ASSET MANAGEMENT INVESTMENT REPORT 4 th QUARTER 217 www.abam.co.za Report completed in January 218 CONTACT DETAILS Sandton Campus South, 2nd Floor, 1 Alice Lane, Sandton, Johannesburg, 2196 Tel no: +27 () 8 111 46 Fax no: +27 () 86 32 267 Email: unittrust@absa.co.za
A word from our MD By Ann Leepile Assets under management at an all-time high Keeping our cool in 218 The beginning of a new year is an opportunity for any business or individual to look back on the past year and assess achievements, mistakes and resolutions for the coming year. Assets under management at an all-time high As a business we are happy to report our assets under management were over R13bn for the first time at the end of December 217. This was on the back of a pretty challenging year for all active fund managers. We run on a franchise model comprised of six franchises, Equities, Africa, Property, Fixed Interest, Balanced and Absolute Return. I am happy to report that of the six franchises, four of them have produced funds with performance in the first quartile for the 217 year, which will stand us in good stead for future asset raising in 218. In line with the positive performance numbers we are seeing, we were able to add over ten new institutional clients and many new retail clients onto our books over the past year. We thank them for having entrusted us with their money and we hope this will be the beginning of some very long and successful relationships. Six franchises were formed to focus on the strengths and capabilities within the investment team The markets seem to have a knack for throwing some interesting surprises our way as the year winds down. This December was no different; the ANC Elective conference had all market participants glued to their seats in anticipation, Naspers rumours of ill-gotten contracts and the Steinhoff scandal created major ructions in the market, just as people were hoping to start winding down. As an active management business, we need to be well positioned for all market scenarios but ultimately as active managers, we are paid by our clients to take active positions in the market. We are happy that on the whole, we were able to produce good alpha for our clients without having taken on too much risk and that our active positions were rewarded with impressive performance. Some great new people have joined the family We welcomed some new staff into the ABAM family in the last quarter of the year. We hope that clients will feel their addition to our business in a positive way. What we hope 218 will bring is continued embedment of our franchise model, further positive asset flows into our business and a strengthening of the Absa Asset management brand as a multi-capability, pragmatic value house. Once again, I would like to assure you of our continued commitment to our clients and our people, this business gets stronger and stronger each year and together with your support as our valued clients, we expect that to continue. Meet the author Ann Leepile MD: Absa Asset Management
INVESTMENT REPORT CONTENTS Summary 1 Market summary 1 Fund performance 1 House asset allocation 2 Snapshot Forecasts and tactical positioning 2 Markets at a glance 3 Absa Select Equity Fund 4 Absa Core Equity Fund 6 Absa Large Cap Fund 8 Absa Africa Equity Fund 1 Absa Property Equity Fund 12 Absa Balanced Fund 14 Absa Absolute Fund 16 Absa Bond Fund 18 Absa Money Market Fund 2 South African Asset Classes 22 Equities 22 Property 23 Bonds 24 Cash 2 International Asset Classes 26 Equities 26 Bonds 27 Cash 28 Currencies 29 Emerging markets 3 Glossary 31
SUMMARY MARKET SUMMARY Local In South Africa the quarter was dominated by the ANC elective conference. The rand, bonds and domestic equities responded strongly to what was interpreted as a market friendly outcome. The rand strengthened by 1.7% during December and helped the bond market to recover from the ratings downgrades earlier in the quarter. Global Global equity markets ended the year on a positive note. The MSCI World Index returned.6% during the final quarter and ended the year up 22.8% in US dollars. Global earnings has recovered strongly during 217 supported by synchronized global economic growth, low inflation and highly accommodative monetary policy. FUND PERFORMANCES TO 31 DECEMBER 217 3 months 1 year (p.a.) 3 years (p.a.) years (p.a.) % Return Benchmark Median % Return Benchmark Median % Return Benchmark Median % Return Benchmark Median Fund Size (R million) Equity Funds Absa Large Cap 3.3 6.7 6. 