Quality to the core investments

news+insights

Quality to the core

Will your investments pass the stress test?

02Events that moved the market Signs of global recovery

07 Q&A with Nersan Naidoo ‘Delivering on promises means attracting the best’

09 Is SA a quality destination for capital? Cash there but not in use

intelligenceQ3 2014

02 News and insights from Sanlam Investments

2 JUL The ALSI hits another

record high for 2014 at 51 883, buoyed by signs of a recovering

global economy.Source: ft.com (2 Jul 2014)

3 JUL The broad measure of US unemployment falls to 12.1%, the lowest level since October 2008.Source: US Bureau of Labour

Statistics (3 Jul 2014)

10 AUG African Bank is placed under curatorship, SA’s first bank failure since Saambou in 2002.

25 AUG The Democratic

Republic of the Congo becomes the fifth

African country this year with residents testing

positive for the deadly Ebola virus.

17 JULThe US imposes sanctions on three Russian companies closest to Vladimir Putin over his failure to curb Ukraine violence.

13 AUG The Japanese sales tax hike takes its toll, as data released shows the world’s third-largest economy shrunk by an annualised 6.8% in 2Q14.Source: Forbes (13 Aug 2014)

31 JUL The IMF reports that Japan’s Abenomics

has contributed to an inflation pickup, but medium-term risks remain substantial.

Source: iMFdirect (14 Aug 2014)

20 AUG The SA Reserve Bank

criticises Moody's decision to downgrade

Standard Bank, FirstRand, Nedbank and Absa.

1 JUL Only a week after

the mining strike is resolved, metalworkers union Numsa launches

its strike.

Q3

Events that moved the market

Signs of global recovery, but not SA

7 AUG The SA business

confidence index drops from 89.7 in June to 87.9

in July, the lowest level since September 1999.

Source: sacci.org.za (7 Aug 2014)

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

27 AUG Amid tougher

international regulations, Pictet becomes the first

of the Swiss private banks to release financial

results, breaking a 209-year-old tradition.

28 AUG The US Commerce Department reports that the country’s real GDP growth for 2Q14 was 4.2%.Source: Fortune (3 Sept 2014)

8 SEPT A surprise drop in Chinese imports and higher-than-expected exports push China’s trade surplus to an all-time high of $49.8 billion.Source: Wall Street Journal

(8 Sept 2014)

5 SEPT The Japanese yen hits a six-year low against

the US dollar.Source: Wall Street Journal

(11 Sept 2014)

12 SEPT Data is released

showing that SA factory output has dropped to

a five-year low.Source: BDlive.co.za

(12 Sept 2014)

18 SEPT Gill Marcus announces

that she’ll step down as Governor of the SA

Reserve Bank after only one term.

4 SEPTIn a surprise move, the European Central Bank cuts its refinancing rate to 0.05%, emphasising its divergence from the US and UK’s monetary tightening.Source: Wall Street Journal

9 SEPT The SA current account deficit expands to 6.2% of GDP in 2Q14, driven by lower global demand and the impact of earlier strikes on exports.Source: SARB Quarterly Bulletin

(9 Sept 2014)

4 SEPT The FTSEurofirst 300

index of top European shares hits its highest

level since early 2008.Source: ft.com (4 Sept 2014)

9 SEPT SA domestic spending

slows for the fourth quarter in a row, in line

with a moderation in growth in households’

disposable income.Source: SARB Quarterly Bulletin

(9 Sept 2014)

26 AUG Data shows SA real GDP

growth is nearly flat for the first half of 2014, after the 0.6% growth in 2Q14 trails

a 0.6% decline in 1Q14.Source: Statistics South Africa

(26 Aug 2014)

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Signs of global recovery, but not SA

News and insights from Sanlam Investments04

NEWS

Can your investment

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the storm?ride out

It pays to choose your fund manager wisely. Ask the right questions and expect clear answers.

Recovery track of the ALSI after 2008 correction

FTSE/JSE All Share TR ZAR Source: Morningstar Direct Sept 2014

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60.00

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10One of the most common mistakes that investors make is to choose a fund manager purely on the grounds of good returns. Even a long track record by an award-winning fund can hide a multitude of sins. While you need to take risk to produce inflation-beating returns, you want to be sure that your fund manager takes no undue risk, invests

in a sound mix of high-quality (sometimes lower-yielding) counters and lower-quality (but higher-yielding) counters, and that you are sufficiently compensated for the risk in your portfolio.

