DECODING CURRENCIES FROM GOLD TO PAPER TO E-MONEY MACROSOLUTIONS NOVEMBER 2017

Transcription

1 MACROSOLUTIONS DECODING CURRENCIES FROM GOLD TO PAPER TO E-MONEY ZAIN WILSON INVESTMENT ANALYST AT MACROSOLUTIONS NOVEMBER Bitcoin, the blockchain, and cryptocurrencies have rapidly risen up the watch list of the investor community in. I would hazard a guess that the question of whether or not bitcoin is in a bubble is right up there with who will rise victorious out of the ANC s December elective conference? on the list of known unknowns. BITCOIN AS A DIGITAL PAYMENT SYSTEM To understand the disparity in opinions around bitcoin and its fellow cryptocurrencies, we need to understand the potential technological revolution they bring, the problems they are purporting to solve and what underpins their value proposition commercial or otherwise. Bitcoin was created as an alternative means of digital payment and as a new digital currency. As you stand, you likely have several forms of digital payment systems accessible within your immediate reach in your wallet, a credit or debit card issued by your bank; on your mobile phone, a banking app and any number of payment applications; and on your laptop, desktop or tablet device, access through your browser to your online banking portal through which you may make direct payments, purchases or transfers. While the technology used varies, all forms of digital payments refer to any non-cash transaction where there is a transfer of actual value. These applications and services are essentially user interfaces aimed at providing improved convenience and ease of execution of payment, without jeopardising security for either party in a transaction. All forms of digital payments are built on the same underlying local and international banking infrastructure, which is conferred with the responsibility of keeping a living record (or centralised ledger) of all individuals and institutions monetary assets. This ensures the legitimacy of every transaction, without which, buying and selling goods and services would be virtually impossible without physical cash, as there would be little basis for trust between the payer and recipient. The simple interfaces we use daily belie the elaborate network required. In any one transaction there is the owner of the digital payment interface (for instance, PayPal), the payee s bank (Capitec) and the recipient s bank (FNB). The banks, as gatekeepers of the ledger, remain embedded in the chain, while the number of other intermediaries can easily go upwards of five (imagine an online payment through PayPal using a credit card for an international purchase). As an alternative form of digital payment, bitcoin s unique commercial value proposition is that it tackles the same desire for convenience and ease of execution, but also does the job of the banking network in verifying and keeping record of the living ledger. It replaces the complex international banking network without jeopardising the validity and security of individuals and institutions ledgers and the related transactions. This cuts out numerous middlemen and reduces costs, while also leveraging off the larger and broader network to reach parts of the world that traditional financial networks cannot easily reach. BITCOIN AS A DIGITAL CURRENCY Bitcoin goes a step further than just offering a broader and cheaper payment service. It also acts as its own separate currency. Payment interfaces like PayPal, ApplePay, Visa and FNB process, record and validate transactions in US dollars, euros, rands or other governmentissued currencies (fiat money). Bitcoin, on the other hand, provides the same service in erm, bitcoins. The debate around government issued fiat money has been around since its first use in China around 000AD.

