MARKET & FUND COMMENTARY JUNE 2013

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1 MARKET & FUND COMMENTARY JUNE 2013 Over the quarter to the end of June, the ALSI fell by 0.2%, putting an end to an extremely volatile period. Resources (RESI20) fell 11.1% during the period and if not for the 8% return from industrials (INDI25) and a relatively unscathed financials (FINI15) sector, the quarter would have looked very ugly. Amongst the fixed income asset classes, the SA Listed Property Index bounced back in the latter stages to end largely flat, while the SA Preference Share Index declined by 1.8%. Rising bond yields saw the All Bond Index fall 2.3% during the quarter in which the Rand depreciated by 7% against the USD. CPI on a year ago in May surprised on the downside, increasing 5.6%, with wages, fuel, electricity prices and a weaker Rand expected to keep inflation around the upper band in the months ahead. Table 1: Total return of selected SA indices to 30 June 2013 Quarter 1 Year 3 Years 5 Years 10 Years SA Equity Top Small Caps Resources Industrial Financial SA Property SA Bonds SA Prefs SA Cash Rand / US Dollar Rand / Euro Rand / GB Pound Source: I-Net Bridge There are significant headwinds facing SA and the ZAR at the moment in the form of USD strength as their economy shows signs of recovering, slowing economic growth elsewhere (especially out of China and developed Europe), deteriorating SA trade fundamentals, impending Government and sector wage negotiations, falling commodity prices, SA socio-politics and a host of broader emerging market issues (e.g. Egypt and Brazil), as yet, unresolved. Perhaps the biggest risk we face in the short-term is the uncertainty that surrounds the timing of a tapering off and eventually, halting (expected to be mid-2014) of the quantitative easing QE policy that has been followed by the US. While some ZAR retracement in the short-term is likely, we expect the ZAR to have a weakening bias for the foreseeable future and as such we retain full offshore exposure within client portfolios and the unit trust funds we manage, as appropriate.

2 Chart 1: US unemployment & inflation two factors that the US Fed is watching carefully as they will largely determine the quality of the US economic recovery and thus the pace at which QE is to be withdrawn. Watch for 6.5% unemployment and 2.5% inflation. Chart 2: Foreign flows directing SA bond market returns likely to have negative impact on the ZAR as developed market yields move higher. Fed policy is key. Page 2 of 7

3 Chart 3: ZAR-USD exchange rate and Global Industrial Commodity Index slowing China has put pressure on commodity prices, just at the wrong time for SA. The ZAR is very much a commodity currency. Add outflows and the weakness bias is firmly in place. Table 2: Returns on Cordatus Portfolios ending 30 June 2013 Month Quarter 6 Months 1 Year 2 Years (ann) 3 Years (ann) Cordatus SA Equity Portfolio Benchmark [1] Cordatus Global Equity Portfolio [GBP] n/a n/a Benchmark [2] GBP n/a n/a Prescient Wealth Balanced FoF A n/a n/a Benchmark [3] n/a n/a Prescient Wealth Income FoF A n/a n/a Benchmark [4] n/a n/a Cordatus Worldwide Flexible Pres FoF A1 n/a n/a n/a n/a n/a n/a Benchmark [5] n/a n/a n/a n/a n/a n/a Cordatus Worldwide Flexible Pres Fund A1 n/a n/a n/a n/a n/a n/a Benchmark [5] n/a n/a n/a n/a n/a n/a A current fact sheet for each of the above portfolios is available at Returns for periods longer than 1 Year are annualised. The Equity and Global Equity Portfolios are segregated mandates run according to specific client income, risk and return objectives. Benchmark [1] = 100% All Share Index TR, Benchmark [2] = 100% MSCI World Index TR [GBP], Benchmark [3] = 50% JSE ALSI + 25% ALBI + 15% MSCI + 10% SA Cash TR, Benchmark [4] = 100% SA Cash Index + 2%. Benchmark [5] = CPI + 5% Page 3 of 7

