28/03/2018

1

Hot Topics | March 2018

Leading opinion: Getting more out of investing

4. A new concept to disrupt

the retirement industry

Agenda

9:00

10:30

Break

1. Setting the scene

2. 2018 global themes and

opportunities

3. 2018 local themes and

opportunities

4. A look at alternative

investments

11:00

28/03/2018

2

Setting the scene

Presenters

Lesiba Mothata Chief Client Officer

Alexander Forbes Investments

The experts

Gyongyi KingChief Investment Officer

Alexander Forbes Investments

John AndersonGroup Executive:

Client Solutions,

Strategy

Alexander Forbes

Deb ClarkeGlobal Head of

Investment Research

Mercer

28/03/2018

3

template

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Join with event code

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Question

Whose interests are you representing here today?

Members of our retirement fund

My clients interests as a consultant, actuary or in another capacity

Media, Financial Services Board, National Treasury

None of the above

28/03/2018

4

Setting the scene – Lesiba Mothata, Chief Client Officer

The current reality

AFRF Member Watch Survey 2016

Credit Suisse Global Return Yearbook 2017

Stats

Ave. preservation:

Retire comfortably:

8.4%

6%

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5

Why haven’t strong returns translated into better outcomes? Industry has been fixated on returns instead of investor outcomes.

Source: Behavior Gap, Carl Richards

GREEDBUY FUNDS/HIRE

MANAGERS

FEARSELL FUNDS/FIRE

MANAGERS

Better outcomes

through

meticulous risk

management

Re

turn

Time

*

Competitive long-term growth with focus on client outcomes

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6

1 Your Goals

We work with you to

establish the right goals

2 Solutions design

We work with you to design

and implement solutions to

meet your goals

3Client experience

We help you track the

journey towards your

goals

Process uniquely links advice to investment management

Manages money in a way to grow off a higher base

We communicate to give customers clarity and confidence in meeting their goals

Living*Investing framework Strategic relationship

• Strategic alliance with Mercer combines our thinking and research with unrivalled global experience

• Unfettered access to global skills, research and experience that we can leverage to improve outcomes for clients

• Clients will benefit from this relationship in terms of access to professional expertise and investment propositions

Global leadership with a Pan-African presence

+

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Mercer Investments

$200bnGlobal

Delegated

Assets

Alexander Forbes and Mercer... Leveraging off strengths

Alexander Forbes Mercer

Local leadership

Accountability

Customisation

Trusted adviser

Regional

company with

regional focus

Integrated

approach

Developing strategies

to address threats

and opportunities

Capturing

innovation both

globally and

locally

140+ full-time manager

researchers

Involvement with

world’s largest

institutional investors

Strength in global

Alternatives

Aggregated

buying power

Breadth of

experience

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Global themes – Introducing Deb Clarke from Mercer Local themes – Lesiba Mothata, Chief Client Officer

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2018 themes & opportunities

FROM QE TO QT -- AN EMERGING MARKET RESPONSE

Uneventful response to higher

US interest rates

Emerging markets

assets in favour

Prepare for market volatility

OPPORTUNITIES ABOUND AS AFRICA INDUSTRIALISES

Fastest growth region in

the world

Untapped private

funding model

Underutilised alternative

asset class

ALTERNATIVES ATTRACTIVE IN A LOW RETURN ENVIRONMENT

No bull market started on dear

valuations

Future returns to be

lower

Alternative assets can

augment outcome

STEWARDSHIP IN THE 21ST CENTURY

Governance practices impacted

2017 equity market returns

SA investment

community focused on

ESG issues

We incorporate ESG in our

investment process

1. From QE to QT – an emerging market response

Source: Institute of International Finance, January 2018

They are investments that may be relatively illiquid, that are not publicly traded or that use

non-traditional strategies

Emerging market (EM) flows minus mature market (MM) flows (% of assets under

management)

Strong demand from EM assets

EM bonds/equities now represent 11.8%/13.4% of global funds’ bond/equity

portfolios

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1. From QE to QT – an emerging market response

Source: Bank of America/Merrill Lynch, September 2017

They are investments that may be relatively illiquid, that are not publicly traded or that use non-traditional strategies

Improved EM fundamentals suggest there are still legs in the

current bull market

Start date End date Duration (months) % Returns in US$ p.a.