2 Before that, money was commodity based initially rare stones, shells, grain and livestock and later almost exclusively gold and silver. These commodities either possessed a use outside of acting as money or had a degree of rarity, and could be assigned some intrinsic value. Fiat money emerged as it reduced the cost and difficulty of storing and moving money (imagine having all of your savings as a silo of wheat that has an expiry date!). Through time, different regions around the world adopted hard fiat money, linking the ratio of the paper money to a fixed amount of a physical commodity to underpin its value. This solved the problems of portability and storage, while promising that it could be exchanged for the physical commodity on demand. Without exception, each of these experiences ended in the fiat money being inconvertible into the promised quantity of the commodity often as governments were tempted to simply create new money (to finance wars and expansions). Each fiat money regime inevitably collapsed and ended in periods of high inflation as the money rapidly devalued (debasement), eventually to be re-pegged at a new, more appropriate, ratio to the chosen commodity. As such, governments have fluctuated between hard fiat money (pegged to a commodity) and soft unpegged fiat money, with its value effectively reliant on the widespread trust of the users. Which system is preferable, each with its own flaws and advantages, is a shifting debate of ideology shaped by the most recent crisis. Examples of this destruction in trust continue to this day in Argentina, Venezuela, and our neighbour, Zimbabwe. In all cases, the preferred alternative currency of choice to which these broken paper money economies resort has been the US dollar, benefiting from its role at the centre of global finance. As the world s reserve currency, the US dollar exhibits the favourable feature of having the broadest network of use. The global financial crisis further highlighted some of the vulnerabilities within the global fiat money and banking system, keeping a few ardent believers calling for the return to some form of hard fiat or commodity-based monetary system. It is no coincidence that bitcoin was launched in August 2008, in the midst of the crisis. Built into its design is a limited amount of bitcoins that can be created over time. The limited supply eliminates the ability of individual governments and the banking network to simply create new money, while the fact that each bitcoin is an easy-to-store and transferable digital code makes it more appealing than a clunky piece of metal. Whether or not bitcoin or other cryptocurrencies supplant our rands and US dollars is far more difficult to assess compared to the commercial value of a digital payment system, given that the usefulness of any form of non-commodity money is reliant on the trust in it and a sufficiently large network of users. MINING BITCOIN The secret to bitcoin s controlled supply is the algorithm built in to the digital currency s programming. The algorithm limits the amount of new coins available in each block, with a total of 2 million coins expected to be mined by The coins are earned by bitcoin miners. These are specialised computers on the network, which work on solving the cryptography problem required to validate each new block of transactions. This occurs roughly every 0 minutes. As a reward for validating each block of transactions and extending the blockchain (decentralized ledger), the miners compete to earn both the coins and a small transaction fee. Over time, as more bitcoins are released, the algorithm adjusts the number of available bitcoins released per new block lower. This ensures that the total supply remains on a predictable path to reach the predetermined 2 million by As this plays out, the reward for mining (or validation) will increasingly move towards earning a transaction fee. This is to ensure that sufficient miners continue to be compensated to maintain the blockchain. Traits of Money Preferred Money Trait Commodity (Gold) Fiat (Rands) Crypto (Bitcoin) Secure (Difficult to counterfeit) HIGH HIGH HIGH HIGH Durable HIGH HIGH LOW HIGH Divisible HIGH MODERATE MODERATE HIGH Transactable & Portable HIGH MODERATE HIGH HIGH Sovereign (Government LOW HIGH LOW Issued) STABLE AND Scarce PREDICTABLE SUPPLY HIGH LOW HIGH Non-monetary Use HIGH LOW LOW BITCOIN, THE BUBBLE The question of whether or not bitcoin is in a bubble relates to the price of bitcoin in fiat currency terms (US dollars) analogous to whether or not the South African rand might be "cheap" or "expensive". Given that bitcoin, the asset, is closer to a currency than an equity or a bond, one consequence of a possible bubble would be that the continued use of bitcoin as money is closely tied to the stability of its price. While shares can sustain periods of large drawdowns (as long as the underlying businesses do not go bust), excessive volatility and a collapse in the price of a currency can perpetuate vicious cycles, driving away those that use it as a means of exchange.

