2011 Q2. South Africa. Fund Observer

Transcription

1 2015 Q Q2 South Africa Fund Observer

2 Morningstar Fund Observer 2nd Quarter 2015 Contents Data: Individual Funds 3 Data: Fund Categories 4 Data: Fund Houses 5 Data: Market Performance 6 Commentary: Quarterly Market Summary 7 Commentary: Rekenthaler Report Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

3 Morningstar Fund Observer 2nd Quarter 2015 Page 3 Performance and Estimated Net Flows for Largest 20 Funds by AUM Short Term Bond Morningstar Rating Return (Past Quarter) Mstar Category Quartile Rank Return (1 Year) Fund Level AUM (R Mil) Quart Est Net Flow (R Mil) Coronation Strategic Income STANLIB Income Cautious Allocation ABSA Absolute Allan Gray Stable Coronation Balanced Defensive Coronation Capital Plus Nedgroup Inv Stable Prudential Inflation Plus Moderate Allocation Allan Gray - Orbis Global FoF Allan Gray Balanced Coronation Balanced Plus Foord Balanced Investec Opportunity Old Mutual SYmmETRY Balanced FoF South African Equity Allan Gray Equity Coronation Top Foord Equity Nedgroup Inv Rainmaker Old Mutual Investors Global Equity Allan Gray - Orbis Global Equity FF Largest Funds: Market Cap vs # of holdings Nedgroup Inv Stable AUM: R29bn AG Stable AUM: R38bn Avg Mkt Cap (R bn) Investec Opportunity AUM: R37bn AG Equity AUM: R41bn Coro Bal Plus AUM: R68bn Prudential Inf Plus AUM: R26bn AG Balanced AUM: R101bn 100 Foord Balanced AUM: R40bn 50 Coro Capital Plus AUM: R23bn Coro Bal Defensive AUM: R36bn # of holdings

4 Morningstar Fund Observer 2nd Quarter 2015 Page 4 Performance and Estimated Net Flows by Fund Category ASISA Categories Return (1 Month) Return (Past Quarter) 1 Year Return Category (R m) AUM Quart Est Net Flow (R m) South African IB Short Term South African EQ Mid/Small Cap Global MA High Equity Global MA Flexible Global EQ General South African MA Low Equity Wwide MA Flexible Global MA Low Equity South African MA Medium Equity South African MA Flexible South African MA High Equity South African EQ General South African IB Variable Term South African RE General Global RE General Morningstar Categories Return (1 Month) Return (Past Quarter) 1 Year Return Category (R m) AUM Quart Est Net Flow (R m) South Africa & Namibia Small-Cap Equity Bond - Ultra Short Term Bond - Short Term Flexible Bond Global Large-Cap Blend Equity Cautious Allocation Flexible Allocation Moderate Allocation Aggressive Allocation South Africa & Namibia Equity Diversified Bond Africa Equity Global Bond Property - Indirect Global Property - Indirect South Africa & Namibia

5 Morningstar Fund Observer 2nd Quarter 2015 Page 5 2nd Quarter Net Flows* and Morningstar Ratings by Fund Company AUM (R Mil) (30/06/2015) Quarterly Net- Flow (R Mil) Net-Flow Rank # of 4 & 5 Star Rated Funds Total # of Star Rated Funds % of Funds rated 4 & 5 Stars ABSA Fund Managers % Allan Gray Unit Trust Mgmt % Ashburton Management Company % Boutique Collective Investments % Cadiz Collective Investments % Ci Collective Investments % Community Growth Mgmt Co % Coris Capital Collective Inv Mgrs % Coronation Management Co % Discovery Life Collective Inv % Element Unit Trusts % FNB Unit Trusts % Foord Unit Trusts % Grindrod Collective Investments % H4 Collective Investments % Indequity Investment Mgrs % Investec Fund Mgrs SA % Investment Solutions UTs Ltd % IP Management Company % Kagiso Collective Investments % Marriott Unit Trust Mgmt Co % MET Collective Investments Limited % Momentum Collective Investments % Nedgroup Collective Investments % Oasis Crescent Management Co % Old Mutual Unit Trust Mgrs % Personal Trust Intl Mgmt Co % PPS Management Company (Pty) Ltd % Prescient Management Co % Prime CIS Mgmt Co % Prudential Portfolio Managers % PSG Collective Investments % RECM Collective Investments % Rezco Collective Investments % Sanlam Collective Investments % Satrix Managers (Pty) Limited % STANLIB Collective Investments % STANLIB Multi-Manager % Sygnia Collective Investments n/a *Figures are estimates which exclude Money Market and Fund of Funds

