Alexander Forbes Investments Limited.Registration number 1997/000595/06.

For institutional and individual investors

Q1 2020A review of key global trends, our local

market and how it’s informing performance

INVESTMENT REPORT

Chief Investment Officer’s message 3

Macroeconomic review and outlook | Twenty Plenty: COVID-19 macro sudden stops, uncertainties and market dynamics 5

Asset allocation | All cycles turn eventually 12

Disclaimer 18

CONTENTCONTENT

2019 ASSET ALLOCATION UPDATE

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Chief Investment Officer’s messageGyongyi King

Over our history, humanity has faced many crises. Each time, we have shown resolve to overcome them and ultimately flourish thereafter. Similarly, we have been managing investment portfolios on behalf of our clients for over 21 years, and have witnessed many financial and economic crises during this time. While we have seen market shocks before, each one is unique in origin and evolution. Many parallels can be drawn to past shocks and, while there are similarities, the velocity and simultaneous global events unfolding do make this an unprecedented shock.

Earlier this year, we updated our clients about the macro-economic themes we saw challenging long-term return assumptions namely, increasing volatility, weak global growth, low-return environments and an unfavourable economic outlook for our beloved South Africa. Having said this, one could not have anticipated the current situation we face, which has had a direct impact on the retirement and personal savings of investors globally. Developments are still unfolding, and the full extent of the impact is not yet certain.

CHIEF INVESTMENT OFFICER'S MESSAGE

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ALEXANDER FORBES INVESTMENTS

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There have been significant market changes in a very short space of time, but what has not changed is our investment approach, which is designed to navigate market turbulence and steer us through challenging times, now and in the future. Importantly, it is during these times that our clients need us the most. We encourage our clients to look after themselves and their families, and support their communities as we dedicate ourselves to making the biggest impact in safeguarding your investments.

Industry recognition

Winners! 2019 HedgeNews Africa Award 2019

We recognise that the journey towards achieving an investment goal is as important as the investment goal itself. Thus I am pleased to report that in the long-term Fund of Funds categories, the AF Invest Stable QI Hedge Fund of Funds won the 2019 HedgeNews Africa award for its five-year performance. This award recognises the best risk-adjusted returns of alternative strategies and hedge funds in South Africa and the broader African region each year.

The portfolio has a low-risk objective, and the goal to achieve absolute returns over a rolling 12-month period. This award is a corroboration to the long experience and deep expertise within the investment team, and our ability to build solutions that are tied to our clients’ goals and expectations.

Hedge funds are aiding our multi-managed solutions during these harsh market conditions. Hedge funds have a low correlation to traditional asset classes which helps protect clients’ assets in volatile market environments – making hedge funds an important allocation to the mainstream component of our solutions.

Performance review

In an environment where there has been a broad-based decline across virtually all financial markets, it is almost impossible for portfolios to come out unscathed. It is disappointing to report negative returns, however, the value of following a prudent investment approach is demonstrated in this environment. Our solutions have been purposefully diversified for some time

now and were better positioned to protect during the volatile conditions. As a result of the defensive allocations embedded in our solutions, we were able to reduce the extent to which they participated in the market falls.

On a relative basis, our multi-asset class portfolios have outperformed their benchmarks – with our flagship portfolio, Performer, achieving performance over its benchmark of more than 4%.

The portfolios in our Global Range have lagged their respective benchmarks. This range is benefiting from purposeful diversification and is being closely risk-managed. Our hedge fund of funds for qualified investors have all outperformed their respective benchmarks. These portfolios have proven to be an important component of solutions in the current market environment and are serving their intended purpose by proving adequate protection during the current market weaknesses.

Our solutions are constructed with long-term investment objectives in mind. We had anticipated a low return and volatile environment for some time now and had taken measures to mitigate against this environment, where possible, without compromising the long-term objectives of our solutions.

Our investment approach remains unchanged

Every aspect of our multi-managed investment approach is designed to give our clients the highest probability of achieving their investment goals. This approach offers enhanced diversification – understanding of what risks need to be managed and how best to manage those risks. It also has the ability to assess the likelihood of an investment strategy, and the asset managers employed to deliver on those strategies, delivering performance that optimises investment outcomes. We do this through our understanding of investor needs, risk management and forward-looking asset manager research and selection. The result is less volatile return streams and an improved probability of achieving desired investment objectives, irrespective of the market conditions.

The value of staying invested

Markets can be a terrifying place to be, fuelled with anxiety and doubt, but long-term investors should not panic. If history is a reliable indicator, we know that whenever markets have experienced a ‘crash’, the subsequent years are followed by recovery. Amid the heightened volatility and unpalatable returns, investors should remember that the markets are cyclical and focus on their investment goals. We plead with investors to be patient – committing to your long-term strategy will ensure that you remain on track.