3 There are plenty of signs that bitcoin and the broader cryptocurrency market are in the midst of a bubble:. The extent and pace of the increase in price, and with it the market capitalisation, has been astronomical. - The US dollar price of bitcoin is up from US$747/BTC at the start of to US$7 300/BTC as I write (7 November ) a growth rate of 80% per year. With it, the market capitalisation has gone from just over US$9 billion to US$2 billion. If the market capitalisation of bitcoin continues to grow at the rate it has since, it would be the size of global GDP by For this to be fundamentally justified, bitcoin would have to become the globally accepted reserve currency as the value of money as a medium of exchange cannot exceed the value of transactions it is used for. (Sources: BITCOIN MARKET CAP IN US DOLLARS (BILLIONS) AS AT 5 NOVEMBER Billions $ $ $0 000 $ $ $ $ $ $ $ $ $ $0 000 $0 US$23bn Source: 2. Everyone around you is talking about it - You hear more and more anecdotal stories of friends or acquaintances who have invested in bitcoin and made a quick buck, paying for their next holiday, with a guarantee that the price can only go up. - Google trends reveal that the popularity of blockchain and cryptocurrency as search topics has increased by a multiple of 7 times over the past four years. By comparison, another disruptive technology, Uber, is lagging behind with an increase of only 0 times. GOOGLE TRENDS: E-MONEY AND UBER Level of interest for a keyword phrase relative to total search volume Bitcoin (worldwide) Blockchain (worldwide) Cryptocurrency (worldwide) Uber (worldwide) Source: Google, to 2 November 3. There is a sudden proliferation of expert opinions and articles on the subject this one included! 4. The market for the asset is dominated by speculators, and with it, the use of borrowing to fund their activity. - While there is no easy way to measure how many people have quit their day jobs and registered bitcoin trading operations in their garages, the extreme price volatility and sensitivity of the bitcoin and other cryptocurrencies to news and events suggest the role of speculators in driving the price is high. - The volume of transactions performed via bitcoin (payments of bitcoin from one user to the next) compared with the high volume of trade on bitcoin exchanges (those buying and selling bitcoin with fiat currencies) also gives an indication of the users of the digital payment system relative to the investors and speculators in the digital money. - A more stable and functioning currency needs a foundation of active users (those using the currency as money), with the traders and speculators being secondary and acting to grease the wheels and keep the system efficient. - Measuring the use of borrowing to fund speculative activity is impossible, given the unregulated nature of cryptocurrencies. BITCOIN ESTIMATED TRADE VOLUME AS A PERCENTAGE OF TRANSACTION VOLUME (USD) 00% 90% 80% 70% 60% 50% 40% 30% 20% 0% 0% 5. There is belief in a new paradigm and that this time is different. - The potential of new and disruptive technologies is notoriously difficult to measure, part of which makes them ripe for speculative bubbles. Some truly are transformative, while others fade. - As belief in the technology and possibilities that come with it spread, new markets, businesses and micro-economies are rapidly created around the new technology. While many of these are legitimate businesses (still tied to the success of the underlying technology), others don t stack up quite as well under a critical eye. - One measure of the growing micro-economy is the number of newly issued cryptocurrencies currently totalling 293! This is many times more than the roughly 85 sovereign

4 states in the world a decent proxy for the number of independent fiat currencies. On top of that, there are exchanges, wallet providers, detailed research, data and analytic providers and, not least, the new applications of the technologies, which are attracting increasingly larger amounts of funding. 