news+insightsintelligenceQ1 2015

02Events that moved the market Stocks sprint

06 Serious about saving Tax-free boost for investing

08 Budget basics How will it affect investments?

Nuanceof thedanceMaintaining the delicate balance between state and investor

Cost of capital

02 News and insights from Sanlam Investments

Events that moved the market

Stocks sprint despite global unrest

Q1

15 Jan International Monetary Fund

head, Christine Lagarde, sees lower oil prices as a boost, but warns the

globe is ‘weak on its knees’. Source: Reuters

3 Jan Boko Haram blazes the town of Baga in nigeria, leaving up to 2 000 dead.Source: BBC News Africa

22 Jan The €1.1 trillion stimulus programme announced by European Central Bank president Mario Draghi surprises on the upside.Source: The Telegraph

10 FEB Strikes hurt 2014 manufacturing production, which is flat after four years of positive growth.Source: Statistics South Africa

10 FEB US data reveals more than five million job openings by end 2014, the highest level since 2001.Source: Job Openings and Labour

Turnover Survey

26 Jan anti-austerity leftist party, Syriza, wins the Greek elections. Source: The Wall Street

Journal

15 Jan The Swiss national Bank

shocks world markets by removing the Swiss

franc/euro peg.Source: Forbes

4 FEB Jordan declares war

against Isis after the horrific execution of Jordanian pilot

Muath al-Kaseasbeh.Source: The Independent.co.uk

5 FEB Sa electricity production

in decline after peaking in 2011. Imported electricity

up nearly 19% in 2014.Source: Statistics South Africa

7 FEB Nigeria postpones its

elections by six weeks, faced with poll disruptions

by Boko Haram.Source: The Economist

17 Jan Japan pledges $200 million

in non-military aid for the fight against the Islamic

State in Iraq and Syria (Isis).Source: Reuters

9 Jan Paris under siege in extremist hostage drama, leaving several civilians dead.Source: BBC News Europe

03Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel

24 FEB The FTSE/JSE all Share Index breaks through the 53 400 level for the first time.Source: www.moneyweb.co.za

3 Mar Deputy Governor Daniel Mminele signals that SarB will keep rates on hold for a while.Source: SA Reserve Bank

4 Mar The euro hits an 11-year low as investors wait for details on ECB’s bond-buying programme.Source: Reuters

25 FEB among other tax raises, nene increases total fuel tax by 80.5c per litre, putting pressure on headline inflation.Source: National Treasury

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24 FEB SA Gross Domestic Product grows by 1.5% in 2014, down from 2.2% in 2013.Source: Statistics South

Africa

17 FEB SA stocks shoot to

record high of 53 153, but closes the day slightly lower.

Source: Reuters

19 FEB China starts celebrating the

Lunar new Year, spending around $100 billion on

shopping and eating out.Source: www.theguardian.com

28 FEB China cuts its one-year

lending rate for the second time in less than four months,

signalling an easing cycle.Source: The Wall Street Journal

5 Mar China’s PM, Li Keqiang,

expects growth of 7% in 2015 and calls for a 10%

increase in military spending.Source: BBC

6 Mar Italy’s 10-year bond hits

the lowest yield since Bloomberg started

collecting data in 1993.Source: Bloomberg News

6 Mar US unemployment

drops to 5.5%, the lowest rate in

almost seven years.Source: Bloomberg News

2 Mar The nasdaq Composite Index

breaks through the 5 000 level for the first time in

15 years.Source: The Wall Street Journal

12 FEB Economic Freedom Front members are forcibly removed from parliament during the most closely watched State of the Nation address since the release of Nelson Mandela.Source: The Daily Maverick

17 FEB Sa Consumer Price Index for January prints at 4.4%; no surprise after recent oil price plunge.Source: Statistics South Africa

20 FEB US stock indices

soar to record highs amid Greece

exit fears.Source: Forbes

9 Mar The SA rand hits a 13-year low against the dollar after an emerging market sell-off in anticipation of a US rate hike.Source: Reuters

18 Mar SA Consumer Price Index prints at 3.9% year-on-year for February 2015, while retail growth slows to 1.7%.Source: Bloomberg News

18 Mar The Fed cuts its inflation outlook for 2015 and dramatically lowers its projected interest rate path.Source: Reuters

4 Mar India cuts its main interest rate for the second time this year, surprising markets.Source: The Wall Street Journal

04 News and insights from Sanlam Investments

GautenG: Highest number of taxpayers and largest contributor to tax assessed. Source: SARS (2014)

R10 billion Planned spending cuts announced by Minister Nene in October 2014.Source: National Treasury

Moving

Since the days of Plato, we have been contemplating the relationship between the State

and its citizens. Ostensibly the state is in control, fulfilling its obligation in terms of the social contract to make sure citizens respect one another’s rights. But within a democratic system, the beat to which the state marches can change, not only through the mechanism of the voting booth, but also through consumers’ wallets and investors’ movement of capital.