The proverbial cyclone does not hit the investment landscape every year, but when it does and the debris settles, it soon becomes clear who invested in quality and who didn’t.

It starts with the right advice Time in the market is important, particularly where an equity or property investment is concerned. When the equity market corrects, very few share prices remain unscathed. Defensive portfolios normally experience a lower-than-market-average drop in value, but it could take several months – even years – for an investor who invested just before a crash to get his money back, let alone show a real return. Investors who don’t have the time to mend their sails should rather choose the safe harbour of more conservative investments.

A good financial adviser will steer a conservative, short-term investor away from higher-risk, higher-return investments, which require patience and a

longer-term commitment to realise their full value. Such a recommendation is by no means a reflection on the quality of the portfolio. The expected volatility (or market risk) of an equity portfolio is simply too high for, say, a two-year investment term. A sound investment is therefore first and foremost an appropriate investment – one that is right for the specific investor’s needs and investment horizon.

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

High-quality equity portfoliosAs far as equity investments are concerned, Patrice Rassou, Head of Equities at Sanlam Investments, and his team assess the following to determine the quality of a company:

• The past financial returns of the company, using as much financial history as they can obtain

• The track record of company management with respect to capital allocation

• The level of corporate governance within the company, by interacting with the boards of the companies they invest in.

Investing in people with integrityAs far as his criteria for company management is concerned, Patrice favours shrewd CEOs who will exit value-destroying lines of business early and allocate capital only to value-accretive opportunities.

‘We look for managers who, like us, focus on the long term and who do not take shortcuts to achieve their goals. We first and foremost make sure that we invest our clients’ money in companies run by people with integrity. We appreciate management who are open and prepared to interact with our team, sometimes three or four times a year. Experience has taught me that good managers are very hands-on and they focus on running their company – not on their share price.’

Lessons from the pastAfter more than two decades in financial services, Patrice can recall many poignant failures of SA companies. He points out, ‘It is no surprise that African Bank, Unifer and Saambou were all victims of exuberant lending in the unsecured market, which led to bad debts and eventually the bank’s inability to service its liabilities. This shows that industries focused on growth often assume too much risk when the environment is benign, only to pay the price when economic growth slows.’

Value investors welcome varying qualityThe JSE has been on a bull run since 2008 and the share prices of quality-listed companies have been bid up by investors looking for growth opportunities. Value managers, such as Sanlam Investments, invest in high-quality companies if their share prices are offering value, but also invest in lower-quality stocks if there is a sufficient margin of safety built into the purchase price. Often such opportunities are ignored by market participants who prefer to invest in the fad of the moment.

Patrice reminds investors that resource companies are often seen as low quality because they are cyclical, require high capex and are dependent on commodity prices. ‘So, after the global financial crisis, we were able to accumulate a large position in resources stocks when they were heavily sold off.’

With the constant stress testing of portfolios and clear expectation management by fund managers and intermediaries, the next storm should bring no surprises.

Is sticking to the Collective Investment Schemes Control Act (Cisca) guidelines good enough? It’s possible to lose a significant amount of money while obeying the Cisca guidelines for unit trust investments. Chris therefore imposes stricter rules for managing credit concentration risk. He believes that the framework his team follows, if applied correctly, should minimise the need to write off more value than the excess performance relative to benchmark over a one- to two-year period, after a single credit event.

The problem with credit ratingsCredit rating agencies provide credit ratings in return for a fee, which means they are inherently conflicted. They are also often hesitant to announce a downgrade, as that may precipitate a crisis. An important downgrade therefore sometimes happens only after a credit event, which doesn’t help fund managers much. Sanlam Investments therefore uses its own credit analysts and its own internal credit ratings, and only depends on external ratings agencies when clients specifically request this.

Diversification for a robust portfolio Diversification is the backbone of a portfolio, irrespective of whether you are investing in equity, property or fixed interest. Should one issuer or company collapse, there should be enough other counters in your portfolio to sustain investment performance.

Chris Hamman, Head of Fixed Interest at Sanlam Investments, believes that fixed interest portfolios should not have more than 10% exposure to any counterparty, unless that party is one of the four big banks or debt guaranteed by the SA government, and no more than 5% exposure to any one SA company. ‘You want a balance of high- and low-quality counters.’

Quality in the fixed interest space In the fixed interest space, the same issuer can issue several instruments, all with different levels of quality, for example, senior debt, subordinated debt, mezzanine debt, preference shares and other types of shares.