2019 ASSET ALLOCATION UPDATE

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Twenty Plenty: COVID-19 macro sudden stops, uncertainties and market dynamics Isaah MhlangaIsaah Mhlanga | Chief EconomistChief Economist

Highlights■ The global financial markets sell-off

in Q1 2020 due to the COVID-19 pandemic sudden stops

■ Global central banks and fiscal authorities deliver coordinated stimulus to cushion economies

■ Oil price wars and projections of a global recession drives crude oil price to 18-year low

■ SA macro and markets following global trends with a further complication from Moody’s downgrade to sub-investment

grade

MARKET AND ECONOMIC OUTLOOK

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ALEXANDER FORBES INVESTMENTS

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The coronavirus which causes what is now commonly known as COVID-19 has turned everything from everyday life, business operations, macroeconomics and market dynamics on their head. The optimistic outlook that prevailed at the beginning of the year, which popular language termed ‘Twenty Plenty’ has turned into a multitude of sudden stops in human movements, company closures and fast-tracked a bear market that was already in the making from the United States (US) and China trade wars.

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In this environment, all forecasting exercises will necessarily be inaccurate given that the underlying COVID-19 pandemic, which will determine for how long the global lockdown remains in place, remain unresolved. More so, statistical data out of official authorities will become unreliable due to COVID-19 capacity constraints and inability to conduct the usual statistical field surveys. This will make tracking the impact of this pandemic on the macroeconomy difficult for as long as the lockdown remains in place.

Twenty Plenty: COVID-19 sudden stops and uncertainties imply that almost every forecast will be wrong

MARKET AND ECONOMIC OUTLOOK

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Before the COVID-19 pandemic outbreak, the International Monetary Fund (IMF) projected global growth to stabilise over the medium term, with output forecast to grow moderately by 3.3% in 2020 as risks to a US recession and geopolitical tensions subsided. However, the economic downturn caused by the coronavirus pandemic will be far more strenuous than initially thought and likely to extend into 2021 as governments globally restrict movement, business and consumers. The recovery from the abrupt halt in economic activity will likely be slow, with some pundits saying it may take years.

The pandemic outbreak brings about a dual economic shock to the global economy. It impacts both the supply side and the demand side, largely because it is related to business and consumer sentiments. Our economic scenarios so far suggest a quick global recovery over the next year, driven by the significant stimulus across major economies. As a base case, the global

1a. Global economic growth forecasts (world/DM/EM)

1b. Global fiscal and monetary policy stimulus (%of GDP)

*Sub-Saharan Africa - proposed **Caribbean and Pacific small states Source: Bloomberg and Alexander Forbes Investments

Source: Bloomberg and Alexander Forbes Investments

economy is projected to contract by 3.0% before rebounding to 5.8%. The sharp recovery reflects both base effects and the anticipated impact of the stimulus on economic activity.

Global financial markets tanked over the fears of global recession due to the pandemic

As can be seen below, all the major global asset class returns were negative during the first quarter, except for global bonds, reflecting recession fears and a flight to safe heaven assets. Growth assets such as equities in both developed and emerging economies recorded negative returns. Similar trends were observed in the South African asset class returns where the returns of equities, bonds and property were negative. Local cash was the only asset class to register positive returns.

25.0%

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UK

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Fiscus stimulus Monetary stimulus

Global economy

2.9%

2019 2020 2021

5.8%

-3.0%

1.7%

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2019 2020 2021-6.1%

Advanced economiesEmerging markets and developing countries

3.7%

2019 2020 2021

6.6%

-1.0%

Figure 1: Economic scenarios

G-20 membersSub-Saharan Africa and Asia

(selected low and middle income countries)

Small states Aggregates

ALEXANDER FORBES INVESTMENTS

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2a. Global asset class performance in USD

2b. Local asset class performance in ZAR

Sources: Bloomberg and Alexander Forbes Investments

Sources: Bloomberg and Alexander Forbes Investments

10%

20%

10%

0%

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-20%

-30%

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15%

MSCI DM Index

ALSI TOP40 Index Capped Swix Resources Financials Industrials ALBI(bond index)

Local Property Local Cash

8.7

4.6 4.5 5.3

13.8

2.8 1.7 0.6 1.6 1.60.0

-21.4 -19.2

-26.6 -25.2

-39.4

-8.5 -8.7

-47.7

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-0.4

4.42.0

-27.6

-14.9

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-20.9 -21.3-23.6

MSCI ACWI Index MSCI EM Index Citi World GBIMSCI EFM EX SA Index

JP Morgan EM Bonds

MSCI UK

5%

-5%

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-15%

-20%

-25%

-30%

-35%

0%

Q4 2019

Q4 2019

Q1 2020

Q1 2020

Figure 2: Asset class performance

ALEXANDER FORBES INVESTMENTS

MARKET AND ECONOMIC OUTLOOK

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Global currencies weakened against the US dollar as investors fled to safe-haven assets like the USD cash. Despite the ease of the Brexit turmoil in the quarter, the GBP weakened against the US dollar, falling by 6.3% in Q1 2020 following an appreciation in the previous quarter. The euro weakened by 1.6% in Q1 2020 from an appreciation of 2.9% in the last quarter of 2019. The US dollar appreciated against the majority of the emerging market currencies, including the Brazilian real and South African rand which depreciated by 29.2% and 27.4% in Q1 2020, respectively.

