Contents Newsflash Market Comment Is it time to invest more defensively? Other Commentators Economic Update...

Transcription

1 19 January 2015

2 Contents Contents... 2 Newsflash... 3 Market Comment... 3 Is it time to invest more defensively?... 4 Other Commentators... 6 Economic Update... 8 Weekly Market Analysis STANLIB Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund STANLIB Flexible Income Fund STANLIB Multi-Manager Absolute Income Fund... 13

3 Newsflash The big oil price slide is very positive for lower inflation, but it also raises the spectre of deflation in many countries. Market Comment Volatility in currency, commodity, bond and share markets has risen substantially over the past few months, indicating some investor confusion. What has caused this? The very sharp rise in the US dollar is a dominant factor because the stronger the dollar gets, typically the more dollar-priced commodities come under pressure. Since March last year the biggest currency in the world, the US dollar, has gained 17% against the 2 nd biggest currency in the world, the euro, from $1.40 to $1.155, almost without any pullback - to the strongest in 12 years, as well as gaining strongly against most other currencies. Against the pound, the dollar has gained 12% since early July, from $1.71 to $1.51. These are huge moves and have played a big role in suppressing the prices of almost all commodities, including food, the metals and oil. Then the collapse in the oil price, driven both by excess supply and the powerful dollar, has caused some anxiety too because many analysts wonder whether it is also a demand problem (indicating a weak global economy), which we don t think it is. In fact the weaker oil price is overwhelmingly positive for boosting consumer spending globally. Secondly, why are European, US and other bond yields tumbling so dramatically? Is this another sign (on top of oil) of an impending slide in the world economy? Does the market know something we don t know? Are we facing deflation? This issue is causing upset in stock markets too. Are the yields falling mostly because of impending quantitative easing in Europe (pumping cash into the economy by buying government bonds) or is there a more sinister reason? The 30-year US government bond, which started 2014 at 3.96%, is now trading at 2.45%, the lowest yield in living memory (and I ve been around a while). This bond delivered over 25% in returns last year. Obviously the big oil price slide is very positive for lower inflation, but it also raises the spectre of deflation in many countries, not least of all in Europe. Both these factors are very positive for bonds (driving yields down and bond prices up). Even our SA All Bond Index, which gained an impressive 10.1% in 2014 (on a risk-adjusted basis this was better than the All Share Index s 10.9% return), is already up 4.1% in January 2015!! The sharp slide in bond yields (rise in bond prices) has boosted listed property returns offshore and locally. Our SA Listed Property Index returned an amazing 11.1% in the last quarter of 2014, beating all other asset classes hands-down and an even better 26.6% in So far in 2015 the index is up another 2.3%!! Even better in rand terms, the STANLIB Global Property Fund gained 30.9% in rands in 2014 (18.3% in dollars), our best unit trust return for the year. It also gained 11.1% in the 4 th quarter. This fund is up another 2.9% in dollars so far in As mentioned, equities have been confused by all the above, because of all the mixed signals out there and the Swiss Central Bank added to the confusion be removing the franc s peg against the euro of 1.20 last week, causing the franc to gain 18% in one day.