6. Some of the smart money is beginning to take profits. This is by no means a comprehensive analysis of bitcoin and the world of cryptocurrencies. Nor are we experts on technology there are many more potential applications not discussed here, as well as some features I have not explored. Instead, what I have attempted to do is frame a better understanding of what cryptocurrencies are and, by drawing some lessons from history, highlight some of the opportunities and risks:. As a form of digital payment, bitcoin is underpinned by a viable value proposition. Although not enabling completely free transactions, it presents an alternative form of digital payment, which will find niche markets for transactions that are uneconomical for current payment systems. This opportunity is large, and meaningful. - However, this is not a commoditised market the software on bitcoin is open source, it is free for anyone to copy and attempt to improve upon. Thus, the only true advantage bitcoin has over its peers is the larger network of users it has already established. - For bitcoin to maintain its lead and remain ahead of its competing cryptocurrencies and the alternative technologies used by traditional payment providers, it would have to continuously improve upon its technology and offering. WHAT DOES THIS MEAN FOR YOUR FUNDS? While there are a few cryptocurrency exchange traded funds (ETFs), futures and even dedicated mutual funds (investing ONLY in cryptocurrencies) in the US, regulation remains an obstacle globally. For instance, it is not clear whether cryptocurrencies are considered currencies or commodities, and what the respective tax implications would be on any profits. Currently in South Africa, lack of regulatory direction leaves cryptocurrencies as un-investible for our funds and, as such, MacroSolutions does not have any exposure. In addition to the regulatory uncertainty, the highly competitive market in which cryptocurrencies operate and absence of intellectual property protection, weaken the competitive edge of any one cryptocurrency over the next, while valuation remains distorted by the amount of speculators active in each currency. For now, this would exclude bitcoin and other cryptocurrencies from being considered as an appropriate investment opportunity. Exciting and interesting, but speculative is a more appropriate space. 2. Bitcoin as a digital currency is slightly more complex. The success of any currency depends on some failure or discontent in the currency that precedes it, and a build-up in trust and usage via a strong network in the new currency. 3. The argument that bitcoin, the digital money, has no intrinsic value is misguided in that it is no different from other forms of fiat money. Whether or not there is trust and a large enough network of users, is a more appropriate question for a currency to be legitimate. The two greatest obstacles to expanding this network is the uncertainty around regulation from governments, and the high volatility in the price of bitcoin, which can dissuade an everyday mom and pop user. 4. Bitcoin, and the cryptocurrency craze more broadly, exhibit definite signs of a bubble. While the technology is potentially disruptive, the balance of speculators to real users appears unstable.

5 MARKET COMMENTARY AS AT THE END OF OCTOBER Globally, the reflation theme has been reinforced again this month, with recent global data supportive of economic growth, coupled with a subdued inflation outlook. This theme talks to synchronised global growth and has been in effect for much of the past year. Investor confidence around corporate earnings has been buoyed, as reflected by a 20.2% return from global equity (in US dollars) year to date and 2.% in October. US fiscal stimulus hopes revived again during October, even though any proposed stimulus package will have many obstacles to overcome. Also, the chances of the hawkish Kevin Warsh being the next US Federal Reserve Board (Fed) chairperson faded in favour of Jerome Powell. Locally, the big news was the less than inspiring Medium-Term Budget Policy Statement (MTBPS) delivered by Finance Minister Gigaba. A few of the shocks were that the expenditure ceiling will be breached, we can expect a wider budget deficit and a higher debt trajectory is expected essentially, there is no fiscal consolidation whatsoever. With South Africa s sovereign rating teetering, it is at serious risk of being downgraded to sub-investment grade. The rand weakened on the back of the MTBPS, ending the month 4.7% weaker. This helped to drive the local market higher, with counters like Anglo American up 9.4%, Sasol up.5% and British American Tobacco rising 7.5%. Naspers delivered another +7.9% over the month and has returned +70.9% year to date. The broad SA equity market, as represented by the FTSE/JSE Capped Shareholder Weighted Index, ended the month 4.9% higher. Given the uncertainty around the potential downgrade, the weaker rand and South Africa s low growth profile, local bond yields moved higher, with the All Bond Index declining 2.3% for the month. OLD MUTUAL MAXIMUM RETURN FUND OF FUNDS (Peter Brooke and Arthur Karas) (Classification category: Worldwide Multi-Asset Flexible) October continued where the last quarter left off, being a good month in terms of investment returns. Returns were driven by strong global and local equity markets and the weaker