The commodity index fell by 19.4% in Q1 2020 from an increase of 7.0% in Q4 2019. Oil prices saw the biggest decline among the commodity complex, largely due to the price war between Saudi Arabia and Russia combined with weak global demand. In Q1 2020, the oil price tanked by 65.5% to $22.7 per barrel, while platinum, copper and silver fell by 25.2%, 20.3% and 21.7%, respectively. For the first time WTI oil price futures have entered into negative territory, which effectively means that oil producers would pay buyers to have the oil, reflecting an oversupply in the market as economies in lockdown and grounded airlines have significantly reduced demand for oil.

Global currencies weaken against the US dollar and commodities weaken over demand concerns

3a. DM FX vs. the US dollar

3b. EM FX vs. the US dollar

Sources: Bloomberg and Alexander Forbes Investments

Sources: Bloomberg and Alexander Forbes Investments

Figure 3: Global currencies tanked over the fears of the global recession

20%

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-5%

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-15%NOK

BRL ZAR RUB MXN IDR CLP TRY HUF THB INR MYR VND CNH PHP

CAD SEK DKK CHE JPY EUR GBP NZD AUD

Q4 2019

Q4 2019

Q1 2020

Q1 2020

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ALEXANDER FORBES INVESTMENTS

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COVID-19 found the South African economy already in a technical recession, having recorded two consecutive quarters (the third and fourth of 2019) of negative growth and an overall growth rate of only 0.2% for the year as a whole. The impact of COVID-19 remains uncertain as there is no way of knowing how long the underlying COVID-19 pandemic will last and as a result, how long the lockdown will remain in place. Various sectors that are not deemed essential remain closed with indications that there will be a phased-in approach to reopening the economy after 30 April. Economic growth forecasts range from -1% to -10%, with the wider range reflecting the level of uncertainty.

The SARB cut rates by 225 bps and relaxed regulatory requirements to boost liquidity

The South African Reserve Bank (SARB) cut the repo rate by a cumulative 225 basis points to 4.25% to reduce the cost of debt to the economy and help cushion businesses and households. This is a similar monetary policy-easing approach to other central banks around the world aimed at buffering the economic fallout of COVID-19. The bank announced additional monetary policy measures to stimulate liquidity in the markets, including buying government bonds from the secondary market and reducing regulatory requirements for banks, which combined, have released over R500 billion in liquidity.

The SARB forecasts headline inflation to average at 3.8% y/y in 2020, well below the bank’s midpoint target of 4.5%. Projections for 2021 and 2022 are set to average 4.6% y/y and 4.4% y/y, respectively, well within the 3%-6% target set by the bank. With this low inflation forecast, there is still room for at least one more rate cut, which is also shown by the bank’s forecast of the repo rate.

Moody’s downgraded South Africa's sovereign credit rating to sub-investment grade (Ba1), retaining a negative outlook.This is the first level into sub-investment grade and effectively completes the trio of the major credit rating agencies (Fitch and S&P) as sub-investment grade. The credit rating agencies assessed that South Africa has a lower probability of comfortably honouring its debt commitments, and as a result, investors are likely to require a higher compensation for the risk taken. The main reasons for the downgrade were:

• South Africa’s credit profile that is increasingly constrained by deep and widespread fiscal pressures

• persistently low economic growth amid social and political obstacles to reforms

• the reduction in the fiscal space due to government debt-to-GDP and an increase in interest payments

• unreliable electricity supply, persistent weak business and investment confidence

• the long-standing structural labour market rigidities that continue to constrain domestic economic growth

There is a low likelihood that the credit rating will improve in the short term, more so with the sudden economic and financial consequences brought on by the COVID-19 pandemic. Therefore, any effort to improve South Africa’s financial and economic constructs may prove to be more challenging. However, this is also an opportunity for the nation to rebuild the economy. Moody’s suggested that to improve South Africa’s credit rating the following factors should be considered:

• government’s ability to quickly develop a credible strategy to halt and ultimately reverse the rise in debt, and

• government’s ability to implement the range of measures required to improve economic growth prospects, financing risks remaining low as well as an improved likelihood that government debt could stabilise relative to GDP.