To say that the state leads and investors follow is therefore to describe only half the truth. Both parties influence one another in the loose embrace of the dance. Still, investors have high expectations of

government institutions, such as the Reserve Bank, National Treasury, the Department of Trade and Industry and other state departments. If these expectations are not met, capital finds a home elsewhere.

In an ideal worldIf investors today had to draw up a contract with government to create an investment utopia, what six points would they be asking for?

1 Strengthen the sovereign rating of the countryTo draw foreign investment

and to avoid a capital flight, the government has to steer clear of any situations that could result in a sovereign downgrade. Among other things, it needs to keep a close eye on its own financial statements, such as the Budget, the fiscus and the current account.

inSiGHt

together in adelicate dance

The relationship between the

State and investors is

a delicate one and can

be likened to a dance

partnership where first one

partner and then the other takes the lead.

Standard & Poor’s, for example, consider the following five factors in its sovereign credit analysis:• Institutional effectiveness and

political risks, reflected in the political score

• Economic structure and growth prospects, reflected in the economic score

• External liquidity and international investment position, reflected in the external score

• Fiscal performance and flexibility, as well as debt burden, reflected in the fiscal score

• Monetary flexibility, reflected in the monetary score.

South Africa’s government bond yield and the normalised exchange rate are strongly correlated to the sovereign rating of the country. The higher the risk of lending to a country, the higher the government’s lending rate

(government bond yield) will be.

As Chris Hamman, Head of Fixed Interest at Sanlam Investment Management points out, ‘Government bonds, together with the currency, are the share price of a country. So, if the management of the country does a good job, you’ll see bond yields at a fairly low and stable level, and the currency and inflation similarly stable. If management deteriorates, bond yields will rise and currency will weaken.’

In November last year, Moody’s downgraded SA’s investment grade rating to Baa2, but the actions announced by Finance Minister Nene at both the Medium Term Budget and the 2015 Budget meetings are steps in the right direction to reduce SA’s debt and set the country on the road to recovery and a potential upgrade.

05Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel

2 Make it easy to do business in SaUncertainty scares investors

away. Humans need certainty in terms of interest rates, taxes and the protection of private property before they will part with their money.

South Africa moved up two spots to rank 39th out of 185 countries in the World Bank and International Finance Corporation’s Doing Business 2013 report, an annual survey that measures the time, cost and hassle for businesses to comply with legal and administrative requirements. South Africa fell between developed countries such as France (34) and major developing economies such as Mexico (48), China (91) and India (132).

The report placed South Africa tenth for its protection of investors, the best of all African countries, and it recorded significant improvements in the areas of trading across borders and enforcing contracts.

3 Maintain appropriate levels of monetary controlRunaway inflation is the

enemy of investors as it adds to the uncertainty around the level of real return on equity that they can expect. The SA Reserve Bank is highly instrumental in this regard, averting looming inflation increases by raising interest rates at the

appropriate moment.

On the other hand, too tight monetary controls can stifle economic growth, diminishing return on investment. The Reserve Bank’s skill lies in knowing when to open the tap of money supply and when to turn it tight.

4achieve the right level and mix of taxesIn order for company earnings

to grow, investors require the economy to grow at a reasonable pace. To stimulate growth, the state needs to achieve the right mix of taxes that provide it with enough funds to develop the country’s infrastructure and its people, but at the same time the tax regime should not be so onerous as to discourage private investment. The tax structure should be aligned with GDP growth and increased employment in order to translate into better financial results for SA companies and, as a result, boost the returns of stock market investors.

5Curb state spending and invest appropriatelyTying in with the sovereign

rating of the country, National Treasury needs to be disciplined about controlling the state’s debt and spend efficiently in line with the National Development Plan. While expenses relating to the short-term relief of the suffering of the poor and

dependent are important, the largest part of state expenditure should prioritise long-term growth.

6ignite new marketsGovernment has the power to implement policies that

could change the face of business. For example, the government can grant subsidies for businesses that use renewable energy, and thereby boost those markets. The government can also underwrite the development of new technology that will bring the necessary change. Tax exemptions on a particular sector trigger investment in it and may generate growth.