4 The JSE ALSI 40 Index closed on Friday at the same level as last January 2014, down 3.4% in 2015 and - 9.8% from its record high in early July last year. Stock markets are usually very buoyant at the end of the year, but all the above issues clouded the landscape and caused weak returns, with the ALSI 40 Index -4% in the past seven weeks since end November. This was entirely due to the JSE Mining Index falling 4.2% in December plus another 1.2% in January and of course Sasol falling 6.7% in December and another 11% in January (-40.5% from its June record high). The JSE Financial & Industrial Index, now 81% of the All Share Index, did extremely well last year, gaining 8% in the last quarter and a whopping 19.5% in 2014!! Plus it was up a bit in December and even hit another record high on 29 th December. Sure, it is down 2.5% so far in 2015, but the uptrend (bull market) remains firmly intact. How about offshore? The US S&P 500 Index hit a new record high in late December as well, although in the very powerful dollar and has corrected by close to 5% since then (-3.4% as of Friday s close). So its bull trend remains firmly intact too, as the leading world stock market. The Russell 2000 Index of smaller US shares also hit a record high in late December and the Nasdaq Index of mostly technology companies hit a new 15 year high too. In dollar terms, the MSCI Europe Index (including the UK) is down almost 15% from its July high, trading at the same level as almost 4 years ago! However, in euro terms the European index is pretty much at its highest level since the 2008/9 crash, so it is only the currency factor that has driven it down so much in dollars. Likewise the MSCI World Index is down 5% in dollars from its early July record high, also reflecting the problems caused by the powerful dollar. Interestingly, the rand lost 9.6% against the rampant US dollar last year, but gained 3.1% against the euro; was down 3.5% against the pound. In fact, further illustrating the huge effect of currencies, in euro terms the MSCI World Index returned 19.8% in 2014 (only 5.5% in dollars) - and is trading at an all-time record high now. Similarly, in pound terms the MSCI World Index returned 12.1% in 2014 and hit an all-time record high last week. Is it time to invest more defensively? In about 7 weeks time the global equity bull market will turn 6 years old. That is a long bull market! Fewer than 30% of bull markets last longer than 6 years and since 1871 the US stock market has never risen for 7 consecutive years in a row. So is it sensible to pull in one s horns and reduce exposure to equities at this stage, play defense and reduce one s offense? After all, even though the JSE All Share Index is down 6.6% from its peak 6 months ago, the index has given an annualised total return of 20.7% in the past 6-plus years, from the crash lows. Even from the pre-crash peak in 2008, the ALSI has returned 9.7% per year for 6.5 years, hardly shabby. The ALSI is now trading at 16.5 times earnings of the past twelve months (the so-called PE or price to earnings ratio), well above the new SA of 14.7 times, i.e. in expensive territory AND the earnings of shares like Sasol and the big mining shares are bound to be down this year because of the huge fall in the prices of oil, iron ore and copper.

5 The MSCI World Index (global equity index) has returned an annualised 17.8% in dollars over the past 6 years, or 21.3% in rands. This index is trading at close to 16 times earnings, which historically is still fair value, neither expensive, nor cheap. So arguably older investors, or investors who can least afford to lose capital from these lofty levels, should start to at least consider investing more defensively, or begin to formulate some plan to do so, even if they delay it. Sure, the huge tumble in the price of global energy (the oil price) is a big positive for global consumers and most countries around the world, including China, India and Japan. Also, the huge decline in bond yields makes alternative investments like bonds and cash appear much less attractive, especially offshore, and makes equities more compelling by comparison. If anything, the tumble in oil prices should assist in global growth picking up and maybe even beating forecasts for the first time in years. In turn this should be good for non-energy and non-mining earnings - and resources are only about 5% of global equities versus 21% here on the JSE. The oil price decline adds approximately $150bn to household income in the US, apart from businesses. In SA our petrol price is down R3.13 per litre in the past 5 months, or 21.8%, with another chunky cut expected in two weeks time. Unquestionably, it is similar to a big tax cut for all of us consumers, so it is not surprising that the JSE Consumer Services sector is up a whopping 30% in the past 3 months, trading at a new record high. This sector includes Naspers, Shoprite, Woolies, Mr Price, Spar, Foschini, Clicks and Massmart. One of the US market letter writers whose material I read, Steve Sjuggerud, thinks that shares are not expensive yet in the US and shares typically reach bubble valuations before the bull market ends. He notes that the US PE ratio is now 18.3, which is higher than the long-term average of around 16. However, the PE on its own does not give enough information, so he prefers to uses a simple metric to better compare apples to apples, namely the PE ratio plus interest rates. Why interest rates? Because the level of interest rates has a lot of information built into it, including inflation expectations, economic growth expectations and whether or not the US Fed is being accommodative (implementing policies to stimulate the economy) or restrictive (implementing policies to cool the economy). We need to know what is going on with earnings AND interest rates to know what s really happening with share valuations. The chart below (True Wealth Indicator) takes the PE ratio and adds short-term interest rates. If the PE ratio is 10, for example and short-term interest rates are 5%, Steve s indicator shows a value of 15. Today PE ratios are slightly elevated, but interest rates are near zero. So compared with history, today s level shows shares are STILL not expensive based on this measure (which only shows the US stock market). The number 22 is the magic number for this indicator. When this indicator is less than 22, shares tend to return 12.3% over the next 12 months. But when its more than 22, shares fall over the next 12 months. Today s reading is less than 19 - so we are not in a danger zone yet; and clearly we are nowhere near bubble valuations in US shares. Also rising interest rates do not typically kill the bull market in shares, at least not until they have risen quite substantially. In the past 30 years, the US stock market has risen along with rising interest rates because the Fed is raising interest rates because the economy is stronger - and therefore company earnings are growing too.