6 Morningstar Fund Observer 2nd Quarter 2015 Market Performance Local Market Indices 1 Month Quarter 1 Year YTD 3 Years 5 Years JSE All Share JSE All Share SWIX JSE Top 40 JSE SA Listed Property JSE Small Cap JSE Mid Cap STeFI Composite Beassa ALBI JSE Sector Indices Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil&Gas Technology Telecommunication Total Ret 1 Mo (Qtr-End) Total Ret 3 Mo (Qtr-End) Total Ret 1 Yr (Qtr-End) Global Market Indices 1 Month Quarter 1 Year YTD 3 Years 5 Years S&P 500 NASDAQ 100 Shanghai SE Composite Nikkei 225 Average Hang Seng HSI Top 10 Stocks by Market Cap Quantitative Moat Quantitative Fair-Value Estimate Closing Price (14/05/2015) Quantitative Valuation Quantitative Valuation Uncertainty Quantitative Financial Health Naspers Ltd Class N SABMiller PLC BHP Billiton PLC CIE FINANCIERE RICHEMONT SA DR Mtn Group Ltd Sasol Ltd Anglo American PLC British American Tobacco PLC Standard Bank Group Ltd Old Mutual PLC Wide Overvalued Medium Moderate Wide Fairly Valued Medium Strong Narrow Undervalued Medium Moderate Wide Fairly Valued Medium Strong Wide Fairly Valued High Strong Narrow Undervalued High Strong None Undervalued High Moderate Wide Fairly Valued Low Strong Narrow Fairly Valued Medium Strong None Fairly Valued Medium Strong