13.6 23.1 22.2 8. 9.2 8.4 12.2 11.8 1.9 1 73 Absa Property Equity 7.3 8.3 7.1 26.8 17.2 1.1 21.1 11.7 11.1 22.2 13.9 13. 4 321 Absa Select Equity 7.6 7.4.4 13. 21. 12.7 4.7 9.3.9 7.9 11.9 9.8 3 37 Absa SA Core Equity 6.9 9.6.4 17. 21.2 12.7 46 Multi Asset Funds Absa Absolute A 2.2 1.8 1.4 6.4 8.6 8..4 9.3 6.6 6.8 9.4 8.2 9 334 Absa Balanced R 2.8 2.1 1.7 1.4 9.6 9.4 6.7 1.3 6.2 8.6 1.4 8.8 2 79 Absa Flexible Growth 2.9 2.1 2. 9.6 9.6 9.4 6.6 1.3 6. 9.2 1.4 8.9 2 91 Absa Flexible Income 1.9 1.8 1.9 8. 7. 8. 7. 7.1 7. 6.1 6. 6. 1 384 Absa Tactical Income A 1.9 2. 1.9 6 Absa Inflation Beater 2..9 1.4 9. 4.6 8. 6.1.3 6.6 6.1.4 8.2 398 Absa Managed A 2.6 2.3 2.1 1.1 1.6 1.1 6. 11.3 6. 9. 11.4 9.8 92 Interest Bearing Funds Absa Bond 2.2 2.2 2.1 11.3 1.2 1. 8.1 6.9 6.7 6.6 6.3 6.4 2 49 Absa Core Income A 2. 1.9 1.9 9.6 7.7 8.6 2 Absa Income Enhancer 2. 1.8 1.9 9.2 7. 8.6 7.9 7.1 7.9 6.6 6. 7. 99 Absa Inflation Linked Income A 1.8 1.4 2.1 9. 6.6 1. 88 Absa Money Market 1.8 1.8 1.8 7.6 7. 7.7 7.2 7.1 7.2 6.4 6. 6. 66 2 International Funds Absa Africa Equity A -3.6-6.3-4.8 12.8 11. 1. -2. -.2-3.6 461 Absa Global Core Equity FF A -2.4-3.2-3.4 7.1 11.4 1.4 6 746 Absa Global Multi Asset FF A -6. -7.8-6.9-6. -6.6-2.3 1 36 Absa Global Property FF A -3.7-3.2-4.7 2.3 11.4.4 16 Absa Global Value -4.1-3.2-3.4 8.2 11.4 1.4 12.7 12.4 9.8 19.9 21.1 17.8 876 Absa Euro Income -6.4-7.3 2. 2. 1. 1.8..9 19 Absa Sterling Income -6.2-7. -..6-2.2-1.8 3.9 4.2 98 Absa US Dollar Income -8.3-8.4-8.8-8.7 2.3 3.2 7.6 8. 9 INVESTMENT REPORT 1
SNAPSHOT South Africa South Africa 216A 217E 218E 219E Real retail spending 1.9%.8% 1.7% 2.1% Real Investment.%.7%.7% 2.1% GDP growth.3%.7% 1.% 1.9% CPI average 6.4%.2%.%.2% Prime EOP 1.% 1.% 1.2% 1.2 Rand/USD EOP 13.69 13. 14.26 14.16 ASSET ALLOCATION Asset Class Allocation Comments Equity Underweight Markets significantly overvalued both locally and globally. Low global rates and excess money supply is driving elevated PE s. Listed Property Overweight Recent de-ratings have seen property yields showing better value than bonds and equities. A weak economy however poses a risk to domestic property counters. European property remains very attractive. Bonds Overweight Bonds performed strongly in the year. However, emerging market bonds still look attractive. South African bonds are vulnerable to future potential downgrades. We see upside risk to global interest rates in coming years. Cash Overweight A good defensive asset as cash is still the safe asset class, which gives optionality if markets sell off. Foreign Full weight Full exposure to foreign assets is maintained as a hedge against further rand weakness/ volatility that may emerge as a result of political events. There is a substantial possibility that there may be further downgrade announcements from the various ratings agencies. INVESTMENT REPORT 2
Index (natural log scale) %pa Yield Metals (2=1) natural dog scale Oil ($/barrel) natural log scale % pa % pa %pa % pa MARKETS AT A GLANCE Alsi total returns All Bond total returns 2 4 1 3 2 1 1 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return Money market total returns 11 1 9 8 7 6 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return 1 9 8 7 6 CPI and CPI food -yr rolling inflation rates 4 26 27 28 29 21 211 212 213 214 21 216 217 CPI CPI Food 24 Metals and Oil 26 2 Gold and Platinum 12 128 64 32 2 1 16 1 6 26 27 28 29 21 211 212 213 214 21 216 217 Metals $ index Brent crude oil 8 26 27 28 29 21 211 212 213 214 21 216 217 $ Gold Platinum spot (US$/oz) Morgan Stanley world equity index All Bond index yield curve 2 1. 2 9. 2 26 27 28 29 21 211 212 213 214 21 216 217 Index -yr rolling total return 1 1 - -1 9. 8. 8. 7. 7. 6. 3 6 9 12 1 18 21 24 27 3 31 Dec 17Years 3 Sep 17 INVESTMENT REPORT 3
Absa Select Equity Fund Fund comments The Absa Select Equity Fund ranked in the second quartile of funds listed in the Morningstar SA General Equity Fund category. The local equity market was buoyant during the year, along with global markets, driven by broad-based strength across all the major sectors. The fund benefitted from being positioned in mining majors Glencore and Anglo American, which gained nearly 4% during the year, boosted by stronger commodity prices over the period. Performance was helped by Global markets remain resilient, which should benefit the local market INVESTMENT REPORT 4