6 The quants queen Elaine Garzarelli is also still bullish on US equities (see below), while BCA Research is positive for 2015 too (see below). However, it does make sense for investors to begin to formulate a plan of defense, even if the actual defense is delayed to a certain point in time. After all, our JSE Financial & Industrial Index is expensive. At this stage our Mining shares are still in a down-trend or bear market. Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants system (which she calls her proprietary stock market indicator) stands at 62% currently, which is still a bullish reading on the US stock market. Her system would need to show a reading below 30% for her to turn bearish. Her monetary and valuation indicators are mostly bullish, her economic cycle indicators are neutral and her sentiment indicators are mostly bearish. She remains unhedged and fully invested and anticipates that corrections should be limited to 4-7%. The latest correction was -4.7% at its worst last week. Garza says that last week all US equity indices declined due to fears of deflation! The combinations of weak global demand and increased oil supplies, along with the rising dollar, have kept downward pressure on the oil price. The plunge in oil is good for consumption spending, but shares do not like uncertainty and a continued drop in oil prices may cause an energy-related crisis involving Nigeria, Venezuela, a US based energy company, or an energy-related bank. Also, geopolitical risks remain in Russia, Greece and the Middle East. Based on her operating earnings estimate for 2015 of 132, she sees fair value for the S&P 500 Index at 2310, or 15% higher than the current level. This is interesting because many forecasters have been reducing their earnings forecast because of the big fall in the oil price and its effect on the big oil companies. Garza says investors worry about the plunge in oil and if it will be problematic for employment.

7 However, so far the US economy is looking very solid. Even mortgage applications are up 27% year-onyear, at the highest level in 6 years. Refinancing applications are up 66%. Sharp declines in the long government bond yield have helped reduce mortgage interest rates to 3.9%. Garza believes that the decline in oil prices and low mortgage rates should boost economic growth in the year ahead. BCA Research BCA s Chen Zhao, in his last report for BCA after 22 years there (he is moving to Brandywine), said he thinks the tumbling oil price is unambiguously positive because it redistributes cash from oil producers to oil consumers and there are far more consumers than producers. His colleagues at BCA think the first few months of 2015 could witness a scary air pocket for stock markets because of the downgrading of US company earnings, the reduction in capital spending from oil companies (about 25% of total capital spending and R&D in the US) and the concerns about deflation. Later in 2015 they see a goldilocks scenario in the US, where growth is good, but inflation and interest rates are still low. Chen says the dominant story is the strong dollar; commodity price weakness, bond yield meltdown and market volatility are all part of the strong dollar story. The bull market in the dollar is probably only half way through, in both duration and in magnitude, because the dollar usually moves in big cycles, with bull markets in the past lasting 5 or 6 years on average. On 22 nd January the ECB meets to decide whether to implement full-blown QE and on 25 th January there are Greek elections. Either could cause a sharp fall in the euro. There is some probability that Greece may be out of the Eurozone by year-end. If the ECB announces a QE program that meets or exceeds market expectations, this could actually stabilise the euro, or even lead to a rally. Despite the possibility of a countertrend rally in the euro, Chen sees the euro at $1.10 by later Should the euro fall substantially versus the dollar, it is almost inevitable that 10-year Treasury yields will fall to 1.5% or even lower, which could lead to a period of shares underperforming bonds. Chen expects the Chinese stock market to rise substantially. Paul Hansen Director: Retail Investing