1 Oct-76 Oct-80 49 169 (28)

2 Apr-85 Jul-90 64 299 (30)

3 Jan-91 Feb-94 37 221 (46)

4 Sep-98 Feb-00 17 125 (77)

5 Mar-03 Oct-07 56 396 (41)

6 Mar-09 May-11 26 154 (54)

7 Jan-16 Sep-17 20 60 (33)

Average (equal weighted) 42 (3.5 years) 228 (46)

Mean 43 (3.6 years) 195 (44)

Anatomy of EM bull markets

1. From QE to QT – an emerging market response

Source: Bank for International Settlements (February 2018) and Alexander Forbes Investments

Overvalued

Undervalued

Overvalued

Undervalued

Adjustment after downgrade has been different. Risks for rand strength remain

Currency valuation: Brazilian real vs. SA rand

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2. Opportunities abound as Africa industrialises

Source: PwC Annual Global CEO Survey, International Monetary Fund and Alexander Forbes Investments

Where half of the population growth will come from

The fastest growing middle class and highest broadband

growth

Has 21 countries of the 43 in the world that will grow at

>5%

Will have 2 million new workforce entrants

every year

Currently represents 15% of world’s

population and 3% of its GDPPart of China’s Belt and Road Initiative

Fastest growth and youthful region in the world

Every year between 2015 and 2030, 29-million new entrants will

join Africa’s labour force

2. Opportunities abound as Africa industrialises

Source : Deloitte Africa Construction Trends 2017 Report

Infrastructure needs are ≈ US$170 billion annually, with a funding gap of ≈ US$108 billion

27.1

15.5

14.5

13.2

9.2

8.3

6.33

1.7 1.3

Who funds?

Governments

China

Private Domestic

International Development Finance Institutions

African Development Finance Institutions

European countries

Other countries

US

South Africa

Brazil

Sources of funds for infrastructure

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3. Alternatives attractive in a low return environment

7

9

11

13

15

17

19

21

23

25

1995 1999 2003 2007 2011 2015

Alsi P/E ratio ave. = 15.4

Source: I-Net Bridge, Bloomberg and Alexander Forbes Investments

Investment implications

No bull market was

started on dear

valuations.

Even when the current

investment outcome has

been stellar, valuations

underpin future returns.

Need to diversify into

alternative asset classes.

JSE/FTSE All Share Index valuation (price:earnings ratio)

Investment implications

Greater levels of diversification.

Robust portfolios on a risk management

front.

Strong alignment with long-term

investment horizon of retirement funds.

Making a positive contribution to general

economic growth.

3. Alternatives attractive in a low return environment

Source: Alexander Forbes Investments

Enhanced

return

Long

term

Diversification

Inflation

protectionAccess

Societal

benefits

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4. Stewardship in the 21st century

Source: JP Morgan and Bank of America/Merrill Lynch

2017

JSE/SWIX 17.7%

JSE/SWIX ex properties and SNH 21.2%

Outperformance (bps) +347

9.3%

16.0%

24.2%

20.1%

20.9%

13.0%

Investment implications

Governance considerations

negatively impacted investment

outcomes.

Poor ESG processes at

companies can destroy value.

Even for passive investors,

there is a responsibility to take

ESG considerations into

account as risks amount.

Active managers need to apply

their minds fully when engaging

with the company management

on ESG issues.