Should an issuer fail, as happened with African Bank recently, the holders of senior debt are first in line for capital repayments. Chris points out that senior unsecured debt is of the highest quality because it gives the claimant a claim over the entire balance sheet of the company.

Chris recommends that investors make sure that:

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Chris Hamman

A high-quality fixed-interest portfolio will be one where the individual counterparties have strong balance sheets and where there is very little concentration risk. One needs to distinguish between necessary and unnecessary risk. ‘We do not believe that you are compensated for concentration risk and we therefore minimise this type of (unnecessary) risk,’ Chris stresses, ‘but clients with a higher risk appetite or who need growth, will need a (lower quality) higher credit risk portfolio.’ Credit risk is a function of the strength of the balance sheets of the counterparties to whom you lend.

Senior debt

Subordinated debt

Mezzanine debt

Preference shares

Other shares

The pecking order for capital repayments

Source: Sanlam Investments

They understand where the money to service the interest and repay the interest is coming from

Their fund managers are accurately and transparently marking to market (valuating) the investment and able to explain their methodology in simple terms

The fund manager takes no undue credit concentration risk, that is, the portfolio is well-diversified

They have no undue exposure to low-quality instruments.

Patrice Rassou


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The trustee By law, before a unit trust can be launched, the unit trust management company (manager) needs to appoint a trustee to safeguard the assets of the unit trust.

The trustee is usually a bank or other financial institution that is in no way associated with the manager or the fund manager.

The trustee must be independent, and cannot be a subsidiary or holding company of the manager.

Every unit trust has a mandate that states its investment objectives and what the fund manager may do to achieve these goals.

The trustee needs to make sure the fund is managed according to the rules of the mandate and the Collective Investment Schemes Control Act.

The Financial Services Board (FSB)The manager needs approval from the FSB before a new unit trust can be launched. Certain stipulated information is also reported to the FSB.

The FSB has the power to request an audit, to instruct a manager or trustee to terminate any undesirable practice, to fine the manager and to apply to the court for the winding-up of a manager or a unit trust.

The Collective Investment Schemes Control Act (Cisca)Cisca regulates how a unit trust should be managed and what information needs to be disclosed to investors.

It limits exposure to any one holding or certain asset classes, and requires specific minimum disclosures.

Cisca also empowers the Registrar to inspect, suspend or cancel the registration of a unit trust, should it suspect fraudulent or negligent activities.

How safe is your unit trust money?If you invest in unit trusts, your investment is regulated by law. In addition, the way in which the different roles are split up makes it very difficult for any one of the parties to disappear with your money.

Key role players

What does this mean? •Even if the manager or

fund manager goes out of business, the trustee will hold your assets safely on your behalf.

•The fund manager does not have direct access to the actual money invested in the unit trust. He needs to work through the trustee.

•The potential for your investment to be affected by fraud is curbed substantially, but it cannot be entirely eliminated.

• If a company in which you are invested fails, this will have a limited impact on your total investment.

•Because the manager must disclose all instruments in the portfolio at least quarterly, you enjoy increased transparency.

But remember:These regulations cannot protect investors against market corrections or crashes. You therefore need to make sure that you choose the funds that suit the amount of market or investment risk you are willing to take on.

Collective investment schemes are generally medium- to long-term investments. Past performances will not necessarily be repeated in future and the value of investments/unit trusts may go up and down. Collective investments are bought and sold at ruling prices and may borrow money and lend out scrip (paper). A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. The Manager will provide additional information on a proposed investment, including brochures, application forms and annual or quarterly reports free of charge. 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 will differ based on the initial fees applicable, the actual investment date, the date of reinvestment of income, as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee 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. International investments or investments in foreign securities could carry additional risks, such as potential constraints on liquidity and the repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk and 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 that are authorised in terms of the Financial Advisory and Intermediary Services Act. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments scheme.

The investor may employ the expertise of a financial adviser when choosing a unit trust, or do his or her own research and deal with the unit trust manager directly.

The manager and trustee set up a unit trust together. The trustee safeguards the assets of the unit trust and makes sure it sticks to the investment mandate.

The FSB is the regulator of the unit trust industry. The manager and the fund manager need a licence to operate, which is issued by the FSB. The manager needs to submit regular reports to the FSB.

The Association for Savings and Investments SA (Asisa) is the self-governing body of the industry and most managers are members.