8 Economic Update It has certainly been a busy, but interesting, start to the year. During the first few weeks of 2015 a broad range of economic data, both locally and internationally, has significantly impacted the financial markets, leading to increased volatility and a reassessment of economic outlook for In particular, the oil price declined further in early January, the Swiss National Bank removed the cap on its currency, the Bank of India cut rates, US retail sales were extremely disappointing but their gain in employment was impressive, the World Bank revised down its global growth outlook for 2015, and the IMF warned that the lower oil price will do little to help the global economy. In the week ahead, the financial markets will be focused on whether or not the ECB introduces outright QE as well as the World Economic Update from the IMF, and the outcome of the Greece Election. 1. South Africa s manufacturing production remains subdued 2. South Africa s retail sales holding-up, and should be boosted by lower petrol price 3. Eskom s unplanned loss of generating capacity has surged 4. Euro-area now experiencing deflation 5. World trade has been weak in years since the global-financial-crisis 6. Swiss National Bank removed its currency cap against the Euro 7. India central bank cut rates by 25bps to 7.75% 8. Kenya interest rates remain on-hold as inflation falls 9. Nigeria s inflation rate hurt by a weaker currency 1. In November 2014, South Africa s manufacturing production declined by a substantial 2.1%m/m, after rising by a modest 0.1%m/m in October 2014 (monthly data is seasonally adjusted). The market was expecting manufacturing activity to rise by 0.5%m/m in November It is extremely concerning that all ten major sub-sectors of manufacturing declined during the month. This broad-based fall-off in manufacturing activity partly reflects the re-introduction of load shedding by Eskom in early November In the first eleven months of 2014, South Africa s manufacturing production has declined by a very disappointing -0.1%y/y and is likely to have declined during 2014 as a whole. This is despite the Rand/Dollar weakening by 30% over the past three years. Clearly, Rand weakness does not automatically translate into increased manufacturing production, especially when the sector is plagued by regular bouts of labour unrest and periodic electricity outages. The overall weakness in South Africa s industrial output reflects a wide range of factors including problems with low productivity, regular labour market disruptions, and infrastructure bottlenecks, especially electricity. 2. Stats South Africa released the Retail Sales data for November According to this latest survey, retail sales rose by a solid 1.5%m/m, in real terms, during November 2014 (seasonally adjusted). On a short-term trend basis (three months from Sep 2014 to Nov 2014) consumer spending rose by 0.9%q/q, which suggests that although consumer activity remains relatively subdued, spending continues to convincingly avoid outright recession conditions. A breakdown of retail activity by major category reveals that sales of clothing and footwear rose. Although this category of spending is still one of the most resilient components of consumer activity, the rate of growth has slowed appreciably in recent months. Sales of furniture and appliances recorded surprisingly strong growth in November, but are still effectively in recession having weakened substantially over the past 18 months. Other retail sectors recorded mixed results in November, with hardware sales up, while food sales were down. Food sales have weakened noticeably in recent months. As we have highlighted on many occasions over the past few months, there is clear evidence that consumer income and spending is under pressure. This partly reflects the ill-effects of higher inflation in 2014, but also weak consumer confidence, and the fact that many middle to low income earners have become more highly indebted in the past two years and are struggling to meet their repayment obligations. However, the recent significant (and pending) reduction in the fuel price will provide significant relief in H1 2015, unless there are substantial job losses or a dramatic increase in household taxes in the February 2015 National Budget.