rand. This level of short-term returns is obviously not sustainable in the long run, but highlights the importance of sticking to one s investment plan. Missing a rise of 5% in a month has a material effect on longer-term returns and highlights the risk of sitting in cash. With the recent strong rally, the Maximum Return of s has now delivered a return of 22% over the past 2 months and 3.5% a year since its inception in June 203. A big contributor to returns during the month was the weakness in the rand. This was partially driven by the bad news in the MTBPS, which clearly shows South Africa heading towards a ratings downgrade unless dramatic remedial action is taken. As discussed previously, we had taken a negative view on South Africa s outlook and had sold out of all of our South African bonds. We had also reduced our exposure in South African equity and property and increased our holdings in offshore equity. These actions have worked well for the fund. We have also held a high level of equity in the fund, which has also been a positive contributor to returns. Looking forward, some consolidation in performance should be expected, but we will continue to allocate your capital where we think we have the best chance of delivering a high real return. OLD MUTUAL FLEXIBLE FUND (Peter Brooke and Arthur Karas) (Classification category: South African Multi-Asset Flexible) October saw a continuation of the strong investment returns of the previous quarter. Strong global and local equity markets and the weaker rand all drove the portfolio s performance. With the recent equity rally, the Old Mutual Flexible has delivered a return of 5% over the past 2 months, well ahead of the fund s performance objective. A big contributor to returns during the month was the weakness in the rand. This was partially driven by the bad news in the MTBPS, which clearly shows South Africa heading towards a ratings downgrade unless dramatic remedial action is taken. We had taken a negative view on South Africa s outlook and sold out of all of our South African bonds. The fund has also reduced its exposure to SA listed property, which offers fundamental value, but is also vulnerable to a ratings downgrade. The fund weathered the negative impact of the MTBPS quite well, providing some comfort that the positioning is appropriate. The fund is positioned to continue to benefit from strong global markets, while we have tried to ensure that our domestic investments are not dependent on the weak local economy or simply a binary call on possible political outcomes. OLD MUTUAL BALANCED FUND (Graham Tucker and Warren van der Westhuizen) (Classification category: South African Multi-Asset High Equity) The fund had another good month, both on an absolute basis and relative to its peers. On an absolute basis, clients have benefited from the stronger markets and our exposure to these growth assets, which in turn has resulted in returns that are in line with the fund s inflation target over the five-year period. Against its peers, the fund is top quartile in its category over the past year. Positions in Naspers and Capitec have added enormous value over the longer term, while our recent reduction in local bonds has protected the value of portfolio more recently. Our focus on portfolio construction and building a robust solution has helped in navigating these turbulent times. The broad position within the fund remains unchanged, with a preference for growth assets over fixed income. After a good period of outperformance, and with its valuations being less attractive, we sold out of emerging market debt and increased exposure to emerging market equity. Within local equities, we continue to prefer counters that will benefit from the strong global environment. We are more cautiously positioned with respect to businesses that are primality focused on the local economic environment. Source: Morningstar Direct

6 MARKET COMMENTARY CONTINUED We are entering a very uncertain few months for South Africa, which has a very binary feel to it with the possibility of either a short-term positive or negative outcome. It is impossible to know which outcome will play out. As such, we maintain a well-diversified portfolio with a focus on the longer term. However, the portfolio is holding cash and is looking to take advantage of any opportunity that may arise as a result of this uncertainty. OLD MUTUAL MODERATE BALANCED FUND (John Orford and Alida Jordaan) (Classification category: South African Multi-Asset Medium Equity) The fund enjoyed a good return during October and has delivered a return of 2.6% over the past year well ahead of inflation for the period. During the month, South African bonds and the rand