A R500 billion fiscal package (10% of GDP) to mitigate the impact of COVID-19

President Cyril Ramaphosa announced a R500 billion fiscal package (10% of GDP) to support the local economy and fight the spread of the virus. The package will be divided as follows: R20 billion will fund the health response to coronavirus, a loan guarantee scheme amounting to R200 billion will be introduced in partnership with major banks, the National Treasury and SARB to assist companies with operational costs, salaries, rent and supplier payments, among other things. A R50 billion allocation will support those receiving welfare grants and the unemployed. The government has set aside R100 billion for job protection and creation after the pandemic. Furthermore, the President announced R70 billion in tax relief measures. Of this, R20 billion will be made available to municipalities for the provision of emergency water supply, increased sanitisation of public transport and facilities, and providing food and shelter for the homeless.

Outlook for South Africa’s economy

2019 ASSET ALLOCATION UPDATE

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The R500 billion stimulus package comprises R200 billion in credit guarantee scheme, R130 billion in reprioritised spending that was already allocated to national departments, and R70 billion in tax relief. The remaining R100 billion will be funded from international lenders such as the World Bank, IMF, BRICS New Development Bank and the African Development Bank. As a member of the IMF, South Africa pays a subscription, which entitles the country to $4.2 billion (R79.8 billion) in emergency funding, should it request financial support to fight the coronavirus. The loan would be typically payable over 3.25 to 5 years and at an interest rate of just over 1%. This, together with the $1.0 billion funding applied for from the New Development Bank, equate to R95 billion, which would leave the country with a shortfall of R5 billion that can easily be raised from the World Bank or the African Development Bank at lower interest rates compared to capital markets. The 2%

Sources: Alexander Forbes Investments

Figure 4: Summary of SA’s R500 billion fiscal package (10% of GDP)

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0Loan scheme Jobs protection/

creationTax relief Social grants UIF COVID-19 Municipalities

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debt-to-GDP rise due to this funding is very small. However, the expected contraction in the economy will lead to an increase in the debt-to-GDP ratio to around 80% of GDP while the fiscal deficit will rise to 14% of GDP.

The impact of COVID-19 is still unfolding and we will get a clearer picture as more data become available. What is clear is that economic activity has been negatively impacted, companies are experiencing cashflow problems and jobs will be lost. Monetary and fiscal stimulus will help in offsetting this impact, but more is required to lift economic growth in a post-COVID-19 environment. Structural economic reforms and investment will be pivotal, and indications so far suggest that there is more determination to implement this time around. Only time will tell.

MARKET AND ECONOMIC OUTLOOK

Asset allocationAsset allocation | | All cycles turn eventually All cycles turn eventuallyRob PriceRob Price | Head of Asset AllocationHead of Asset Allocation

Key themes:

■ COVID-19 pandemic is the trigger, not cause, for global recession

■ Volatility and risk repricing after years of complacency

■ Our solutions were defensively positioned heading into Q1 2020

■ Long-term asset class return expectations improving

■ Coast is not clear in short term■ Value in South African real interest rates■ Ripe conditions for active management

and hedge funds

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ALEXANDER FORBES INVESTMENTS

We have warned about volatility and low investment returns for a long time. The coronavirus is just the trigger to take the global economy and financial markets into a period of correction, lower returns and heightened volatility. We are never likely to predict the exact cyclical trigger, and we did not predict the virus, but the underlying imbalances in financial markets and the global economy pointed towards the need for this correction, well before the coronavirus ensued. While painful, correction is what we require to generate a better and more sustainable outlook. Long-term returns are improving under these conditions, but we are still cautious and expect further challenges over the coming quarters.

We cannot avoid our problems forever

After the longest and weakest economic expansion cycle on record, the United States (US) economy will enter a recession in 2020. The 2009-2020 cycle was 11 years compared with the post-World War II average of five years, and real GDP expanded 2.6% (annualised) during this cycle compared with the post-war average of 3.9%. It seems contradictory, but one of the reasons for the uncharacteristically weak and long cycle was deliberate attempts to avoid a recession. Policymakers used low interest rates and debt to stimulate the economy as much as possible. Developed market interest rates fell to their lowest levels on record during the most recent cycle and debt-to-GDP levels are at their highest levels since World War II, which highlights the overuse of monetary and fiscal policy. This is not just a US or developed market phenomenon. South African

interest rates also fell to their lowest levels on record during this cycle and debt levels to their highest. Debt suggests a preference for consuming today, rather than in the future, which makes today feel better than it should like a weekend shopping binge on credit. The rising trend in debt implies that it was not spent productively, the longest and weakest cycle on record. Eventually, the debt needs to be repaid, which is painful.

