Contents Newsflash Market Comment Other Commentators Economic Update Weekly Market Analysis... 9

Transcription

1 29 February 2016

2 Contents Contents... 2 Newsflash... 3 Market Comment... 3 Other Commentators... 4 Economic Update... 6 Weekly Market Analysis... 9 STANLIB Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund STANLIB Flexible Income Fund STANLIB Multi-Manager Absolute Income Fund... 11

3 Newsflash Just looking at charts of the various equity indices, both offshore and local, one gets the impression that they are still in low (i.e. buying) territory - and that the next big move is up. Market Comment Just looking at charts of the various equity indices, both offshore and local, one gets the impression that they are still in low (i.e. buying) territory - and that the next big move is up. The MSCI World Index is still -14% in dollar terms from last May s record high and at 2013 levels. On balance, it looks like it has been forming a bottom over the past 5 weeks. Although on the local front we have some extra problems, such as drought, rising inflation, rising interest rates, political issues upsetting our Minister of Finance (and our bond yields and currency) and a possible downgrade below investment status later in the year, even our equity indices look as if they are in low territory and the next big move is up. Take, for example, the JSE Financial & Industrial Index (see graph below). This index is 82.5% of the JSE All Share Index. It was bigger until Sasol, Kumba and a couple of other shares were recently transferred across to the Resources Index. The point is this FNDI Index has been the engine of our JSE bull market since March 2009, so for almost 7 years, while the Resources Index has been in a vicious bear market since At this stage the FNDI Index is trading where it was a year ago. It fell about -13% from November to January and has been attempting to form what looks like a bottom since then, with more-or-less a W shape having formed. In particular the Financials Index, which fell -22% during Nene-gate and is still -17% from its April 2015 high, looks to be (hopefully) getting ready for some recovery; no guarantees of course, but that s the way the chart looks at this stage. The Financials Index is 21.6% of the ALSI or 26% of the Financial & Industrial Index, meaning that Industrials make up 74% of the Financial & Industrial Index. Source: I-Net BFA Industrials are trading at the same level as a year ago and are down -8% from the November record high. This index is dominated by rand hedges, with SAB 13.4% of the index, Naspers 11.7%, Richemont 7.5% and British American Tobacco 3.9%, making it 36.5% for these top 4 shares in the index and whose share prices are more driven by offshore economics than local SA economics.

4 Meanwhile the Resources sector (17.5% of the ALSI) continues to look very intriguing, with even the Brent oil price showing early signs of at least a short-term bottom forming, although dollar strength of late is a threat to this and all commodities. The copper price has stabilised and the iron ore price has picked up quite sharply of late, from $38/ton to $48/ton. This has helped Kumba Iron Ore gain a phenomenal +191% (no, this is not a misprint) in the past 5 weeks, back to October s price level. Similarly, Assore Limited has jumped by +125% in the past 5 weeks and is now actually back at March 2015 levels, so almost at the same price as a year ago. Gold shares have sparkled, with the JSE Gold Index +93% so far in 2016 and another new high for the year today - and its highest level in 3 years! Harmony s share price was at at end 2015 versus 52 rand today (it hit 8 rand in November). On the chart, it almost looks like a stairway to heaven, so dramatic has the trend been (from 8 to 52 in just over 3 months); one of the sharpest uninterrupted trends I have witnessed. The platinum index, by comparison, has been sedate, up only +38% so far in 2016 (versus +93% for the Gold Index). Anglo Platinum is up +76% so far in 2016 and at another high for the year today, but Impala Platinum has so far been a big drag on the index, up only +28% in Amplats is 32% of the Platinum Index and Impala 31.9%. The other interesting fact is that while Anglo American is up 47.6% so far in 2016, the biggest miner of them all, BHP Billiton, is still actually down by -9.4% in Sure, Anglo fell -68% last year versus Billiton s -30%...but still. Billiton has been lifeless so far in this mining rally. So, maybe Impala Platinum and BHP Billiton are the sleepers in this mining revival, i.e. maybe their turns are still to come if indeed this is a serious reversal/ending of the nasty bear market of the last few years. On that point, China's central bank on Monday cut the proportion of funds banks must set aside as reserves, according to a statement, in the latest attempt to keep growth on track in the world's second largest economy. The People's Bank of China, the central bank, said it would trim the so-called "reserve requirement ratio" by 0.50 percentage points. That helps. Certainly it is helping the JSE Mining Index rise to a new 2016 high today, up 3% by 1pm on Monday 29 th (up 24.3% in 2016). Meanwhile Eurozone inflation fell to -0.2% in February (i.e. deflation), so we now need the European Central Bank (Mario Draghi) to announce some extra stimulation in March, as he hinted he may do. Other Commentators US Market Analyst, Elaine Garzarelli Garza feels that markets have been depressed because of worries about the slowdown in the global economy, yet the US market is not yet discounting the positives in the US that are offsetting the slowdown (the market has not factored in the positives). Helping the US consumer are strong employment, low interest rates which benefit debt consolidation and mortgage expenses and low energy prices, which reduces petrol and heating expenses. With the consumer making up two-thirds of the economy, this should help them spend their increased savings on new cars, furniture, vacations, entertainment etc. Garza s quants model reading remains at a still-bullish 61% (out of a maximum possible 100%). The S&P 500 Index is -7.4% below its fair value of 2,104. Although the number of bullish investment advisors jumped up to 34.7% from 26.5% last week, the current level is still considered bullish, since it is below 39%. For the US economy, Garza expects continued slow but steady growth going forward. Existing home sales are up 11% year-on-year. Low mortgage rates, solid job growth and robust household formation are the fuel for new and existing home sales. The supply of houses has declined to a 4.3 month s supply in January, near a record low, and tightening inventories have allowed home prices to rise.

