. The credit investment philosophy is centred on mitigating default and liquidity risks continuously, through fundamental research, diversification within each debt instrument, portfolio risk management and monitoring, as well as ongoing engagement with management.


This fund consistently has outperformed its benchmark over the long-term, based on one-year rolling returns since 2008. As expected, the fund’s performance over the long term relative to peers is lower given the fund’s relatively conservative nature in its category (cash-type with short durations). The rolling standard deviation has remained consistently below that of peers and above that of the benchmark. The standard deviations shot up in 2014, when there was a write-down of African Bank, but still remained between peers and the benchmark. Moreover, the ABIL exposure was roughly 5% of the portfolio at the time of the write-down, and investors should experience a pick-up in yield once the side-pocket is paid out. Since inception, the fund only experienced relatively significant drawdowns in 2014. On a rolling three-month basis over the past 10 years (as at 30 June 2017), the fund has outperformed SteFI 96.34% of the time.


The fund outperformed its benchmark, but slightly underperformed the SA Interest-Bearing category average by (0.02%) in Q4 2017, returning 1.91% while its benchmark returned 1.80%. Over a one-year period ending 31 December 2017, the fund outperformed cash by (0.65%) delivering 8.21%, but underperformed its peer category. The fund has been a consistent performer since inception in terms of outperforming cash. It is important for investors to realise that this fund is an enhanced cash fund, which means it will typically deliver returns in excess of cash. As a result, this fund displays the lowest volatility (as measured by standard deviation) in comparison to its Shopping List peers, with an annual standard deviation of 0.13%. Local money market instruments account for 70.24% of the portfolio, down from 85.48% in the previous quarter, and local bonds account for 11.14% of the portfolio, down from 14.29%. Local cash accounts for 12.42%. The maturity spread profile can be described as follows: exposure to instruments with durations less than 13 months (13.60%), and exposure to instruments with durations greater than 13 months (65.50%). Furthermore, the fund’s exposure to negotiable certificates of deposit, deposits and floating-rate notes accounts for 85.87% of the portfolio. The fund continues to be highly concentrated with instruments from the top four banks, where exposure has decreased by 2.77% over the quarter from 94.30% to 91.53%.


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8%

18%

28%

38%

48%

58%

68%

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98%

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Floating Rate Note

Deposit

Debenture

Credit Linked Notes

Commerical Paper

Bonds

NEDGROUP INVESTMENT CORE INCOME

Fund manager Taquanta Asset Managers Consistency (No. of quarters) 16

Benchmark STeFi Composite Index Risk Description Conservative



Philosophy Top-down, bottom-up, contrarian value Fee Description (retail class) Annual management fee


Category South Africa - Interest-Bearing - Short-Term Regulation 28 Yes


Key Insights

The SIM Enhanced Yield Fund is managed by Melville du Plessis, who follows a team-based approach with respect to the instruments and issuers that make up the fund’s investment universe. His main focus is macroeconomic and interest-rate research, which will guide his fund’s duration view. There is keyman risk as du Plessis is the sole portfolio manager on this fund. The fund’s duration historically has been between 0.5 and 1.5 years. Moreover, the fund has a performance target of outperforming its benchmark by 100 to 150 basis points. The portfolio manager’s attention to detail is a value-add in terms of managing cash flows, which was pertinent in June 2016 when the fund received a big outflow. This outflow was funded by using Sanlam’s internal liquidity which provides peace of mind that returns will not be sacrificed at the expense of large outflows.

Fund Use

The fund is a credit fund that aims to provide capital stability, whilst still being able to provide investors with reasonable income, regardless of interest-rate fluctuations. This fund is aimed at clients with a relatively low risk appetite. It can also be utilised as a fixed-income shorter-duration component within the building-block approach to constructing a multi-asset portfolio. Moreover, the fund offers relatively more capital protection, especially in a rising interest rate environment as the funds in this category are allowed a maximum modified duration of up to two years. Like a money market fund, the SIM Enhanced Yield Fund can be used to park funds when equity markets are unstable. Investors can also utilise this fund to draw income within their diversified portfolios. Furthermore, this fund can be seen as an aggressive fund from a risk perspective, in comparison to its Shopping List peers.


Melville du Plessis has been the sole portfolio manager of the SIM Enhanced Yield Fund since 31 May 2016. He joined Chris Hamman in the management of this fund in October 2011, with his main responsibility being the management of daily cash flows. Subsequently, as from 1 August 2016, Hamman left SI and was replaced by Mokgatla Madisha as head of fixed interest. The credit process in the fixed-interest team is one of the outstanding competitive advantages for this fund and SI as a whole. Moreover, the credit process can be described as follows: setting an internal rating per issuer and issue, which looks at qualitative factors as well as Moody’s expected default frequency; credit vetting which is done by Sanlam’s central credit committee (CCC); limit setting; and monitoring. It is important to note that this is an iterative process. Furthermore, this fund places an emphasis on a team approach as du Plessis is supported by a team of four credit analysts and the CCC team.


The fund consistently has delivered returns above its benchmark and the SA Interest-Bearing category average over one-, three-, five- and six-year periods. Meanwhile, on a risk-adjusted basis (as measured by a rolling one-year Sharpe ratio), the fund has delivered risk-adjusted returns above its Shopping List peers and the category as a whole. The fund displays higher volatility in comparison to the category average, but investors are compensated for the added risk. On a rolling three-month basis, since inception of the fund, (as at 30 June 2017), the fund has outperformed SteFI 83.33% of the time.


The SIM Enhanced Yield Fund outperformed its benchmark and Shopping List peers in Q4 2017, returning 2.00% compared to its benchmark’s return of 1.92%. Over a one-year period ending 31 December 2017, the fund once again outperformed its benchmark and Shopping List peers, returning 10.00% in comparison to its benchmark’s return of 8.06%. Moreover, it is important to note that this fund is a more volatile fund (as measured by standard deviation) in comparison to its Shopping List peers, with an annual standard deviation of 0.47%.However, investors are compensated for taking on this added risk, explained by duration and interest-rate risk. Year-to-date (as at 31 December 2017), the ALBI returned 5.66%, which was mainly driven by the long end of the yield curve (over 12 years), returning 6.44%, followed by the middle-end of the yield curve (7-12 years) which returned 5.27%. Cash returned 7.56% over the past year. The modified duration of the fund is currently at 0.55 years. The fund’s maturity profile can be described as follows: exposure to cash and floating rate instruments (84.40%); exposure to bonds maturing between zero and three years (7.50%); exposure to bonds maturing between three and seven years (3.47%); exposure to bonds maturing between seven and twelve years (0.81%); and exposure to inflation-linked bonds (3.82%). Furthermore, the fund only has 2.40% exposure to the South African government with the rest invested in credit instruments with SA corporates and banks. Currently, the exposure to the top four banks is 54.5%.


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Bonds 7-12 years

Bonds 3-7 years

Bonds 0-3 years

Cash and Floating Rate Notes

SIM ENHANCED YIELD

Fund manager Melville du Plessis Consistency (No. of quarters) 03

Benchmark STeFi Composite Index+0.5% Risk Description Conservative



Philosophy Pragmatic value Fee Description (retail class) Annual management fee


Category South Africa - Interest-Bearing - Short-Term Regulation 28 Yes


STANLIB INCOME

Fund manager Victor Mphaphuli and Henk Viljoen Consistency (No. of quarters) 66

Benchmark STeFi Composite Index Risk Description Conservative

Role of Benchmark Cognisant Inception Date 01 April 1987


Philosophy Top-down, bottom-up, valuation-driven Fee Description (retail class) Annual management fee


Category South Africa - Interest-Bearing - Short-Term Regulation 28 Non-compliant

Key Insights

The fund is managed on the principle that, through active management, fixed-income market inefficiencies can be exploited and value can be added through bottom-up and top-down macro research and analysis. Value can be added from duration management, yield curve strategies, credit positioning and a relative value matrix. The fund takes multiple, small-duration bets as part of the diversification strategy. The team’s target is to outperform the benchmark by 1%-2% per annum, after fees. Meanwhile, the fund’s internal benchmark for return attribution analysis is the one- to three-year bond index. The fund historically had relative longer durations but has managed to reduce its duration after the 2008 financial crisis. Capital gains of instruments are incidental as returns are derived from income yields. This fund has a long track record and has lived through bull and bear markets.

Fund Use

The fund aims to provide capital stability whilst still being able to provide investors with reasonable income, regardless of interest rate fluctuations. This fund is aimed at clients with a relatively low risk appetite. This fund can also be utilised as a fixed-income, shorter-duration component within the building-block approach to constructing a multi-asset portfolio. Moreover, the fund offers relatively more capital protection, especially in a rising interest-rate environment as the funds in this category are allowed a maximum modified duration of up to two years. Like a money market fund, the fund can be used to park funds when equity markets are unstable. Investors can also utilise this fund to draw income within their diversified portfolios. Furthermore, this fund can be seen as moderate in comparison to its Shopping List peers where it can be described as being in the middle between the Nedgroup Investments Core Income Fund and the SIM Enhanced Yield Fund from a risk perspective.


Stanlib’s fixed-interest team aims to take advantage of market inefficiencies that result in mispricing. There have been a few changes to the team, co-headed by Henk Viljoen and Victor Mphaphuli, mainly from a credit perspective which has been a concern. These changes include selling their stake of Stanlib Credit Partners as well as more recently, with Chris Li Green (previously head of credit) leaving due to personal reasons. As a result, Beverley Warnasuriya, who comes with 14 years of experience has been appointed as head of credit. Stanlib have recently hired a new credit analyst, Stephan Pienaar, who will support Warnasuriya. Pienaar is responsible for the research and issuances of corporates, while Warnasuriya is responsible for banks, state owned entities, insurers and the South African government issuances. Warnasuriya’s attention to detail and experience is something that Glacier Research takes comfort in. Viljoen provides support mainly within the strategic and tactical positioning, while Mphaphuli actively manages the fund. Stanlib has one of the biggest fixed-interest teams in the country and therefore has a strong focus on fixed interest.


The fund consistently has delivered returns above that of the benchmark and sector category average over one-, three-, five- and ten-year periods. Meanwhile, on a risk-adjusted basis, the fund delivered returns nearly in line with the sector category average, based on rolling three-year Sharpe over the long term. The fund experienced a significant drawdown in 2014, which was the result of the fund’s ABIL exposure. However, the side-pocket has been paid out and investors should see a pick-up in yield. On a rolling three-month basis over the past ten years (as at 30 June 2017), the fund has outperformed SteFI 89.02% of the time.


The fund underperformed its benchmark and SA Interest-Bearing category average in Q4 2017, returning 1.54% compared to its benchmark’s return of 1.80%. Over a one-year period ending 31 December 2017, the fund outperformed its benchmark and the category average, delivering a net performance of 8.81%, while its benchmark delivered a net performance of 7.56%. Moreover, year-to date (as at 31 December 2017), the ALBI returned 5.66%, which was mainly driven by the long end of the yield curve (over 12 years), returning 6.44%, followed by the middle-end of the yield curve (7-12 years), which returned 5.27%. Cash returned 7.56% over the past year. The modified duration of the fund has decreased over Q4 due to volatility in the bond market, now at 0.35 years compared to 0.59 years in the previous quarter. The fund’s maturity profile can be described as follows: exposure to bonds maturing in less than one and three years (63.14%); exposure to bonds maturing between three and seven years (23.35%); and exposure to bonds maturing beyond 12 years (1.20%). The fund’s assets under management have increased by 16.85% over the quarter, from R23 638 million to R27 622 million. Furthermore, the fund is relatively concentrated with instruments from the top five banks (including Investec), with exposure of 42.33%.


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Cash

Bonds Over 12 Years

Bonds 7-12 Years

Bonds 3-7 Years


SA - INTEREST BEARING - VARIABLE TERM

Category Analyst: Lesego Mogomotsi

These portfolios invest in bonds, fixed deposits and other interest-bearing securities, and may invest in short, intermediate and long-dated securities. The composition of the underlying investments is managed actively and will change over time to reflect the manager’s assessment of interest rate trends. These portfolios offer the potential for capital growth, together with a regular and high level of income. These portfolios may not include equity securities, real estate securities or cumulative preference shares.

Shopping List selection: Stanlib Bond Fund, Coronation Bond Fund

Risk-Reward: 1 Year Annualised

Time Period: 01/01/2017 to 31/12/2017

Std Dev

-2.0 1.0 4.0 7.0 10.0 13.0 16.0

-8.0

-4.0

0.0

4.0

8.0

12.0

16.0

STANLIB Bond A (ASISA) South African IB Variable Term

Re

turn

Quartile Ranking

As of Date: 31/12/2017


-6.0

-4.0

-2.00.0

2.0


4.0

6.0

8.010.0

12.014.0


Re

turn

Returns



STANLIB Bond A

(ASISA) South African IB Variable Term 8.86 8.86 6.37 7.515.80 5.80

8.386.43 6.437.6810.92 10.92

Risk Statistics

Time Period: 01/01/2017 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

STANLIB Bond A

(ASISA) South African IB Variable Term 5.45 -2.58 75.00 25.00 0.24

0.5525.0075.00-2.646.07


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-10.0

-8.0

-6.0

-4.0

-2.0

0.0



Time Period: 01/01/2013 to 31/12/2017


2014

01 02 03 04 05 06 07 08 09 10 11 12

2015

01 02 03 04 05 06 07 08 09 10 11 12

2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

-7.5

0.0

7.5

15.0

22.5


Re

turn


Key Insights

This fund is the only bond fund with offshore exposure in the SA interest-bearing variable term category. This exposure is capped at 10% and can be obtained through developed market (DM) and emerging market (EM) fixed-income instruments and currency. Overall risk is managed through currencies’ futures. There is no hard limit on EM exposure but a soft limit of 5%. It has been as high as 4.4% on emerging markets and as high as 7.5% offshore.

Fund Use

This is an actively-managed bond fund that seeks to maximise returns from a diverse range of primarily South African bonds. It aims to outperform the All Bond Index. It is suited to serve as a core bond component of a building-block portfolio and can also be included in various risk-profile portfolios. It is worth noting that this is an actively managed bond fund that can go up to 10% offshore. Therefore, the fund can be better used in a Regulation 28 portfolio with an equity fund that has no offshore exposure or a fund that will not exceed 15% offshore, such as the Prudential Equity Fund.


Coronation is a bottom-up investment house which focuses on proprietary research. Interest rate management (duration and yield curve) and security selection (credit and liquidity management) are two of the major focus areas of the fixed interest team. The fixed income portfolios are positioned with a long-term strategic market view in mind, with short-term tactical opportunities being taken when the market differs from the strategic view. The fixed interest team is now headed by Nishan Maharaj, and consists of 12 investment professionals. This team was previously headed by Mark le Roux, who remains an important asset to the team, despite his role having changed somewhat in recent times. With his wealth of institutional knowledge a key asset to the team, le Roux has high allocation in fixed income multi-councillor portfolios. The Bond Fund is not a multi-councillor managed fund while the institutional bond fund is managed on a multi-counsellor basis.


The fund has delivered first quartile returns overall, trailing return periods. It is a first and second quartile performer over calendar year periods. However, on a rolling one-year basis, this fund struggled to outperform the benchmark in 2015. The strong risk management capability of the portfolio managers is evident in the fund’s lower volatility profile over all periods, relative to the benchmark. It also achieves superior risk-adjusted returns as measured by its Sharpe ratio over rolling three years, relative to peers and the benchmark. Even though all of the bond funds in the category are highly correlated to the ALBI, it is the one fund that is correlated marginally less over a three-year period. This can be attributed to the active nature of the fund and the 10% foreign allocation. This fund is a good protector of capital, which is evident through its attractive drawdowns relative to the benchmark.