Table 1: 2009-2020 US business cycle was the longest and weakest in post-WWII history

Start End YearsAnnualised Real

GDP growth

Nov-45 Oct-48 3

Nov-49 Jun-53 4 6.4%

Jun-54 Jul-57 3 3.5%

May-58 Mar-60 2 5.5%

Mar-61 Nov-69 9 4.9%

Dec-70 Oct-73 3 4.0%

Apr-75 Dec-79 5 3.8%

Aug-80 Jun-81 1 2.4%

Dec-82 Jun-90 8 4.1%

Apr-91 Feb-01 10 3.5%

Dec-01 Nov-07 6 2.7%

Jul-09 Dec-19 11 2.2%

Average 5 3.9%

Source: Alexander Forbes Investments

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1919 1929 1939 1949 1959 1969 1979 1989 1999 2009 20190

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Debt/GDP ave

RHS: US, UK, JP, EU ave. (central bank interest rates)

The last time we accumulated this much debt, the world was at war

Source: NBER and Alexander Forbes Investments

Figure 1: Low interest rates and debt overused by policymakers during this cycle

ASSET ALLOCATION

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Hiding behind debt creates risks and complacency

Persistent use of debt and interest rates is unsustainable. It is also dangerous because the low cost of debt induces less sensible investment and spending decisions. For example, cheap debt can make a risky business venture seem profitable, an expensive luxury car seem affordable or a leveraged investment into a speculative asset class seem prudent. These errors build up before recessions, like deadwood that builds between forest fires. Regular forest fires burn off the deadwood, allowing the ecosystem to rejuvenate quickly and remain healthy. Regular intervention to postpone short-term difficulty of a small forest fire, leads to a build-up in deadwood and greater pain when its fire finally ignites. Regular forest fires cause risk to be priced correctly and a healthy dose of scepticism keeps risks in check, whereas the longer the cycle extends, the greater the degree of complacency.

During the boom times, it is challenging for the man on the street to see the deadwood, but once the correction emerges it is easily visible. Numerous countries and corporates will have their credit risk downgraded during this recession. These downgrades should have taken place many quarters before

the recession but low global interest rates and reduced global volatility made the more inflated credit ratings seem palatable at the time. South African and UK government debt downgrades in March 2020 are just two examples of this dynamic where credit risk suddenly appears more obvious during a global recession.

Cyclical challenges dictated defensive positioning

The late stage in the economic and financial market cycles, was one of the reasons why our solutions were reasonably defensively positioned over recent quarters, with hedge fund, cash and large offshore allocations. Our solutions have benefited from their asset allocation during the Q1 2020 volatility, which is good. But absolute return performance on many portfolios is still likely to be poor and tough to digest for clients. Amongst South African asset classes, it is only nominal bonds and cash that beat inflation over the past five years. Globally, returns were still poor but were assisted by 8% annualised US dollar gains versus the rand. Despite the benefit from offshore exposure, the current real return experience for South African investors is only comparable with the rare negative returns experienced around 1992 and 2012.

Figure 2: Real 5-year returns for basic Reg 28 compliant portfolio are negative

Source: Alexander Forbes Investments

15%

5%

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5-year real rolling annualised returns (basic portfolio, 45% SA equity, 25% SA Bonds, 10% Global Bonds, monthly re-balancing

1990 1995 2000

10%

2005 2010 2015

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MARKET AND ECONOMIC OUTLOOK

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(5-year real annualised returns)

Asset class (rand-denominated for SA asset classes and USD for global asset classes)

5-year period to end ~

~ March 2020 ~ March 2015 ~ March 2010 ~ March 2005 ~ March 2000

Local Equities (FTSE/JSE ALSI) -5% 10% 12% 10% 6%

Local Property (SAPY) -19% 8% 6% 8% -9%

Local Nominal Bonds (All Bond Index, ALBI) 0% 4% 1% 10% 11%

Local ILBs (CILI) -3% 5% 4% 11% NA

Local Cash (SteFI) 2% 0% 2% 5% 8%

Global Equities (MSCI World, USD) 2% 9% 1% -5% 17%

EM Equities (MSCI EM, USD) -2% 0% 13% 2% 3%

US Government Bonds (Treasury Index, USD) 2% 4% 3% 5% 5%

Global Government Bonds (FTSE WGBI, USD) 1% 3% 1% 3% 5%

EM Bonds (Barclays EM Aggregate, USD) 1% 5% 7% 9% 16%

US Cash (USD) 0% -1% 1% 1% 3%

Rand - Dollar * 8% 11% 3% -1% 13%

Prospects improve as we uncover errors

With markets correcting, the long-term return outlook improves dramatically. This is the ‘silver-lining’ in this environment. It is through uncovering our problems and admitting that they exist, that we can solve them and invest in a better future. Real return expectations over the next five years on global equity are returning to 7% annualised, while South African equity the expectations are returning towards 5%, which is encouraging but not outlandishly cheap. South Africa’s weak economic growth outlook remains a constraint for South African equity.

Have we reached the bottom?

A better long-term return outlook does not eliminate the possibility of further short-term pain. Trying to pick the market bottom is a dangerous game – we will only know in hindsight. We manage portfolios by balancing the risks and opportunities presented to us in financial markets. Opportunities are emerging and we are adjusting portfolios to take advantages of these, but not going gang-ho into risk just because of the cheaper valuations. In the past, global and South African equities have experienced more pronounced and longer bear markets than March 2020. Moreover, the lack of policy ammunition implies that the future presents different challenges to the past. Long-term expectations play out over the long term, not the short term. In the short term we expect further difficulty, volatility and a continuation of the bear market.