4. Stewardship in the 21st century

Source: Alexander Forbes Investments

Independence

of Directors

Ownership and

Control StructureRemuneration Policy,

King IV

External Audit and Audit

Committee Independence

Proxy Voting

G

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2018 themes & opportunities

FROM QE TO QT -- AN EMERGING MARKET RESPONSE

Uneventful response to higher

US interest rates

Emerging markets

assets in favour

Prepare for market volatility

OPPORTUNITIES ABOUND AS AFRICA INDUSTRIALISES

Fastest growth region in

the world

Untapped private

funding model

Underutilised alternative

asset class

ALTERNATIVES ATTRACTIVE IN A LOW RETURN ENVIRONMENT

No bull market started on dear

valuations

Future returns to be

lower

Alternative assets can

augment outcome

STEWARDSHIP IN THE 21ST CENTURY

Governance practices impacted

2017 equity market returns

SA investment

community focused on

ESG issues

We incorporate ESG in our

investment process

Global trends impacting investors – An EM response

R E G U L AT I O N S

C L I M AT E C H AN G E

T E C H N O L O G YF E E S

D I V E R S I T Y

N E W S O L U T I O N S

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Questions for Deb and Lesiba via Slido

Question

How satisfied are you about your board’s efforts in incorporating ESG

considerations into the fund’s investment strategy?

Not satisfied

Satisfied

Very satisfied

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Alternative investments – Gyongyi King, Chief Investment Officer

Regulation allows for increased portfolio diversification into private markets

Cash

Up to 100%

Property

Up to 25%

Equities

Up to 75%

Alternatives

Up to 15%

Commodities

Up to 10%

30% Global

assets

15% hedge and

private equity

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Alternatives: different risks for different sources of return

Source: Alexander Forbes Investments

Type Underlying investmentPerformance return

characteristics

Liquidity

profile

Private

equity

Buyouts, venture capital,

distressed debt

Higher performance return,

relative to listed equitiesLow

Private debtCorporate, real estate,

infrastructure

Income, with some downside

risk protectionLow

Real assetsInfrastructure, direct real estate,

natural resources, commodities

Income, some inflation

protectionLow

Hedge

funds

Long/short, relative value,

multi-strategy

Performance returns higher

than cash, diversificationModerate

Characteristics of private markets

Alternative investment strategies that

cannot be accessed through a listed

exchange

Typically long-

term investment

horizon

Limited

liquidity

Can give exposure to parts of the

economy that cannot be

accessed through listed

instruments

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Private markets follow these strategies

Private equity AgricultureDirect

property

Infrastructure Private debt

A story that resonates – for it is all around us

Wake up in

the morning Flat tyre on your

way to work

Long day at work,

not feeling well

Grab a sandwich

on way to work

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Why private markets?

Returns linked

to inflation

Inflation protection

2 – 20-year time

horizons

Long term

Environmental,

Social and

Governance attributes

Societal benefits

Alternative source of

income generation

Enhanced return

Uncorrelated, less

cyclical, lower volatility

Diversification

!

Societal benefits for investing in South African private markets

Energy efficiency

Carbon emissions

Water scarcity

Waste management

Environmental Impact

Assessments

Environmental

Affordable housing

Education

Healthcare

Gender and diversity

Employee

engagement

Job creation

Health and safety

Social

Stakeholder

engagement

Board of directors and

committees

Policies and

procedures

Transparency and

accountability

Governance

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Private markets in portfolios

Practicalities around implementation will need to be discussed

We are of the view that Funds should give consideration to private

markets

Low returns

expected from

listed asset

classes

Alternative

source

of returns

Societal

benefitsPortfolio

diversificatio

n

!

General hedge fund objectives

Employ

non-traditional

investment

strategies

Have a low

correlation to

traditional portfolios

of equities and

bonds

Have a clear focus

on downside risk

management

Target returns in

excess of cash

!

%

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Hedge funds – tools in the toolbox

Leverage

Shorting

Change in market exposure

Non-benchmark cognisant

Size

South African hedge fund universe and available strategies

Source: Novare Hedge Fund Survey 2016

Equity market neutral12.6% Multi-

strategy7.2%Volatility arbitrage

1.1%

Equity long/short

61.6%

Other strategies

0.7%

Fixed income …

Commodities

3.8%

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Share A @ R12 p/share

Share B @ R8 p/share

Buy back Share B at

the present price of R8,

make R100 profit

To buy stocks that will

go up in the future

Sell stocks now that will

go down in the future

May position the

portfolio for the market

to go up or down in the

future

Summary of Equity Long/Short

Buy 100 shares Share

A at price of R10 per

share

Borrow 50 shares of

Share B and sell for

R10 per share

Example One month laterAim

!