The list above is not nearly exhaustive. Investors can also present government with conflicting requests. For example, importers would prioritise the protection of the rand, whereas a weaker rand would benefit exporters, making their companies more competitive. The state then has to balance out conflicting needs and drive its policy in the direction that keeps the bigger economic drum beating.

The state therefore does not have the luxury of saying, ‘Other dancers may be on the floor, dear, but my eyes will see only you.’ It has to consider the interests of several stakeholders and navigate through an ever-changing socio-economic and political landscape. Not an enviable task.

Description Standard & Poor’s

Moody’s Fitch

Prime aaa aaa aaa

High grade aa+ to aa- aa1 to aa3 aa+ to aa-

upper medium grade

a+ to a- a1 to a3 a+ to a-

lower medium grade

bbb+ to bbb- baa1 to baa3 bbb+ to bbb-

non-investment grade speculative

bb+ to bb- ba1 to ba3 bb+ to bb-

Highly speculative

b+ to b- b1 to b3 b+ to b-

Substantial risks

CCC+ Caa1 CCC

extremely speculative

CCC Caa2 /

in default with little prospect for recovery

CCC- to C Caa3 to C /

in default D DDD to D /

Source: Trading Economics

What do the different ratings mean?

‘Musical innovation is full of danger to the State, for when modes of music change, the

fundamental laws of the State always change with them.’

Plato

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DISCLAIMER Sanlam Investment Management (Pty) Ltd is an authorised Financial Services Provider. This publication is intended for information purposes only and the information in it does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act.

06 News and insights from Sanlam Investments

South Africans are not saving enough and it’s affecting the development and growth of the nation. From

the state’s perspective, it needs gross domestic product growth of 5% to relieve poverty among its citizens and to reduce the persistent unemployment problem. But growth cannot be achieved without savings and investments.

To reignite a savings culture, the National Treasury has just introduced tax-free savings accounts (TFSAs). Designed to encourage long-term savings, while giving investors access to their money at any time, these accounts offer an excellent saving opportunity.

How does it work?All the proceeds – dividends, interest and capital gains – will be tax-free.

However, an individual’s overall contributions per tax year will be limited to R30 000. Any contributions exceeding the annual cap will be taxed at 40%. Investors will therefore have to manage their overall annual contributions carefully to remain within the limit. Unused amounts may not be rolled over – it’s a case of ‘use it or lose it’.

Although a lifetime contribution limit of R500 000 applies, the total value of an individual’s tax-free savings accounts, with all interest, dividends

NEWS

FrEE StatE: lowest average taxable income.Source: SARS (2014)

r6.5 billioN Amount the 2015 increase in the RAF and fuel levy will pocket Treasury.Source: National Treasury

The state gets

seriousabout

Tax-free savings accounts are being

introduced to encourage a

savings culture among South

africans.By Quaniet Richards

Head of Investments, Retail

Assumptions for calculation (currently considered reasonable for a balanced portfolio):balanced tFSa portfolio experiences: Nominal consistent total return of 10% per annum net of fees, before tax.balanced discretionary portfolio experiences: Nominal consistent total return of 10% per annum net of fees, before tax, broken down into: – capital growth of 7% per annum only taxed at redemption at 13.33% (see drop in green line) – dividend yield of 1% per annum on fund level taxed at 15% – interest income of 2% per annum at fund level taxed at 40%.

• Investor stops monthly contributions after 16 years and 8 months when the lifetime limit of R500 000 is reached.

• Investor has a marginal tax rate of 40%.• 25-year investment horizon • No allowance for rebates or exemptions• Investments are monthly in advance.NotE: this calculation is for illustrative purposes only. it is not in any way guaranteed. actual investor experience can differ widely from that shown here. Market values move up and down but for ease of illustration we used smoothed returns. Keep in mind that the end values are nominal – we do not take inflation into account.

the extent of the tax saving possible with tax-free Savings accounts (tFSas)

Payments tFSa Discretionary productSource: Sanlam Investments

5 years 10 years 15 years 20 years

R3 000 000

R2 500 000

R2 000 000

R1 500 000

R1 000 000

R500 000

R0

R2 724 643

R2 073 805

R500 000

and capital gains, may over time exceed R500 000.

What about withdrawals?Withdrawals will be tax-free. Investors may withdraw money at any time but legislation discourages unnecessary withdrawals: no amount withdrawn may be replaced. Every contribution counts towards the annual allowance and brings an investor closer to the limit, even if he or she is only replacing money withdrawn in that same year.

