Companies we invest in Top holdings 31 December 2017 Company Weight Alphabet 5.90 Mastercard 5.18 Wells Fargo 4.36 Morgan Stanley 3.95 Home Depot 3.94 Unilever 3.93 Siemens 3.83 Throughout 2017, we have continued to benefit from the so-called goldilocks scenario that has fuelled investor willingness to accept risk. Global economic growth synchronised, accelerating fast enough to create jobs and fuel spending, while still remaining slow enough so as not to induce higher inflation expectations, and as such supporting continued loose monetary policy. With an expected gradual pick-up in inflation, we anticipate monetary conditions to gradually tighten somewhat, particularly in developed markets. However, we believe that a continuation of the global growth momentum into 2018 should continue to support corporate profits. Despite historically low volatility, mainly due to abundant global liquidity, we have been able to take advantage of politically fuelled market uncertainty during 2017, by systematically building positions in companies that meet our investment criteria. In 2018, we expect a rise in volatility, mainly due to reduced liquidity, will continue to provide us with similar opportunities, allowing us to invest in quality companies at attractive valuations. While we acknowledge the advancing age of the bull market, we caution investors that bull markets do not die of old age but rather of policy error or anticipation of recession, neither of which seem imminent. Jerome Powell, successor to Fed Chair Janet Yellen, is expected to continue with the Federal Reserve s current monetary policy, but could be inclined toward less regulation. Furthermore, 2018 will be the first year in a while where the European Central Bank will not be buying all of the incremental bond supply, suggesting higher European bond yields. However, we are convinced that European bond yields will only rise moderately; partly because global currency reserves are growing and need to be invested, driving central banks to buy government bonds. Valuations reflect a belief that growth will remain strong in the US and continue to gather momentum in Europe. While we are cognisant of historically-high current valuation levels, we believe they are supported by earnings momentum as well as other positive economic indicators; with a potential additional boost from expected tax reforms that should support the repatriation of foreign funds. Our global outlook encourages us to seek out companies that portray a strong revenue growth profile, in combination with quality and visibility in their earnings. We, therefore, remain focused on companies with cumulative growth that are capable of offsetting any negative impact from gradually rising interest rates. FedEx 3.81 Johnson & Johnson 3.77 LVMH 3.74 Sasfin Securities Research Email: sassec.research@sasfin.com
Companies we invest in... 1 Positioning... 1 Table of Contents... 2 Portfolio performance... 3 Attribution analysis... 4 Positive attribution... 4 Negative attribution... 4 Sector review... 4 Appendix I: SGEM framework... 5 Mandate... 5 Objective... 5 Monthly review process... 5 SGEM investment team... 5 Appendix II: Structure biases and guidelines... 6 Cost assumptions... 6 Portfolio positioning guidelines... 6 Page 2
Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 16 January 2018 Global Equity Model Monthly Review Since 31 December 2014 the SGEM has achieved an effective total return of 32.9% (in USD), which is 9.9% ahead of the MSCI All Country World Index (MSCI ACWI), for the period ending 31 December 2017. Table 1 : Effective total return in US Dollar (USD) terms as at 31 December 2017 Monthly Last 3 months 1 Year Since 31 Dec 2014 Sasfin Global Equity Model (SGEM) 1.93 3.68 23.45 32.90 MSCI All Country World Index (MSCI ACWI) 1.50 5.37 21.62 22.99 S&P 500 0.98 6.12 19.42 29.86 FTSE/JSE All Share (ALSI in USD) 9.70 16.77 29.76 11.72 Table 2 : Effective total return in South African Rand (ZAR) terms as at 31 December 2017 Monthly Last 3 months 1 Year Since 31 Dec 2014 Sasfin Global Equity Model (SGEM) -7.91-5.46 11.08 41.98 MSCI All Country World Index (MSCI ACWI) -8.30-3.92 9.44 31.39 S&P 500-8.77-3.24 7.46 38.73 FTSE/JSE All Share (ALSI) -0.89 6.47 16.77 19.35 Figure 1 : Total relative performance of a notional $1m invested since 31 December 2014 14,000,000.00 13,000,000.00 12,000,000.00 11,000,000.00 10,000,000.00 9,000,000.00 8,000,000.00 SGEM MSCI AC World The SGEM performance is net of trading and management fees. It is therefore more appropriate to compare it to a tradable version of its benchmark (MSCI ACWI). We have used the ishares MSCI ACW ETF for this purpose. Page 3