Summary of Equity Market Neutral

Buy 100 shares Share A

at price of R10 per

share

Borrow 100 shares of

Share B and sell for R10

per share

Market goes down 2%

Share A @ R9 p/share

Share B @ R8 p/share

Combination equals

profit of R100

To generate returns

regardless of direction

of market

Normally match long

and short stocks to

same value in same

sector

Buy stock in a sector

that will go up in the

future

Sell stock in a sector

now that will go down in

the future

Example One month laterAim

!

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Regulatory update

Latest regulation

Hedge funds managers’ regulation

Hedge funds (Collective Investment Schemes Control

Act) (CISCA)

Advantages of the new regulation

Practical issues when considering alternative investments

Risk management

Asset allocation

decisionManager

selection

MonitoringFund

selection

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Questions for Gyongyi via Slido Retirement fund survey – John Anderson, Client Solutions

28/03/2018

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This edition includes 15 surveys with 58 managers and 369 funds, covering four

balanced surveys, ten specialist surveys, and a multi-manager survey

Alexander Forbes performance surveys continue to evolve

Enhancements post-1996

Risk profiling

SA-only and Global-only portfolios

Benchmarks returns

Risk-adjusted measures Specialist Equity Survey Property

SurveySurveys Revamped

1994

Manager Watch

Performance-Only

Survey – a market first!

2001

Absolute

Return Survey

2003

Specialist

Bond Survey

2007

Medical Aid

Survey

2013

Formalised Survey

Governance

2015

Survey

Rules

2017

New Survey

Technology

1998

Manager Watch™

Survey revamped

Participation criteria set

Large Manager Watch™

- Launched June 1998

- Top 10 active

Balanced Managers

RDP Survey (later

renamed Targeted

Development

Investments Survey

2002

Money

Market

Survey

2004

Hedge

FoF

Survey

2006

Internation

al Survey

2010

BEE

Survey

2012

LDI Survey

2014

Equity Funds

Analysis

2016

Survey Rules

Updated New LMW

Definition

2018

Shari’ah Survey

Roll-out

The largest asset managers as at 30 June 2017

2016 Ranking2017

RankingAsset Manager AUM (R billion)

1 1 - Old Mutual Investment Group 586

2 2 - Coronation Fund Managers 512

3 3 - Investec Asset Management 498

4 4 - Allan Gray Limited 479

6 5 STANLIB Asset Management 473

5 6 Sanlam Investment Management 437

7 7 - Alexander Forbes Investments 290

8 8 - Prudential Portfolio Managers 195

10 9Sanlam Multi-Manager

International191

9 10 Futuregrowth Asset Management 168

Total AUM increased by 7% over the past 12 months

Despite a reduction in AUM of 7%, OMIG still the largest manager

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Shift towards smaller manager continues

76.9% 76.2%74.0%

71.5%69.2%

17.2% 16.8%19.3% 19.7% 20.8%

5.9% 6.9% 6.6%8.8% 10.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Top 10 Managers Next 10 Managers Remaining Managers

SA Equity Manager Watch™

25.8%

13.4%

16.9% 16.3% 15.1%16.0%

8.3%

11.8% 12.8%10.9%

-4.0%

0.5%4.0% 4.5% 4.8%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1 Year 3 Years (p.a.) 5 Years (p.a.) 7 Years (p.a.) 10 Years (p.a.)

Highest Median Lowest

1 year3 years

(p.a.)

5 years

(p.a.)

7 years

(p.a.)

10 years

(p.a.)