9 3. Eskom has indicated that their unplanned loss of generating capacity (which is referred to as UCLF, namely Unplanned Capacity Loss Factor) has risen steadily to almost 15% of total installed capacity at the end of A few years ago this was relatively stable at around 4% to 5%. Although Eskom has MW of installed capacity, the combination of planned maintenance couple with the unplanned loss of generating capacity means that Eskom will not be in a position to meet peak electricity demand on a typical summer day over the coming months. The increase in the UCLF percentage is an indication of the deteriorating plant health and the high plant utilisation, coupled with poor maintenance. Clearly Eskom has struggled to balance the need for adequate maintenance with the base demand. Not performing sufficient maintenance reduces plant reliability and increases the risk of load shedding over the longer term. Unfortunately, because the UCLF has now reached around 15%, regular load-shedding appears inevitable. 4. In December 2014, Euro-area consumer inflation fell to -0.2%y/y, down from +0.3%y/y in November This was below market expectations. Consumer inflation in the Euro-area has been slowing steadily since 2011, raising fears of sustained deflation in the region. This is the lowest level of consumer inflation since the global financial market crisis in The decline in inflation in December was largely driven by a fall in energy prices in November, while food, alcohol & tobacco prices remained stable as did non-energy industrial goods inflation. The only annual increase in inflation was for services, unchanged from November More encouragingly, core consumer inflation (which excludes energy, food, alcohol and tobacco) was up slightly in November The financial markets are focused on whether or not the ECB will introduce outright QE (purchase of government bonds). It seems the ECB has prepared a framework on how to implement QE and Mario Draghi appears to be in favour of implementing QE. However, the rest of the ECB council is divided on implementing QE. 5. Growth in world trade has slowed appreciably since 2008 compared with the trend established during the 1990s and early 2000s. If global trade had continued to expand at its historical pace, it would have been almost 20% above its actual level in This moderation in the rate of increase in world trade has been driven by a combination of factors including relatively weak global economic activity, some increase in trade restrictions and protectionism, and less access to trade credit. In particular, the uneven and weak economic recovery in the Euro-area, which accounts for a quarter of global merchandise trade, has dampened world trade. Furthermore, imports growth in developing economies has decelerated to its slowest pace since the 2008 global financial crisis, reflecting weaker domestic demand in some large middle income economies, and exchange rate depreciation since the financial market turmoil in May Importantly, despite a recent improvement in world trade, it is not expected to return to the steeply rising trend achieved during the precrisis years. In addition, the expected acceleration in US economy over the next couple of years should support manufacturing exports from Central America and Asia, but not necessarily exports from South Africa. Instead, the modest growth in Europe and Japan and the slowing expansion in China implies that South Africa is going to continue to struggle to gain traction in lifting exports. A key exception remains South Africa s exports to the rest of Africa, which has become South Africa s largest export destination in the past few months, accounting for 33.8% of South Africa s total exports in October 2014 and November 2014 compared with 29.1%% for Asia and 20.2% for Europe. 6. Back in June 2011 the Swiss National Bank (SNB) announced that the Swiss Franc would not be allowed to trade stronger than CHF1.20 per EUR. At the time, the announcement was considered an interesting, bold, expensive and exceptional move. From the SNB perspective, the overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of deflation. It was felt that this threat out-weighed the cost of on-going currency intervention. The strength of the Swiss Franc in 2011 largely reflected a combination of the global search for safe-haven assets as well as the strong economic fundamentals in Switzerland. On 15 Jan 2015, the SNB shocked the financial markets by announcing that it was removing the cap on the Swiss Franc. Consequently, and understandably, the Swiss Franc appreciated dramatically from CHF1.20 to CHF1.028, a gain of almost 17% in the value of the Swiss Franc versus the Euro. This largely reflects the on-going safe-haven status of the currency. The move triggered additional euro weakness against the USD, and had a ripple effect on other currencies. The removal of the cap was accompanied by a reduction in the SNB deposit rate from 0.25% to 0.75%. What prompted the SNB to remove the cap? There are a couple of factors to consider. Firstly, scrapping the cap will halt the expansion of the SNB's balance sheet which has grown to a massive 85% of GDP, due largely to foreign exchange intervention by the SNB in order to hold down the value of the Swiss Franc. Secondly, the timing of the move suggests that Swiss policymakers are concerned about the consequences of a weaker euro following the expected introduction of QE later this month. This would, presumably, lead to even more flows into CHF from the Euro-area, requiring more intervention by the SNB to adhere to the cap. (The key ECB meeting to decide on the introduction of QE is scheduled for 22 January). Thirdly, and the weakest reason, it that by stopping the