The Coronation Bond Fund has managed to produce a return of 11.31% for the year. The fund has outperformed its category average (ASISA South African IB Variable Term) which returned 8.86% for the year by 2.45%, as well as its benchmark (BEASSA ALBI) by 1.09%. For the quarter, the fund returned 2.23% which was also slightly above its benchmark by one basis point. It is noticeable that the ALBI rallied 5.56% in December alone, although the market sentiment previously leaned to it underperforming cash. Both cash and inflation-linked bonds returned 7.5% and 2.8% respectively. The strong performance of bonds over the year can be attributed to healthy foreign net inflows into the SA bond market, which has kept yields relatively in check. The majority of the ALBIs performance came from the 3 to 7-year and 7 to 12-year bonds, which with the repo rate falling, saw increases in their yields. However, the fund cut their allocation to these durations over the last quarter of the year and increased their allocation to over 12 year’s bond by +11%, from 59.9% to 70.9%. This was as a result of the poor medium-term Budget speech. The 3 to 7-year and 7 to 12-year were cut by -0.07% and -5.5% respectively. The fund lost out on some return potential by trimming their allocation. Local bonds rallied as Cyril Ramaphosa was elected president of the ANC to end the year off lower at levels of 8.59% in comparison to the beginning of the quarter when they were in the 9.25% to 9.5% range.


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Cash

Bond Cash

Bonds Over 12 Years

Bonds 7-12 Years

Bonds 3-7 Years

Bonds 1-3 Years

CORONATION BOND

Fund manager Nishan Maharaj, Steve Janson and Seamus Vasey Consistency (No. of quarters) 03

Benchmark BEASSA ALBI Risk Description Conservative



Philosophy Bottom-up, valuation-driven approach Fee Description (retail class) Annual management fee


Category SA - Interest bearing Variable Term Regulation 28 No


STANLIB BOND

Fund manager Victor Mphaphuli and Sylvester Kobo Consistency (No. of quarters) 20

Benchmark BEASSA ALBI Risk Description Conservative

Role of Benchmark Cognisant Inception Date 13 March 2000


Philosophy Top-down, bottom-up, valuation-driven approach Fee Description (retail class) Annual management fee


Category SA - Interest Bearing Variable Term Regulation 28 No

Key Insights

The fund tends to have a higher duration than many of its peers and therefore is very close to the ALBI’s duration. This means that the fund displays similar characteristics to the index with regards to return and risk profile.

Fund Use

The fund seeks to deliver a stable and reliable level of income and consists of various bond, cash and money market instruments. It can serve as the core bond component of a building-block portfolio, but also can be included in various types of risk-profiled portfolios.


Stanlib’s fixed-interest team aims to take advantage of market inefficiencies that result in mispricing. There have been a few changes to the team, co-headed by Henk Viljoen and Victor Mphaphuli, mainly from a credit perspective which has been a concern. These changes include selling their stake of Stanlib Credit Partners as well as more recently, with Chris Li Green (previously head of credit) leaving due to personal reasons. As a result, Beverley Warnasuriya, who comes with 14 years of experience has been appointed as head of credit. Stanlib have recently hired a new credit analyst, Stephan Pienaar, who will support Warnasuriya. Pienaar is responsible for the research and issuances of corporates, while Warnasuriya is responsible for banks, state owned entities, insurers and the South African government issuances. Warnasuriya’s attention to detail and experience is something that Glacier Research takes comfort in. Viljoen provides support mainly within the strategic and tactical positioning, while Mphaphuli actively manages the fund. Stanlib has one of the biggest fixed-interest teams in the country and therefore has a strong focus on fixed interest.


This fund’s return profile has improved, having been a first and second quartile performer over meaningful periods. However, over the one-year, rolling-return performance, it has struggled to beat the benchmark. In calendar-year returns, the fund displays third and fourth quartile returns for 2013, 2014 and 2015. The fund’s maturity profile is very close to that of the ALBI, with a yield in line and sometimes higher than that of its benchmark. This results in the fund displaying higher volatility when compared to the benchmark and peers. The fund’s standard deviations have been consistently higher than that of its benchmark when looking at three-year rolling figures. The fund does move in line with the ALBI more than other funds in its category and this will add a level of predictability to a portfolio, providing a stable level of growth. The fund’s modified duration is high and tracks that of the ALBI.


The Stanlib Bond Fund outperformed the benchmark for the quarter and the year. The fund was up 2.44% for the month, 10.92% for the year as opposed to the benchmark which had returns 2.22% and 10.94% respectively. During Q4, the fund reduced its allocation to cash by 3%, increased exposure to bonds of seven to 12 years by 0.76% and also bonds over 12 years saw a 4.09% increase. The Stanlib Bond Fund reversed the previous quarter’s drop in size by gaining R300m to end the quarter at R3.6bn. In response to the mid-term budget speech, the fund’s modified duration was increased to be slightly above the benchmark at 7.22 years. However, the bond market rallied in December post the ANC elective conference where Cyril Ramaphosa was selected as the new party leader. The ALBI gained 5.7% alone during this month. The bonds also ended at lower levels of 8.59%, an approximate difference of -0.91% compared to the beginning of the quarter.


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Cash

Other Cash

Other Bonds

Bonds Over 12 Years

Bonds 7-12 Years

Bonds 3-7 Years

Bonds 1-3 Years

Bonds 0-1 Year


SA - REAL ESTATE - GENERAL

Category Analyst: Darren Burns

These portfolios invest in listed property shares, collective investment schemes in property and property loan stock and real estate investment trusts. The objective of these portfolios is to provide high levels of income and long-term capital appreciation. These portfolios invest at least 80% of the market value of the portfolio in shares listed in the FTSE / JSE Real Estate industry group or similar sector of an international stock exchange and may include other high yielding securities from time to time. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors.

Shopping List selection: Catalyst SA Property Equity Prescient Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

Catalyst SA Property Equity Prescient A (ASISA) South African RE General

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


-5.0

0.05.0

10.015.0

YTD 1 year 3 years 5 years 7 Years 10 Years

20.025.030.0


Ret

urn

Returns


YTD 1 year 3 years 5 years 7 Years 10 Years

Catalyst SA Property Equity Prescient A

(ASISA) South African RE General

16.71 16.71 13.18

14.10 14.10 10.18 13.1812.82 12.82

14.9415.02 15.02

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

Ratio

Catalyst SA Property Equity Prescient A

(ASISA) South African RE General 11.47 -12.15 71.67 28.33 0.55

13.02 -13.70 71.67 28.33 0.65


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0



Time Period: 01/01/2013 to 31/12/2017


01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 125.0

10.0

15.0

20.0

25.0


Ret

urn


CATALYST SA PROPERTY EQUITY PRESCIENT

Fund manager Zayd Sulaiman Consistency (No. of quarters) 46

Benchmark FTSE/ JSE SA Listed Property Index (J253) Risk Description Aggressive

Role of Benchmark Cognisant Inception Date 01 February 2005


Philosophy Long-term, valuation-driven with an emphasis on risk-adjusted returns Fee Description (retail class)

Annual management fee + performance fee (22.8% of benchmark

outperformance incl. VAT)


Category SA - Real Estate General Regulation 28 No

Key Insights

This team is solely focused on the property sector and is therefore not distracted by any other asset class. They target total returns (income plus capital growth), rather than simply income only. This benchmark-cognisant fund is actively managed, and the portfolio manager, therefore, is able to take larger or smaller positions relative to the SA Listed Property benchmark. The ability to take these positions is primarily due to the relatively small size of the fund when considering the magnitude of the property sector.

Fund Use

The fund provides exposure to the SA Listed Property Index, with active allocations made relative to the benchmark. The fund focuses on total return and is able to invest in the entire sector. The fund would add a stable level of income whilst providing capital appreciation to a risk-profiled, multi-asset or building-block portfolio that is looking to add exposure to local property. On a look-through basis, if you are of the opinion that there is not enough exposure to property in a portfolio, this fund can be used to fill that void.


Catalyst has an 11-member investment team whose sole focus is on the property sector. The team comprises four portfolio managers and seven analysts. Most members of the team are chartered accountants and property specialists with direct property experience. This is especially true for the four directors and portfolio managers who have a combined 60 years’ experience in the financial services industry. The analyst team has been increasing in size, over the past three years, with new members joining on a relatively consistent basis. Paul Duncan and Zayd Sulaiman, both directors in the company, previously managed the SA Property Equity Fund, but since 1 July 2016, Sulaiman has been the sole portfolio manager on the fund while Duncan focuses on the hedge fund portfolios. The team follows a rigorous process with respect to research and portfolio construction. All research is done in-house, with no sell-side research being utilised. Catalyst has an extremely in-depth research process that focuses on two key areas: trends that impact real estate markets and pricing; and trends that impact real estate markets for vacancy forecasts. The analysts aim to identify risk-adjusted returns and value opportunities. Their core competency is in the commercial property market.


The fund has consistently outperformed its benchmark over the majority of periods, when comparing risk-adjusted returns. It has also always been in the top two quartiles since inception. Over longer periods (rolling three-year returns over five years) the fund has outperformed the benchmark over every period. The fund can be more volatile than many of its peers as larger active positions are taken at times. It has been able to consistently reward this extra level of risk, providing higher risk-adjusted returns than the benchmark and many of its benchmark-cognisant peers. It also has been able to achieve higher levels of alpha over all periods, speaking again to the investment team’s active management. The portfolio is highly correlated with the SA Listed Property index and experiences drawdowns at similar times to the benchmark. However these drawdowns are routinely smaller in comparison. The reason for this is primarily due to the smaller number of shares in the benchmark. The fund, therefore, is more diversified and experiences less volatility.


The fund delivered a positive 8.04% for the quarter, beating the category average (+5.65%) by a convincing 2.39%. Unfortunately, despite this considerable return the fund underperformed its benchmark, the SAPY Index, which delivered 8.32%. SA Listed Property was the best-performing asset class over the quarter. Looking at 2017 as a whole, the fund delivered 16.71%, again outperforming the category average (+14.08%), while at the same time underperforming the index, which added 17.15% over the calendar year. The increase in exposure to retail REITS, experienced in the first quarter, continued again in the final quarter of the year as the retail asset allocation increased by a further 1.4%. However, as there was only one change amongst the top holdings within the fund, over the past quarter, these asset allocation changes can largely be attributed to market performance.Overweight allocations in Nepi Rockcastle PLC and Hyprop Investments Ltd contributed to performance as these counters outperformed the benchmark over the quarter. Other contributions to performance came from the underweight allocations to the Rebosis Property Fund and Redefine Properties Ltd, which both underperformed the benchmark. Overweight allocations to Octodec Investments Ltd, Emira Property Fund and Rebosis Property Fund A, detracted from performance on the back of these stocks underperforming the benchmark. Also, underweight positions in the Fortress Income Fund Ltd B and Resilient REIT Ltd, detracted from performance as the stock outperformed. Despite the positive quarter, the manager remains concerned and is aware that some of the returns are non-recurring in nature and that there is a potential for future negative earnings surprises. Consumer and business confidence needs to improve, as well as SA GDP growth. However, despite local fundamentals, the manager believes that ‘short to medium-term growth in distributions is expected to be above inflation for the SAPY, on a market capitalization weight basis, due to the high growth from offshore counters’.


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SA - EQUITY - GENERAL


Funds in the SA Equity General category invest in selected shares across all economic groups and industry sectors of the JSE Securities Exchange South Africa as well as across the range of large-, mid- and smaller-cap shares. These portfolios do not subscribe to a particular theme or value or growth investment style. The portfolios in this category offer medium-to-long-term capital growth as their primary investment objective. Equity portfolios invest a minimum of 80% of the market value of the portfolios in equities at all times. However, a minimum of 80% of the equity portfolio must, at all times, be invested in the JSE Securities Exchange South Africa sector/s as defined by the category, and a maximum of 25% of the equity portfolio may be invested outside the defined JSE Securities Exchange South Africa sectors provided that these investments comply fully with the category definition. Glacier Research split the category into four groups based on specific observable focuses and characteristics, with the aim of providing retail investors with adequate choice and diversification, while maintaining the high conviction in the selected funds. The four groups are: dividend-focused (stocks providing a steady and/or growing dividend yield); benchmark-cognisant (managed relative to a benchmark or to a specific maximum level of tracking error); concentration (these are more highly convicted portfolios with a smaller number of stocks in the portfolio or portfolios concentrated in a particular style); and Core (funds which do not necessarily fall into one of the other categories and often are considered style-agnostic). These groups, of course, are not always mutually exclusive, but provide a good way to categorize funds based on certain distinguishing characteristics.

Shopping List selection: Coronation Equity Fund (Core), Foord Equity Fund (Core), SIM General Equity Fund (Benchmark-Cognisant), PSG Equity Fund (Concentration), Investec Equity Fund (Concentration), Prudential Dividend Maximiser Fund (Dividend-Focused), Marriott Dividend Growth (Dividend-Focused)


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

Coronation Equity A SIM General Equity A Foord Equity R

PSG Equity A Prudential Dividend Maximiser A Marriott Dividend Growth R

Investec Equity A ASISA South African EQ General

Re

turn

Quartile Ranking

As of Date: 31/12/2017


-15.0

-7.5

0.0

7.5

15.0


22.5

30.0

37.5

45.0




Re

turn

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Coronation Equity A

SIM General Equity A

Foord Equity R

PSG Equity A

Prudential Dividend Maximiser A

Marriott Dividend Growth R

Investec Equity A

ASISA South African EQ General

11.48

10.57

10.47

11.55

9.85

10.45

9.31 -10.51

11.31

55.00 45.00

-10.64

-8.34

-9.25

-19.57

-6.66

-9.45

-9.05

60.00

56.67

58.33

65.00

61.67

61.67

66.67

40.00

43.33

41.67

35.00

38.33

38.33

33.33

0.52

0.42

0.30

0.76

0.53

0.42

0.51

0.28

Returns

As of Date: 31/12/2017 Source Data: Total ReturnYTD 1 year 3 years 5 years 7 years 10 Years

Coronation Equity ASIM General Equity AFoord Equity RPSG Equity APrudential Dividend Maximiser AMarriott Dividend Growth RInvestec Equity AASISA South African EQ General

17.08 17.0813.85 13.854.63 4.6311.16 11.16

15.08 15.0813.66 13.6612.18 12.18

8.376.162.729.19

12.78 12.78 5.52 9.749.11 9.11

7.525.848.16

12.7511.6612.0714.4812.3112.81

12.94

12.45 12.4510.97 10.979.65 9.65

15.32 15.3211.75 11.75

10.86 10.8612.32 12.32


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-20.0

-15.0

-10.0

-5.0

0.0




Rolling 3 year Returns

Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

0.0

7.5

15.0

22.5




Re

turn


CORONATION EQUITY

Fund manager Karl Leinberger, Sarah-Jane Alexanderand Adrian Zetler Consistency (No. of quarters) 27

BenchmarkComposite: 87.5% SA Equity (FTSE/JSE Capped

Shareholder Weighted Index) + 12.5% International Equity (MSCI All Country World Index)

Risk Description High



Philosophy Fundamental, bottom-up, valuation-driven approach Fee Description (retail class)Annual management with performance fee

and reduced fees should the fund lose capital over any 60-month period


Catergory SA General Equity Regulation 28 No

Key Insights

The fund is concentrated slightly less than its peers on the Shopping List, with approximately 70 equity holdings. Leinberger, however, prefers to focus on the concentration of the top 10 and 15 holdings to show concentration. The number of holdings is seen as arbitrary. A preference would be to have about 50% to 60% of the fund concentrated in its top 10 holdings. A multi-counsellor approach has been implemented on the fund, with Sarah-Jane Alexander being added as a multi-counsellor, along with Adrian Zetler as a co-manager across the whole fund. Alexander could be described as bold and decisive, and has previously been a co-manager on the industrial fund. Her personality and way of managing money is well-suited to managing a more aggressive mandate such as equity funds. Leinberger places no consideration on measures such as standard deviation or tracking errors. The fund is measured on a completely agnostic basis with a long-term focus – more than 5 years – with permanent capital loss as the primary risk consideration. Consequently, measuring standard deviation and tracking error becomes irrelevant. The offshore allocation predominantly is invested in the Coronation Global Opportunities Equity Fund, which is managed by Tony Gibson, and in turn, uses various underlying managers. A robust manager research process is followed with the involvement of Leinberger, and preference is given to funds with at least a five-year track record. If no suitable managers are found, the equity fund may invest in other Coronation funds with shorter track records, such as the emerging markets and frontier funds.