4 MOVING INTO THE PUBLIC DOMAIN AND A WIDER AUDIENCE. June saw the launch of two CORDATUS branded collective investment schemes (unit trusts). This is a milestone for Cordatus, as we have been content in the past to manage the portfolios of other companies for a fee. So, why change our business model? Why now? The launch of the CIS s has been undertaken for the following reasons; Our performance over the past 10 years has been good enough for us to feel comfortable in our ability to navigate some very testing times and has allowed us to test our approach through full economic cycles. The last decade has been a period of fantastic returns from risk assets and we are not fooled into believing that we had much to do with the Beta that the markets delivered. Our return decomposition has shown however our ability to navigate the hard times is more successful than most of our competitors; and it is this capability upon which we wish to hang our hats. The time to do this is now. Tough times are approaching. Secondly, we have spent a considerable amount of time and effort on refining reporting, administration and product mix within the business. Our efforts have all been aimed at allowing Cordatus to add assets under management without placing undue strain on the existing business structures. We believe that this aspect of the business is now complete. Thirdly, while we remain steadfast in our policy of being the partner of choice for High Net Worth Individuals, we have come to realise that Cordatus is an attractive destination to a large group of people who do not fall into this demographic. Thus, each of the new CIS s has a retail class (which starts at R10,000 and allows for monthly debit orders of R500) to cater for a wider audience. Having retail product available means that we appear in the mainstream press and on numerous electronic platforms as a result. We are prepared for this and fully grasp that we now have a window into our world and have lost the ability to draw the shades whenever we desire. Table 3: Asset Allocation of Cordatus Portfolios ending 30 June 2013 Manager CORDATUS CORDATUS CORDATUS CORDATUS CORDATUS CORDATUS Portfolio Global Equity SA Equity WW Flex Fund WW Flex FoF PWM Bal FoF PWM Inc FoF Currency GBP ZAR ZAR ZAR ZAR ZAR South Africa Equity Property Bonds Cash Other Offshore Equity Property Bonds Cash Other Page 4 of 7

5 Our view of the global financial complex over the next decade is still firmly in place. Namely, that equities and property exposure are preferred, with bonds and cash, our least favoured asset classes. In the shorter-term, we expect that periods of dead air will be reached and volatility is thus likely to increase from current levels. June was just such a period for SA fixed income and equity (specifically the resource counters)! Expect volatility to remain at elevated levels as financial markets grapple with the implications associated with a tapering off of the US QE program. Being cognisant of the risk and liability profile of individual mandates, we would remind investors who have entrusted Cordatus with their long-term wealth management requirements that this thinking is applied consistently across our entire client base. This orientation is reflected in Table 3 above. The new funds, namely the CORDATUS WORLDWIDE FLEXIBLE FUND (uses direct instruments) and the CORDATUS WORLDWIDE FLEXIBLE FUND OF FUNDS (uses external managers) launched in mid-june. We have been the lucky recipients of very large cash flows, but this creates some problems initially. The funds at month-end do not reflect our target allocations as yet as making decisions in the midst of the volatility towards the end of June was folly. We expect that allocations at the end of July will be closer to our preferred stance. A FEW CHARTS THAT YOU MAY FIND INTERESTING, WE DO! Chart 4: Physical Platinum prices and Lonmin Plc (which we bought for R36 earlier this year). We prefer the platinum sector to the gold sector. Page 5 of 7

6 Chart 5: Physical Gold prices and AngloGold Ashanti (which we do not own) Chart 6: SA Petrol price in Cape Town and ZAR USD exchange rate (rising by 84c/l) Page 6 of 7

7 Chart 7: US 10yr bond yields the bond party is running out of support Regards, The Cordatus Team DISCLAIMER Cordatus Capital (Pty) Ltd is an authorised Financial Services Provider [FSP # 21263]. The content of this presentation and any information provided may be of a general nature and may not be based on any analysis of the investment objectives, financial situation or particular needs of the client (as defined in the Financial Advisory Intermediary Services Act). As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate considering the client s own objectives and particular needs. Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith. The products discussed in this presentation, may or may not, be regulated by the FSB. Page 7 of 7