The investor may choose to invest in a unit trust through a linked investment services provider.

The manager appoints a fund manager to research investment opportunities and manage each portfolio's assets. The fund manager, under the watchful eye of the trustee, decides how to invest the unit trust's money.

Financial Services

Board (FSB)

Financial adviser – optional

Investor

Linked Investment

Services Provider (LISP)

– optional

Collective Investment Schemes Manager

(Manager)

Association for Savings and Investments SA (Asisa)

Trustee

Fund manager

Unit trust fund

Source: Sanlam Investments


Q What would

your vision of the perfect investment house entail?

As an investment house we ultimately have the responsibility to deliver on a promise for our clients. That promise may take the form of the security of a dignified retirement or providing for a child’s university education. We deliver on these promises by growing the wealth and savings of our clients through investment decisions that are well researched and well thought-through. Delivering on these promises means that we need to be able to attract and retain the best and brightest minds and provide a culture and environment that enables our people to perform at their best.

Q Does Sanlam’s investment capability

have what it takes to realise this vision? I have no doubt that we have some of the best and brightest investment minds in the country. Our performance track record across a number of our investment capabilities is evidence of this. Our investment capability is world class and we have the ability to be a world-class investment business.

Q What have you prioritised in terms

of what you would like to achieve in your current role? Firstly, I want to make sure that I have the right people in the right seats. Ultimately, this will be a key determinant of our success. Secondly, I want to focus on investing in and developing areas where I believe we can create a competitive advantage for ourselves (for example, Alternatives and Africa). Thirdly, I want to profile and capitalise on areas where I believe we already have a competitive advantage (for example, Satrix, Equities and Retail Implemented Consulting).

Delivering on promises means attracting the best Q&A

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A conversation with Nersan Naidoo, Chief Executive: Investment Core

INSIGHT

Q What aspects of your investment team are

you most proud of? Our main purpose in the Investment Core is to deliver the best investment performance for all our clients. I am most proud of the investment performance track records that our investment teams across the core have managed to build. Charles Darwin said, ‘It’s not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.’ I am also proud of my team’s resilience and willingness to embrace change.

Q How do you define quality results and what

role does risk play in this definition? The more frequently you are able to at least meet your client expectations, the better the quality of your results. Simplistically, risk is the uncertainty around achieving a desired outcome. The better we are able to manage risk, the more certainty we can create around outcomes and the better our chances are of meeting client expectations. Risk therefore plays a critical role in my definition of quality.

Q When you’re not at the office pondering how

to create more alpha for investors, how do you spend your free time? My family is very important to me so I spend as much time as possible with them. I also really enjoy cooking. I think great chefs are a mix of great leaders, inventors, scientists and artists, and that’s why I find it fascinating.

‘We deliver on these promises by growing the

wealth and savings of our clients

through investment decisions that

are well researched

and well thought-through.’


‘An enabling culture means our people can perform at their best.’

Selwyn PillayMulti Management CIO

André RheederDirect Properties CEO

Helena ConradieSatrix CEO

Gerhard CruywagenAsset Management CIO

Nersan NaidooAlternative Solutions CEO

Thomas van HeerdenInvestment Core COO

StJohn BungeyAfrica Investments CEO

Steven RosenbergStructured Solutions CEO

Nersan NaidooInvestment Core CEO

With our growing suite of cost-effective investment solutions, you will find the investment capability you need. Sanlam Investment Core covers the full investment spectrum: active and passive (Satrix), single and multi-manager, traditional and alternative investment teams – searching for opportunities both locally and internationally.

Sanlam Investments’ Core delivering investment performance for all our clients

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NEWS

Real fixed investment spending by the private sector has been especially weak during the

current business cycle upswing, recording low single-digit increases only. The cash is available, but it’s not being deployed.

Domestic corporations are, in fact, accused of going on an ‘investment strike’, considering the high levels of cash on their balance sheets. Fortunately, this cash is not idle. Corporations’ deposits are liabilities on banks’ balance sheets and are therefore ‘employed’ in the economy, for example, as bank loans.

In any event, ultimately, corporations are reticent to invest in South Africa because the return on fixed investment is simply too low relative to potential returns elsewhere.

Productivity drove previous upswing The current business cycle upswing is markedly different to the former economic expansion, which lasted from September 1999 until the recession in 2008. The key difference between the two cycles is productivity growth.

From the mid-1990s to the mid-2000s, the advance in productivity was buoyant in response to the increased competition that accompanied the liberalisation of South Africa’s international trade regime.