10 expansion of the SNB balance sheet it will help slow Swiss money supply growth, which has been growing strongly leading to relatively robust credit growth in recent years. Despite these reasons, it is clear that a sustained rise in the value of the CHF (which seems likely) will hurt the Swiss economy, due to less export competitiveness, and add to existing deflationary pressures. Swiss CPI inflation was recorded at -0.3%y/y in December This will lead many analysts to question the credibility of the SNB. It is also fair to argue that Mr Draghi would not be unhappy with the SNB s decision to remove the cap. This is simply because the SNB has been one of the largest buyers of Euro in recent years (to support their cap) and by no-longer being active in the Euro market the European currency could weaken further; which is ultimately what Mr Draghi would want to help avoid sustained deflation. Unfortunately, the move by the Swiss National Bank has fuelled more market volatility, and exacerbated concerns about global deflation (especially after this week's disappointing US December retail sales, the decision by the Bank of India to cut rates, the World Bank s downward revision to global growth and warnings by the IMF that the lower oil price will do little to help the global economy). 7. On 15 January 2014, the Reserve Bank of India (RBI) decided to cut the Repo rate by 25 basis points to 7.75%. The Repo rate had been unchanged at 8.00% since 28 January 2014, but with consumer inflation falling progressively to below the 6% target in the final three months of 2014, it became clear that the Reserve Bank would cut rates in early In making the decision to cut rates the RBI highlighted that inflationary pressures have eased meaningfully since July This was due to lower than expected prices for vegetables, fruits and cereals as well as the large fall in international commodity prices, particularly crude oil. The RBI also highlighted that weak domestic demand conditions had led to a moderation in core inflation. In its policy statement, the central bank also mentioned the government's commitment to adhere to the fiscal deficit target while emphasising the need for fiscal consolidation and to reduce supply-side constraints. We expect the RBI to cut rates further in 2015, possibly by as much as 75 basis points to 7%, with the next 25 basis point reduction taking place after the National Budget is presented at the end of February In its first meeting of the year the Kenyan Monetary Policy Committee of the Central Bank of Kenya decided to keep rates on hold at 8.5%. This was in line with expectations as the central bank continues to target a medium term inflation rate of 5%. The Kenya Bank Reference Rate (KBRR), which is a weighted average of the Central Bank Rate and weighted 2 month moving average of the 91 day Treasury bill rate has been revised downwards to 8.54% from 9.13%, and will be reviewed again July The sharp reversal of inflation was as a result of the base effect of taxes that were introduced in 2013, as well as lower domestic energy prices and the lower oil price. (The introduction of geothermal power has helped to ensure more consistent power supply as well as lower prices of energy). The Energy Regulatory Commission (ERC) in Kenya dropped fuel prices further on 14 January 2015 by KES9.13, which is the largest fuel price decrease by the ERC, and should ensure further disinflationary pressure in the first half of Inflation in Nigeria has begun to tick-up as the effects of currency weakening have started to have an impact on prices. Inflation was recorded at 8% for December This is the first time that the inflation rate has increased in four months. However the inflation rate has been in single digits since January Food prices, which is the biggest component of the CPI basket, rose in November and is one of the reasons why the inflation rate has increased. The Nigerian government recently announced that it will cut petrol prices by 10 Naira, from N97 to N87, which should ease upward pressure on prices, however the currency has already depreciated by 15% since Although the inflation rate is within the central bank s target of 6% 9%, the Bank is still expected to increase interest rates further to stem the currency weakness. The Nigerian economy is expected to under-perform prior estimates, as the lower oil price takes hurts their economy. The country is scheduled to hold its national elections in February 2015, and is struggling with increased political unrest. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

11 Weekly Market Analysis Currencies/ Indices/ Commodities Friday s Close 16/01/15 Weekly Move (%) YTD (%) Indices *MSCI World US Dollar *MSCI World Rand *MSCI Emerging Market US Dollar *MSCI Emerging Market Rand All Share Index US Dollar All Share Index Rand All Bond Index Listed Property J Currencies US Dollar/Rand Euro/Rand Sterling/Rand Euro/US Dollar Commodities Oil Brent Crude Spot Price ($/bl) Gold Price $/oz Platinum Price S/oz Source: I-Net Bridge * MSCI - Morgan Stanley Capital International