For example, if someone invested R20 000 and then withdrew R20 000 in the same tax year, he’d be able to contribute only an additional R10 000 in the same tax year before reaching the R30 000 annual contribution limit.

Are the tax benefits really that significant compared to a taxable investment?The benefit may be small during the first few years but as the value of the investment grows, it becomes significant. The example below shows how big the difference between investing R2 500 per month in a TFSA and investing the same amount in a ‘normal’ taxable discretionary investment – for example, directly in a unit trust – becomes over a period of 25 years. (Contributions cease after 16 years and 8 months as the lifetime limit is reached but the money remains invested for the remainder of the 25-year investment period.)

07Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel

savingHow does a tax-free savings account compare with an RA?A great benefit of both a tax-free investment account and a retirement annuity (RA) is that all the growth and income of the investment is tax-free.

This includes tax on interest, dividends and capital growth. However, with an RA, the moment an investor starts to withdraw a retirement income, that annuity income becomes taxable at his personal income tax rate. In contrast, withdrawals from a tax- free investment are not taxable.

On the other hand, RA contributions are tax-deductible up to 15% of non-retirement funding income for the tax year, while contributions to a tax-free savings account are not tax-deductible.

Both products have their own benefits and should not be seen as competing with each other but as complementary components of a holistic financial plan. It’s always a good idea to seek sound financial advice before deciding how much to allocate to each product.

Is it possible to open an account on behalf of a child? Yes, investors can open tax-free accounts in the names of their children. When doing this, the children will be using part of their tax-free allowance, which limits their ability to save for themselves via this type of product later on.

Investors should also watch out for donations tax if they’re paying more than R100 000 per tax year into their children’s accounts. They should declare any amount donated in their annual tax returns.

Sanlam Investments’ offeringSanlam Investments has made its tax-free products available from 1 March and they are administered by Sanlam Collective Investments (RF) (Pty) Ltd and Satrix Managers (RF) (Pty) Ltd. There are three products, which include:• Sanlam Collective Investments

tax-free unit trusts• Satrix tax-free unit trusts• the Satrix tax-free ETF range.

The first two products offer all the flexibility of a unit trust. The Sanlam Collective Investments tax-free unit trust is for investors who prefer actively managed funds and they can invest amounts from as little as R200 a month. The Satrix tax-free unit trust is for those who prefer low-cost passive investments and the minimum investment amount is R500 a month.

How to open an accountFor tax-free investments in a fund administered by Sanlam Collective investments (rF) (Pty) ltd:Application forms can be downloaded from sanlaminvestments.com or requested from the Sanlam Collective Investments call centre at 086 010 0266.

For tax-free investments in a fund administered by Satrix Managers (rF) (Pty) ltd:Download application forms from satrix.co.za or request forms from the Satrix call centre at 0860 111 401.

Tax-free products can also be bought online via sanlaminvestments.com.

DISCLAIMER: Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (‘SIM’), Satrix Managers (RF) (Pty) Ltd, and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (‘Sanlam Collective Investments’) and Satrix Managers (RF) (Pty) Ltd (‘Satrix Managers’). (RF) (Pty) Ltd. The Sanlam Group is a full member of the Association for Savings and Investment SA. The tax-free savings products are administered by Sanlam Collective Investments and Satrix Managers. Although all reasonable steps have been taken to ensure the information on this website/advertisement/brochure is accurate, Sanlam Collective Investments (RF) (Pty) Ltd / Satrix Managers (RF) (Pty) Ltd (‘Sanlam Collective Investments’)/(‘Satrix’) does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/units/unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd / Satrix Managers (RF) (Pty) Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (‘Cisca’). International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorised in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme. Standard Chartered Bank is the appointed trustee of the Satrix Managers Scheme.Im

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08 News and insights from Sanlam Investments

25%of GDP - Level of investment SA needs

GDP 14%of GDP - Current level of savings too low to fund required investment

What we save versus what we should save

On 25 February Minister Nene revealed in his first Budget Speech how the state plans to raise its tax revenue and stabilise our national debt.

How will this year’s Budget impact on the savings of individuals, the ability of the state and businesses to

invest, and ultimately on the returns earned by investors?

NEWS

How tax influences investment

SA needs savings to grow the economy South Africa cannot reduce poverty and unemployment unless it grows by at least 5% per annum. This is why Minister Nene noted in the Medium Term Budget that, in addition to enhancing the progressive nature of the tax system, the ‘short and long-term implications for growth and job creation will be a key consideration’ in setting tax policy.