Note*: rand - dollar positive values = rand weakness. Rand - dollar data is nominal, not real.

Property needs to clarify short-term uncertainties

Often there is good reason for cheap valuations. We may require more clarity within a sector before seizing an opportunity. South African property is a good example. The sector corrected 50% in Q1 2020 and has now fallen almost 20% annualised in real terms over the past five years. It looks cheap, but short-term uncertainty needs to be clarified before we will have greater confidence in the long-term return outlook. We need to know how long the lockdowns will continue, whether tenants will pay rent, which tenants will make it through this cycle, how much rent will they pay and what support can regulators and banks provide? As these answers become clearer in the coming months, it may begin to create an encouraging return prospect in this sector.

Ripe conditions for active management and hedge funds

Asset managers that make it through the next few months should outperform their benchmarks over the coming years, seizing on market dislocations. Hedge funds have benefited in these conditions and added value to major accumulation, or growth, phase portfolios. In contrast to active management, many global Exchange Traded Funds (ETFs) have experienced uncharacteristic illiquidity lately. It is frustrating for investors to experience illiquidity within vehicles that were sold for their liquidity characteristics. Persistent illiquidity could cause investors to pay the premium for active management where risks are managed actively.

Table 2: Low real historical returns

ASSET ALLOCATION

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ALEXANDER FORBES INVESTMENTS

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Illiquidity has become a challenge within major US fixed income markets too. We will remain circumspect on the broader market outlook until these US dollar funding challenges alleviate. The weak growth and low interest rate outlook have resulted in a dramatic fall in developed market bond yields. The lower these

yields fall, the more pressure on the long-term return outlook from these bonds, which poses a challenge for pensioners and insurers in these markets. At some point these lower yields will force investors to take allocations elsewhere. Non-growth sensitive commodities like precious metals will be one beneficiary.

Externalities of falling developed market bond yields

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1995

1995 1999 2003 2007

1999 2003 2007 2011 2015 2019

SA-US 10-year spread

PPP (based to Jan 2000)

long-term ave (6.4%)

USD-ZAR currency

+1 std-dev

–1 std-dev

+2 std-dev

Source: Alexander Forbes Investments

Source: Alexander Forbes Investments

Figure 3: SA 10-year bond spread over US Treasuries is attractive for foreign investors

Figure 4: USD-ZAR more than 2 standard deviations from Purchasing Power Parity (PPP) valuation

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2011 2015 2019

MARKET AND ECONOMIC OUTLOOK

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Extreme real rate differentials in South Africa

The dramatic weakening in South African government bonds makes the real yields attractive. South African bonds are yielding more than 10% above their US counterparts and could return above 5% real annualised returns over the coming years. The South African rand blew out to R19/$ in early April 2020, its highest levels on record and 2 standard deviations away from its purchasing power parity valuation. Challenges within US funding markets imply that the pressure could remain on the rand in the short term, but this type of extreme currency valuation is noticeable. Many portfolios that fall under regulation 28 are breaching their 30% offshore allocation mandate – we will use extreme currency valuations as an opportunity to rebalance those breaches.

Opportunistic value emerging but caution still advised

Global authorities will try to circumvent the economic and market correction through doubling down on low interest rate policies and expanding government balance sheets. We are aware that these can buoy financial markets over the short term but also cognisant that these policies reduce the long-term growth potential because they intervene with the market-clearing mechanism and reallocation of capital, which is so desperately needed. As we have seen, these policies have already been overused so the market is now more sceptical when assessing their efficacy. There is a balancing act between long-term opportunities, shorter-term risks, much needed corrections and policymakers who want to avoid adjustment. We continue to balance these factors, through our risk management framework, allocating across a diverse range of opportunities and make use of asset allocation to support clients on their journey towards their savings goals.

Note: Any projections contained in the information in this report are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be realised in the future. Historical returns are no guarantee of future performance.

ASSET ALLOCATION

ALEXANDER FORBES INVESTMENTS

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ALEXANDER FORBES INVESTMENTS

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 licence number 711. This information is not advice, as defined and contemplated in the Financial Advisory and IntermediaryServices 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. An investor may not recoup the full amount invested.

All policies issued or underwritten by Alexander Forbes Investments are linked policies, under which no guarantees are issued. The policy benefits are determined solely on the value of the assets, or categories of assets, to which the policies are linked.

Past performance is not necessarily an indication of future performance. Forecasts and examples are for illustrative purposes only and are not guaranteed to occur. Any projections contained in the information are estimates only and are not guaranteed to occur. Such projections are subject to market influences andcontingent upon matters outside the control of Alexander Forbes Investments, so may not be realised in the future.

