PRIVATE CLIENT VIEW 02.2015 The big surprises of 2014, namely the sharp fall in the oil price and the collapse in developed market bond yields, have carried over into 2015. These factors are expected to remain supportive of growth and risk assets as the cost of capital remains suppressed, liquidity remains high and the search for yield continues. However, these factors point to a bigger set of problems down the line in the form of deteriorating growth momentum, valuation extremes and a strong disinflationary bias in the global environment. Falling domestic inflation (+4.4% Y-o-Y in January 2015) is expected to benefit SA consumers and allows the SA Reserve Bank some breathing space on the interest rate front as expectations are moderated. Rate hikes in 2015 are likely to be driven by the impact of capital outflows and the level of the rand as the US Federal Reserve gets set to raise rates. SA remains vulnerable and we fear that complacency around material structural reform and fiscal policy could take hold. Table 1: Total return of selected SA indices & currencies to 28 February 2015 Quarter 1 Year 3 Years 5 Years 10 Years SA Equity 7.1 16.1 19.4 18.2 18.0 Top 40 6.8 13.6 19.0 17.7 17.6 Small Caps 7.4 25.0 24.6 20.9 20.1 Resources 10 3.4-16.0-2.4 2.1 10.6 Industrial 25 7.7 24.9 32.3 28.9 23.7 Financial 15 8.3 37.3 27.0 22.3 16.8 SA Property 12.0 44.3 25.0 22.6 22.0 SA Bonds 2.0 15.0 9.2 10.2 8.5 SA Prefs -2.3-11.4 2.3 3.7 - SA Cash 1.4 5.3 5.0 5.3 6.9 US Dollar / Rand 5.6 8.4 16.0 8.7 7.2 Euro / Rand -5.3-12.0 9.5 4.5 5.4 GB Pound / Rand 4.0-0.3 14.7 8.9 4.9 Source: I-Net Bridge & Cordatus Capital The risks that are expected to have a material effect on SA investors, should they be realised, are summarised as; Stronger than expected US growth, employment or inflation which forces the Fed to raise interest rates sooner than anticipated by the market / USD strength persists. Eurozone monetary policy (stimulus) does not deliver the desired growth and inflation outcome and as a result, we see a flight to quality and risk assets are exposed. China stimulus does not impact on economic growth and commodity prices. Social disorder and electricity shortages in SA results in a rising cost of capital and falling Government revenue. Large foreign capital outflows, on the back of Sovereign downgrades, will impact equity, property & bond holdings.
Table 2: Returns on Cordatus Funds / Portfolios ending 28 February 2015 Month Quarter 6 Months 1 Year 2 Years (ann) 3 Years (ann) Cordatus SA Equity Portfolio 4.8 5.9 6.3 14.0 17.6 17.2 3 Laws Climate Change Equity Pres Fund 2.5 2.7 0.9 7.7 - - Benchmark [1] 4.1 7.1 5.9 16.1 19.4 19.4 Cordatus Global Equity Portfolio [GBP] 3.4 3.3 7.4 13.4 11.1 - Benchmark [2] GBP 3.4 3.8 10.1 17.6 14.1 - Prescient Wealth Balanced FoF A1 3.1 5.1 7.2 15.2 18.6 - Benchmark [3] 2.3 5.5 6.7 15.1 16.5 - Prescient Wealth Income FoF A1 1.0 3.1 5.3 10.7 9.4 - Benchmark [4] 0.6 1.8 3.7 7.4 7.1 - Cordatus Worldwide Flexible Pres FoF A1 3.1 4.9 5.5 13.9 - - Benchmark [5] 0.4 0.8 2.3 9.4 - - Cordatus Worldwide Flexible Pres Fund A1 4.2 8.8 9.2 15.3 - - Benchmark [5] 0.4 0.8 2.3 9.4 - - A current fact sheet for each of the above portfolios is available at www.cordatus.co.za\downloads. 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%, CPI is lagged by 1 month. Over the past 12-months absolute returns on the multi-asset range of funds managed by Cordatus have been acceptable. Whether in the low risk PWM Income FoF or the higher risk Cordatus Worldwide Flexible Fund, investors have generated real returns during the period. This (with the benchmark of each Fund indirectly aligned) is our primary objective within our fund range and continues to be our focus in the year ahead. Graphic: 1-year return of Cordatus Multi-Asset Funds vs. SA asset class returns: 02.2015 50 45 44.3 40 35 30 25 20 15 10 16.1 15.3 15.2 15.0 13.9 10.7 8.4 5.3 4.4 5 0 Note: SA CPI is lagged by 1 month. Page 2 of 5 Cordatus Capital - Private Client View February 2015