Currently, South Africa has a low level of savings (little more than 14% of GDP), which is insufficient to fund the level of investment required to grow the economy at 5%. What we need now is an investment ratio of at least 25% of GDP.

‘SLiGHtLy ProGrESSivE’ – how World Bank views SA’s tax system‘HiGHLy ProGrESSivE’ – how World Bank views SA’s state spendingSource: SARS (2014)

r1.8 biLLioN Amount the 2015 increase in excise and alcohol and tobacco duties will pocket Treasury.Source: National Treasury (2015)

The state, its Budget and your savings

The new Budget

affects the state and

investors in different ways.

By Arthur Kamp Investment Economist Cost of

capital rises

return on investment (roi) falls

Capital deployment/investment

cut back

if tax regime becomes more onerous:

09Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel

Heading in the right direction

How to increase savings

Private fixed investment by businesses is insufficient Because the marginal rate of return on investment is too low at the moment, private sector fixed investment has fallen. We urgently need to raise economic growth and to keep the cost of capital low. The tax regime influences investment decisions by impacting the cost of capital. Businesses will invest (increase the capital stock and employ people) for as long as the marginal product of capital exceeds the real user cost of capital. An increase in the tax rate or a decrease in incentives curbs business investment.

In 2013 SMMEs accounted for 55% of SA employment. Small businesses are therefore a focal point of our National Development Plan (NDP) and the recent Davis Tax Committee.

SA has taken first steps to curb the cost of capitalOverall, the user cost of capital is sensitive to: • the government bond yield• the rate of depreciation of capital equipment• the corporate tax rate• the price of a unit of capital equipment (influenced by currency volatility).

To keep the cost of capital low, the state needs to lower its debt ratio to avoid further sovereign ratings downgrades (which increases the government bond yield) and to ultimately improve these ratings.

The spending cuts announced in the Medium Term Budget are a good starting point. The planned cuts amount to R10 billion in the 2015/16 tax year. If adhered to, these spending restraints are expected to return government to a position where it borrows solely for the purpose of capital spending in 2015/16 – a welcome development.

What affects the cost of capital?

Cost of capital

Governmentbond yield Corporate

tax rate

Unit price of new capital equipment

rate of depreciation of capital equipment

3 Lower tax on savings, for

example, capital gains tax

1 Lower income tax 2 raise tax on

expenditure (consumption)

Several ways to increase national savingsTo boost national savings, the state has a few options. These, for example, include:• lower income tax (to encourage work and savings)• increased tax on consumption• lower tax on savings or amended savings legislation.In terms of income tax, the 2015 Budget offered only taxpayers earning less than R450 000 per annum some relief after the bracket adjustment for fiscal drag. Those who earn more will pay up to 1% more tax every year.

After accounting for fiscal drag relief, the Budget was slightly skewed towards indirect taxes, mostly taxes on consumption (expenses). Examples include higher excise duties and duties on alcohol and tobacco products (R1.8 billion more for Treasury), as well as the increase in the Road Accident Fund and fuel levy (R6.5 billion more for Treasury). VAT remained unchanged.

In terms of savings tax, on a positive note, the CGT inclusion rate and dividend tax remained unchanged. Tax-free savings accounts are also in force from 1 March 2015, while retirement funding reforms with the objective of promoting savings more broadly are also in the pipeline.

Balanced tax regime and budget a boon for investorsAs much as the 2015 Budget’s increase in taxes on consumption, for example, fuel levies, excise duties and sin taxes, may irk consumers, raising the state’s revenue to help reduce government's budget deficit is a step in the right direction. Together with the discipline of debt control and efficient spending in line with the NDP, SA is setting the stage for an environment more conducive to growth in the long term. A tax structure aligned with GDP growth and increased employment should not only bolster the security of all SA citizens. It should also translate to better financial results for SA companies and, as a result, boost the returns of stock market investors.

Getting the balance rightBy raising taxes and therefore state revenue, the state would be in a much better position to deploy its development plan, but this could dramatically lower the level of private saving and investment.

The state therefore needs to find just the right level and mix of taxation.At the same time, the efficiency of state spending needs to be closely monitored.

Government already spends a large share of its available resources on key target areas of the NDP, including education, but the efficiency must be improved. The state’s debt ratio must be stabilised and reduced to lower the interest burden and free-up resources for spending.