Fund Use

The fund can ideally be used as a core equity fund for an investor that is following a building-block approach who seeks capital growth over a time horizon of five years and longer. Investors in this fund should have a higher tolerance for risk and may experience negative returns over shorter periods of time. This fund includes offshore holdings and therefore provides investors with additional protection in times of rand weakness, and exposure to international markets. With a beta close to one (0.94) over approximately 10 years, it is clear that market fluctuations play a big part in this fund’s return profile. It should be used in conjunction with less beta-dependent funds like the Prudential Dividend Maximiser and Marriott Dividend Growth Funds. With the inclusion of offshore equity, this needs to be taken into account if used as a core SA equity fund. However, the offshore capability will enhance overall offshore exposure within a portfolio. With the recent change of the SA benchmark to Capped SWIX, the benchmark will have less exposure to large cap stocks such as Naspers as there is a maximum limit of 10% per stock. This means that there will be more exposure to mid-cap and small-cap stocks. As a result, there will be less concentration risk.


The fund was managed by Karl Leinberger and Duane Cable up to August 2015. Leinberger is the current CIO and has more than 16 years’ investment experience, most of which has been spent at Coronation. Cable has been removed as co-manager to focus on his responsibilities as co-manager on the Capital Plus and Balanced Defensive Funds. Coronation has a highly-skilled and experienced investment team. This, together with their single investment process, philosophy and research platform, should ensure that these changes have a minimal impact. The investment team consists of three former Coronation CIO’s. Coronation has developed a proprietary central research system which is available to all analysts and portfolio managers at all times. The culture remains one of ownership and accountability that is client-focused. This is evident in that employees own 25% of the holding company of the South African and international operating subsidiaries. All analysts are rotated among industries so as to become generalists in every industry, and avoid developing bias. Coronation believes in conducting comprehensive research on a company, rather than just analysing it. For extra insight, the team spends much time looking at different ways of understanding a company and its operating environment.


The fund has delivered consistent first and second quartile five-year rolling returns over the period beginning 2004 to December 2017. Over the last five years, the fund has produced an annualised return of 12.67% compared to the FTSE/JSE All Share Index performance of 11.93%. It is more volatile when compared to some of its Shopping List peers and the category average. The fund is good at protecting capital and consistently suffers lower drawdowns than the FTSE/JSE All Share Index and the majority of its category peers.


The Coronation Equity Fund underperformed the category average as well as its composite benchmark for Q4 2017, returning 3.15% in comparison to the category average and the composite benchmarks return of 5.68% and 6.98%, respectively. Over a one-year period, as at 31 December 2017, the fund outperformed the category average and its composite benchmark, returning 17.08% in comparison to the category average return of 12.78%, while composite benchmark advanced 16.14%. Even though the fund’s offshore exposure, currently at 27.09% of the portfolio, added significantly to performance for the 2017 calendar year, it was a detractor in the fourth quarter as the rand strengthened after Cyril Ramaphosa’s win at the ANC Electoral Conference. Over the past year, the fund benefitted from holdings in global companies such as JD.com, 58.com and Porsche. The large rand hedge counters such as Naspers (+72%) and Richemont (+25%) had a stellar year, where the portfolio managers consistently trimmed their Naspers exposure throughout the year, with the current exposure at 9%. On an individual counter level, domestic counters were all positive over the quarter, with Naspers (+18.18%), Standard Bank (+23.98%) and The Spar Group (+24.30%) contributing positively to performance. Furthermore, the fund’s sector exposure changed over the quarter, with financials being increased by 2.59%, from 16.81% to 19.30%; resources were reduced by 0.79%, from 8.86% to 8.07%; and offshore exposure was reduced by 1.19%, from 28.28% to 27.09%.


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Key Insights

The fund is managed using a multi-counsellor approach. Each manager takes full responsibility for portfolio construction and each is responsible for risk management. Foord does not believe in committees, but rather that investment ideas should be discussed on an ongoing basis. They place emphasis on getting broader directional macro themes right, and within those themes, buying companies that trade below their value as determined by future cash flows. Foord combines both a top-down and bottom-up valuation approach. The fund constituents are high conviction and subsequently there is little turnover. They believe that if they buy the right companies at the right price, they rarely will have to sell. Therefore, they are considered to be buy-and-hold managers. When comparing the holdings of the Foord Equity Fund to that of its peers, its holdings vary greatly. Foord has managed to achieve superior risk-adjusted returns compared to these peers, which indicate good stock-picking abilities.

Fund Use

The fund is a high conviction SA-only equity fund, with a maximum number of holdings typically less than 45. It is a style and benchmark-agnostic fund that employs a pragmatic view to purchasing shares. This fund will work well with funds like the Prudential Dividend Maximiser Fund that is more benchmark-cognisant, but also more dividend-focused. The fund’s return profile is consistent with lower risk, resulting in good risk-adjusted returns. This fund will work well in a building-block approach as a core SA equity holding.


The fund is managed through a multi-counsellor approach, limiting the risk of “group think” and leading to specific stock ideas being included in the portfolio. The team does not believe in committees, preferring to stay small and engage on an ongoing basis. As an investment house, Foord has been in existence for more than 35 years. It has one of the longest and best track records in the industry, while preferring to keep a lower profile and following a smaller and more nimble approach. The SA team consists of 13 members, with the team in Singapore totalling six members. Foord believes that investment activity is ultimately a long-term process. Therefore, they are buy-and-hold investors. They avoid benchmarks, place emphasis on diversification and look to identify short-term mispricing so that over the longer term the fundamental value will start to materialise. After 23 years with Foord, Brian Davey will be retiring in March 2018 and as a result, Daryll Owen will take his place as a multi-counsellor on the Equity Fund. Furthermore, Nick Balkin will focus his full efforts on South African portfolios and will thereby relinquish his responsibilities on the global funds.


The fund has delivered consistent first and second quartile returns, together with relatively low volatility over rolling five-year periods. Consequently, it has excellent risk-adjusted returns. It protects capital well on the downside. These returns have been achieved through higher alpha generation and generally lower beta, when compared to its peers. The fund has delivered some of the best risk-adjusted returns as per its Sharpe ratio. The fund can exhibit some volatility over shorter periods, but this should be viewed in light of its process, which is to deliver superior returns over longer periods of time. This also speaks to part of the fund’s investment philosophy based on buy-and-hold investing. On a quantitative basis, there are very few peers that screen as well as the Foord Equity Fund, especially over longer-term periods. More recently, the fund’s poor performance is of concern, which is the result of Foord’s bias towards global businesses that are listed locally (rand-hedges) as well as their negative view on South Africa.


The Foord Equity Fund had a tough Q4 2017, slipping 0.44% and underperforming both the category average and the FTSE/JSE All Share Index (ALSI), which returned 5.68% and 7.44% respectively. Over a one-year period, as at 31 December 2017, the fund once again underperformed both the category average and the ALSI, returning a meagre 4.63% in comparison to the category average return of 12.78% and the ALSI’s return of 20.95%. The fund’s poor performance, especially over the past three years is of concern, as rand hedges have performed dismally due to a strong rand. This is the result of the fund’s bias to global businesses listed locally (rand-hedges), with the exception of Naspers, which returned 71.83% for the 2017 calendar year. Consistent with their buy-and-hold philosophy, the fund has seen minimal changes over the period. Minor shifts have been made away from consumer goods, consumer services, healthcare and industrials, while small increases have been made to basic materials and financials. The portfolio managers have continued to position the fund cautiously, which is evident in the exposure to money market instruments, increasing by 3%, from 7% to 10%. On an individual counter level, the fund’s exposure to Naspers (+18.18%), RMB Holdings (+26.89%) and Sasol (+14.95%) contributed positively to performance over the quarter, while exposure to Richemont (-9.07%) and Aspen (-7.74%) detracted from performance. The fund’s exposure on the 5th of December 2017 was the highest of all Foord’s unit trust funds, at 5.2% at the time of Markus Jooste’s resignation. Furthermore, the portfolio managers used the strong rand as an opportunity to add to their existing holdings of global businesses listed locally (rand-hedge stocks). As a result, these counters also detracted from performance on a relative basis due to the rand strengthening by 9.38% against the US dollar.


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FOORD EQUITY

Fund manager Nick Balkin, Dave Foord and Daryll Owen Consistency (No. of quarters) 19

Benchmark FTSE/JSE All Share Return Index Risk Description High



Philosophy Top-down, bottom-up valuation-driven (value and Garp) approach. Style-agnostic Fee Description (retail class) Annual management plus performance fee


Category SA Equity General Regulation No


Key Insights

The Investec Equity Fund’s philosophy and process of focusing on earnings revisions is a differentiator and strength. Earnings revision as an investment strategy has been shown to offer very low correlation to other, more well-known investment strategies such as value, quality, growth, low volatility and price momentum. The equity team’s philosophy is easy to implement and repeat, but it is not easily copied. Hence, Investec enjoys a competitive advantage in implementing this specific strategy. An additional strength is Investec’s global investment infrastructure support in terms of global investment research and idea generation; dealing; ESG; risk and performance measurement; as well as implementation. The investment team is highly qualified and experienced with breadth as well as depth of knowledge. However, the team is responsible for a number of different mandates, which could result in detracting focus from the Investec Equity Fund. The fund started investing in foreign-listed equities and primarily will leverage off the Investec 4Factor research capabilities. This team offers a slightly different investment philosophy, focusing on four factors, namely value, growth, quality and sentiment. This may consequently dilute the strong diversification benefits of a pure earnings revision strategy. However, it is important to note that the inclusion of any offshore holdings will be done on a complementary basis and should mitigate the risk of the dilution of diversification. The fund is a concentrated, high-conviction portfolio with typically 28 to 35 stocks locally and 65 to 75 shares offshore. Portfolio turnover is relatively high at 80%. The fund is managed on a multi-counsellor approach with Chris Freund managing the lion’s share of the fund, Hannes van den Berg managing a meaningful share, Samantha Hartard managing a smaller share, and Rhynhardt Roodt (co-head of the 4Factor team) roughly managing the offshore exposure. Grant Irvine-Smith primarily is responsible for the quantitative side of the research and portfolio construction, as well as the attribution process. From a trading perspective, the team is able to see the effects on their risk parameters on an ex-ante basis as opposed to an ex-post basis.

Fund Use

The Investec Equity Fund works well in a diversified building-block approach as part of a portfolio’s exposure to equity. The fund aims to deliver consistent outperformance, as opposed to lumpy, style-cognisant funds. It is a concentrated portfolio, with high-conviction ideas, and therefore could be used in combination with passive equity funds, or more diversified benchmark-cognisant funds as a satellite portfolio. Alternatively, it will work well in combination with other actively-managed equity funds. The fund includes exposure to foreign-listed equities. The fund’s unique investment philosophy and process of focusing on earnings revisions is a clear differentiator. Consequently, it works well in combination with slightly more style-cognisant, actively-managed funds such as the PSG Equity Fund or the Marriott Dividend Growth Fund. The fund is not entirely benchmark-agnostic, with a specific tracking error limit and volatility targets. Therefore, it would also work well with funds that are completely benchmark-agnostic. This is a well-managed, high-quality equity fund that offers excellent diversification benefits from a portfolio construction perspective. This fund will have higher active risk than pure benchmark-cognisant funds, but lower active risk than pure benchmark-agnostic funds, offering a good alternative between these two styles of management. With the recent change of the benchmark to Capped SWIX, the benchmark will have less exposure to large-cap stocks such as Naspers as there is a maximum limit of 10% per stock. This means that there will be more exposure to mid-cap and small-cap stocks. As a result, there will be less concentration risk.


Qualitatively, this is a strong team, with ample resources to draw upon. The team has been managing assets for a significant period of time, first on the institutional side with the balanced mandates, and from 1 November 2012 to include the retail general equity mandate. Investec has done a lot to change the underlying structures in their investment team, so that the analysts are now able to focus on a single investment philosophy as opposed to conducting research for different managers with different philosophies. The offshore contingent has also been bolstered with the strategic move of Roodt to the UK. Van den Berg joined Investec in June 2017 as a co-portfolio manager from Fairtree Capital. Moreover, Hartard is now part of the multi-counsellor process. Senior investment team members are required to invest alongside their clients, further aligning their interests with those of their clients. Furthermore, the investment team members’ calls are monitored continuously. Those whose investment calls are consistently accurate, enjoy higher weightings when it comes to their decisions in the overall investment process. This fund offers something unique in the way that it is constructed and would be a good candidate to include with other equity funds as part of a broader equity exposure in a client’s portfolio. The fund successfully blends a quantitative, scientific approach with a strong fundamental approach to investments.


The fund’s excess returns exhibit low correlations with some of its more well-known peers in the general equity space, offering good diversification benefits. From a style perspective, the fund tends to exhibit high sensitivity to growth, but positive sensitivities to the four main styles namely, value, growth, quality and momentum. The fund typically targets a tracking error range of between 3% and 5%. Therefore, it takes some active risk and compensates the investor sufficiently as is evidenced by its relatively high information ratio. The fund has exhibited slightly higher levels of volatility when compared to its peers and displayed lower drawdowns during periods of market distress. Consequently, the fund displays excellent risk-adjusted returns.


Over Q4 2017, the Investec Equity Fund added 3.59%, falling short of the category average (+5.68%) and underperforming the FTSE/JSE Capped Shareholder Weighted All Share Index, which returned 8.44%. Over a one-year period, ending 31 December 2017, the fund once again underperformed the category average, advancing 11.99% in comparison to the category average return of 12.78%. The MSCI All Countries World Index gained 5.62% in US dollar terms over the fourth quarter. However, a strengthening of the rand diminished the return figure, losing 2.55% in ZAR terms. Some of the key offshore performers for the 2017 calendar year include PayPal, Microsoft, LAM Research and Samsung. The fourth quarter can be reviewed in two halves, the first being very bearish, with the rand depreciating to its weakest level in November after the disappointing Medium-Term Budget Speech policy statement, coupled with both S&P and Fitch downgrading our local currency sovereign credit rating, and the uncertainty surrounding the ANC Electoral Conference. For the second half of the quarter, domestically-focused stocks rallied on the back of Cyril Ramaphosa’s win. From a stock perspective, the key positive contributors to performance over the quarter were due to overweight positions in retailers, namely Foschini Group (+44.83%) and Mr Price (+37.92%), and banks – Standard Bank (+23.98%) and FirstRand (+32.17%) – which rallied post the ANC Electoral Conference. On the flip side, the main detractors from performance were the fund’s exposure to Steinhoff (-92.25%) and Steinhoff Africa Retail (-27.28%), in the wake of accounting irregularities that came to light in December. Furthermore, going forward, the holdings of the portfolio are receiving positive earnings upgrades which should bode well for this fund.


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Telecommunications

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INVESTEC EQUITY

Fund manager Rhynhardt Roodt, Chris Freund and Hannes van den Berg Consistency (No. of quarters) 5

Benchmark 87.5% FTSE/JSE Capped Shareholder Weighted All Share Index, 12.5% MSCI All Countries World Index Risk Description High

Role of Benchmark Some benchmark consideration Inception Date 02 November 1987


Philosophy Bottom-up, top-down earnings revision Fee Description (retail class) Annual management plus performance fee


Category SA General Equity Regulation No


Key Insights

Marriott employs a highly process-driven approach to income investing. The fund is managed on a committee basis, and Marriott have added two additional resources to this process, after the passing of Simon Pearse. The two new investment committee members are Dave Elliott and Lourens Coetzee. While the benchmark excludes resource stocks, the fund may invest in resource counters, should these counters be able to tick all the boxes that their investment process requires. The fund is characterised by low portfolio turnover, on average holding between 20 and 25 high-conviction ideas. From a style perspective, the fund is slightly biased towards quality counters, as one would expect, given their investment philosophy and process. Even though the fund is highly concentrated, it does include foreign equity to add diversification and broaden the opportunity set of the fund. The fund’s underlying holdings exhibit very few similarities to peers and offers good diversification benefits.