Range 29.8% 12.8% 12.9% 11.8% 10.3%

Tough environment for

active managers based on

large single stock

exposure in many

benchmarks

12 out of 51 Equity

portfolios changed to

Capped SWIX to mitigate

this risk

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Global Balanced Manager Watch™ – best investment view

15.3%

11.4%

15.0%13.9%

12.7%11.9%

7.8%

11.3%12.1%

10.5%

6.6% 5.6%

8.7%9.8%

8.9%

0%

5%

10%

15%

20%

1 Year 3 Years (p.a.) 5 Years (p.a.) 7 Years (p.a.) 10 Years (p.a.)

Highest Median Lowest

1 year3 years

(p.a.)

5 years

(p.a.)

7 years

(p.a.)

10 years

(p.a.)

Range 8.7% 5.8% 6.3% 4.1% 3.8%

Tough environment to

achieve meaningful

inflation-beating returns

over the past three years

On average, asset

allocation remained

relatively stable over the

year despite meaningful

changes in individual

manager asset allocations

Expect increased

divergence in asset

allocation views amongst

managers given new

foreign limits

28/03/2018

28

Time for a break

Presenters

Lesiba MothataChief Client Officer

Alexander Forbes

Investments

The experts

Prof. Robert C MertonAmerican economist, Nobel

Memorial Prize in Economic

Sciences laureate and

professor

John AndersonGroup Executive: Client

Solutions, Strategy

Alexander Forbes

28/03/2018

29

A new concept to disrupt the retirement industry

John Anderson

Defined

Outcome

Defined

Benefit

Defined

Contribution

28/03/2018

30

Give members peace of mind

Alexander Forbes ClarityTM

In partnership with Colourfield Liability Solutions

How does Alexander Forbes ClarityTM

stack up to international best practice?

Best practice principal ClarityTM

solution

1. Set replacement income as the goal ?

2. Set risks relative to the income goal ?

3. Asset allocation strategy to meet income risk ?

4. Efficient use of all dedicated assets ?

5. Offer personalization based on individual account ?

6. Take account of changes in market and personal

circumstances

?

7. Be effective even for those who are completely unengaged ?

8. Supply only meaningful information and offer actionable

choices

?

9. Offer robust, scalable and low cost investment strategies ?

10. Offer seamless transition and payout flexibility at

retirement

?

28/03/2018

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Setting the income target

A retirement fund needs to provide a monthly income

Increase each year with inflation

Supported by the new proposed regulations

A good retirement is being able to maintain the standard of living

Members target individualised income goals based on time spent in a fund

84%

64%

34%

0%

50%

100%

44.5 45 45.5

Inc

om

e T

arg

et

at

Re

tire

me

nt

Age

Live example: Income Target (as % of Salary)

Source: Colourfield

28/03/2018

32

193%

118%

51%

0%

50%

100%

150%

200%

44.5 45 45.5

Fu

nd

ing

Le

ve

l

Age

Individual funding positions

Source: Colourfield

Individual Funding Positions (Assets/Liabilities)

Assets = (current retirement fund

savings + preservation fund +

retirement annuity) +

(value of the future contributions)

Liabilities = cost of securing income

Invest differently

New technology can take the following into account: Human capital

Future contributions

Contribution rate

Preserved assets

Fund credit

Cost to purchase a pension

Age

Salary

Length of service

Default regulations require that the investment strategy is appropriate for members and they are assisted in both the accumulation and post-retirement phase.

This unique information is used to create a custom, personalised investment strategy for each member

28/03/2018

33

Investment strategy

primary objective

PROTECT funding level IMPROVE funding level (significantly)

Majority allocation Bespoke de-risking portfolio (protects against

rising inflation, falling interest rates and

falling equity markets)

Growth portfolio that gives the best

chance of delivering higher investment

returns to fund shortfall

Members on track to meet income goals

Member Z

Member x

Member Y

Members that are

underfunded/not on track

to reach goals

Personalised investment strategy

Member x Y Z

Ratio of Savings to Salary 10.95 4.48 1.12

Contribution Rate 20.97% 20.97% 15.97%

Funding Ratio 202% 85% 53%

Growth assets 17% 37% 57%

De-risking assets 83% 66% 43%

Individual asset mix

28/03/2018

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Invest differently

Individual asset allocations are optimisedGrowth De-risking

Growth Building Block

Growth portfolio options

2 31

Best View: ClarityTM Growth Peer focussed ClarityTM Smart Tracker

Newly developed portfolio specifically

designed for ClarityTM

Greater use of index tracking and smart

beta building blocks to reduce overall

costs

Represents AF Investments’ best house

view of balanced funds

28/03/2018

35

Growth Building Block

Implementation – Best of Breed

R700 billion via our advisory and implemented solutions;