7 Morningstar Fund Observer 2nd Quarter 2015 Commentary Page 7 Local and Global markets falter as crisis in Greece unravels and Chinese stock market plunges Listed property and bonds slide as the All Share remains largely flat over the quarter The second quarter proved to be a choppy period for markets, with markets providing a mixed-bag of returns. After a positive start, most markets experienced a pullback towards the end of the quarter. The unravelling of the crisis in Greece and a large stock sell-off in China were key contributors to this pullback. South African equities were largely flat for the quarter, with listed property, resource and financial stocks all negative for the quarter. The FTSE/JSE All Share Index (ALSI) lost 0.2%, while the All Bond Index was down 1.4%. Kyle Cox Investment Analyst Morningstar Investment Management The Fed was slightly more dovish in its June announcement, and hinted that the interest rate hiking cycle may be more benign than expected. The Fed s announcement, however, was overshadowed by Greece s failure to make 1.6bn to the IMF which had ripple effects across global markets. The S&P 500 lost 1.9% in June, which erased gains earlier in the quarter. The index ending the quarter up 0.3%. European markets also reacted negatively to the Greek crisis with most markets giving back initial quarterly gains. The MSCI Europe Index returned -3.3% for the quarter. Germany s FSE DAX was the hardest hit of the major European markets, with the index losing 5.1% for the quarter. In Japan, continued quantitative easing seemed to shield the market from the ill effects elsewhere, with the Nikkei 225 producing a gain of 3.5% for the quarter. The FTSE 100 also made decent gains of 3.0% over the quarter, despite losing 3.5% in June. The Chinese government continued in its attempts to stabilize growth in the world s second largest economy by reducing interest rates in June. This did not stop a rampant sell-off and spiking volatility in Chinese stock markets in June. Despite losing 7.3% in June alone, the Shanghai Composite was still up 14.1% for the quarter. Developing market local currency equity returns outperformed the rest of the world over the quarter, with the MSCI Emerging Markets gaining 0.8% while the MSCI World lost 0.5%. Continued signs of slower growth in emerging markets had a negative impact on commodity prices. Gold and platinum prices fell by 1.5% and 4.5% respectively. Meanwhile, the spot prices of Brent Crude produced their largest quarterly gain since 2009, as a result of growing demand and expectations of a drop in U.S production. The U.S. Dollar price of Brent Crude ended the quarter up a staggering 15.4%. The FTSE/JSE All Share s lack lustre performance (particularly in listed property, resources and financials) drove losses and flat returns across nearly all the domestic ASISA categories. The South African Equity Industrial category was the best performer with a 0.8% gain, while the worst performing category was, unsurprisingly, the South African Equity Resources category which ended the quarter down 2.7%. The best performing category for the quarter was Regional IB Short Term with a 2.7% gain. The South African IB Short Term and the South African IB Money Market were the next best performing categories returning 1.6% and 1.5% respectively. With markets in negative territory for the quarter, cash and short term income producing assets provided a safe haven for investors. The Rand fell 0.3% against the US Dollar over the quarter. The depreciation against the Sterling Pound and Euro was more pronounced, as the Rand depreciated 5.8% and 2.9% against the Sterling Pound and Euro respectively. The best individual fund performance over the quarter was the 12.9% return of the Third Circle MET Targeted Return fund. The fund benefited from its high exposure to short term income producing assets(including cash). The next best performing funds were the Prescient China Balanced fund and the MET Global Diversified fund returning 7.7% and 7.4% respectively. The worst individual performance over the quarter was -9.2% for the Old Mutual Gold Fund. The funds sizeable exposures to gold mining stocks (AngloGold, Sibanye Gold, Gold Fields etc.) negatively impacted performance over the quarter. The next worse performing funds were Investec SA Value and Catalyst Global Real Estate PSG with returns of -8.7% and -8.6% respectively. Exposure to mining stocks continues to hurt the former's perfromance, while the downturn in property markets negatively affected the latter's returns.

8 Morningstar Fund Observer 2nd Quarter 2015 Page 8 Commentary Faint Praise, Indeed, For Active Management Unpacking Charley Ellis' 'defense' of active investing The Case Against This month, Charley Ellis published "In Defense of Active Investing." The headline intrigues because Ellis is an indexing legend. In 1975, he wrote that active investing is "The Loser's Game." The article became an instant classic and was later incorporated into the curriculum for Chartered Financial Analysts candidates. John Rekenthaler Vice President of Research "The Loser's Game" argued that investment success lies not in hitting the most winners, as it's very difficult to strike winners while competing against hordes of other informed investors, but rather in minimizing the "losers" of turnover, costs, and taxes. (All right, taxes are my addition, as 1970s institutional investors never considered the subject, but Ellis would certainly have discussed them had he thought about retail accounts.) That was not the conventional wisdom at the time, when the friction of costs was considered a minor drawback to the exercise of insight. Now, of course, Ellis' claim is a bedrock belief. The defense article begins by outlining the history of the attack on active management: "First came the academics, armed with their arcane null hypotheses, statistical inferences, and long equations littered with Greek letters." This first wave of attack posed no practical threat. Ellis writes, "Active managers were certain that no practical men of affairs knew about--much less read--the obscure academic journals in which those in the cloister read, publish, and reference each other's articles." "Then came performance reporting and all sorts of odious comparisons. Fortunately, as Nate Silver continues to explain, the numbers we see combine both the signal and the noise in a never-ending cloud of mystery that invites manipulation: Change the base year, change the benchmark or standard of comparison, or report gross of fees rather than net. [The latter is no joke; that remains the standard reporting structure for the separately managed account business.] Or, in especially awkward situations, explain that certain disappointing people have been replaced, so all will now be better." Such evasions, explains Ellis, have come under pressure from comprehensive studies that avoid the anecdote. These reports show that "a majority of their funds fall short of their benchmarks and that the trend is toward larger proportions of actively managed funds falling short and that the magnitude of underperformance substantially exceeds the magnitude of outperformance." Then arrived the attack of active share. The invention of the active share measure initially seemed to help the cause of active managers, as the numbers suggested that the more-active managers fared better, but that finding has recently been called into question. Also, as Ellis points out, the existence of the active share score suggests the troubling math: A fund that has a 25% active share and a 1% expense ratio effectively charges 4% on the fourth of assets that it does not index. It's very difficult to overcome a 4% annual hurdle! This newfangled idea of viewing the expense ratio as paying only for the part of the portfolio that is different than the benchmark, rather than for the entire portfolio, can also be extended to performance. If the stock market returns 5% in a given year, a fund with a 1% expense ratio should not be regarded as having taken 20% of the profits. Because that 5% could be purchased (almost) for free via a market-index fund. The correct evaluation should be as "incremental fees relative to incremental returns," which becomes a "particularly odious comparison" as "the average active manager is shown to be charging incremental fees that amount to more than 100% of the incremental returns--before taxes." (Ellis also relates how investors hurt themselves by chasing 5-star actively managed funds, but in that he is mostly wrong. The big problem for fund investors lies not in swapping funds within a given category, which causes little harm because the returns for funds within a category are highly correlated, but rather in dropping cold assets to buy hot assets. Stocks plunge in 2008! Sell stocks in 2009, buy bonds! That's how investors hurt themselves. And asset-class trades have nothing to do with star ratings, which measure only how funds perform within their categories.)...