Fund Use

The fund can be used in conjunction with other equity funds as part of a larger portfolio’s equity allocation. The fund is suitable for investors with a long-term investment horizon in excess of five years. The fund’s strong focus on higher dividend-yielding equities makes it an ideal candidate for inclusion in portfolios responsible for generating income, especially post-retirement products. The fund’s rigorous screening criteria sometimes may lead to a concentrated portfolio, and this, together with low correlations to other funds, makes it an ideal fund to use when building a well-diversified portfolio. The fund offers offshore exposure and is not a South Africa-only, general equity fund. The fund will temper volatility when used in conjunction with funds like the Coronation Equity, Investec Equity, PSG Equity and SIM General Equity Funds, due to its high conviction benchmark-agnostic style.


Marriott as an investment house has a specific investment philosophy, preferring to focus on the selection of securities that produce reliable income streams which are ideally growing, and to purchase these income streams at appropriate prices. They have been successful in implementing and staying true to their philosophy. Their investment philosophy is easy to understand and implement. However, their dedication to their philosophy and their success in implementing this particular strategy has been a major differentiating factor, when compared to other investment houses implementing the same type of philosophy. The team has been relatively stable, with five members of the investment team having worked together for more than six years. Marriott also has established a stable analyst team successfully, ensuring the sustainability of the entire investment team. Portfolio construction decisions are made by the four senior members of the investment team, namely Dave Elliott, Lourens Coetzee, Neil Nothard and Duggan Matthews. The investment committee is supported by six investment professionals – two locally and four offshore. These investment professionals propose investment ideas to the investment committee, and form the role of “promoters”. The “decisionmakers” then take all the information presented to them and make an investment decision, in line with the income-focused approach. This leads to a certain degree of objectivity and the management of inherent analyst biases.


The Marriott Dividend Growth Fund has been a consistent first and second quartile performer over rolling five-year period. Since 2011, the fund has maintained a healthy dividend yield, never dropping below 2.24%. During the 2008 global financial crisis, the FTSE/JSE All Share Index had a maximum drawdown of 40%, and the average equity fund had a maximum drawdown of 37%, while this fund had a drawdown of only 26%. This proves the fund’s ability to protect capital during times of adverse market movements. Five-year rolling volatility historically has been below its Shopping List peers. However, this gradually has started elevating since the beginning of 2014.


Over Q4 2017, the fund managed to beat the category average, but underperformed the FTSE/JSE All Share Index (ALSI), returning 6.24 versus the category average return of 5.68%, while the ALSI returned 7.44%. Over a one-year period, as at 31 December 2017, the fund once again outperformed the category average, but failed to outperform the ALSI, returning 13.66% in comparison to the category average return of 12.78%, while the ALSI advanced 20.95%. The biggest asset allocation exposure shift over the quarter was a decrease in foreign equity by 4.1%, from 24.26% to 20.14%; and a decrease in consumer services of 1.8%, from 20.88% to 19.04%; while consumer goods was increased by 4.1%, from 25.62% to 29.68%. Some notable counter-specific performances over the quarter include Mr Price (+37.73%), FirstRand (+32.66%) and The Spar Group (+24.38%), while General Electric (-33.33%), Unilever (-10.93%) and Hammerson (-5.73%) detracted from relative performance. Furthermore, the fund’s dividend yield is currently at 3.30%, marginally down from the previous year’s dividend yield of 3.81%. Going forward, given a healthy global economy and a more positive outlook for South Africa, the portfolio managers expect robust dividend growth as well as positive earnings growth from the equities held in the portfolio.


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RSA Money Market (Cash)

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Telecommunications

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Consumer Goods

MARRIOTT DIVIDEND GROWTH

Fund manager Dave Elliott, Lourens Coetzee, Neil Nothard and Duggan Matthews Consistency (No. of quarters) 5

Benchmark Dividend yield of the Financial and Industrial Index Risk Description High



Philosophy Income-focused, with a particular emphasis on sustainability and growing income streams Fee Description (retail class) Annual management fee




Key Insights

The portfolio is constructed by keeping the mean of the general equity category in mind, and overweighting or underweighting certain positions based on Prudential’s view of a stock’s fundamental value. Higher conviction stocks will be under- or overweighted by 3% to 4%, while lower conviction stocks will differ from the benchmark by 1% to 1.5%, respectively. The difference between the Prudential Dividend Maximiser and the Prudential General Equity Funds is the focus on higher dividend yielding stocks, which isn’t truly reflected in the instrument selection locally and offshore. The Dividend Maximiser Fund will also tolerate a higher tracking error. The tracking error may go up to 8%, but in general this is closer to 4%. Prudential is making use of offshore unit trust funds specially created for the domestic funds and being driven by Marc Beckenstrater, However, this is a relatively new and untested process. The previous offshore structure consisted of passives and other offshore managed funds (such as the Vulcan Value Fund) whereby the cost structures were not efficient and at times could have been detrimental to the client. However, the new structure creates a clean structure, both from a cost perspective and an asset allocation perspective which the Prudential SA team can allocate to, costing 0.30% (excluding VAT) per annum. The fund will use its maximum offshore allowance of 25%, should opportunities avail themselves. The fund manages to exhibit a slightly better risk profile when compared to its in-house peer, the Prudential Equity Fund.

Fund Use

From a portfolio construction and financial planning perspective, this fund will work well as a core equity holding in a building-block approach that is focused on low active risk. The investment horizon for this specific fund is medium to longer term. It will also blend well with more actively-managed, specialist South Africa-only funds such as the Nedgroup Investments Entrepreneur Fund, as it is focused on small- or mid-cap stocks and completely benchmark-agnostic. Additionally, this fund will work well when combined with the Foord Equity Fund in a well-diversified, building-block portfolio. This fund is a good alternative for investors seeking exposure to the broader South African equity market that prefer a value-orientated investment philosophy, with a quality bias and high offshore exposure.


Prudential Portfolio Managers is a South African company held by M&G Investments, a global investment management firm, part of the bigger Prudential PLC group incorporating various other companies. Prudential leverages off M&G’s global strategic and tactical asset allocation abilities. Two members of the asset allocation committee attend an asset allocation meeting in London every quarter. The Prudential Dividend Maximiser is managed by Ross Biggs (15 years’ experience), Craig Butters (19 years’ experience) and Rehana Khan (9 years’ experience). This was effective as of 1 June 2016, the fund previously managed by Marc Beckenstrater. They are supported further by an extensive in-house analyst team as well as the broader M&G Investments group. They have a relative, value-based investment philosophy choosing to compare different equity holdings’ expected return with their historical expected returns, and also with their peers’ expected returns. Prudential uses a clearly-defined investment philosophy and process focusing on its strengths of strategic and tactical asset allocation capabilities on a relative basis. Marc Beckenstrater moved to M&G Investments group in London, as of 1 March 2017. Beckenstrater’s sole responsibility at M&G will be to establish a South African offshore investment capability, to be able to compete with the likes of Investec, Coronation and Allan Gray and their respective offshore offerings for South African clients. This means that in future we can expect to see less reliance on other CIS funds when it comes to Prudential Fund’s offshore exposures.


This specific fund had some of the lowest drawdowns during the 2008 global financial crisis, reaching a loss of approximately 25%, compared to other funds like the PSG Equity Fund which lost a staggering 44%. The fund is characterised by relatively low volatility and has shown consistent performance as per its five-year rolling return figures up until the end of 2014. At this inflection point, performance started faltering when compared to its Shopping List peers. When compared to the Prudential Equity Fund, this fund is expected to underperform slightly, but with lower volatility and drawdowns, leading to a similar risk-adjusted return profile as per its Sharpe, Sortino and Calmar ratios, measured over the same rolling-return periods. The dividend yield of the fund has started coming under pressure, not managing to surpass that of the FTSE/JSE Dividend Plus Index. However, as a stand-alone equity fund, it has done well.


The Prudential Dividend Maximiser Fund gained 5.34% over the fourth quarter of 2017, marginally underperforming its benchmark (the category average), which returned 5.68%. Over a one-year period, as at 31 December 2017, the fund outperformed the category average returning 15.08% in comparison to the category average return of 12.78%. In the last quarter, the fund’s South African holdings had a strong quarter, while its offshore exposure, which is currently at 27.30%, detracted from performance as the rand strengthened considerably against the US dollar. The fund’s underweight positions in Steinhoff, Aspen and EOH were the strongest contributors to relative performance over the quarter, while the fund’s underweight Naspers position and its offshore holdings detracted from relative performance. The funds asset allocation has changed over the quarter, with financials increasing by 3.14%, from 16.31% to 19.45%; consumer services increasing by 1.60%, from 15.66% to 17.26%; while consumer goods decreased by 1.81%, from 10.97% to 9.16%; and offshore equity decreased by 0.52%, from 28.58% to 28.06%. Furthermore, the focus of the fund continues to be on finding companies that are undervalued and which are paying good dividend yields with the potential to pay growing dividends over the long run.


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Consumer Goods

Basic Materials

PRUDENTIAL DIVIDEND MAXIMISER

Fund manager Ross Biggs, Craig Butters and Rehana Khan Consistency (No. of quarters) 48

Benchmark ASISA South African – Equity – General Category Mean Risk Description High

Role of Benchmark Benchmark - Cognisant Inception Date 02 August 1999


Philosophy Benchmark-cognisant, value investors Fee Description (retail class) Annual management fee and performance fees




PSG EQUITY

Fund manager Shaun le Roux and Greg Hopkins Consistency (No. of quarters) 14

Benchmark FTSE/JSE All Share Total Return Index Risk Description High

Role of Benchmark Benchmark - Agnostic Inception Date 31 December 1997


Philosophy Fundamental, bottom-up, value approach with a key focus on MOAT, management and margin of safety Fee Description (retail class) Annual management fees



Key Insights

This is a high-conviction fund with a strong emphasis on margin of safety, by avoiding shares that are deemed to be too expensive. Over the long term, the fund has managed to generate consistent first and second quartile performance, without the likes of counters that enjoy high weights in the index. This has led the fund to be uncorrelated to most of its peers. The fact that these top quartile performances were realised with such an uncorrelated portfolio, attests to PSG’s stock-picking ability and global exposure. The fund is managed on a more concentrated basis with an average holding of around 50 stocks, including both local and offshore listed counters. PSG is a process-driven investment house. Their disciplined investment process means that they may enter into positions early and, consequently, may exhibit higher drawdowns and volatility over shorter periods of time.

Fund Use

The PSG Equity Fund will work well by combining it with other specialist funds such as small- or mid-cap or dividend-specific funds to form an investor’s combined equity exposure. Alternatively, it will work well when combined with a more benchmark-cognisant fund, such as the Prudential Equity or SIM General Equity Funds. Therefore, it will work well as a building-block fund that contains both local and offshore exposure. This fund typically will fulfil the role of the alpha generator in a building-block portfolio. It is not suitable for a SA-only portfolio.


The investment team, both equity and fixed income, consists of 16 members. Shaun le Roux, the fund manager, has been responsible for managing this fund since 2002, and has over 21 years’ investment experience, 18 of which have been gained at PSG. Greg Hopkins, CIO, recently has been added as co-manager on this fund. Greg brings with him an additional 20 years’ experience. The fund manager and team are co-investors in this fund and therefore the interests of clients and the managers are aligned. The investment process is well-articulated and structured to ensure that idea-generation takes place effectively and that these ideas are vetted and brought to fruition in a timeous manner. The asset management arm of PSG is part of the wider PSG group and can leverage off the group’s extensive resources and experience should they need to. As a result, a culture of strong corporate governance is evident in the structure and process of investment committee meetings.


The fund has delivered consistent first and second quartile performances over rolling five-year periods since 2008. As with other PSG funds, the excess returns primarily are delivered through stock-specific allocation versus market beta exposure. However, this can lead the fund to underperform when the market is in a strong bull-run. The fund exhibits good risk-adjusted performance figures compared to peers and has managed to outperform its benchmark over all meaningful periods. The fund has a low correlation based on total returns as well as excess returns when compared to its peers, and consequently will offer excellent diversification benefits. The fund’s performance primarily is driven by the manager’s stock-picking ability as opposed to favouring any particular style, such as value, growth, quality or momentum, although returns are more correlated with value as an investment style.


The PSG Equity Fund gained 7.04% over the quarter, outperforming the category average but underperforming the FTSE/JSE All Share Index (ALSI), which returned 5.68% and 7.44% respectively. Over a one-year period, as at 31 December 2017, the fund returned 13.99%, outperforming the category average, which advanced 12.78%, while the ALSI gained 20.95%. The largest shift over the quarter was the funds offshore equity exposure, which decreased by 5.49%, from 24.47% to 19%. This is the result of elevated levels of global stock valuations as well as a lack of finding high-conviction global stock opportunities. The proceeds have been left in both local and global cash, taking the fund’s overall cash level to 7%. From an individual stock perspective, performance over the quarter was driven by Discovery (+32.75%), L Brands (+34.32%) and FirstRand (+32.17%), while the fund exposure to Yahoo! Japan (-11.30%), Super Group (-3.91%) and Brookfield Asset Management (-2.47%) detracted from performance. A significant market event in December was the implosion of the Steinhoff share price. Fortunately, the fund did not have any exposure to Steinhoff. Going forward, the fund retains healthy exposures to domestic businesses that are attractively-priced, specifically mid and small-cap shares, where an emphasis has been placed on position-sizing due to liquidity constraints of mid and small-cap shares. The biggest local counter remains Discovery, while the largest offshore holdings remains Brookfield Asset Management.


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Foreign Cash, Derivative, Money Market

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Cash, Derivative & Money Market

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Key Insights

Even though the fund’s offshore exposure is limited to 25%, it historically has remained lower, at approximately 5% to 8%. Offshore exposure is a by-product of not being able to find opportunities locally. The fund is managed on a benchmark-cognisant basis, using the SWIX as a starting point. Average benchmark positions are considered to be neutral, and these are subsequently over- or underweighted depending on conviction and risk levels. Based on the perceived risk, a counter can either be underweight relative to the benchmark or be left out of the fund in totality. This will also depend on the size of the position in the benchmark, and if the conviction level is low for a counter with a large position in the benchmark. It will be underweight, while counters with smaller positions can be left out altogether. If there is uncertainty surrounding a counter’s valuation, they will hold a neutral position. While the fund manager is also cognisant of peer holdings, this is not used to determine the allocation of assets, but rather as a gauge for market sentiment.

Fund Use

The fund is a benchmark-cognisant fund, and will work well for an investor who is uncomfortable with a manager taking too much active risk, investing outside of the benchmark. From a portfolio construction and financial planning perspective, this fund can be used as a core equity holding in a building-block approach that is focused on low active risk; is peer-cognisant; and has minimal offshore exposure. The investment term for this fund is approximately three to five years. The fund will complement benchmark-agnostic equity funds like the Marriott Dividend Growth and PSG Equity Funds, and should reduce overall portfolio volatility.


The fund is managed by Patrice Rassou, who is supported by a large team of analysts. The fund employs a bottom-up, pragmatic-valuation process. A benchmark is taken into account during portfolio construction. Counters are given an overweight allocation if they are deemed to be less risky and undervalued, while counters deemed to be overvalued and more risky on a fundamental valuation basis, are given an underweight allocation. This process allows for more time to be spent on actual bottom-up valuation as less time is spent on trying to screen for possible investment ideas and the investable environment. However, it is a more constrained approach and would not necessarily be reflective of the manager’s best ideas.


The fund has a low tracking error compared to its benchmark. If active risk is taken, the fund compensates the investor sufficiently as measured through a higher-than-average information ratio. The standard deviation of this fund’s outperformance relative to its benchmark is relatively low, as one would expect. When comparing this fund’s performance to that of its peer category average, the fund not only outperforms its benchmark in times when the benchmark is down, but it also outperforms the category average in times when the benchmark is positive. The fund typically will participate in more of the market’s upside, while being less exposed to that of the downside. This fund has been a consistent long-term performer, delivering first and second quartile performance over rolling three- and five-year periods.