5 BCA Research In a special report on currencies, BCA has come up with what they call fair value models for various currencies, including the rand. Most models incorporate adjustments for relative productivity trends (the Balassa-Samuelson effect), terms-oftrade shocks (which are particularly powerful for commodity currencies), accumulated current account positions (a measure for net international investment position), and interest rates differentials. Furthermore, to account for any regime shift regarding risk aversion, BCA adds some kind of global factor in their analysis. The greenback is largely driven by the differential between U.S. and G10 real bonds yields, as well as the relative productivity trends between the U.S. and its trading partners and competitors, per BCA. At present, the dollar is overvalued by one sigma, or 10%. While this limits the upside of the currency, this does not mean that a reversal is imminent. Indeed, since 1980, the dollar has remained overvalued or undervalued for prolonged intervals of time. Instead, BCA continues to expect the dollar to strengthen against EM and commodity producers, very few of which are flagging strong value-based buy signals. They also expect the dollar to remain a slave to interest rate differentials against the euro and the yen. European productivity trends relative to the euro area s trading partners and competitors is the single most important driver of the euro, but the net international investment position, commodity prices and bond yield differentials all play crucial roles. The euro is strongly positively correlated with the CRB (Commodity Research Bureau Index). This seeming inconsistency is explained by the fact that the ECB has historically targeted headline inflation, which correlates closely with commodity prices. Also, Russia and other petro states have preferred to recycle their commodity windfall into European rather than U.S. assets. Currently, the model shows the real trade-weighted euro as being less than 2% undervalued. This suggests that the euro could have upward potential for the next few months as this currency rarely stays at its fair value, gyrating around it instead. Unsurprisingly, the yen is one of the cheapest currencies out there. If there is an economy defined by housing trends, it is the U.K. The single strongest explanatory variable for sterling is British real house prices. Second comes the spread between British and G10 bond yields; and finally, with a limited degree of significance, relative productivity trends between the U.K. and its trading partners and competitors. The pound could have further downside as the currency is not yet cheap and with the fight between the yes and the no camp over Brexit only starting, uncertainty will only grow as time passes. Finally, with emerging markets only beginning to deleverage, global asset prices could remain volatile a scenario under which the pound historically has fared poorly. The rand is hampered by poor productivity trends relative to its main trading partners and competitors. Second in importance is the country s NIIP (net international investment position) otherwise known as the accumulated current account position (the net amount of money flowing into or out of a country), followed by commodity prices. Today, regardless of its vicious drop, the ZAR remains expensive, with an 8% overvaluation. Since the rand usually rallies after reaching deep discounts, betting on further weakness remains a safe approach for investors. Also, as is the case with other commodity currencies, the ZAR tracks the path dictated by its fair value, which continues to point down due to South Africa s poor productivity record, adding to BCA s negative bias. Finally, South Africa s elevated inflation rate suggests that the real ZAR devaluation will be corroborated with a nominal devaluation. The Mexican peso is at fair value, Brazil s currency is not cheap despite its big fall, the Swiss Franc is fairly valued and the Aussie dollar has more cyclical downside potential. Paul Hansen Director: Retail Investing