weakened in response to the MTBPS. The mid-term budget clearly outlined the alarming trajectory of South Africa s debt-to-gdp ratio, without outlining any clear plans to rein in government spending or debt. Economic policy remains the hostage of political uncertainty ahead of the ANC s elective conference in December. The fund had considerably reduced its exposure to government bonds earlier in the year at levels well below current bond yields. For now, we are comfortable running an underweight allocation to government bonds, given the serious deterioration in the fiscal outlook and the still attractive returns on offer in money markets. Over the past year, the fund benefited from an overweight allocation to global equities, which have performed strongly and supported the fund s performance. We continue to see global equities as offering an attractive risk/reward proposition, given the broad-based strength of global corporate earnings. The same cannot be said of South African companies, where earnings prospects remain poor. While prospects for domestic companies are not good, our exposure to Naspers and to mining companies has benefited the fund s performance. Looking ahead, the fund is well positioned. It has significant offshore exposure and within local assets, we are overweight in cash. Cash not only offers a reasonably attractive return, but also provides capital stability and provides us with optionality to buy assets as they become cheaper. OLD MUTUAL STABLE GROWTH FUND (John Orford and Alida Jordaan) (Classification category: South African Multi-Asset Low Equity) The fund enjoyed a good return during October and has delivered a return of.6% over the past year well ahead of inflation for the period. Over three years, the fund s returns are in line with the inflation target and over longer periods are ahead of the fund s inflation target. Over the past year, the fund benefited from an overweight allocation to global equities, which have performed strongly and supported the fund s performance. We continue to see global equities as offering an attractive risk/reward proposition, given the broad-based strength of global corporate earnings. The same cannot be said of South African companies, where earnings prospects remain poor. While prospects for domestic companies are not good, our exposure to Naspers and to mining companies has benefited the fund s performance. Looking ahead, the fund is well positioned. It has significant offshore exposure and within local assets, we are overweight in cash. Cash not only offers a reasonably attractive return, but also provides capital stability and provides us with optionality to buy assets as they become cheaper. OLD MUTUAL REAL INCOME FUND (John Orford and Alida Jordaan) (Classification category: South African Multi-Asset Low Equity) The fund delivered a return marginally below cash for the month, while the one-year return at 8.2% remains on track to beat its inflation target of CPI + -2%. October proved a difficult month for South African bonds, as the MTBPS painted a sombre picture of South Africa s finances and the growth challenge that lies ahead. In response, yields rose by half a percent on the benchmark bond, with the domestic All Bond Index returning -2.3% over the period. The strategy of maintaining a low duration, high quality core of fixed income assets enabled the fund to navigate the period reasonably well, minimising any downside risk. While this was counteracted, in part, by local property assets in the fund underperforming as yields rose, the performance of the total fund provided a reassuring litmus test of the robustness of the fund to withstand unexpected shocks. Over the next year, while the likelihood of interest rate cuts has been reduced in light of a disappointing budget and a South African Reserve Bank with an already hawkish bias, we do not expected cash yields to rise outside of a material shock to the rand. With the forward yield of the domestic property assets close to that of the fixed income assets of the fund, and given their ability to deliver real dividend growth, we continue to expect these assets to deliver real returns in excess of cash over the investment horizon. Note: Unless otherwise stated, data is sourced from Deutsche Bank Equity Research and FactSet. During the month, South African bonds and the rand weakened in response to the MTBPS. The mid-term budget clearly outlined the alarming trajectory of South Africa s debt-to-gdp ratio, without outlining any clear plans to rein in government spending or debt. Economic policy remains the hostage of political uncertainty ahead of the ANC s elective conference in December. The fund had considerably reduced its exposure to government bonds earlier in the year at levels well below current bond yields. For now, we are comfortable running an underweight allocation to government bonds, given the serious deterioration in the fiscal outlook and the still attractive returns on offer in money markets. Source: Morningstar Direct