The SIM General Equity Fund, added 4.32% for Q4 2017, underperforming the category average and the FTSE/JSE All Share Index (ALSI), which returned 5.68% and 7.44%, respectively. Over a one-year period, as at 31 December 2017, the fund outperformed the category average, but underperformed the ALSI, returning 13.85% in comparison to the category average return of 12.78% and the ALSI’s returns of 20.95%. Over the quarter, Naspers (+18.18%), Barclays (+30.26%) and Standard Bank (+23.98%) were the top contributors to performance, while Steinhoff (-92.25%), Mondi (-10.97%) and Aspen (-7.74%) detracted from performance. At the beginning of Q4 2017, the fund’s exposure to Steinhoff was 5.73%, while at the end of Q4 the fund’s exposure was 0.30%. The turn of events at Steinhoff is extremely concerning especially from a governance perspective, given the scale of value destruction. Moreover, the fund’s exposure to Naspers has increased over the quarter by 4.43% from 16.42% to 20.85%, which is slightly underweight relative to the fund’s benchmark. The fund’s sector exposure has changed over the quarter, with consumer services increasing by 3.35%, from 21.97% to 25.32%; financials increasing by 1.80%, from 19.45% to 21.25%; consumer goods decreasing by 5.05%, from 14.26% to 9.21%; and offshore decreasing marginally (0.53%), from 9.35% to 8.82%, but it is still a far cry from the 25% allowable limit.


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SIM GENERAL EQUITY

Fund manager Patrice Rassou Consistency (No. of quarters) 39

Benchmark FTSE/JSE All Share Index Risk Description High

Role of Benchmark Cognisant Inception Date 26 June 1967


Philosophy Bottom-up, pragmatic value Fee Description (retail class) Annual management fees




SA - EQUITY - MID- & SMALL-CAP


These portfolios invest in established smaller companies as well as in emerging companies. New investment by the portfolios are restricted to fledgling, small and mid-cap shares only and at least 80% of the portfolio will be invested in fledgling, small and mid-cap shares at all times. Due to both the nature and focus of these portfolios, they may be more volatile than funds that are diversified across the broader market.

Shopping List selection: Nedgroup Investments Entrepreneur Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Nedgroup Inv Entrepreneur R (ASISA) South African EQ Mid/Small Cap

Ret

urn

Quartile Ranking

As of Date: 31/12/2017


-20.0-15.0-10.0-5.00.0

YTD 1 year 2 Years 3 Years 5 Years 7 Years 10 Years

5.010.015.020.0


Ret

urn

Returns

As of Date: 31/12/2017 Source Data: Total ReturnYTD 1 year 2 years 3 years 5 Years 7 Years 10 Years

Nedgroup Inv Entrepreneur R

(ASISA) South African EQ Mid/Small Cap

7.69 7.69 7.87 12.59 12.59 16.30 12.00

-1.51 -1.51 3.03 9.467.48 7.48 5.74

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

PercentSharpe

Ratio

Nedgroup Inv Entrepreneur R

(ASISA) South African EQ Mid/Small Cap

8.67 -7.78 63.33 36.67 0.70

8.17 60.00 40.00-8.94 0.12


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-10.0

-8.0

-6.0

-4.0

-2.0

0.0



Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 120.0

5.0

10.0

15.0

20.0


Ret

urn


NEDGROUP INVESTMENTS ENTREPRENEUR

Fund manager Anthony Sedgwick of Abax Investments Consistency (No. of quarters) 20

Benchmark ASISA Category Average Risk Description Aggressive



Philosophy Relative value with a strong focus on forecasting earnings growth Fee Description (retail class) Annual management fees


Category SA Equity Specialist: Small- & Mid-Cap Regulation No

Key Insights

Abax typically conducts research on about 140 stocks listed on the JSE. A ranking table is compiled from which stocks are chosen for all Abax funds with an equity mandate. Stocks on this ranking table that fall into the small- and mid-cap range are then available for inclusion in the fund. Portfolios are compiled on a complete benchmark and peer-agnostic basis, with the primary goal for the portfolio manager being to find companies that are relatively cheap with relatively better growth prospects. The fund may hold some large-cap stocks from time to time, gained from unbundling. However, it is not permitted to trade in these securities and they may only be sold. The fund has a large-cap bias and therefore has a low tolerance for risk compared to peers. Identifying companies with high levels of cash is an important part of Abax’s process, resulting in investment in companies with high levels of cash on their balance sheets. However, this fund holds a small illiquid position in MetroFile but Abax believes that this is a strong and stable company. Credibility of management is of high importance and meeting with management is believed to add value to the decision process.

Fund Use

This fund is ideal for an investor who follows a building-block approach to portfolio construction and who wishes to gain exposure to small- and mid-cap stocks by combining it with a focused large-cap manager. It has a lower correlation with the JSE All Share and hence, offers good diversification benefits from a portfolio construction perspective. Small-caps consistently have outperformed the JSE All Share over longer periods of time but at an increased level of risk. The Nedgroup Investments Fund consistently has outperformed its peers in this sector and is an ideal choice should an investor want exposure to small- and mid-cap stocks. This fund would work well with funds such as the Coronation Top 20 Fund or more benchmark-cognisant funds such as the SIM General Equity Fund and the Prudential Equity or Dividend Maximiser Fund, bearing in mind that it offers no offshore exposure.

Qualitative Highlightsw

The fund has been managed by Anthony Sedgwick since 2006. Anthony has over 20 years’ investment experience, managing small-cap stocks since the 1990’s and has been with Abax since 2003. The portfolio manager leverages off Abax’s larger equity team. It is a very stable team with very low staff turnover. All staff members are shareholders in ABAX and therefore have a vested interest in building a sustainable, profitable business for the long term. Staff members also are encouraged to co-invest alongside investors in the products that they manage. Abax concluded and announced an agreement with Affiliated Managers Group (AMG), a NYSE listed US investment firm, to acquire a 25% equity stake in Abax. The AMG model is to partner with high-quality boutique investment management firms (including Veritas, the managers of the Nedgroup Investments Global Equity Fund). They have established a reputation for providing each affiliated firm with complete independence and operational autonomy. As part of the transaction, the four senior partners at Abax – Anthony Sedgwick, Marius van Rooyen, Omri Thomas, and Steve Minnaar – have agreed to long-term commitments with the firm. They each have a ten-year employment contract, while the other four investment managers have signed five-year contracts. ABAX’s investment philosophy is primarily focused on identifying those companies whose future earnings potential is mispriced by the market. This approach has been applied consistently over the past 12 years. The investment process is well-defined. It focuses extensively on relative performance evaluation and combines sell-side research with the firm’s own proprietary analysis and modelling.


The Nedgroup Investments Entrepreneur Fund exhibits performance and risk figures that are consistently better than its category average and peers. Over the past ten years, the fund has managed consistent Q1 and Q2 performance. Over a rolling, five-year return period, the fund has outperformed on both excess returns and its ability to deliver alpha. This was achieved at volatility levels similar to peers. The fund does not have the lowest standard deviation in the category, neither does it have the worst. Outperformance was such that, on a risk-adjusted basis, as measured by its Sharpe and Sortino ratios, the fund managed to deliver superior results when compared to its peers. It captures more upside and less downside compared to peers and has one of the lowest down-capture ratios. Therefore, when markets are down, the fund fares better, compared to its peers and the category average. However, the fund’s up-market capture ratio has deteriorated in the short term when compared to peers in the category as it no longer captures most of the overall performance in up-markets relative to the JSE Small-Cap Index. Over the longer term, however, it still maintains the highest up-market capture ratio, which illustrates the manager’s ability to outperform. This fund has an attractive drawdown profile which can be attributed to its bias to larger-cap stocks due to legacy holdings.


The Nedgroup Investment Entrepreneur Fund returned a stellar 6.11% over Q4 2017, outperforming the category average, which returned 3.99%. Over this period, the FTSE/JSE Mid Cap Index returned 11.58% and the FTSE/JSE Small Cap Index returned a meagre 3.60%. Meanwhile, over a one-year period, as at 31 December 2017, the fund outperformed the category average once again, returning 7.08% in comparison to the category average return of -1.51%. Over this period, the Mid Cap Index gained 7.35% and the Small Cap Index added 2.95%. It is important to note that this fund has a bias toward mid- and large-cap stocks (primarily due to legacy holdings) when addressing its performance. Some notable counter-specific performances over the quarter include Barloworld (+28.02%), Naspers (+18.18%) and JSE Limited (+25.03%), while Holdsport (-11.62%), Steinhoff Africa Retail (-27.28%) and Kap International (-5.55%) detracted from relative performance. The fund’s asset allocation has changed over the quarter, with consumer services increasing by 5.71%, from 17.89% to 23.60%; industrials increasing by 0.87%, from 26.65% to 27.52%; while healthcare decreased by 2.04%, from 2.04% to 0%; and consumer goods decreased by 1.77%, from 13.78% to 12.01%.


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SA - EQUITY - FINANCIAL


These portfolios invest at least 80% of the market value of the portfolios in shares listed in the FTSE/JSE financials industry group orin a similar sector of an international stock exchange. Up to 10% of a portfolio may be invested in shares outside the defined sectors incompanies that conduct similar business activities as those in the defined sectors. Due to both the nature and focus of these portfoliosthey may be more volatile than portfolios that are diversified across a wider range of FTSE/JSE industry groups.

Shopping List selection: Nedgroup Investments Financials Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0

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Nedgroup Inv Financials R (ASISA) South African EQ Financial

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Quartile Ranking

As of Date: 31/12/2017


4.0

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14.0

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20.022.0


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Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Nedgroup Inv Financials R

(ASISA) South African EQ Financial

11.67 -11.84 61.67 38.33 0.87

12.62 56.67-16.92 43.33 0.43

Returns


YTD 1 year 3 years 5 years 7years 10 years

Nedgroup Inv Financials R

(ASISA) South African EQ Financial 6.43 11.9715.36 15.36 13.91

14.93 14.93

11.74

12.05 16.64 17.90 14.72


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-17.5

-15.0

-12.5

-10.0

-7.5

-5.0

-2.5

0.0



Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

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5.0

10.0

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20.0


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Key Insights

The Nedgroup Financials Fund is part of the Nedgroup’s bestof-breed strategic offering. The fund was initially managed by Debbie Tredoux from Quaystone. SIM Global was launched in February 2004, and it was from September 2004 that Kooyman took over the management of this fund. SIM Global and SIM Unconstrained have recently announced a merger between the two businesses. The new entity is called Denker Capital. Kooyman has over 26 years’ investment experience and has been managing the fund for over 11 years. He is responsible for all investment decisions and the portfolio construction of the fund, and is fervently experienced in selecting local and global financial stocks. The team has spent 11 years building a platform and research team that has a strong ownership culture. The investment team consists of 15 members. The team consists of five global equity analysts and two research assistants. Catherina du Toit resigned from the business at the end of December 2014 and her responsibilities were distributed within the team with some responsibilities falling back on Kooyman himself. The team has continued to strengthen its financial research capacity by adding Barry de Kock (he joined in February 2015) and Ben Kooyman (appointed on a contractual basis since November 2014). The team is mostly responsible for the global financial stocks, while Kooyman is responsible for the South African financial stocks.

Fund Use

This is an equity specialist fund and can be used by investors looking to take a view on the financial sector. This fund can also be used in numerous risk-profiled portfolios, although it is vital for the investor to be cognisant of the risk exposure when exposed to a single sector. A key differentiating factor of this fund is its exposure to offshore, leveraging off the Sanlam Global Financial Fund. Investors should therefore be cognisant that this is not an SA-only financials fund.


The fund is benchmark agnostic and relies on a bottom-up research process focusing on valuations. Denker Capital believes that markets are inefficient and that prices over time reflect the intrinsic value of the business. The team looks for companies that have a track record of generating shareholder value, which allows for compounding, a good risk-adjusted return on equity, considerable evidence of a turnaround, and trading at a value below their intrinsic value. Travelling frequently allows Kooyman to perform detailed fundamental analysis on foreign based companies to ensure the qualitative factors remain high. He is not reluctant to include foreign holdings and small caps in order to exploit market mispricing.


On a rolling five-year basis the performance of the fund has consistently been above the category average. This return has been achieved at higher volatility to the category average over the same rolling period due to the fund’s foreign exposure. The fund’s maximum drawdown since inception was 46.35%, while the category average was 41.58%, occurring during the financial crisis. However, in the last year the fund’s maximum drawdown has decreased substantially to 11.84% while the category average was 16.92%. The fund’s standard deviation on a rolling three-year basis for the period of five years has consistently been lower than the category average and consistently generated alpha above its peers over all periods.


The fund underperformed both the benchmark and ASISA South African Equity Financial category for Q4, returning 12.57%. Its underperformance to the benchmark and the category average was -3.41% and -0.25% respectively. Over a one-year period, the fund also underperformed both the category average and benchmark, returning 14.3% for 2017. Taking into account the volatile economic climate and the rand strengthening 10% against the US dollar in December, the fund did relatively well. The strong performance of the fund was driven late in December when Cyril Ramaphosa was elected ANC leader. The undervalued shares rallied over this period. The leading contributors of the fund over the quarter were FirstRand Limited (+3.10%), Sanlam Limited (+2.51%), Standard Bank Group (2.23%) and the JSE Limited with a contribution of 1.45%. It is notable that the fund’s top holdings collectively generated an average return of 30% for the year. Sanlam Global Fund, which contributed 22% for the year in ZAR (29.7% USD), was hit by the late strengthening of the rand as the share was the leading detractor for the quarter. The sector return attribution for the quarter still has financials first, followed by industrials and real estate. It is noteworthy that the fund reduced their exposure to foreign collective investment schemes (according to Sanlam global financials) from 19.94 in Q3 to 0.91% in Q4 – a 19.06% decrease. Cash and money market also saw a +14.01% increase to 16.27%, from the previous 2.26% in the previous quarter. Their +5.19% increase to banks paid off as the stocks rallied strongly and ended the year on a high note. The only significant change in the top 10 holdings of the fund was that Coronation Fund Managers which was there in Q3 at 2.98% was replaced by Barclays Africa Group with a holding of 6.51% which had a positive run in the last quarter of the year.


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15.00%25.00%35.00%45.00%55.00%65.00%75.00%85.00%95.00%

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NEDGROUP INVESTMENTS FINANCIALS

Fund manager Kokkie Kooyman (Denker Capital) Consistency (No. of quarters) 32

Benchmark ASISA South Africa Equity Financial Risk Description Aggressive


Return Focus Relative Fund Size (Rm) R447

Philosophy Fundamental bottom-up valuation-driven approach Fee Description (retail class) Annual management fees


Category SA Equity Financials Regulation No

THE SHOPPING LIST BY GLACIER RESEARCH - Q4 - FEBRUARY 2018 7 1

SA - EQUITY - INDUSTRIAL


These portfolios invest at least 80% of the market value of the portfolios in industrial shares listed on the Johannesburg Stock Exchangeor in a similar sector of an international stock exchange. Industrial shares include all companies listed on the JSE other than those shareslisted in the FTSE/JSE oil & gas, basic materials, and financials industry groups.

Shopping List selection: SIM Industrial Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

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SIM Industrial R (ASISA) South African EQ Industrial

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Quartile Ranking

As of Date: 31/12/2017


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SIM Industrial R

(ASISA) South African EQ Industrial 11.80 11.80 5.85 12.93 14.56 12.55

14.7517.8216.858.5315.80 15.80

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

SIM Industrial R

(ASISA) South African EQ Industrial 11.06 63.33-11.50 36.67 0.58

0.8531.6768.33-10.3012.22


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-12.0

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Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

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0.0

7.5

15.0

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30.0


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Key Insights

The team will be biased towards mid-cap stocks, which is a function of the size of the majority of the counters in the sector. The SIM Industrial Fund, therefore, is concerned with liquidity, the benchmark and its peers. The fund is the only one in the industrial category that utilises offshore investments. The general idea is to have the offshore exposure between 3% and 5%.