6 Economic Update Budget Review 2016/17 On Wednesday, 24 February 2016, the Minister of Finance, Pravin Gordhan presented his first National Budget since resuming office as Minister of Finance in December As usual, the Minister tried to balance a range of competing objectives, but with an overarching need to try to avoid any further credit rating downgrades. Consequently, the Minister delivered a very determined budget that focused on a combination of tax increases, especially a further increase in the fuel levy, and fiscal consolidation, in order to reduce the fiscal deficit to below 2.5% of GDP over the next 3 years. This meant that there were very few new spending initiatives, although there is a substantial increase in spending on tertiary education and some relief for the farming community who have been adversely affected by the current severe drought. Foreign investors and the international credit rating agencies are likely to welcome the Minister s intention to reduce the fiscal deficit as well as contain government debt. In particular, it is clear that there is no room to accommodate another substantial rise in public sector wages. The business community is also likely to welcome key aspects of the budget including the Minister s intention to remove barriers to business investment. Unfortunately, the household sector, which is already under-strain, will face the bulk of government s fiscal austerity measures. This will dampen consumer activity further in The budget numbers For the 2015/16 fiscal year the Minister of Finance expects the budget balance to have recorded a deficit of 3.9% of GDP. This is slightly worse than the 3.8% the Minister projected in the October 2015 MTBPS, largely as a result of a revenue shortfall. The deficit is then expected to decline to 3.2% of GDP in 2016/2017, before falling sharply to 2.8% of GDP in 2017/18 and a mere 2.4% of GDP in 2018/19. It should be mentioned, however, that a significant part of the reduction in the fiscal deficit in 2016/2017 is due to a sharp reduction in the transfers to other members of the Southern Africa Customs Union (SACU) to the extent of almost R12 billion. This could become problematic for regional stability. Overall, while the reduction in the budget deficit over the next three years reflects an intention to adhere to fiscal discipline, South Africa s National Treasury has developed a reputation in recent years for not being able to achieve the intended reduction in the fiscal deficit. The government also intends to achieve a primary budget surplus (but deficit less interest costs) of 0.4% of GDP in the current fiscal year. This would be a very welcome achievement, and would go a long way towards convincing the public that government is serious about its intention to achieve a more disciplined financial framework. The revenue side of the budget Total government revenue is budgeted to increase by 8.3% in 2016/2017. This appears largely achievable compared with the revenue growth of 11.2% in 2015/16, despite economic growth softening to less than 1.0%. However, it is worthwhile noting that tax revenue is budgeted to rise by a more ambitious 9.8% over the coming year, which does appear over-optimistic given the low growth environment. (The difference in growth between tax revenue and total revenue is largely explained by a substantial reduction in the transfer to the other SACU members). The composition of tax revenue is not expected to change significantly over the coming year, with the bulk of the revenue still being derived from direct taxes in the form of personal income tax (38% of total) and company tax (17.1% of total).