Over the past month the largest positive sector outperformance has been achieved by our Information Technology exposure. This has been achieved by focusing on real long-term growth, at a reasonable price, in our stock selection process. Whilst over the past month our largest sector underperformance can be contributed to our overweight position in Consumer Staples. Table 3 : SGEM GICS sector weights, as at 31 December 2017, relative to MSCI ACWI GICS sector weights Cash Consumer Discretionary Consumer Staples Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Energy 0 5 10 15 20 25 MSCI ACW SGEM Page 4
This section sets out the key objectives and constraints associated with the model portfolio. The benchmark is the MSCI All Country World Index in USD (MSCI ACWI). The objectives are to generate: o o o real positive total returns long term compounded out-performance nominal total return above the MSCI ACWI. Shares are intended to be held for a minimum of 36 months. The model portfolio size will aim to be 30 shares. There is no explicit risk metric. The portfolio risk should not be significantly above the standard deviation (annual) of the MSCI ACWI. The minimum shareholding is aimed at 3%, except where a shareholding has drifted below that level. The Sasfin Global Equity Model s (SGEM) objective is to achieve incremental total positive returns that compound over the longer term. By focusing on real long-term growth, at a reasonable price, the SGEM aims to lower the risk of capital loss. This goal is further supported by our global macro thematic trend analysis. The combination of these factors with the resultant high conviction share selection enables us to add value. This report follows the monthly SGEM investment committee review and reports on the: Performance and sector review in USD over various time periods (including since inception); Changes made to underlying company holdings; Highlights the investment reason for the changes to company holdings; and The current SGEM shares, weights and basic fundamental factors. Bruce Ackerman Bradley Mitchell Riaan Prinsloo, CFA Nicholas Dakin Mike Haworth Co-portfolio manager Co-portfolio manager Co-portfolio manager Equity Analyst Global macro strategist Page 5
The SGEM is designed to be an indicative portfolio. Actual portfolios are likely to be different given clients varying mandates. The SGEM monthly review assists with the structuring of client portfolios by highlighting shares offering opportunity or concern. The portfolio is designed for a target portfolio of $1m or more. Qualitative metrics used for analysing shares are cyclicality, product mix, geographic mix and currency exposure. The SGEM now includes the following cost assumptions: Trading costs of 1.0%. Annual fees (including management fee) of 1.50%, which are charged monthly. Some quantitative metrics which should be considered when repositioning a client s equity portfolio for a defensive bias are: Look for beta shares of less than one, relative to the MSCI ACWI. Look for low positive or negative correlations with the MSCI ACWI. Look for low earnings cyclicality. Attractive forward dividend yield. Increase diversification. This means increase the number of shares in the portfolio. This reduces individual share exposure. It also means increasing the number of sectors and geographies to which the portfolio is exposed. This reduces concentration and should reduce correlation. In general, high valuations are where the price-to-book ratio is above 1.5x and a forward price-to-earnings ratio is above 15x. In the case of cyclical shares, an earnings collapse normally pushes up the valuations, yet the emphasis should be on stability, not trying to guess the recovery of highly cyclical earnings. Reduce cyclical exposure. There are a number of macroeconomic cycles in differing phases at any point. The main cycles to be considered are: credit, interest rates, business, capital markets and commodity cycles. Avoid companies in the midst of large capital expansion programmes or restructurings. There are inevitably more costs than originally estimated. Look for companies with inelastic demand curve characteristics. This can either come from nondiscretionary consumer, business spending factors, long-term contracts or a high level of annuity income. Focus on large companies. Smaller companies could to have wider earnings variability. Large companies tend to have a longer track record, economies of scale, more bargaining power and higher levels of reserves for tough times. Avoid obvious risks. Regulation risks lie in the socially sensitive sectors such as healthcare, housing, utilities, education and food. Page 6