Fund Use

The fund provides industrial equity exposure to a building-block portfolio looking to get exposure to the industrial sector. This needs to be managed actively in order to avoid the risk of being over- or underexposed to industrials. This type of specialist fund can be included in numerous types of risk-profiled portfolios.


Andrew Kingston and Marlo Scholtz have co-managed the fund for more than five years. Kingston has over 15 years’ experience in the industrial sector and Scholtz has over 10 years’ industry experience. Kingston is the head of equity research at Sanlam Investments (SI), where he is responsible for driving research efforts of the respective analysts. SI’s pragmatic value investment style is reflected in this fund as the managers believe that long-run, real returns revert to the mean. The portfolio managers are supported by six equity analysts and the small-cap team. The spread between the current price and the intrinsic value of a share will determine opportunities and the level of conviction through the weight of the holding. SI has a highly qualified and experienced team. The senior team members have been with SI for a significant period of time, which speaks to the stability of the investment team.


The fund consistently has outperformed the category sector average over one, three, five and ten years. The fund captures more of the upside and less of the downside than its peers. It exhibits high levels of excess returns. The fund has a high correlation with its peers and the category as a whole, which makes sense considering that there are only five funds in this specialist category. The fund can display higher levels of volatility in general than its peers, with slightly higher drawdowns. On a rolling three-year basis over the past ten years (as at 30 June 2017), the fund has outperformed the FTSE/JSE SA Industrials TR Index 44.71% of the time.


The fund underperformed its benchmark but outperformed the category average in Q4 2017, returning 1.45%, while its benchmark returned 4.67%. For the year ending 31 December 2017, the fund underperformed its benchmark, but outperformed the category average, returning 15.80% in comparison to the benchmark’s return of 22.50%. Over the quarter, the fund was not very active and introduced a new holding in the form of MTN. The portfolio managers added to their holdings of Steinhoff, unfortunately prior to the accounting irregularities announcement. I t was subsequently trimmed, as was Altron. The fund’s long-standing holding in Sovereign Foods was exited following a reasonable offer from outside investors, and both Barloworld and Adapt IT were trimmed slightly. The top ten holdings account for 80.35%, with Naspers accounting for 44.23%, British American Tobacco accounting for 10.19% and Richemont accounting for 6.77%. The Naspers exposure viewed in isolation, is unreal. However, the current average Naspers exposure in the SA Industrial category is 32.86%. The fund’s sector exposure composition has remained relatively the same over the quarter. The fund’s sector exposure can be described as follows: healthcare sector (5.212%), consumer services sector (54.07%), consumer goods (20.21%), industrials (4.30%), technology (4.59%), cash (6.24%) and international (4.27%). Furthermore, the leading contributors to performance over the quarter were Naspers (+6.97%), Dis-Chem (+0.59%) and Curro Holdings (+0.45%), while Adaptit Holdings (-0.51%), Compagnie Fin Richmont (-0.69%) and Steinhoff International (-3.65%) detracted from performance.


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SIM INDUSTRIAL

Fund manager Andrew Kingston and Marlo Scholtz Consistency (No. of quarters) 48

Benchmark FTSE/JSE Industrial Index (J257) Risk Description Aggressive

Role of Benchmark Cognisant Inception Date 03 August 1966


Philosophy Bottom-up, pragmatic value Fee Description (retail class) Annual management fee


Category SA Equity Industrials Regulation No


SA - EQUITY - RESOURCES

Category Analyst: Patrick Mathabeni

These portfolios invest at least 80% of the market value of the portfolios in shares listed in the FTSE/JSE oil & gas and basic materials industry groups or in a similar sector of an international stock exchange. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors. Due to both the nature and focus of these portfolios, they may be more volatile than portfolios that are diversified across a wider range of FTSE/JSE industry groups.

Shopping List selection: Investec Commodity Fund


Time Period: 01/01/2013 to 31/12/2017

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Investec Commodity R (ASISA) South African EQ Resources

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Quartile Ranking

As of Date: 31/12/2017


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Returns



Investec Commodity R

(ASISA) South African EQ Resources 8.23 2.884.35 4.3516.76 16.76

3.725.88 5.888.5110.13 10.13

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Investec Commodity R

(ASISA) South African EQ Resources 51.67 48.3319.23 -31.97 -0.11

-0.0353.3346.67-36.3522.86


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-37.5

-30.0

-22.5

-15.0

-7.5

0.0



Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

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01 02 03 04 05 06 07 08 09 10 11 12

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Key Insights

The fund’s strategy places emphasis on finding reasonably valued stocks (in relative terms) where expectations of future profits are being revised upwards. Earnings revision is a key variable to constructing this fund. At the onset of the investment process, a view is taken on the prospects of all commodity prices. Bottom-up valuation allows the team to identify companies with strong corporate strategies and the quality of operations. The fund managers display little attachment to stocks if they feel the earning potential of a particular equity is deteriorating, despite its current valuation.

Fund Use

The Investec Commodity Fund is a resource specialist equity fund. It can be utilised as a resource component in a building-block approach to constructing a diversified equity model portfolio which also looks to express a view on the industrial sector. Resource counters include mining, minerals, energy, natural resources and other commodity stocks. The fund can also be used to construct various other risk profiled model portfolios. However, it is important to be cognisant of the risks associated with an investment’s exposure to a single sector.


Daniel Sacks has been managing the fund since 2002 while Hanré Rossouw joined as co-manager in 2013. Hanré covers precious metals, frontier and emerging market resources within the Investec commodities and resources team. Prior to joining Investec in 2013, Hanré was the Chief Financial Officer of Xstrata Alloys overseeing Xstrata Plc’s chrome and platinum interests in South Africa. Sacks’ strong economic background may be seen as an added advantage in the valuation process. The combination of expertise in investment banking, economics, and commodity industry and portfolio management enables the team to take advantage of unique investment opportunities. Fundamental to the investment process is core valuation measures which are calculated and the output from the valuation model used to identify future upgrades or downgrades in earnings. The portfolio managers also leverage off the strong investment capabilities of the Investec equity team. They are directly supported by Unathi Loos who is a portfolio manager with co-portfolio management responsibilities for the South African resources strategy as well as the small-cap strategy, within the global 4Factor equity team. She is also responsible for the analysis of the South African listed chemicals and other general small-caps companies.


The fund consistently has outperformed its benchmark on a risk-adjusted basis over the long term, based on five-year rolling excess returns and alpha. The fund has also delivered consistent long-term risk-adjusted returns above those of peers based on a five-year rolling peer group average Sharpe ratio. The fund experienced larger drawdowns compared to peers, more so between 2008 and 2013. However, these drawdowns were still better than the benchmark. The fund also offers the lowest downside risk over the long and medium term amongst all its peers, which is significant due to the volatility associated with the resources and commodities sector.


The fund invests mainly in commodity equities alongside a very thin exposure to cash. The commodity universe is broken down into chemicals and basic resources, with the latter accounting for 85% of the fund holdings while the former holds the remainder of the shares coupled with an insignificant cash holding. Basic resources are further composed of forestry and paper; industrial metals; general mining; platinum and precious metals; and coal, with the highest exposure to general mining; gold mining; and platinum and precious metals. On an overall portfolio level, for the year 2017, the Investec Commodity recorded lacklustre returns (+10.13%) relative to the Resource 10 benchmark (+16.77%) and the ASISA category average (+16.67%). The fund fared poorly from a risk perspective, posting higher volatility (24.86%) relative to benchmark (22.96%) and the category average (16.34%) compared to greater drawndowns (-17.80) than the benchmark (-13.34) and the category average (-6.86). The fund also recorded a lower return-per-unit-of-risk (0.23) relative to benchmark (0.49) and category average (0.62). On Over a longer time horizon (3 years), the fund posted a sterling performance (+8.51%) relative to the benchmark (-1.42%) and category average (+8.23%), and also fared well on risk by recording better volatility (25.15%) compared to the benchmark (26.21%) while the category average recorded a much better volatility (18.98) and drawdown (-20.57). On a quarter-to-quarter basis, the Investec Commodity Fund underperfomed (+13.69%) its benchmark (+17.69%) in the third quarter while slightly outperforming the industry category average (12.37%). However the fourth quarter was positive as the fund outperformed (+4.87%) both the benchmark (+3.65%) and the category average (3.04%) on an annual basis. The third quarter underperfomance can be explained, at a sector level, by a negative active weight exposure on general mining, which led to the foregoing of returns that could potentially have been earned as that sub-sector contributed substantially towards overall portfolio returns. While the coal industry showed compelling returns in the fund, due to its very low holdings position, its impact was halted. On a stock level, returns on the third quarter were driven largely by ARM, Glencore, and South 32 while Impala Platinum and BHP Billiton shed the most value. Anglo American, Sasol and Mondi constitute the largerst individual holdings in the fund. However, perfomances of Sasol and Mondi were meagrely positive with Anglo American taking a slide. While the fund outperformed the benchmark in the fourth quarter, the portfolio’s underweight position towards bulk commodities detracted from performance over the quarter. General mining continued to occupy the highest weighting position in the fund and outperformed benchmark returns at a sector level. Forestry and paper dipped over the last quarter of 2017 but the downturn was made less severe by the negative active weight position.


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Oil & Gas

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Additional

INVESTEC COMMODITY

Fund manager Daniel Sacks and Hanré Rossouw Consistency (No. of quarters) 46

Benchmark FTSE/JSE Resources 10 Risk Description Aggressive

Role of Benchmark Benchmark - Agnostic Inception Date 01 February 1995

Return Focus Relative Fund Size (Rm) R 375

Philosophy Relative value with earnings revision focus Fee Description (retail class) Annual management fee


Category SA Equity Specialist - Resources Regulation No


GLOBAL - EQUITY - GENERAL

Category Analyst: Jan Vlok

These portfolios invest in selected shares from equity markets across the globe. They do not subscribe to a particular theme or investment style and will be invested across all market sectors, as well as across the range of large-, mid- and smaller- cap shares. The portfolios offermedium to long-term growth as their primary investment objective. A minimum of 80% of the market value of the portfolio is invested in equities.

Shopping List selection: Investec Worldwide Equity Feeder Fund, Nedgroup Investments Global Equity Feeder Fund, Old Mutual Global Equity Fund, Glacier Global Stock Feeder Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0 21.0

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10.0

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Investec Worldwide Equity FF B Nedgroup Inv Global Equity FF A Old Mutual Global Equity A

Glacier Global Stock FF (ASISA) Global EQ General

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Quartile Ranking

As of Date: 31/12/2017


0.0

2.5

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12.5

15.017.5

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22.5

25.0



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Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Investec Worldwide Equity FF BNedgroup Inv Global Equity FF AOld Mutual Global Equity AGlacier Global Stock FF(ASISA) Global EQ General

15.9215.2615.73

60.00 40.00-12.7915.00

-13.59-14.76-13.66

61.6768.3368.33

38.3331.6731.67

0.680.82

1.1114.60 -9.16 65.00 35.00 0.95

0.73

Returns



Investec Worldwide Equity FF B

Nedgroup Inv Global Equity FF A

Old Mutual Global Equity A

Glacier Global Stock FF

(ASISA) Global EQ General 9.74 9.74 9.47 17.43 17.43

12.14 12.14

10.08 10.08

12.21 12.21

8.44

10.85

12.94

17.36 17.36

18.93 18.93

23.99 23.99

8.82 8.82 10.62 20.43 20.43


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-15.0

-12.5

-10.0

-7.5

-5.0

-2.5

0.0




Time Period: 01/01/2011 to 31/12/2017


2014

01 02 03 04 05 06 07 08 09 10 11 12

2015

01 02 03 04 05 06 07 08 09 10 11 12

2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

-20.0

0.0

20.0

40.0

60.0



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Key Insights

The Glacier Global Stock Feeder Fund is a rand-denominated fund and invests directly into the Dodge & Cox Global Stock Fund (USD class). Dodge & Cox is one of the largest and most experienced money management firms in the world. The three qualitative factors that stand out are the size, experience and stability of the investment team; the rigour of the investment process; and the independence of the firm and active employee ownership. The fund is managed on an absolute basis, targeting superior long-term returns. Although the benchmark is the MSCI World Index, the fund typically tends to have significant emerging markets exposure relative to the benchmark, which speaks to their absolute focus. The fund is moderately concentrated, typically holding around 80-90 stocks in the portfolio. The fund will, under normal circumstances, consist of at least 40% non-US securities.

Fund Use

The Glacier Global Stock Feeder Fund is suitable for investors seeking absolute return-focused, global equity exposure across both developed and emerging markets. The fund can be used to achieve additional global exposure in a multi-asset portfolio or as the global equity carve-out in a building-block portfolio.


Dodge & Cox was established in 1930. The team is led by very experienced investment professionals with an average tenure of more than 20 years. The investment team consists of more than 70 individuals. The size of the team allows for greater coverage and identification of investment ideas. To ensure that all ideas are shared and discussed, Dodge & Cox has created sector committees where analysts are given the opportunity to present their best ideas. These are then ‘escalated’ to policy committees by sector committee leaders, who are senior investment team members themselves. Decisionmaking at Dodge & Cox is ultimately the responsibility of five policy committee teams. The rigour and discipline of the investment process is definitely a qualitative highlight of the Global Stock Fund. The process is clear and defined. All stocks go through individual analyst assessments, a team-based review, (called sector committee meetings), and a collective judgement-based review (called the policy committee) by the most experienced investment team members. The standout attributes are that the company is completely investment-focused, independent and wholly-owned by active employees. The team, therefore, only focuses on generating the best possible returns and is not distracted by fund inflows or generating performance fees.


*Please note that the returns highlighted below reflect the performance and risk metrics of the Dodge & Cox Global Stock Fund, translated into rand-denominated figures. The Glacier Global Stock Feeder Fund will aim to be fully invested in the fund, within the allowed CICSA constraints.The fund has managed to beat its benchmark on an annualised basis since inception on 1 December 2009, as well as over-static periods of year-to-date and longer. The fund also has managed to produce returns in excess of the category average, consequently maintaining top-quartile performance for annualised performance since inception. On a rolling five-year basis, the fund has maintained top quartile performance since inception, with the exception of the Q2 performance during the period January to July 2011. On the same five-year rolling basis, the fund has outperformed the Global Equity category average 96% of the time since inception and the MSCI World Index 100% of the time since November 2011. Although the fund had larger drawdowns and volatility in its earlier years, it has compensated for this by maintaining top-quartile risk-adjusted performance on both an annualised and rolling five-year basis since inception. Consequently, the fund produced superior risk-adjusted returns relative to the category 100% of the time since inception.


The fund produced a below-average return of -4.51% over the last quarter of 2017, consequently underperforming both the category average and the MSCI World NR index by -1.09% and -1.24% respectively. Since the fund was only launched on 9 February 2017, there is no calendar year figure available, but since its full calendar month (March 2017), the fund has delivered 5.9% as opposed to the category average performance of 9.3% over the same period. The underperformance can be attributed to the fact that value underperformed growth in 2017, where the former is more the style of the fund, with performance generally more correlated to that of value. The fund feeds into the Dodge & Cox Global Stock Fund, which returned 14.1% (USD). Over this period, the rand appreciated by 5%, which hurt the local performance figure. Over this period the fund’s energy holdings were down compared to a positive index return for the sector, underpinned by Apache (-18.42%) and Anadarko (-16.69%). Another relative detractor was the underweight (-6%) allocation to the well-performing industrials sector (+25%) as well as key communications stocks, Altice (-50.35%) and Sprint (-33.14%), which experienced significant drawdowns. Key stock picks, Naspers (+74.31%), Alnylam Pharmaceuticals (+146.03%) and JD.com (+35.49%) contributed positively over this period. Overall, the strong performance of US growth over value stocks, with the former outperforming the latter by 16.5% during 2017, had the over-arching negative impact on the fund’s performance. For these reasons the fund is underweight richly-valued US equities versus international stocks, which trade at 20 times forward price-to-earnings ratio (PE), compared to the fund’s PE of 15.5. The fund also remains a significant investor in more attractive emerging market stocks, currently 17.3% of fund assets. When looking at portfolio composition, main changes include a -1.2% trimming in information technology stocks subsequent to strong runs, as well as a -0.2% reduction in financials. Proceeds were redeployed to select healthcare stocks including, Eli Lilly, GlaxoSmithKline and Medtronic as well as energy counters, Suncor and Occidental Petroleum. A notable change in asset allocation was a 1.5% increase in cash levels, indicative of a richly-valued equities environment.