A fine balancing act

Capital flees the country

Sensible mix of taxes and promotion of

savings

Accelerated economic

growth

Funding for national

development

Higher company earnings and

investor returns

taxpayers don’t have enough

disposable income left

to invest

Low return on capital

demotivates businesses

too mUCH tAx

JUSt tHE riGHt tAx LEvEL

Enough state money available for

socio-economic development

A better infrastructure/resources for

economic growth

businesses and individuals

continue investing and

saving

News and insights from Sanlam Investments10

My stock pickMondi

Murray & Roberts Holdings

Mondi is a leading packaging and paper producer that has operations focused on Europe, as well as exposure to Russia, South Africa and North America. Mondi benefits from high-quality, low-cost assets, vertical integration into paper pulp, and from energy-generating capacity.

What we like Mondi has invested capital and rationalised its business in recent years. The group has been successful in shifting its geographical and product mix. Increasing exposure to emerging markets and consumers, as opposed to industrial packaging, has resulted in improving margins and returns. These positive trends have been despite a relatively adverse macro-environment and position the group well for any meaningful improvement, particularly in Europe.

Capital allocation has been a key success of the group. Over the past two years Mondi has invested €350 million in projects with returns in excess of 40%. A large portion of these projects has been focused on cost optimisation. Further spend of €420 million over the following two years is expected to yield returns in excess of 20%.

The acquisition of Nordenia in 2012 has been slower to deliver on

Murray & Roberts is an integrated engineering and construction services company. It operates in southern, central and western Africa, the Middle East, south-east Asia, Australasia and North and South America. The company operates through four main divisions, namely: Underground Mining, Oil and Gas, Energy and Industrial, and Infrastructure and Building.

What we like Murray & Roberts is emerging from a period in which it suffered significant losses on two major contracts. This is exacerbated by having to operate in an environment of low levels of government infrastructure spending, as well as reduced capex from resources companies that are responding to declining commodity prices.

The company has claims to recover these losses and this is being pursued through various legal processes. The quantum of these claims is in excess of R2 billion.

Despite the challenging environment, the company has managed to

improve its earnings over the last two years. The company is ungeared and has net cash of R900 million.

What we don’t like The company has significant exposure to the Oil and Gas market in Australia. It has shifted its focus from the construction of new Liquid Natural Gas (LNG) plants to the more profitable areas, commissioning and expanding existing plants.

However, should the lower oil price persist for an extended period, this may lead to lower earnings from this aspect of the business.

Risks to the investment case• An unsuccessful outcome to the various claims resolution processes• A protracted period of limited spending on projects by governments

and mining companies• New loss-making contracts that would negatively impact the group’s

cash flow.

Equity analyst Lazar Naiker

discusses Mondi

Portfolio manager Michael Canterbury discusses Murray &

Roberts Holdings

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uppl

ied

expected returns given a weak global consumer, however this business does appear to be turning a corner and provides a good base for Mondi to deliver high-value, specialised consumer packaging products.

Risks to our view While Mondi’s key grades are relatively well balanced from a supply and demand perspective, challenges in the graphic paper markets could see competitors convert capacity to produce packaging in the medium term. That said, if these conversions were to take place they would take some time to deliver (two to three years from announcement) and Mondi will retain its low-cost position.

In the short term, exposure to Russia could negatively impact if demand in that region declines, although this is to a certain extent mitigated by ruble weakness.

The bottom lineWhile the stock has performed well, up circa 28% YTD, we believe that high quality management, allocation of capital into high-return projects and growth from a solid base of operations positions the group well.

18%

17%

16%

15%

14%

13%

12%

11%

10%

9%

900

800

700

600

500

400

300

200

100

-

€ m

2010 2011 2012 2013 2014

Mondi operating profit and return on capital employed (ROCE)

Operating profit (LHS) ROCE (RHS) Source: Mondi 2014 Annual results

DISCLAIMER The past performance of the company is not an indication of future performance. Always seek independent professional financial advice before making an investment decision.

Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel

1 Use the 75% equity allocationFirstly, use the full 75% allocation to equities,

provided your client has a sufficiently long investment horizon to stomach volatility. Over the past five decades and longer, equity has outperformed all other asset classes significantly. Over the long term, a higher allocation to equities can enhance portfolio returns considerably.

2 Add alternative and other investment allocationsAlternative investments,

specifically fund of hedge funds (FoHF) and fund of private equity funds (FoPE), offer relatively uncorrelated returns in comparison to traditional asset classes like equity, bonds and cash.