Meanwhile, government dis-saving declined sharply, leaving room for the private sector to leverage and invest. Wage cost growth was contained and productivity spurred economic growth and job creation. Corporations’ profits increased relative to GDP and government

revenue growth was boosted.

Why this upswing is differentDuring the current business cycle upswing, however, trade liberalisation has been reined in, productivity growth has waned and wage costs have increased persistently relative to GDP.

The flipside of this is a decline in the share of profits in GDP and weaker-than-hoped-for government revenue growth.

Ultimately, weak productivity growth holds downside risk for economic growth and upside risk for inflation.

Buoyant JSE not helping unemployedAlso, while the earnings of companies listed on the JSE have been more buoyant than for the companies representing the entire South African economy, it is the latter that matters

more for government revenue collection.

Currently, weak employment growth holds risk for government spending, while low-income growth limits the National Treasury’s ability to respond to the social needs of the unemployed and the poor, and creates the risk of worse-than-expected fiscal outcomes.

What is needed now?Overall, while recent labour disputes have exaggerated the weakness of the economy, it desperately needs a surge in productivity in both labour and product markets, or a bounce in the country’s terms of trade (export prices relative to import prices). But as these drivers of economic growth are currently absent, it is difficult to see what will lift domestic corporate profits growth or accelerate private sector fixed investment spending meaningfully.

Is SA a quality destination for capital?

Investment cash is available but

it’s not being used, with

some domestic corporations

being accused of going on

an ‘investment strike’.

By Arthur Kamp Investment Economist

• Productivity growth• Increased competition• International trade

liberalisation• Growth in:

- Corporate profits - Government revenue

• Wage costs relative to GDP rising

• Upside risk for inflation

• Decline in government dis-saving

• Wage costs contained

• Trade liberalisation reined in• Productivity growth waning• Corporate profits softening• Weak growth in:

- Government revenue - Employment

• Downside risk for economic growth

Return on investment (ROI) is currently simply too low.

Then: (Sep 1999 to 2008

recession)

Now:Why is now different from the previous

SA expansion?

SA companies are currently sitting on their cash. Why?

Where's the money?

News and insights from Sanlam Investments10

My stock pickWoolworths

MMI

Woolworths Holdings Limited has a portfolio of retail food and clothing stores trading under brands like Woolworths, Country Road, David Jones, Trenery, Witchery and Mimco. It operates in Africa, Australia, New Zealand, United Arab Emirates and Oman.

The company’s joint venture with Absa Bank provides Woolworths customers with store cards and financial products, such as credit cards, personal loans and insurance. Its recent acquisition of the Australian David Jones turned it into one of the largest clothing retail businesses, in terms of revenue, in the southern hemisphere.

What we like The business’s strong, recognisable brands resonate well with its customers and it remains true to its values of quality, style and innovation. It has adapted its business model to respond faster to ever-changing fashion and colour trends. It dominates the top end of food retail in South Africa and its strategy to increase store size to drive bigger basket size is starting to bear fruit.

The newly acquired David Jones has been badly run, with weak systems

MMI is one of the big five insurers listed on the JSE. It’s well diversified, with retail life insurance, health insurance and medical scheme administration, employee benefits, short-term insurance and asset management offerings.

In addition, it services both the high-growth entry level, and the mature, but lower-risk affluent segments of the market, with some exposure to higher-growth African markets.

What we don’t likeThe share price has risen significantly since its lowest levels. It trades at a premium to its embedded value, but this is based on fairly conservative actuarial operational assumptions. This has led to strong positive experience variances arising from better than expected mortality, lapse and expense experience over time. Some premium to reported embedded value is therefore justified.

and poor processes, but Woolworths understands the Australian marketplace and can realise easy gains by fixing the retail basics inside the business.

What we don’t likeThe business has to absorb the acquisition of David Jones and roll out Witchery in South Africa, increase its local footprint aggressively, improve omni-channel and expand into Africa all at the same time. With so many moving parts in the business, execution risk is very high.

Risk to the valuation Turnarounds can take twice as long and cost twice as much as estimated. Therefore the biggest risk to the valuation remains the extent and speed with which Woolworths can turn around David Jones.

The bottom lineWoolworths is a food and clothing retail business with very strong brands and a good management team that continues to evolve its business model as the competitive environment changes.