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Consumer Discretionary

GLACIER GLOBAL STOCK FEEDER

Fund manager Dodge & Cox Investments Consistency (No. of quarters) 5

Benchmark MSCI World Risk Description Aggressive

Role of Benchmark Benchmark - Agnostic Inception Date 07 February 2017

Return Focus Relative Fund Size (Rm) R160

Philosophy Bottom-up, valuation-based Fee Description (retail class) Annual management fee

Glacier Risk Rating 9.99 Total Investment Charge 1.60% (pro-forma)

Category Global Equity General Regulation No


INVESTEC WORLDWIDE EQUITY FEEDER

Fund manager Global 4Factor Team Consistency (No. of quarters) 54

Benchmark MSCI AC World NR Index Risk Description Aggressive

Role of Benchmark Cognisant Inception Date 01 March 1995


Philosophy Bottom-up research, style-agnostic Fee Description (retail class) Annual management fee



Key Insights

The Investec Worldwide Equity Feeder Fund is more benchmark-cognisant when compared to its Shopping List peers. The team conducts a rigid quantitative screening model and therefore may miss out on good investment opportunities where the scoring falls below the required 11. There is a big focus on quantitative screening and modelling risk. The fund targets a maximum tracking error of 7% against its benchmark. The addition of Rynhardt Roodt, previously of the SA equity team, to the UK-based team, is perceived to be positive. However, the development will be closely monitored.

Fund Use

The Investec Worldwide Equity Feeder Fund is suitable for building-block portfolios for offshore equity exposure, if the investor is looking for more of a benchmark-cognisant, relative, focused, global equity carve-out. The fund can be used in numerous risk-profiled portfolios.


The fund feeds directly into the Investec Worldwide Equity Fund managed by the Global 4Factor team led by James Hand. Until 30 November 2015, it fed into the Investec GSF Global Equity Fund. Both funds follow the same philosophy and process, but the Investec Worldwide Equity Fund focuses on larger, more tradeable stocks. It is also a more concentrated portfolio with approximately 80 securities compared to the historical average of 100-120 securities held in the Investec Global Equity Fund. This has resulted in a marginally higher return target (increased from 2-3% to 3%), without materially increasing risk. The team comprises two members in the analytics team, eight other strategy leaders and 12 global analysts. Each analyst is responsible for share selection within each of the super-sectors globally and the analytics team is responsible for maintaining the 4Factor quantitative screening model. The 4Factor strategy employed is based on the premise that over time, share prices are driven by four key attributes: strategy, value, earnings and technicals (supply and demand dynamics). Strategy aims to identify companies that create wealth for their shareholders by increasing cash flows. Value focuses on companies which are trading at a discount relative to their fair value. Earnings revisions, specifically upward revisions, coupled with investors’ over- or under-reactions to new information, are an indication that this positive trend will continue. When looking at technical aspects, specific attention is paid to trends regarding sentiment towards a share, i.e. share price trends. These four factors combine the best of traditional and behavioural finance theory. They follow an extremely structured investment process. They use their proprietary stock-scoring tool that applies the four factors in order to identify high-quality companies with attractive valuation, improving operating performance and a rising share price relative to the market. Each factor is given a possible score of four and a share can thus score a maximum of 16. Shares with a score above 11 are considered as potential ideas for inclusion and are researched further. After initial screening, the highly-skilled analysts are responsible for the qualitative and fundamental research on the stocks selected and have the final say in the portfolio construction. There is careful consideration given to the risk each stock will bring to the entire portfolio. Diversification is achieved by looking at correlations and the beta of the portfolio. A very strong sell-discipline is maintained and once a stock reaches fundamental value or the score falls below ten, a meeting is held to discuss the investment case. The default is to sell. However, portfolio managers will have the final decision. Following a broader company trend of investment teams becoming globally integrated, the SA Equity & Multi-Asset (SAE&MA) team has become part of the global 4Factor team. Consequently, former co-head of SAE&MA, Rhynhardt Roodt, has been promoted to co-head and co-portfolio manager of the 4Factor team, relocating to the UK. This development is not expected to result in any changes seeing as these team leaders have been working closely together for a number of years, but a keen eye will be kept on how it plays out. In light of the addition, James Hand will relinquish his role as co-head and assume a role in the CIO office focusing on research but on a reduced time-basis.


The fund delivered above-average, five-year rolling returns 99% of the time since the five-year period ending mid-2004, and 86% of the time since inception, with slightly higher volatility than peers. The added volatility has been compensated for, in that the fund has managed to deliver above-category average, risk-adjusted returns over the same period and 90% of the time since inception. Over longer periods the fund has also achieved this by observing lower drawdowns than peers. During the financial crisis, the fund experienced slightly lower drawdowns (-34.6%) than both the category average (-35.5%) and the MSCI ACWI (-35.5%), as well as delivering a better drawdown profile compared to peers 80% of the time since inception. The fund has, for periods longer than three years, managed to outperform the category average, maintaining first or second quartile performance over these periods and has marginally underperformed the MSCI All Country World Index since inception of the fund. Of all the Shopping List funds, this one exhibits the highest beta since inception, as a benchmark-cognisant fund should.


The fund delivered a relatively strong return of -2.75% over the last quarter of the year, outperforming both the category average and passive alternative, the MSCI World NR Index, by 0.67% and 0.52%, respectively. The solid quarterly performance ensured a calendar year return figure of 13.10%, the second-best performer amongst Shopping List peers, and yet again ahead of both the category average and passive alternative, by 3.37% and 2.29%, respectively. Notable changes in portfolio composition over the course of the quarter, were firstly a 1.5% increase in technology stocks, highlighted by the top two holdings in the fund, Microsoft and Alphabet, with the latter contributing most to the fund’s quarterly performance, by adding 15.42% over this period. Secondly, the fund increased energy exposure by 0.6% through purchases of oil counter Royal Dutch Shell on an attractive, fully-covered, dividend yield as well as the combination of a pipeline of projects and large scale divestments and cost reductions that potentially will improve returns and cash flows going forward. Within the sector, National Grid (-2.86%) detracted, while Valero Energy (+20.49%) eliminated any negative effects. Thirdly, consumer goods & services exposure decreased by 1.9% over the quarter with beverage companies Pernod Ricard (+15.47%) and Asahi (+23.45%) contributing to performance, whilst online eBay (-1.87%) and Priceline (-5.08%) detracted. Finally, financials remain the most represented sector in the portfolio at 25.6%, marginally down from the previous quarter, through selling of SunTrust Banks due to earnings upgrades coming to a halt and valuation becoming fair in the managers’ view. However, the holdings are quite diversified, with only Citigroup appearing in the top ten stock exposures at 1.9%, with significant contributions coming from the sector, especially Bank of America (+16.99%), AIA Group (+15.61%) and DBS Group (+21.28%), which all benefitted from interest rate hikes being priced in, whilst BNP Paribas (-7.36%) detracted. The managers feel that the portfolio will benefit from the value factor at the latter end of the bull run, which remains cheap despite experiencing positive earnings revisions.


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Telecommunications

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Other

Oil & Gas (Energy)

Industrials

Health Care

Financials


Key Insights

This is a very concentrated portfolio that typically will hold between 25 and 40 stocks. The managers follow a strong absolute-return mindset – absolute, and not relative valuations are considered. This fund can also have a large allocation to cash (tactical holding of a 20% maximum) if the portfolio manager cannot find enough attractive investment opportunities. This also speaks to their absolute return-focus. They will not just be invested fully because it’s an equity fund. Historically, the cash component has been held in a deposit account, but the team is working on a project to earn a better yield on these assets through money market accounts. They follow a very structured investment process that screens out stocks with a market cap less than $3bn, primarily for liquidity reasons. Relative to the Investec fund which only screens out below $1bn, this fund may miss out on some investment opportunities in the small-cap space. Global equity mandates are one of the key strategies that the company focuses on and comprises 95% of AUM. Managers’ interests are aligned in that they invest in their own funds alongside those of clients’. The appointment of Ian Barnes as CEO, alleviates some operational responsibility from the senior investment team members, which shows their true investment focus.

Fund Use

The Nedgroup Global Equity Feeder Fund is suitable for building-block portfolios (for offshore equity exposure), if the investor is looking for more of a concentrated absolute-return focus, global equity carve-out. The fund primarily invests in developed market equity, with little emerging market exposure. Therefore, the fund can be used in numerous risk-profiled portfolios seeking global developed market exposure.


Veritas was established in 2003 with a philosophy focusing on real returns. Their two-pronged strategy encompasses global equity and Asian equity mandates. In partnership with their clients, they align their interest as owners by investing in their own funds alongside those of their clients and on the same terms, i.e. the same fee classes. Andy Headley, the fund manager, ultimately is responsible for the global strategy. The co-manager is Charles Richardson. There are six career analysts who focus on specific sectors. Theme generation drives the majority of their stock ideas. Themes, more often than not, have a macroeconomic backdrop. So it is fair to say that the idea-generation process is a combination of top-down and bottom-up factors. However, stock selection ultimately drives performance attribution. They follow a very structured investment process with the aim of identifying quality companies, i.e. companies with competitive advantage coupled with high barriers to entry, cash generative abilities and a business model that is not easy to replicate. Ideas are generated by identifying themes, using proprietary insights and quantitative screening. The valuation process focuses on the company’s ability to generate cash for shareholders. These cash flows are modelled and discounted at a constant rate of 10% so that a value (the internal rate of return) of the company over a five-year investment horizon is established. Their aim is to buy stocks that generate a 15% total return (IRR) over that timeframe. Protection of capital is of primary importance to Veritas when constructing portfolios, which are constructed independently of benchmark (no tracking error target) or peers. This results in a concentrated portfolio of between 25-40 stocks with any individual counter carrying a maximum weight of 8%, any sector a maximum of 30% and any regional exposure is kept to a maximum of 40%. A strict sell discipline is maintained and a share will be sold when there is either a qualitative thesis breach or it reaches its five-year intrinsic value, or the transitional terminal value (terminal value discounted at 7%) is reached during the five-year time horizon. Veritas recently appointed CEO, Ian Barnes, so that the senior investment team members can focus solely on investment management, without being responsible for operational issues.


On a rolling five-year basis, since inception, the fund has outperformed the Global Equity General category on average 75% of the time. When comparing performance over a rolling three-year basis, the fund outperforms peers 80% of the time. However, since February 2009, on the same rolling basis, the fund has outperformed peers 100% of the time. On a static basis, the fund has outperformed the peers over one, three, five, seven and ten-year periods, whilst maintaining first or second quartile positions throughout. Consequently, the fund has a higher average monthly return versus the peer average. A notable fact is that the fund has managed this whilst maintaining the lowest equity exposure amongst Shopping List peers. Over rolling five-year periods, the fund has exhibited more volatility than peers 95% of the time due to the concentrated nature of the fund, but has compensated for this by maintaining superior risk-adjusted returns 90% of the time and consistently since February 2009. However, since inception, the fund has exhibited lower volatility versus its benchmark. During the 2008-2009 period, the fund experienced greater drawdowns (-39.5%) than both the category average (-35.5%) and the MSCI ACWI (-35.5%), but since May 2010, has managed lower down-period percentage and drawdowns versus its Shopping List peers.


The fund produced a paltry return of -6.30% during the fourth quarter of 2017, vastly underperforming both the category average and MSCI World NR Index, which delivered -3.42% and -3.27% respectively. The quarterly underperformance was driven by a number of short-term stock specific concerns, rather than long-term trends as well as the strong rally in the rand, which effected all the funds in the category. However, the fund produced a satisfactory return of 10.08% for the calendar year, equating to slight outperformance of the category average (+9.73%), though slightly underperforming the passive alternative (+10.81%). The fund’s composition has remained largely unchanged, given the long-term holdings of select quality companies, as the portfolio remains largely invested in healthcare, information technology and industrial stocks and from a regional perspective, underweight US and Europe and overweight UK and Asia Pacific. Over the course of the quarter, information technology stocks contributed most to performance, highlighted by Qualcomm (+24.52%), which surged on Broadcom’s rejected $103 billion dollar bid to acquire the telecoms equipment and semiconductor company, which would be the largest tech acquisition ever. Other tech counters, Microsoft (+15.42%) and Alphabet (+8.18%) contributed, whilst Baidu (-5.44%) and Check Point Software Technologies (-9.12%) detracted. Healthcare stocks also contributed on a relative basis, with Express Scripts (+17.88%) and UnitedHealth (+12.94%) doing well, whilst Allergan (-19.87%) declined on an unfavourable court ruling regarding the company’s billion dollar eye medication and CVS Health (-10.26%) fell following news that they were to acquire health insurance company, Aetna. The biggest detractor during the quarter, however, was Capita (-26.97%) which shed value on warnings of a subdued market despite winning several high profile contracts and initiating a turnaround plan and a new CEO. The portfolio managers feel these companies have shed value on short-term trends and that future prospects remain promising for the portfolio. Hence, they have added to select existing positions, as finding reasonably-priced, quality companies in the current richly-valued environment is difficult, which explains the high cash (13.7%) position in the portfolio.


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NEDGROUP INVESTMENT GLOBAL EQUITY FEEDER

Fund manager Veritas Asset Management LLP Consistency (No. of quarters) 16

Benchmark ASISA Global Equity General mean Risk Description Aggressive

Role of Benchmark Benchmark - Agnostic Inception Date 01 October 2001


PhilosophyStyle-agnostic, top-down, bottom-up, valuation-driven

approach, with a big focus on quality and absolute returns

Fee Description (retail class) Annual management fee of feeder is 0%; fee charged in the offshore fund




OLD MUTUAL GLOBAL EQUITY FEEDER

Fund manager Ian Heslop, Amadeo Alentorn and Mike Servent Consistency (No. of quarters) 6

Benchmark MSCI AC World NR Index Risk Description Aggressive

Role of Benchmark Cognisant Inception Date 17 May 1995


Philosophy Quantitative, valuation-driven Fee Description (retail class) Annual management fee



Key Insights

This team has a unique systematic approach to managing the fund. All research efforts by the team are focused on enhancing the model used to select stocks and rebalance the portfolio. The fund previously has had up to 40% of the exposure in off-benchmark stocks with a maximum holding in each of these stocks of up to 0.5%. Off-benchmark stocks are chosen from the same regions and countries that the benchmark positions come from. The fund exhibits, on average, an 88% similarity with its benchmark from a sector perspective. The fund’s investment process is built around five key factors: dynamic valuation or quality; sustainable growth; analyst sentiment; company management; and market dynamics. These factors are implemented independently, bolstering diversification within the portfolio. Key to weighting these different factors in determining a score on a security level is determining the market environment, i.e. the risk environment and market sentiment. The fund is very active, characterised by a high weekly turnover. However, trading is managed as part of their model and costs on a very conservative basis. The fund’s unique process has positioned it ideally to take advantage and compete with a proliferation of high frequency and algorithm trading strategies. The introduction of an ESG factor into their quantitative model is a new development in their investment process, affecting company valuations and thus decisions.

Fund Use

The Old Mutual Global Equity Fund is suitable for investors seeking a broad-based, diversified exposure to developed global market equities. The fund is ideal for investors with a long-term time horizon, who are able to stomach short-term volatility and drawdowns. The fund can be used as a single, standalone fund offering global equity exposure as part of a wider diversified portfolio or it can be used in conjunction with other global equity managers. Managers that follow a more concentrated fundamental approach or pure top-down macro approach would work equally well in conjunction with this fund.