7 THREE-YEAR PERFORMANCE: (TO 3 OCTOBER ) ASSET ANALYSIS: (AS AT 3 OCTOBER ) 4.0% 2.0%.5% p.a. 0.0% 9.5% p.a. 9.7% p.a. 8.0% 8.3% p.a. 8.5% p.a. 7.9% p.a. 8.% p.a. 6.9% p.a. 7.% p.a. 6.0% CPI 4.0% 2.0% 0.0% Flexible Flexible Life Balanced Balanced Life Stable Growth Stable Growth Life Real Income Real Income Life Maximum Return of s Sources: Investment Group & Morningstar Real Income Real Income Life Stable Growth Stable Growth Life SA Equities Property Preference Shares Commodities Nominal Bonds Inflation-linked Bonds Cash International Africa Moderate Balanced Balanced Balanced Life Flexible Flexible Life Maximum Return of s Sources: Investment Group & Morningstar 3 years 5 years Performance 3 October year (p.a.) (p.a.) Highest 2 Average 2 Lowest 2 Description TER TC Flexible 5.2% 9.5% 2.0% 54.0% 4.4% -26.9%.64% 0.8% Flexible Life 5.5% 9.7% 2.3% Target: CPI + 5% to 7% p.a. 0.% 0.3% 0.5% CPI + 5% to 7% p.a. over rolling 3 years UT Peer Average.8% 6.8% 9.7% South African - Multi-Asset - Flexible Balanced 5.2% 8.3% 0.5% 45.5% 3.5% -23.2%.64% 0.% Balanced Life 5.4% 8.5% 0.7% Target: CPI + 4% to 5% p.a. 9.% 9.3% 9.5% CPI + 4% to 5% p.a. over rolling 3 years UT Peer Average 2.7% 7.7% 0.% South African - Multi-Asset - High Equity Moderate Balanced A 2.6% 2.6% 4.6% 0.7% CPI + 3% to 4% p.a. over rolling 3 years.92% 0.24% Target: CPI + 3% to 4% p.a. 8.% UT Peer Average.5% South African - Multi-Asset - Medium Equity Stable Growth.6% 7.9% 8.8% 8.6% 8.4% -5.3%.6% 0.06% Stable Growth Life.8% 8.% 9.% Target: CPI + 2% to 3% p.a. 7.% 7.3% 7.5% CPI + 2% to 3% p.a. over rolling 3 years UT Peer Average 0.0% 7.4% 8.5% South African - Multi-Asset - Low Equity Real Income 8.2% 6.9% 7.4% 5.4% 8.9% -0.7%.42% 0.08% Real Income Life 8.2% 7.% 7.5% Target: CPI + % to 2% p.a. 6.% 6.3% 6.5% CPI + % to 2% p.a. over rolling 3 years UT Peer Average 0.0% 7.4% 8.5% South African - Multi-Asset - Low Equity Maximum Return of 22.0%.5% 23.6% 9.7% -3.8%.87% 0.% s Benchmark 3 9.4%.4% UT Peer Average 6.5% 0.8% Worldwide - Multi-Asset - Flexible CPI 4 5.% 5.3% 5.5% Total Expense Ratio is a historic measure and includes the annual service fee. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER may not necessarily be an accurate indication of future TERs. Transaction Cost (TC) is a necessary cost in administering the fund and impacts fund returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of fund, the investment decisions of the investment manager and the TER. TERs and TCs as at 30 September. 2 Rolling 2-month returns (Since inception). 3 60% FTSE/JSE Shareholder Weighted All Share Index, 35% MSCI All Country World Index, 5% STeFI Composite Index. 4 The CPI figures are lagged by one month as the number was calculated before this month s inflation rate was released. Sources: Morningstar and Wealth FOR MORE INFORMATION, VISIT: Investment Group (Pty) Ltd PO Box 878, Cape Town 8000 Tel: Fax: Statutory information applicable to collective investment portfolios listed in table above: You should ideally see the funds as medium- to long-term investments. The fluctuations of particular investment strategies affect how a fund performs. Your fund value may go up or down. Therefore, we cannot guarantee the investment capital or return of your investment. How a fund has performed in the past does not necessarily indicate how it will perform in the future. The fund fees and costs that we charge for managing your investment are disclosed in the relevant fund s minimum disclosure document or table of fees and charges, both available on Unit Trusts' public website or from its contact centre. 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Unlisted investments have short-term to long-term liquidity risks and there are no guarantees on the investment capital nor on performance. It should be noted that investments within the fund may not be readily marketable. It may therefore be difficult for an investor to withdraw from the fund or to obtain reliable information about its value and the extent of the risks to which it is exposed. The value of the investment may fluctuate as the value of the underlying investments change. In respect of pooled, life wrapped products, the underlying assets are owned by Life Assurance Company (South Africa) Limited, who may elect to exercise any votes on these underlying assets independently of Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. November