12 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: Effective: 6.14% per annum 6.32% per annum STANLIB is required to quote an effective rate which is based upon a seven-day rolling average yield for Money Market Portfolios. The above quoted yield is calculated using an annualised seven-day rolling average as at 18 January This seven- day rolling average yield may marginally differ from the actual daily distribution and should not be used for interest calculation purposes. We however, are most happy to supply you with the daily distribution rate on request, one day in arrears. The price of each participatory interest (unit) is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. STANLIB Enhanced Yield Fund Effective Yield: 6.46% STANLIB is required to quote a current yield for Income Portfolios. This is an effective yield. The above quoted yield will vary from day to day and is a current yield as at 16 January The net (after fees) yield on the portfolio will be published daily in the major newspapers together with the all-in NAV price (includes the accrual for dividends and interest). This yield is a snapshot yield that reflects the weighted average running yield of all the underlying holdings of the portfolio. Monthly distributions will consist of dividends and interest. Interest will also be exempt from tax to the extent that investor s are able to make use of the applicable interest exemption as currently allowed by the Income Tax Act. The portfolio s underlying investments will determine the split between dividends and interest. STANLIB Income Fund Effective Yield: 7.27% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. The above quoted yield will vary from day to day and is a current yield as at 16 January 2015.

13 STANLIB Extra Income Fund Effective Yield: 6.77% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. The above quoted yield will vary from day to day and is a current yield as at 16 January STANLIB Flexible Income Fund Effective Yield: 6.83% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. The above quoted yield will vary from day to day and is a current yield as at 16 January STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.58% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. The above quoted yield will vary from day to day and is a current yield as at 16 January 2015.

14 Glossary of terminology Bonds A bond is an interest-bearing debt instrument, traditionally issued by governments as part of their budget funding sources, and now also issued by local authorities (municipalities), parastatals (Eskom) and companies. Bonds issued by the central government are often called gilts. Bond issuers pay interest (called the coupon ) to the bondholder every 6 months. The price/value of a bond has an inverse relationship to the prevailing interest rate, so if the interest rate goes up, the value goes down, and vice versa. Bonds/gilts generally have a lower risk than shares because the holder of a gilt has the security of knowing that the gilt will be repaid in full by government or semi-government authorities at a specific time in the future. An investment in this type of asset should be viewed with a 3 to 6 year horizon. Cash Collective Investments Compound Interest Dividend Yields Dividends Earnings per share An investment in cash usually refers to a savings or fixed-deposit account with a bank, or to a money market investment. Cash is generally regarded as the safest investment. Whilst it is theoretically possible to make a capital loss investing in cash, it is highly unlikely. An investment in this type of asset should be viewed with a 1 to 3 year horizon. Collective investments are investments in which investors funds are pooled and managed by professional managers. Investing in shares has traditionally yielded unrivalled returns, offering investors the opportunity to build real wealth. Yet, the large amounts of money required to purchase these shares is often out of reach of smaller investors. The pooling of investors funds makes collective investments the ideal option, providing cost effective access to the world s stock markets. This is why investing in collective investments has become so popular the world over and is considered a sound financial move by most investors. Compound interest refers to the interest earned on interest that was earned earlier and credited to the capital amount. For example, if you deposit R1 000 in a bank account at 10% and interest is calculated annually; your balance will be R1 100 at the end of the first year and R1 210 at the end of the second year. That extra R10, which was earned on the interest from the first year, is the result of compound interest ("interest on interest"). Interest can also be compounded on a monthly, quarterly, half-yearly or other basis. The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. The higher the yield, the more money you will get back on your investment. When you buy equities offered by a company, you are effectively buying a portion of the company. Dividends are an investor s share of a company s profits, given to him or her as a part-owner of the company. Earnings per share is a measure of how much money the company has available for distribution to shareholders. A company s earnings per share is a good indication of its profitability and is generally considered to be the most important variable in determining a company s share price.