The Old Mutual Global Equity Fund is managed by the Old Mutual Global Investor’s Global Equity team. Ian Heslop has been managing the fund since 2004, and he is supported by two other fund managers, Amadeo Alentorn and Mike Servent. The team leverages off external research provided by an academic advisory board who are experts in the accounting, mathematics and statistics fields of study. All investment ideas are generated within the team, but the academic board will do the preliminary research, present on current investment topics and produce reports of interest to the team to evolve their ideas. This assists the team to gauge different views on how markets misprice, and to identify stocks that are mispriced. Exposure to benchmark stocks are weighted and have stock, sector and country limits. The four major regions that the fund is spread across are plotted on a risk (realised volatility and unpredictability of the future) versus sentiment (pessimism or optimism) graph on a daily basis. This is so that current conditions and outlooks are incorporated into the model at all times. There are five criteria which cover quantitative and qualitative measures: dynamic valuation; sustainable growth; analyst sentiment; company management and market dynamics. These criteria are implemented to be as uncorrelated as possible, allowing the components to work independently of one another, thereby increasing diversification. These five stock selection criteria are combined to produce a single balanced forecasted return for each stock in the universe. Stock return forecasts are used in an optimisation process to construct the most efficient portfolio. Stock selection weights are driven by styles which dominate under current market conditions. Ultimately, the model will produce a portfolio which is not concentrated, resulting in potentially lower volatility, smoother long-term returns and good diversification. A recent addition to their process is an ESG overlay, given the company-wide focus, but also due to the fact that ESG adds to alpha over time. ESG considerations now have been added to the quantitative model, applicable on every level of valuations.


On a rolling five-year basis, since inception, the fund has delivered returns in excess of the Global Equity General category on average 88% of the time. However, since March 2006, on the same five-year rolling basis, the fund has outperformed peers 100% of the time. The fund consequently outperformed its benchmark, the MSCI World Index, over static 1-, 3-, 5- , 7- and 10-year periods, subsequently maintaining a top quartile position over all these periods and indicating the consistent long-term performance over different cycles. The fund also boasts an impressive average rolling one-year return of 15.4% since inception. It also has typically displayed a higher volatility profile, as measured by standard deviation, than the category average, as it only produced lower five-year volatility 2% of the time versus peers. Despite the higher volatility, the fund has produced superior, risk-adjusted returns 99% of the time over peers, indicating that the fund compensates investors well for the increased levels of volatility. The fund may experience higher levels of volatility and drawdown over shorter periods of time, but it is over longer periods where the fund’s quantitative performance characteristics really start to look impressive. Since July 2010, however, the fund has exhibited better drawdown than peers 92% of the time.


The fund delivered a negative performance of -2.75% over the final quarter of 2017. However, it finished the year up 12.21%, outperforming the MSCI World NR that delivered 10.81% over the same period. Over longer more meaningful periods, the fund has been compounding annualised excess returns above 3% versus its benchmark, creating meaningful long-term growth. In terms of fund positioning the fund had a 56% exposure to North America (USA & Canada), a 15.6% to European equity, a 9.1% exposure to UK equity, with a 8.3% exposure to Japanese equity. When compared to the benchmark, these weights imply slight underweight positions in terms of US equities (59%), Japanese equities (8.95%), with an overweight position towards UK equities, constituting 6.63% of the MSCI World benchmark. In terms of these regions, the fund’s proprietary models viewed most regions as a balance between risk-on and risk-off environment, with the exception of Asia Pacific that remained in a marginal risk-off mode. In terms of sector exposure, the fund was notable underweight the energy and financials sectors as well as telecommunications. Overweight positions included positions in the utilities, information technology and real estate sectors. However, it is important that the fund aims to resemble the index closely in terms of sector and geographic exposures and all the individual active positions constituted less than 4% on an absolute basis.


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Information Technology

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GLOBAL - REAL ESTATE - GENERAL


These portfolios invest in listed property shares, collective investment schemes in property and property loan stock and real estate investment trusts. The objective of these portfolios is to provide high levels of income and long-term capital appreciation. These portfolios invest at least 80% of the market value of the portfolio in real estate shares and may include other high-yielding securities from time to time. Up to 10% of a portfolio may be invested in shares outside the defined sectors in companies that conduct similar business activities as those in the defined sectors.

Shopping List selection: Catalyst Global Real Estate Prescient Feeder Fund


Time Period: 01/01/2013 to 31/12/2017

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Catalyst Glbl Real Estate Prescient FF A (ASISA) Global RE General

Re

turn

Quartile Ranking

As of Date: 31/12/2017


-7.5

-5.0

-2.50.0

2.5


5.0

7.5

10.012.5

15.017.5


Re

turn

Returns


YTD 1 year 2 Years 3 years 5 Years

Catalyst Glbl Real Estate Prescient FF A

(ASISA) Global RE General

13.645.56-7.420.08 0.08

0.96 0.96 -6.57 5.06 12.96

Risk Statistics

Time Period: 01/01/2013 to 31/12/2017

Std DevMax

Drawdown(monthly)

UpPeriod

Percent

DownPeriod

Percent

SharpeRatio

Catalyst Glbl Real Estate Prescient FF A

(ASISA) Global RE General

0.4838.3361.67-19.6014.98

13.73 -18.48 63.33 36.67 0.47


Time Period: 01/01/2013 to 31/12/2017

2013 2015 2017-20.0

-15.0

-10.0

-5.0

0.0



Time Period: 01/01/2013 to 31/12/2017


2016

01 02 03 04 05 06 07 08 09 10 11 12

2017

01 02 03 04 05 06 07 08 09 10 11 12

0.0

10.0

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40.0


Re

turn


Key Insights

The fund has a preference for real estate investing companies (as opposed to real estate developers), that derive at least 70% of their income from rent. Therefore, the fund is exposed to very few risks related to real estate development. The fund places an emphasis on more developed markets, as is evident by the adoption of its new benchmark, the FTSE EPRA/NAREIT Developed Rental Index Net Total Return, which consists of stocks in the following regions: United States, Canada, United Kingdom, Europe, Japan, Hong Kong, Singapore, Australia and New Zealand. Catalyst has a very strong team, and is a property-only investment house. Therefore, its approach is very specific and focused.

Fund Use

This fund is ideal for clients who wish to gain investment exposure to developed real estate globally, with a focus on investments that generate the majority of their income from rent. It is a benchmark-cognisant fund with active positions not exceeding 5%, although the manager does not target a specific tracking error. This fund is diversified over wide geographical regions, and the minimum investment term is three years. Currency risk is not always hedged, and investors should be aware of this as its performance in rand may display some increased volatility. This fund can be used in either a hybrid, risk-profiled, multi-asset portfolio or as a building block, in those instances where the investor requires a minimum percentage exposure to offshore property.


The investment team comprises seven individuals who are all property experts. Jonathan Kinnear joined the global team on 1 March 2017. Prior experience of the team includes the physical management of properties as well as the management of unlisted property portfolios. Great care is taken to understand property portfolios, with physical site visits forming a key part of the investment process. The fund is managed by André Stadler, who has 22 years’ industry experience and is also the head of the investment committee at Catalyst. He is supported on the global fund by Jamie Boyes (co-manager and responsible for portfolios in North-America and Europe), Paul Duncan (Asia) and three other analysts, focusing on the remaining portfolios. The team’s investment philosophy is very clear and focused, giving preference to developed markets, and investments that derive at least 70% of their income from rent. Their investment process is derived from years of experience and consistently is implemented across all investments.


The fund is a consistent top performer over five years and three years, with the recent underperformance as a result of rand strength, dampening the one-year figure. The fund has reflected volatility that is slightly higher than its peers, since its inception. Rolling periods reveal that the fund captures more upside when compared to the category average and peers. However, the fund changed its benchmark from 1 April 2015, which significantly altered its underlying holdings, and this might explain some of its current underperformance of the benchmark in US dollars. On a rolling three-year basis over the past ten years (as at 31 December 2017), the fund has outperformed the ASISA Global Real Estate category average up until Q4 where it dipped and started underperforming the category average.


The fund outperformed its benchmark and underperformed the category average for Q4 2017, returning 2.26% -3.77% in ZAR (4.654.96% in USD), while its benchmark returned -0.17% -4.99% in ZAR (+2.17% 3.63% in USD). For the year ending 31 December 2017, the fund underperformed outperformed its benchmark and underperformed the category average, returning -12.85% 0.30% in ZAR (-2.59% 10.79% in USD), while its benchmark returned -12.65% -0.98% in ZAR (-2.37 9.38% in USD). Due to the fact that the fund is a feeder fund, an important factor impacting a South African investor is the rand/dollar exchange rate, which leads to increased volatility. The rand strengthened in the last quarter of the year and this had an impact on most offshore funds. The fund’s single biggest geographical exposure is to North America, currently at 63.67% 66.83%, 1.89% lower than it was the previous quarter at 65.56%. marginally up from 65.94% in the previous quarter. Its second biggest geographical exposure is to Europe (excluding UK) which has marginally increased to 13.65% from 13.06% in the previous quarter. 1.21% from the 12.10% in at 12.10%, up from 12.01% in the previous quarter. The fund remains well diversified with industrial and office, residential and speciality sectors, collectively accounting for more than half the portfolio (54.62%). Despite slightly lower allocations this quarter, the retail sector and the residential sectors are still the most preferred sectors. The retail sector is preferred at 26.59% and 21.90%. 2017 was mainly characterised by mergers and acquisitions and structural changes. The fund’s biggest currency exposures are to the following: the USD 63.73% up from 62.12% in the previous quarter; EUR at 10.61%, marginally lower than Q3 which was at 10.13%; and the GBP is higher at 6.01% in comparison to the 5.74% previously. The Euro zone was the biggest regional contributor to performance, contributing 16.38% for the year. North America, the biggest currency exposure detracted -5.67% for the year which could have contributed to the low performance of the fund. The top annual detractors for the fund come from this region. The Asian region is currently allocated 10.57%, up from the 9.47% it was in the previous quarter. Singapore was the best-performing listed real estate market of 2017. The country was underweight in the portfolio allocation which detracted from regional returns. The last quarter of the year was characterised by the dollar weakening against most currencies, the dollar being the second weakest currency of 2017 in comparison to other major currencies. The industrial property sector did well which contributed to performance as it was supported by higher manufacturing demand in the US. The UK market is still affected by Brexit as it’s still navigating its exit from the European zone which has resulted in lower fundamentals. Despite this, demand for property has kept prices up and the weaker pound encouraged offshore investors (mainly from Asia) looking for prime offices.


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Speciality

Healthcare

Retail

Residential

Office

Industrial

Hotels

Diversified

CATALYST GLOBAL REAL ESTATE GENERAL

Fund manager André Stadler and Jamie Boyes Consistency (No. of quarters) 18

Benchmark FTSE EPRA/NAREIT Developed Rental Index Net Total Return Risk Description High

Role of Benchmark Cognisant Inception Date 01 July 2009

Return Focus Relative Fund Size (Rm) R848 047 739

Philosophy Long-term, valuation-driven with an emphasis on risk-adjusted returns Fee Description (retail class) Annual management fee


Category Global Real Esate General Regulation No

USER GUIDE

Performance and Quartile Rank

The quartile ranking table below includes both the total return and the associated quartile ranking for the specified period. Each marker represents a fund’s return and quartile ranking.

Asset Allocation

Quartile Ranking

As of Date: 31/03/2015

9.89.08.37.56.86.05.34.53.83.0

YTD

Old Mutual Income R Nedgroup Inv Core Income RSTANLIB Income R

1 year 3 years 5 years 10 years

Ret

urn


The asset/sector allocation of the fund is indicated for funds that have exposure to different asset classes/sectors (e.g. Flexible, Equity General). “Current” indicates the latest allocation as at 31 December 2015. The previous quarter’s allocation is shown as one quarter ago and asset allocation goes back three quarters.

Fund Size (Rm)

The market value of assets under management at time of publishing the Shopping List.

Glacier Consistency Rating

The Glacier Consistency Rating is an indication of the number of consecutive times a fund has appeared on the Shopping List. Should a fund be removed from the list and subsequently reinstated, the consistency history will no longer be applicable.

12 Month Yield (%)

This figure refers to the yield of the fund for the previous year. It is calculated by dividing the total distributions for the past year by the fund price at the beginning of the period. This gives an indication of the yield received by an investor for the previous one-year period. One must remember that annual management company fees (as indicated by the TER) are deducted before distributions are paid and therefore the yield may be lower than expected. This is especially applicable in the case of funds with performance fees.

Modified Duration

Duration is a useful measure of the sensitivity of a bond or income fund to changes in interest rates. For example, if a fund has a modified duration of 3.5 years, for every 1% drop in interest rate, the capital portion of the fund will grow by 3.5% and vice versa.

Total Investment Charge (TIC)

Total investment charge is the sum of total expense ratio (TER) and transaction costs (TC) (TER+TC).

TER

TER indicates the percentage of the net asset value (NAV) that was paid as expenses within the fund. This includes performance fees charged by the fund manager. It is also valuable when comparing fees on funds of funds as it includes the fees of the underlying funds. As far as possible, the latest available TER is indicated.

TC

TC is the cost incurred in the buying and selling administration of the fund and impacts on the fund’s returns.

Risk Analysis

A risk rating of between 0 and 10 has been assigned to every fund, illustrating the level of risk associated with the fund. The table indicates the corresponding risk level for each rating.

0 – 2 conservative 2 – 4 cautious 4 – 6 moderate 6 – 8 moderately aggressive 8 – 10 aggressive

In determining the risk rating for each fund we use downside volatility, variability of returns and sector/asset class risk of the fund over one-, three- and five-year periods, where available.

Downside volatility, measured by downside deviation, measures the variation of the fund’s return below the risk-free rate of return. Variability of returns, measured by annualised standard deviation, measures the variation of a fund’s returns around its mean. Sector/Asset class risk, measured by a classification from one to ten calculated for each collective investment sector, measures the underlying risk associated with investing in different sectors.

Maximum Drawdown The maximum monthly drawdown in the period is given. This indicates the maximum monthly capital loss experienced within the time period used.

Positive/Negative Months

This indicates the number of monthly periods during which the fund generated a positive/negative return.

Sharpe Ratio

This indicates the excess return generated per unit of risk. A fund’s Sharpe ratio should be compared to that of its peers – a higher ratio means the fund generated higher risk-adjusted returns. This could be due to either higher returns or lower volatility, or a combination of the two.

Rolling Returns Chart

Rolling one-year/three-year returns are shown to illustrate the performance of funds over moving periods (to remove end-point bias). Each point on the chart represents the fund’s one-year/three-year return up to that point. Monthly data points were used for the past 5 years.

Investor Risk Profiles

A conservative investor requires stable investment growth or a high level of income. The primary investment goal is capital protection. This investor may require access to the investment within three years.

A cautious investor requires stable growth in his/her investment and is uncomfortable when investment values decline. The investor may require a moderate level of income and is likely to have an investment horizon of at least three years. The primary investment goal is capital protection.

A moderate investor invests for the longer term (at least five years) and requires no income. The investor can tolerate fluctuations in the value of his or her investments from time to time. The primary investment goal is capital growth.

A moderately aggressive investor invests for the long term (at least seven years) and requires no income. Typically, this investor is prepared to accept more risk than a moderate investor, but does not want full exposure to equities. The primary investment goal is capital growth.

An aggressive investor invests for the long term (at least ten years) and seeks the highest possible growth. Typically, the investor is prepared to accept substantial fluctuation in the value of his or her investment. The primary investment goal is long-term capital growth.

Source: Morningstar Direct

GLACIER FINANCIAL SOLUTIONS (PTY) LTD IS A LICENSED FINANCIAL SERVICES PROVIDER

Contact Glacier ResearchThis document is intended for use by intermediaries. It is importatnt to bear in mind that any investment has some risk. For more information visit our website at www.glacier.co.za or contact our Communication Centre on:

Tel: +27 21 917 9603Fax: +27 21 947 9210Email: [email protected]

the shopping list by glacier research · 2020. 8. 6. · darren is a cfa charterholder and holds a...

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