Table 3: Broad Asset Allocation of Cordatus Portfolios ending 28 February 2015 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 0 93 37 63 76 87 Equity 0 92 36 44 44 4 Property 0 0 0 1 5 7 Bonds 0 0 0 6 13 40 Cash 0 1 1 11 14 36 Other 0 0 0 1 0 0 Offshore 100 7 63 37 24 13 Equity 84 7 57 30 21 7 Property 5 0 3 0 1 Bonds 0 0 0 2 1 3 Cash 11 0 6 1 2 2 Other 0 0 0 1 0 0 During the month, the only material asset allocation change has been the increase in offshore equity exposure within the Cordatus Worldwide Pres Flexible Fund, funded from SA equity. QUARTERLY UPDATE ON THE IMMUNISATION PORTFOLIO Having reset the immunisation portfolio for the year ahead at end November 2014, the past quarter has delivered the desired results for an equity fund split equally between SA and offshore selections. The local component delivered 12% in the first quarter of Year 3, with the offshore selections delivering 17% (in ZAR). The aggregate portfolio returned 14.3% for the quarter. Current holdings are shown in the table below. Cordatus adapts the weighting in the official Stats SA CPI basket to weightings more representative of higher income investors (Benchmark Holdings %). The difference between Benchmark & Portfolio holdings represents sub-sector performance variances over the quarter. CPI Category Benchmark Holding % Portfolio Holding % Local (SJ) Offshore Food & non alcoholic beverages 18.0 19.0% Woolworths (WHL) Tesco PLC (TSCO:LN) Pioneer Foods (PFG) Reckitt Benckiser PLC (RB/:LN) Alcoholic beverages & tobacco 3.0 2.9% SA Breweries (SAB) Anheuser Busch Inbev [BUD:US] Clothing & footwear 5.0 5.0% Foschini (TFG) Inditex SA (IDEXY:US) Housing & utilities 13.0 13.8% New Europe Prop (NEP) Blackstone (BX:US) Household contents & services 10.0 9.4% Anglo American (AGL) Samsung Electronics (SMSN:LI) Health 10.0 9.8% Discovery (DSY) ishares Nasdaq Biotec ETF (IBB:US) Transport 5.0 4.3% Sasol (SOL) BMW AG (BAMXY:US)) Communications 3.0 2.6% MTN (MTN) Vodafone (VOD:LN) Recreation & culture 5.0 4.8% Sun International (SUI) Carnival PLC [CCL:LN] Education 13.0 14.1% Curro Holdings (COH) Pearson PLC (PSON:LN) Restaurants & Hotels 5.0 4.8% Famous Brands (FBR) Yum! Brands Inc (YUM:US) Personal care, Insurance & other services 10.0 9.5% FirstRand (FSR) Unilever (ULVR:LN) 100.0 Results since the start of this immunisation portfolio are as follows; Yr1 ending Nov 13 +40.4% Yr2 ending Nov 14 +14.7% Page 3 of 5 Cordatus Capital - Private Client View February 2015
THOUGHTS & ACTIONS All charts from INet BFA, unless indicated otherwise We jumped the gun on reducing SA property exposure into falling yields over the past year! The chart below shows the yields on SA 10-year Government bonds and the SA listed property index. Historically these yields have moved in synch, lately this relationship has broken down. We do not believe this divergence can persist for much longer. This divergence is currently trading at unhealthy levels and we expect some mean reversion in the near future. We remain marginally represented in this sector, retaining an offshore bias. Page 4 of 5 Cordatus Capital - Private Client View February 2015
The performance from SA listed property over the past year has been on the back of lower bond yields globally, results exceeding expectations in the main, increasing offshore and Africa exposure from the companies and lower interest rates. We do not expect that this favourable environment will be maintained in the near future and thus our positions are curtailed. FUND RESEARCH Our most recent Fund Research note was published in February 2015. This note may be viewed at http://www.cordatus.co.za/wp-content/uploads/pru-div-max-fund-feb-2015.pdf IS THERE AN OXYMORON WITHIN YOUR INVESTMENT PORTFOLIO? Dear Investors, This letter was written for a specific dividend-seeking income investor, in response to a request for an independent review of a much wider portfolio which utilises Funds and direct instruments. We feel however that it deserves a wider audience. It is that important. An oxymoron is a figure of speech in which two opposing ideas, or words (normally a noun and an adjective) are joined to create an effect. Common examples of oxymora used in everyday speech are living dead, open secret and tragic comedy. Shakespeare and Tennyson used them very effectively in their plays and musings to illustrate a point or feeling; it is our opinion that a Fund within the Prudential Investment Managers stable has succumbed to the inclination. Being cognisant of the risk, return and investor profile of individual mandates, we would remind investors who have entrusted Cordatus with their long-term wealth management requirements that performance (see page 1) over the next decade is unlikely to match that of the past 10 years! The price you pay for any asset is important and our portfolios (as shown in Table 3) reflect our view on relative valuations, reversionary trades and the need for some protection. Regards, Craig, Rolfe, Kim and Arthur 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. @CordatusC Page 5 of 5 Cordatus Capital - Private Client View February 2015