15 Equity Financial Markets Fixed Interest Funds Gross Domestic Product (GDP) Growth Funds Industrial Funds Investment Portfolio JSE Securities Exchange Price to earnings ratio Property Resources and Basic Industries Funds A share represents an institution/individual s ownership in a listed company and is the vehicle through which they are able to share in the profits made by that company. As the company grows, and the expectation of improved profits increases, the market price of the share will increase and this translates into a capital gain for the shareholder. Similarly, negative sentiment about the company will result in the share price falling. Shares/equities are usually considered to have the potential for the highest return of all the investment classes, but with a higher level of risk i.e. share investments have the most volatile returns over the short term. An investment in this type of asset should be viewed with a 7 to 10 year horizon. Financial markets are the institutional arrangements and conventions that exist for the issue and trading of financial instruments. Fixed interest funds invest in bonds, fixed-interest and money market instruments. Interest income is a feature of these funds and, in general, capital should remain stable. The Gross Domestic Product measures the total volume of goods and services produced in the economy. Therefore, the percentage change in the GDP from year to year reflects the country's annual economic growth rate. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Industrial funds invest in selected industrial companies listed on the JSE, but excluding all companies listed in the resources and financial economic groups. An investment portfolio is a collection of securities owned by an individual or institution (such as a collective investment scheme). A funds portfolio may include a combination of financial instruments such as bonds, equities, money market securities, etc. The theory is that the investments should be spread over a range of options in order to diversify and spread risk. The primary role of the JSE Securities Exchange is to provide a market where securities can be freely traded under regulated procedures. Price to earnings ratio or p: e ratio is calculated by dividing the price per share by the earnings per share. This ratio provides a better indication of the value of a share, than the market price alone. For example, all things being equal, a R10 share with a P/E of 75 is much more expensive than a R100 share with a P/E of 20. Property has some attributes of shares and some attributes of bonds. Property yields are normally stable and predictable because they comprise many contractual leases. These leases generate rental income that is passed through to investors. Property share prices however fluctuate with supply and demand and are counter cyclical to the interest rate cycle. Property is an excellent inflation hedge as rentals escalate with inflation, ensuring distribution growth, and property values escalate with inflation ensuring net asset value growth. This ensures real returns over the long term. These funds seek capital appreciation by investing in the shares of companies whose main business operations involve the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry and other natural resources, or where at least 50 percent of their earnings are derived from such business activities, and excludes service providers to these companies.

16 Smaller Companies Funds Value Funds Growth Funds Smaller Companies Funds seek maximum capital appreciation by investing in both established smaller companies and emerging companies. At least 75 percent of the fund must be invested in small- to mid-cap shares which fall outside of the top 40 JSE-listed companies by market capitalisation. These funds aim to deliver medium- to long-term capital appreciation by investing in value shares with low price/earnings ratios and shares which trade at a discount to their net asset value. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Sources: Unit Trust and Collective Investments (September 2007), The Financial Sector Charter Council, Personal Finance (30 November 2002), Introduction to Financial Markets, Personal Finance, Quarter , Investopedia ( and The South African Financial Planning Handbook 2004.

17 Disclaimer The price of each unit of a domestic money market portfolio is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. An investment in the participations of a CIS in securities is not the same as a deposit with a banking institution. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from STANLIB Collective Investments Ltd (the Manager). Commission and incentives may be paid and if so, would be included in the overall costs. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. TER is the annualised percent of the average Net Asset Value of the portfolio incurred as charges, levies and fees. 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. Portfolios are valued on a daily basis at 15h30. Investments and repurchases will receive the price of the same day if received prior to 15h30. Liberty is a full member of the Association for Savings and Investments of South Africa. The Manager is a member of the Liberty Group of Companies. As neither STANLIB Wealth Management Limited nor its representatives did a full needs analysis in respect of a particular investor, the investor understands that there may be limitations on the appropriateness of any information in this document with regard to the investor s unique objectives, financial situation and particular needs. The information and content of this document are intended to be for information purposes only and STANLIB does not guarantee the suitability or potential value of any information contained herein. STANLIB Wealth Management Limited does not expressly or by implication propose that the products or services offered in this document are appropriate to the particular investment objectives or needs of any existing or prospective client. Potential investors are advised to seek independent advice from an authorized financial adviser in this regard. STANLIB Wealth Management Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/590) Compliance No.: H368X0 17 Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T (SA Only) T+27(0) E contact@stanlib.com Website STANLIB Wealth Management Limited Reg. No. 1996/005412/06 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments Limited Reg. No. 1969/003468/06