What we likeFirstly, MMI trades on a P/E multiple of just over a 14x, a sharp discount to the broader market, which is closer to a 19x or 20x multiple. Unlike some of the other insurers, it also uses conservative cash accounting, so the quality of earnings is very good. We see this in the high earnings yield of over 7% that is passed on to investors in the form of a healthy 5% dividend yield. In contrast, an insurer like DSY has a high reported earnings yield of 6%, but because of poorer cash earnings, it can only afford to pay a dividend yield of around 1.5%.

Secondly, MMI has a significant amount of excess capital, currently earning not much more than cash. This could lead to a value lift or rerating, should it deploy that in accretive acquisitions, share buybacks or special dividends. In its recent results, it declared a 50cps or R800-million special dividend, and there is certainly scope for more down the line.

Portfolio manager Marlo Scholtz

discusses Woolworths

Portfolio manager (under supervision)

Asheen Rabilal discusses MMI

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Revenue (last reported period, US$BN)

North America Europe South America Combined Entity Australasia Africa Source: Annual report S&P Capital IQ company filings April 2014

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Visit our multimedia investments portal sanlamintelligence.co.za follow us @sanlamintel 11

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protectionincreasesFourth level of diversification

When planners and

consultants work together, clients benefit

from a team approach.

The need for diversification to curb undue risk is a common thread that runs through this edition of Sanlam Intelligence.

Diversification as you know it At the most basic level, portfolios need to consist of

numerous individual holdings, such as shares or bonds. The 1977 study by Elton and Gruber showed that adding shares to a portfolio one by one, decreases volatility significantly up to 30 holdings in the portfolio. Thereafter, the reduction in risk becomes marginal.

At the next level, long-term investors spread their savings across all of the main asset classes – if risk management matters more to them than maximising returns. (Return maximisers normally choose 100% equity, where legislation allows them.) The Asisa stats show that the bulk of 2013’s total net inflows found a home in the multi-asset category. SA investors (and their intermediaries) are well aware of the benefits of leaving asset allocation to an experienced fund manager.

At a third level, investors can distribute their money among different fund managers, opting for a multi-manager approach. If combined correctly, the low correlation between the managers’ monthly returns can create a smoother overall return pattern.

Level 4: Implemented consulting – blending two perspectives on a client’s portfolio

The financial adviser’s knowledge of his client’s investment needs

The investment consultant’s expertise in portfolio optimisation, investment trends and future regulatory requirements

Level 3: Multi-manager Fund A Fund B Fund C Fund D Fund E Fund F

Level 2: Multi-asset classes Cash Bonds Property Equity International Alternatives

Level 1: Sufficient underlying securities

According to the Asisa stats for Q1 2014, there are more than a thousand funds managed by SA asset managers. Analysing these funds and determining what blend would create an optimum performance profile is a full-time job. Along with this analysis, regular reviews are also required.

The implemented consulting approach relieves the adviser not only from the fund research and review responsibility, but the consultancy also documents this process and therefore lifts a large part of the adviser’s risk and compliance burden.

The teamwork between the adviser and the asset consultants makes it possible for the adviser to have more frequent contact with his client, keeping the investor on track to meet his or her goals.

Manager A Manager B Manager CIndividual portfolio characteristics

• Consistent out-performance of cash

• Strong upside returns

• Multiple sources of alpha

• Capital protection

• Exceptional risk management

• Downside protection

Result of the blend

A higher return per unit of riskSmoother returns through the investment cycle

INSIGHT

Example of how multi-management strengthens a portfolio – a conservative mandate

Fourth level of diversification Implemented consulting adds another level of diversification to the investment process. Instead of only one individual, the investor has a whole team dedicated to matching his needs to a solution – or a range of solutions.

The financial adviser spends time with the client to map that client’s goals and needs in terms of future cash flow; the investment consultant assists the adviser to quantify those needs and create liability-driven solutions to match them.

Source: SMMI

Source: SMMI

News and insights from Sanlam Investments

SIM Enhanced Yield Fund annualised returns to 31 Aug 2014

SIM Enhanced Yield - A1 Sector average STeFI Source: MoneyMate Sep 2014

1 year 2 years 3 years

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

Searching for qualityHistory shows that borrowers can easily trap the average fixed interest portfolio manager by offering yield. With this in mind, investors may be well advised to search for quality instead of yield. But what do we mean when we say ‘quality’?

Firstly, quality and predictability go hand in hand. Companies with stable management teams and more predictable earnings – typically large national and multinational companies – are therefore regarded as higher-quality borrowers.