3 Add more propertyThere is no maximum on the combined exposure

of equity and property, meaning these two asset classes combined could theoretically take up the entire portfolio.

4 Use the Africa allocationAdditional geographic diversification is allowed

through Africa exposure of up to 5% in addition to the 25% exposure to international assets generically. Total foreign exposure can therefore reach 30%.

Four levers for maximising retirement fund returns

11

In 2011 Minister Gordhan announced changes to Regulation 28 of the Pension Funds Act to make sure SA retirement savings are ‘invested in a prudent manner that not only protects the retirement fund member, but is channeled in ways that achieve economic development and growth’. In short, Regulation 28 is a mechanism the state uses

to protect the investor against large, permanent losses by forcing the diversification of retirement savings across different asset classes.

So how is it possible to step up your clients’ returns while staying within legislative limits?

What are these limits?Currently, Regulation 28 permits:• 75% exposure to equities• 15% exposure to hedge funds and private equity combined (10% maximum

for each of these)• 10% exposure to commodities• 25% exposure to property• 25% exposure to international assets• 5% exposure to Africa.

The adviser’s challengeAs adviser you play a key role in ensuring the best possible retirement outcomes for your client. Your clients may vary in their investment needs, their risk tolerance and time horizon, but your younger and your most aggressive clients often pose a challenge: How do you maximise their long-term returns (which could otherwise be solved by allocating 100% to equity) while staying within the Regulation 28 limits (allowing only 75% equity exposure)?

Results of using the leversThe chart on the right shows that the returns of a more typical Regulation 28-compliant portfolio could have been enhanced by more than 0.5% per year with the use of alternative asset class allocations over the last 15 years (measured toward the end of 2014).

An extra 0.5% per annum makes a significant difference over the long term. It is worth noting that the Africa allocation would have reduced the total return over this period, since this geographic collective performed very poorly over that time.

A word on riskAn investment with more inherent investment risk is expected to provide a better return in the long term in order to incentivise investors to allocate capital to it. However, that risk can, per definition, lead to losses. Bear in mind that the higher expected return is by no means guaranteed – particularly over shorter time periods (less than five years).

The revised Regulation 28 allows you, the adviser, a great deal of flexibility to adjust the risk profile and increase the potential returns of your client.

Step up your retirement returns

How do you step up your clients’

returns while staying within

the limits of Regulation 28?

By Carl Roothman Head of Retail

INSIGHT

* Part of this article is a reproduction of research that appeared in the Baobab newsletter. It is reprinted with the kind permission of Kobus Hanekom and Willem le Roux from Simeka Consultants & Actuaries.

Number of negative return periods and probability of a negative return

Source: Simeka Consultants & Actuaries (Jan 2015)

18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%Standard

15.37%

FoHF

0.31%

FoPE

0.44%

Add’nal Property

0.52%

Africa

-0.72%

CITy OF JOHANNESbUrG: highest average taxable income per assessed individual for 2013 (R318 533)Source: SARS (2014)

r90 bIllION The accumulated surplus of the national Unemployment Insurance Fund (UIF).Source: Simeka Consultants & Actuaries

However, these phenomena move in cycles and over the next 10 years this allocation may even provide the best return of all the asset classes. The conclusion is that the long-term expected return can potentially be enhanced by even more than 0.5% per annum without paying too dearly in terms of the risk taken.

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News and insights from Sanlam Investments

Annualised rolling three-year returns

SIM Balanced A Asisa SA Multi-Asset High Equity Source: Morningstar Direct | Rolling three-year returns up to 31 January 2015

20.00

18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2011

/01/

3120

11/0

2/28

2011

/03/

3120

11/0

4/30

2011

/05/

3120

11/0

6/30

2011

/07/

3120

11/0

8/31

2011

/09/

3020

11/1

0/3

120

11/1

1/30

2011

/12/

3120

12/0

1/31

2012

/02/

2920

12/0

3/31

2012

/04/

3020

12/0

5/31

2012

/06/

3020

12/0

7/31

2012

/08/

3120

12/0

9/30

2012

/10

/31

2012

/11/

3020

12/1

2/31

2013

/01/

3120

13/0

2/28

2013

/03/

3120

13/0

4/30

2013

/05/

3120

13/0

6/30

2013

/07/

3120

13/0

8/31

2013

/09/

3020

13/1

0/3

120

13/1

1/30

2013

/12/

3120

14/0

1/31

2014

/02/

2820

14/0

3/31

2014

/04/

3020

14/0

5/31

2014

/06/

3020

14/0

7/31

2014

/08/

3120

14/0

9/30

2014

/10

/31

2014

/11/

3020

14/1

2/31

2015

/01/

31

On a calendar year basis, the SIM Balanced Fund has also been one of the most consistent funds relative to its peers. It has proven this by being one of only six managers to consistently stay in the top half over

every calendar year from 2009 to 2014 (see table below). This consistency over time can be attributed to value added at both tactical asset allocation and individual security level.