9 Morningstar Fund Observer 2nd Quarter 2015 Page 9 Commentary Faint Praise, Indeed, for Active Management The Case For (Against) You might wonder how Ellis rescues active management from that onslaught. The answer: He doesn't. His main line of defense is that, although active managers generally don't do well for their shareholders, they deliver a great social good in creating highly efficient markets. Viewed in absolute terms, the (literally) hundreds of billions dollars spent each year on investment professionals looks ridiculous. But from a relative perspective, it's a modest price to pay for having the world's businesses accurately priced. Because the benefits are tremendous. Efficient markets "encourage millions of investors to trust the capital markets with their savings." They reward stronger companies and penalize the weaker. They break down national borders, making for a "global megamarket," which has made for "faster growth, more and better jobs, more democracy, and better prospects for world peace." Active management has helped to lift "over 1 billion people out of poverty in just one generation." Whew again! I have no idea if all that is true; however, at the least Ellis is correct that active managers perform a useful service in pricing securities. Unfortunately, even if Ellis' argument is completely and fully accurate, that's no reason to invest actively. So the world needs active managers. So as a whole they are useful members of society, not parasites. So what? Let others fund their noble venture. You and I will free-ride. We will index and let those suckers paying 1% per year teach the world to sing. Ellis' secondary defense is similarly unconvincing. He writes that, although it's difficult to win the Loser's Game, it is also "hard to lose." After all, the corollary of the criticism that active managers mostly hold the market is that active managers mostly hold the market. The biggest success for any prospective investor lies in getting into the game. After that, the leakage caused by active managers is modest. Besides, investing actively is good entertainment. "Since active investing is exciting and fun, investors who are losing a bit in purely economic terms surely enjoy a significant social good by being part of the action." At this point, I wonder whether Ellis is sliding into satire. He continues in the next paragraph, "Unrelenting attackers--apparently driven by the 'green grievance' of jealousy--curiously ignore the enormous benefits to everyone in our society that come directly from active investors' generous philanthropy. We should be more appreciative of active investors' services to society as leading patrons of the performing arts and as core benefactors of colleges, universities, museums, hospitals, and orchestras--and as major donors to political campaigns, which are so important to our democracy." With Friends Like Ellis... While I don't believe the case for active management is as hopeless as Ellis presents, as investors can improve their odds by seeking funds that share certain common attributes, I do not dispute his thesis. Active managers do set efficient security prices. They do help global markets to function smoothly. But there's no particular reason why you need to own them. Ellis' "defense" of active management is in reality a highly effective attack. He came not to praise active managers, but to bury them....

10 2014 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.