The government sector may also be included in this group, because government may levy taxes to honour interest and capital payments.

Apart from identifying high- quality borrowers, individual investors may need to identify high-quality fixed-interest portfolios. Diversification is without a doubt the outstanding characteristic of a high-quality portfolio.

To limit the overall impact of a default, a diversified portfolio may consist of 40 to 60 carefully chosen borrowers and even hundreds of individual bonds.

Unfortunately, a historic track record of paying interest is not a reliable indicator of quality. But, fortunately, one does not need specialist skills to avoid investment schemes and other low-quality investments.

These can readily be identified because they typically promise unrealistically high future interest payments. To avoid these borrowers one simply has to guard against being too greedy.

Of course, the importance of quality is only really appreciated once an adverse event occurs. But these events are unpredictable.

Informed investors will therefore always search for quality first, while the rest will search for yield.

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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 [email protected] l 021 950 2036

SIM Enhanced Yield Fund an anchor in the storm In the previous edition of Sanlam Intelligence’s insight, we covered the importance of equity exposure if you’re investing for the long run. But what about shorter-term investors, or those who require a regular, stable income?

The SIM Enhanced Yield Fund invests in slightly riskier interest-bearing instruments than a money

market fund, but the portfolio manager keeps a close eye on the risk in the fund and considers the capital stability over any one-year period.

He avoids undue concentration risk, but does take on somewhat more credit and curve risk than a cash investment, which means negative monthly returns are possible.

By Chris Hamman Head of Fixed Interest

INSIGHT

DISCLAIMER The Sanlam investments cluster is part of the Sanlam Group. It consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI"), Satrix Managers (Pty) Ltd, Graviton Wealth Management (Pty) Ltd, Graviton Financial Partners (Pty) Ltd, Radius Administrative Services (Pty) Ltd and Blue Ink Investments (Pty) Ltd and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd and Satrix Managers (RF) (Pty) Ltd. Although all reasonable steps have been taken to ensure the information in this document is accurate, the Sanlam investments cluster does not accept any responsibility for any claim, damages, loss or expense, however it arises, out of or in connection with the information in this document. 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. This document 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. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. The contents of this document remain the property of the Sanlam investments cluster and may not be reproduced without the written permission of the Sanlam investments cluster. Sanlam is a full member of Asisa. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / collective investment 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. Collective investment schemes are generally medium- to long-term investments. 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 value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. Portfolio performance is calculated on a NAV to NAV basis and does not take any initial fees into account. An annualised growth rate is used for all performance data of 12 months or longer. Income is reinvested on the ex-dividend date. Total return performances are published. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. No performance figure in this document is guaranteed. It is for illustrative purposes only and the performance of the fund depends on the underlying assets and variable market factors. All the funds listed in this document are approved collective investment schemes in terms of Cisca. The Manager has the right to close portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios are 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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Distribution of the SIM Enhanced Yield Fund's monthly returns

The minimum recommended investment term is one year, over which the fund has beaten cash 84% of the time, with an average outperformance of 1.9% per annum.

The returns are quoted for lump sum investments at the start of the performance measurement period.

SIM Enhanced Yield A1 STeFI Composite ZAR Source: Morningstar Direct | As at 31 July 2014

-1.0 to -0.5 -0.5 to 0.0 0.0 to 0.5 0.5 to 1.0 1.0 to 1.5

Produce a negative monthly

return only 10% of the time

Convincingly beat cash

66% of the months

100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

% o

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turn

s fa

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Monthly return in %

• The fund primarily invests in cash and money market instruments.

• Its allocation to credit bonds for a yield pick-up is secondary.

• Inflation-linked bonds are used to a lesser extent.

fundfactConsidering investing? Here are some key facts about the fund:

Fund category: SA - Interest Bearing - Short TermBenchmark: STeFI + 0.5%Portfolio manager: Chris Hamman Annual management fee: 0.47%Launch date 1 May 2011Initial advice fee (max.) 0.34%Initial manager fee 0.00%Annual advice fee (max.) 1.14%Annual manager fee 0.47%Total expense ratio (TER): 0.51%

The retail class of this fund has a TER of 0.51%. For the period from 1 July 2013 to 30 June 2014 0.51% 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 factsheet on www.sanlamintelligence.co.za/fact-sheets for more information on the fund. It is available from the Manager free of charge.

Quality to the core investments

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