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Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel For more information on the newsletter contact Sonia Jamoulle at sanlamintelligence@sanlaminvestments.com l 021 950 2999

Achieving balanced growth through diversificationThe Sanlam Investment Management (SIM) Balanced Fund is Regulation 28-compliant and therefore meets the state’s requirements for retirement savings. Because it may not be more than 75% exposed to the stock market, the fund experiences lower volatility than a pure equity fund.

By investing in a single fund that diversifies across all major asset classes, investors outsource the difficult decision of how much and when to invest in various asset classes. Even

though the fund holds a variety of instruments, it’s primarily equity-centric, seeking long-term capital growth. Currently the manager has a strong preference for offshore assets.

The fund has consistently beaten its peers on a rolling three-year return basis (shown in chart below), outperforming the mean of the funds in the Asisa SA Multi-Asset High Equity category by 1.7% per annum on average.

The fund is available through the following platforms:• Sanlam Collective Investments• Glacier• Stratus• As an option on the Cumulus RA.

DISCLAIMER Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI"), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Radius Administrative Services (Pty) Ltd (“Radius”), Blue Ink Investments (Pty) Ltd (“Blue Ink”), Sanlam Capital Markets (Pty) Ltd (“SCM”), Sanlam Private Wealth (Pty) Ltd (“SPW”) and Sanlam Employee Benefits (Pty) Ltd (“SEB”), a division of Sanlam Life Insurance Limited; and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”) and Satrix Managers (RF) (Pty) Ltd (“Satrix”). Although all reasonable steps have been taken to ensure the information in this document is accurate, Sanlam Collective Investments (RF) (Pty) Ltd (“Sanlam Collective Investments”) does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. Sanlam Group is a full member of the Association for Savings and Investment SA (Asisa). Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. All returns for periods longer than 12 months are annualised. This means that cumulative returns are re-scaled and converted to an average annual return over that measurement period longer than 12 months. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result as a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002. International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorised in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme.

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Considering investing? Here are some key facts about the fund:Fund category: SA Multi-Asset High EquityMaximum equity: 75% (Regulation 28-compliant)Benchmark: Mean of the Asisa SA Multi- Asset High Equity categoryMinimum time horizon: 5 yearsPortfolio managers: Gerhard Cruywagen and Patrice RassouLaunch date: 1 February 1995Initial advice fee (max): 3.42%Initial manager fee: 2.28%Annual advice fee (max) 1.14%Annual manager fee: Performance fees (min of 1.25% p.a.)Fee hurdle: Mean of the Asisa SA Multi- Asset High Equity category Sharing rate: 20% Maximum fee: 2.85%. If the fund performs in line with the fee hurdle, then the fee is 1.25% per annum. Performance fees accrue daily, based on daily performance, and are paid to the manager monthly.Total expense ratio (TER): 1.86%

The retail class of this fund has a TER of 1.86% for the year to 31 December 2014. For the period from 1 January 2014 to 31 December 2014 1.86% of the average net asset value of the portfolio was incurred as charges, levies and fees related to the management of the portfolio. A higher TER ratio does not necessarily imply a poor return; nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs.

Please check the fund’s fact sheet on www.sanlamintelligence.co.za/fact-sheets for more information on the fund. It is available from the Manager free of charge.

Quartile ranking per calendar year

Source: Morningstar Direct to 31 December 2014

South African – Multi-Asset – High Equity

2014 2013 2012 2011 2010 2009

SIM Balanced Fund 2 2 1 2 2 2

Source: Morningstar Direct | As at 31 January 2015 (annualised returns)

Long-term returns to 31 Jan 2015

3 years 5 years 10 years

SIM Balanced A 15.26% 14.12% 13.87%

(Asisa) SA Multi-Asset High Equity

14.29% 12.60% 12.66%

The Sanlam Investment Management Balanced Fund allows investors to outsource dif-ficult decisions about investing in various asset classes.

Average outperformance of

1.7% p.a. over seven years!

What does offshore exposure mean?The fund may hold up to 25% in offshore assets. As at 31 December 2014 this allocation was almost fully utilised (24.4%).