Investment process has been forged over the past 20 years;

Combination of best of breed underlying asset managers;

As part of the Mercer Group, Mercer Investments significantly

bolsters our offshore research capability

Living*Investing approach integrates advice with the investment journey, focusing on the client experience every step of the way. We do this in pursuit of

certainty. We pursue certainty of investor excellence by boldly integrating the different aspects of investing to help investors achieve their investment outcomes.

Developed by Dimensional Fund Advisors (almost $530bn)

Colourfield has customized and tailored the technology with

Dimensional Fund Advisors for use in South Africa.

Implementation – Best of Breed

Technology Provider

Live for more than a decade Successfully deployed in the

USA, UK, Canada and Netherlands.

Developed by Robert Merton - winner of the 1997 Nobel

Memorial Prize in Economic Science.

Base technology:

Weathered 2008 financial crisis, delivering reasonable

returns during this period.

Largest LDI manager in the country by assets under management

and number of clients.

Actual experience in managing portfolios in line with what is

required for successful implementation in South Africa.

Business dedicated exclusively to the de-risking of liabilities.

LDI Building Blocks

28/03/2018

36

Engage members

Current communication focuses on fund credit, returns and performance

Member doesn’t know what income the fund credit can provide in retirement

Not all funds provide projection statements

Members think about their fund credit as a bank account

Change the focus to retirement income

Online services

28/03/2018

37

This information is for illustrative purposes only

How does Alexander Forbes ClarityTM

stack up to international best practice?

Best practice principal ClarityTM

solution

1. Set replacement income as the goal

2. Set risks relative to the income goal

3. Asset allocation strategy to meet income risk

4. Efficient use of all dedicated assets

5. Offer personalization based on individual account

6. Take account of changes in market and personal

circumstances

7. Be effective even for those who are completely unengaged

8. Supply only meaningful information and offer actionable

choices

9. Offer robust, scalable and low cost investment strategies

10. Offer seamless transition and payout flexibility at

retirement

28/03/2018

38

Give members peace of mind

Alexander Forbes ClarityTM

Taking human capital into account

Personalised investment strategy

Manage the relevant risks

Use international best practice

Income goal

Best in breed liability driven investments

Understandable communication for all

members

In partnership with Colourfield Liability Solutions

template

Closing

commentsRemember to

rate your

presenters on

slido.com

28/03/2018

39

Disclaimer

Alexander Forbes Financial Services is a licensed financial services provider (FSP 1177).

The information in this document belongs to Alexander Forbes. You may not copy, distribute or modify any part of this document

without the express written permission of Alexander Forbes. Alexander Forbes Investments Limited is a licensed financial

services provider, in terms of section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002, as amended, FAIS

license number 711. This information is not advice, as defined and contemplated in the Financial Advisory and Intermediary

Services Act 37 of 2002, as amended. The value of a portfolio can go down, as well as up, as a result of changes in the value of

the underlying investments, or of currency movement.

The information reproduced here, has been compiled by, or arrived at, by Alexander Forbes Investments from sources believed

to be reliable. However, Alexander Forbes Investments does not accept liability for any consequences arising from its use, nor

make any representation as to its accuracy or completeness. These products are not guaranteed. Please be advised that there

may be representatives acting under supervision. Company registration number: 1997/000595/06. Pension fund administrator

number: 24/217. Long-term Insurer number: 00018/001. Postal address: PO Box 786055, Sandton 2146. Physical address: 115

West Street, Sandown 2196. The complaints policy and conflict of interest management policy can be found on the Alexander

Forbes Investments website:

www.alexanderforbesinvestments.co.za. Telephone +27 (0) 11 505 6000.

THANK YOU