Please be advised that there may be supervised representatives.

Company registration number: 1997/000595/06

Pension Fund Administrator number: 24/217

Insurer number: 10/10/1/155

Postal address: PO Box 786055, Sandton 2146

Physical address: 115 West Street, Sandown 2196

Telephone number: +27 (0) 11 505 6000

The complaints policy and conflict of interest management policy can be found on the Alexander Forbes Investments website: www.alexanderforbesinvestments.co.za.

DISCLAIMER FOR QUALIFIED INVESTOR HEDGE FUNDS

RISKS (PORTFOLIO SPECIFIC) Derivatives: There is no assurance that a portfolio’s use of a derivative strategy will succeed. A portfolio’s management may employ a sophisticated risk management process, to oversee and manage derivative exposures within a portfolio, but the use of derivative instruments may involve risks different from, and, in certain cases, greater than, the risks presented by the securities from which they are derived.

Disclaimer

Exposure to foreign securities: Foreign securities within portfolios may have additional material risks, depending on the specific risks affecting that country, such as: potential constraints on liquidity and the repatriation of funds; macroeconomic risks; political risks; foreign exchange risks; tax risks; settlement risks; and potential limitations on the availability of market information. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Investors are reminded that an investment in a currency other than their own may expose them to a foreign exchange risk.

Hedge fund of funds: A hedge fund of funds is a portfolio that invests in portfolios of collective investment schemes (unit trusts) that levy their own charges, which could result in a higher fee structure for the fund of funds.

Drawdown: The potential magnitude of loss - the largest peak-to-trough decline in returns over the period, also known as the maximum drawdown.

Liquidity: The risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).

Equities: The value of equities may vary according to company profits and future prospects, as well as more general market factors. In the event of a company default, the owners of their equity rank last in terms of any financial payment from that company.

Bonds: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates and/or inflation rises. Bonds issued by major governments and companies, will be more stable than those issued by emerging markets or smaller corporate issuers. If an issuer experiences financial difficulty, there may be a risk to some, or all, of the capital invested. Any historical or current yields quoted should not be considered reliable indicators of future performance.

For a detailed description of these risks, and other risks that are relevant to the portfolio, please refer to the CIS RISK DISCLOSURE DOCUMENT, available on the website.

GENERAL Collective investments (unit trusts) are generally medium-term to long-term investments, but a hedge fund may have short-term strategies and practices. The value of participatory interests (units) or the investment may go down as well as up. Past performance is not necessarily a guide to future performance. Hedge funds

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trade at ruling prices and prices may fluctuate post publication. Hedge funds can engage in scrip borrowing and scrip lending. The manager does not provide any guarantee, either with respect to the capital or the return of a portfolio. Any forecasts and/or commentary in this document are not guaranteed to occur. Different classes of participatory interests apply to these portfolios and are subject to different fees and charges. A SCHEDULE OF FEES AND CHARGES, with maximum commissions, is available on request from us or from your financial adviser. Forward pricing is used. Hedge funds are CIS with a strategy that allows for leveraging and short-selling strategies. Hedge fund strategies can result in losses greater than the market value of the fund, but investors’ losses are limited to the value of the investment or contractual commitments. Hedge funds can also invest in illiquid instruments. While CIS in hedge funds differ from CIS in securities (long-only portfolios) the two may appear similar, as both are structured in the same way, and are subject to the same regulatory requirements. Further risks associated with hedge funds include: investment strategies may be inherently risky; leverage usually means higher volatility; short-selling can lead to significant losses; unlisted instruments might be valued incorrectly; fixed income instruments may be low-grade; exchange rates could turn against the fund; other complex investments might be misunderstood; the client may be caught in a liquidity squeeze; the prime broker or custodian may default; regulations could change; past performance might be theoretical; or the manager may be conflicted. For a detailed description of these risks, please refer to the HEDGE FUND RISK DISCLOSURE DOCUMENT, available on the website.

REDEMPTIONS A Qualified Investor Hedge Fund (QIHF) can borrow up to 10% of the value of the portfolio, for redemptions of participatory interests. The ability of a portfolio to repurchase, is dependent upon the liquidity of the securities and cash of the portfolio. A manager may, in exceptional circumstances, suspend repurchases for a period, subject to regulatory approval, to await liquidity, and the manager must keep the investors informed about these circumstances.

PERFORMANCE FEES Performance fees are not levied on the portfolio, although they have been provided for. Investors will receive three months’ written notice, if performance fees will be levied in the future. The rate of return is calculated on a total return basis, and the following elements may involve a reduction of the investor’s capital: interest rates, economic outlook, inflation, deflation, economic and political shocks or changes in economic policy.