7 Revenue from indirect taxes, such as VAT and the fuel levy, have grown steadily over the years (despite the VAT rate remaining unchanged at 14%) and now comprise an indispensable component of tax revenue. In fact, the revenue received from VAT (25.9% of total) consistently and significantly exceeds corporate tax receipts, with 2016/2017 no exception. The Minister announced a fairly large number of tax changes in the budget, but avoided any adjustment to the VAT rate, corporate tax, and the top marginal tax rate for individuals. There was also, unsurprisingly, no adjustment to exchange control. Instead, the largest tax change was an adjustment to the thresholds and tax brackets applicable to individual income tax combined with a 30c/l increase in the fuel levy. There was also an increase in capital gains tax, a rise in transfer duties for properties worth more than R10 million, and the normal increase in excise duties. This was done to alleviate some of the fiscal pressure government is under to contain the fiscal deficit. The increase in the fuel levy is expected to raise an additional R6.8 billion in revenue which is very substantial and will easily offset the modest adjustment the minister made to the alleviation of fiscal drag on personal income tax as a result of bracket creep impact of inflation. Overall, the Minister avoided a substantial increase in taxes, but it is clear that tax revenue is under pressure and that government will most likely have to raise taxes further over the coming years if economic growth and employment do not improve. It is also clear that, for the moment, the fuel levy is being used as an alternative to increasing the VAT rate. However, this cannot be sustained indefinitely and that ultimately the government will have to seriously consider raising the VAT rate. The average VAT rate in emerging markets is around 18% compared with 14% in South Africa. The expenditure side of the budget Over the next three years the Minister is projecting average expenditure growth of only 7.1% a year. This is relatively moderate and only slightly above inflation, suggesting that government is focused on becoming significantly more disciplined. This focus on fiscal discipline is reflected in the fact that the government intends to reduce its expenditure ceiling by an impressive R25 billion over the next three year compared with the October 2015 Medium Term Budget Policy Statement (MTBPS). Key areas of growth in government spending during 2016/2017 remain education, welfare (social grants), health, including housing and community development. The Minister specifically highlighted that the government has allocated an additional R31.8 billion to support higher education over the next three years. This is clearly in response to the fees must fall campaign by university students. The Minister has also indicated that government will support the farming community heavily impacted by the current drought, but only to the value of R1 billion. Encouragingly, the government will endeavour to improve the funding for state-owned entities, including a greater involvement by the private sector as well as the disposal of non-essential assets. There is also an intention to make greater use of Private/Public Partnerships (PPP) to develop the coal and gas energy sectors. At the same time, salary increases are to be contained, will new hiring will be more strictly controlled. Unfortunately, there is still not enough in the budget to directly promote job creation. South Africa s unemployment rate remains far too high by historical and international standards, and clearly contributes much of the social tension and anguish experienced in South Africa on a daily basis. Increasing employment in South Africa has to be the number one economic/political/social objective. It is also very encouraging to see that National Treasury has announced that it will be reviewing all contracts above R10 million across government. This is being done in a quest to ensure value for money and reduce wastage and irregularities in procurement. The primary focus of this review is on all State- Owned Companies (SOCs) such as PRASA, Eskom, Transnet, SABC and South African Airways. The coal contracts of Eskom also fall within the category of contracts that are above R10 million.

8 Importantly, the international credit rating agencies have flagged the lack of economic and the absence of a comprehensive growth strategy as one of their major concern. South African government has become a lot more indebted While South Africa s public sector debt parameters remain very acceptable by world standards at around 50% of GDP, the total debt as well as the cost of servicing that debt is clearly on the rise. For example, back in 2009, government s gross debt totalled only 26% of GDP. If left unchecked, government debt will quickly become a major hindrance to achieving many vital policy objectives. Already the cost of debt exceeds the total budget allocation to public order and safety and is one of the fastest rising components of state spending. The higher the debt, the higher the interest cost associated with that debt. In South Africa s case, the interest cost of state debt is projected to rise to over R154 billion in 2016/2017 or 10.7% of total government expenditure. This compares with only R88 billion (8.8% of total expenditure) as recently as 2012/2013. Conclusion The deterioration in South Africa s fiscal parameters over the past few years coupled with the systematic downgrade of South Africa s credit rating is extremely unfortunate and troubling. Encouragingly, there is a clear intention on the part of the Minister of Finance to contain the overall increase in expenditure through a lowering of government s expenditure ceiling as well as improvement in the efficiency of existing expenditure. The size of government debt at around 50% of GDP remains a significant concern, especially in a rising inflationary and interest rate environment, and against a backdrop of successive credit rating downgrades. Consequently, it is critical that government s expenditure ceiling is not breached, the public sector wage increase in contained and that a concerted effort is made to raise South Africa s growth rate through the encouragement of private sector business. The proposals to restructure and revamp the State Owned Enterprises also need to gain traction very quickly, while the Ministers intention to address institutional and regulatory barriers to business investment and growth need to be implemented. Overall, the tone of the budget is very welcome. The Minister is clearly determined, to avoid any further credit rating downgrades. However, the various state departments are going to have to demonstrate their political will to achieve the necessary fiscal reforms. Lastly, as we have mentioned on numerous occasions, South Africa s policy officials will increasingly need to focus on implementing measures that ultimately grow the economy and encourage employment in order to broaden the tax base. This will have to increasingly involve the private sector. Ultimately, without a rapid and sustained rise in tax revenue it is going to become increasingly difficult for the South African government to meet all the needs of the country and maintain an investment grade credit rating. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

9 Weekly Market Analysis Currencies/ Indices/ Commodities Friday s Close 26/02/16 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

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: Effective: 7.03% per annum 7.28% 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 28 February 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: 7.36% 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 26 February 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: 7.92% 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 26 February 2016.

11 STANLIB Extra Income Fund Effective Yield: 7.59% 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 26 February STANLIB Flexible Income Fund Effective Yield: 7.41% 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 26 February STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.13% 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 26 February 2016.

12 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.

13 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.

14 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.

15 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.: HX 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