PERFORMANCE RETURNSLump-sum performance returns are being quoted. Income distributions, prior to deduction of applicable taxes, are included in the performance calculations. NAV to NAV figures have been used for the performance calculations, as calculated by the manager at the valuation point defined in the deed, over all reporting periods. Investment performance calculations

are available for verification upon request by any person. Reinvestment of income is calculated on the actual amount distributed per participatory interest, using the ex-dividend date NAV price of the applicable class of the portfolio, irrespective of the actual reinvestment date. The performance is calculated for the fee class. The individual investor performance may differ, as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. The rate of return is calculated on a total return basis, and the following elements may involve a reduction of the investor’s capital: interest rates, economic outlook, inflation, deflation, economic and political shocks or changes in economic policy. Annualised returns are period returns re-scaled to a period of one year. This allows investors to compare returns of different assets that they have owned for different lengths of time. All period returns greater than one year have been annualised. Returns for periods less than one year have not been annualised. A cumulative return is the aggregate amount an investment has gained or lost over time, independent of the period of time involved. Actual annual figures are available to the investor on request.

PRICES PRICES are published daily in the Business Report (South Africa’s National Financial Daily) and are made available on the website.

VALUATION AND CUT-OFF TIME The QIHFs are valued on the last day of each calendar month. The pricing date is the last day of each calendar month. The withdrawal instruction must be received before 13:00, at least five business days (or shorter, as determined by the manager) prior to the pricing date, failing which, the pricing date in the following calendar month will apply.

CLOSURE OF THE PORTFOLIO The manager shall, in its absolute discretion, without notice or on such notice as it may determine, be entitled from time to time to close the portfolio to new investments and/or to close the portfolio to investments from new investors and/or to accept new investments only from certain persons or groups of persons and/or to limit or suspend the creation and issue of new participatory interests, in each case on such terms as it may determine, if such restrictions will, in the manager’s view, benefit the portfolio or the effective management thereof or for any other reason whatsoever. The manager shall, in its absolute discretion, determine the date from which any such restrictions shall take effect, the date from which any such restrictions shall cease to apply and/or the date on which any such amended restrictions shall apply.

STRUCTURE OF THE PORTFOLIO The portfolio was established as a collective investment scheme trust arrangement on 26 May 2016, with the conversion process being completed on 1 November 2016. All prior information was in an unregulated environment. The portfolio will not change its investment strategy or investment policy without prior approval

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from the Financial Sector Conduct Authority and investors. The ballot procedure, as prescribed in CISCA and the Deed, will be followed.

COUNTERPARTIES AND PRIME BROKERS We do not enter into counterparty or prime broker arrangements, but the underlying portfolios may enter into such arrangements. We receive reporting on counterparty exposure levels from the underlying portfolio managers and this information can be provided on request.

ADDITIONAL INFORMATION For more information on the portfolio, refer to the following documents, available from your financial adviser, or on request from the manager, at no additional costs.

▪ MINIMUM DISCLOSURE DOCUMENTS▪ PORTFOLIO SUMMARY ▪ ANNUAL REPORT ▪ FEE AND CHARGES SCHEDULE▪ APPLICATION FORM (LEGAL ENTITIES)▪ APPLICATION FORM (INDIVIDUAL INVESTORS)

COMPLAINTS The COMPLAINTS POLICY AND PROCEDURE, and the CONFLICTS OF INTEREST MANAGEMENT POLICY are available on the website. Associates of the manager may be invested within certain portfolios, and the details thereof are available from the manager.

CONTACT DETAILS

CIS ManagerAlexander Forbes Investments Unit Trusts Limited is registered as a manager, in terms of the Collective Investment Schemes Control Act, and through Alexander Forbes Group Holdings Limited, is a member of the Association for Savings and Investment South Africa (ASISA).

Registration number: 2001/015776/06

Physical address: 115 West Street, Sandown, 2196

Postal address: PO Box 786055, Sandton, 2146

Telephone number: + 27 (0)11 505 6000

Email address: afinvestments@aforbes.com

Website: www.alexanderforbesinvestments.co.za

Board members: M Ramplin, S Mtemererwa, M Denenga, L Stott,

R Knipe

Trustee, Custodian and Depository

FirstRand Bank Limited, acting through RMB Trustee Services

Registration number: 1929/001225/06

Physical address: No 3 First Place, Corner Jeppe and Simmonds

Streets, Johannesburg, 2001

Postal address: PO Box 7713, Johannesburg, 2000

Telephone number: +27 (0) 87 736 1732

Email address: info@rmb.co.za

The trustee is registered, as a trustee, in terms of the Collective

Investment Schemes Control Act.

Investment Manager Hedge FundsCaveo Fund Solutions (Pty) Limited, registration number 2003/017504/07, is a licensed authorised Financial Services Provider (FSP), as a hedge fund FSP, in terms of section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002, as amended, FAIS licence number 24297. The address is the same as the manager. This information is not advice, as defined in the Act. Please be advised that there may be supervised representatives.

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