Firstrand Anglo Old Mutual Reinet Bidcorp Naspers BHP Billiton Richemont Sanlam Remgro Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecommunications Financials Technology Glencore Firstrand Greenbay Mr Price Steinhoff Naspers Netcare Reinet Investments ABInBev Sanlam Absa Select Equity Fund Relative return contribution (1 year) Performance: Total returns to 31 December 217 (%) Top detractors (%) 7. 6.. Top contributors (%) Term Absa Select Equity Benchmark Sector median Rank Quarter 7.6 7.4.4 47/182 1 year 13. 21. 12.7 73/16 3 years 4.7 9.3.9 93/128 years 7.9 11.9 9.8 81/13. -1. -.63 -.63 -.6 -.36 4. 3. 4% Industry allocation compared to the Alsi 31 December 217-2. -3. -4. 2. 1...33.3.61.66.94 3% 2% -. 1% -6. -7. -6.6 % -1% Fund Benchmark Relative Top weightings vs benchmark as at 31 December 217 Top underweight (%) -2-4 -6-8 -1-12 -14-12.71-1.93-1.6-2.61-3.4 Top overweight (%) 14 12 1 8 6 3.88 4 3.9 2.33 2.67 2.69 2 1-year sector attribution Fund 1.37 Benchmark 2.9 Relative return -.8 Sector Relative return contribution Basic Materials.19 Industrials -.19 Consumer Goods -.33 Health Care -.48 Consumer Services -.2 Telecommunications.6 Technology.41 Financials. Additional -.32 Cash & Money Market -.72 Fund -.8 INVESTMENT REPORT
Absa SA Core Equity Fund Fund comments The Absa SA Core Equity Fund returned 17.% for the year, ranking in the top quartile in its peer group. The local equity market rallied in 217, with all sectors delivering solid returns. Steinhoff s share price collapsed on news of accounting irregularities, the fund carried a small overweight position in the counter. Given the lack of information at this point in time, we have maintained our position in Steinhoff and will continue to reassess our holding, which is now only.6% of the fund, as and when information comes to light. On the back of strong commodity prices, mining houses like Glencore and Anglo American delivered returns of nearly 4% for the year. The fund holds meaningful positions in both these counters. WEIGHED ON PERFORMANCE Overweight positions Commodity process strong 1st quartile over 1 year INVESTMENT REPORT 6
Foschini Bidcorp Sanlam British American Tobacco Investec Naspers Barclays Africa Growthpoint Nepi Rockcastle Remgro Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecommunications Financials Technology Mondi Rand Merchant Investments Imperial Holdings Barclays Africa Brait EOH Naspers Steinhoff Investec Discovery Absa SA Core Equity Fund Relative return contribution (1 year) Performance: Total returns to 31 December 217 (%) Top detractors (%) Top contributors (%) 1.8 Term Absa SA Core Equity Benchmark Sector median Rank 1.6 Quarter 6.9 9.6.4 61/182 1.4 1 year 17. 21.2 12.7 34/16. 1.2 -.2 1. -.4 -.6 -.8 -. -.31.8.6.4.2.2.28.4.4 4% Industry allocation compared to the Swix 31 December 217-1..2 3% -1.2. -1.4 2% -1.6-1.8-1.62-1.8-1.6 1% % -1% Fund Benchmark Relative Top weightings vs benchmark as at 31 December 217 Top underweight (%) Top overweight (%) 8 7 1-year sector attribution 6 Fund 18.3-1 -2-3 -1.87-1.22-1.14-1.2 4 3 2 1 1.67 1.76 1.81 2.32 2.81 Benchmark 21.21 Relative return -2.91 Sector Relative return contribution Basic Materials.6 Industrials.2 Consumer Goods -2.17-4 Health Care.21 - Consumer Services -1.69 Telecommunications.47-6 Technology -1.1-7 Financials.86-8 -7.16 Cash & Money Market -.14 Fund -2.91 INVESTMENT REPORT
Absa Large Cap Fund Fund comments The Absa Large Cap Fund had a soft fourth quarter with the fund returning around 3.3% compared to its benchmark which delivered 6.7%. Over 1 years the annualized relative performance of 11.4% outperforms the benchmark at 1.3%. CONTRIBUTING POSITIVELY TO RELATIVE PERFORMANCE Overweight position in Steinhoff. Underweight positions in Naspers and Standard Bank. GLOBAL GEOPOLITICS REMAINS A RISK FOR MARKETS Trump presidency Brexit negotiations US/Korean tension INVESTMENT REPORT 8
Bidcorp Anglo American Platinum Barclays Africa Firstrand British American Tobacco Naspers Remgro Standard Bank Growthpoint Bidvest Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecommunications Financials Technology Life Healthcare Remgro Greenbay Nepi Rockcastle Barclays Africa Steinhoff Naspers EOH Standard Bank British American Tobacco Absa Large Cap Fund Relative return contribution (1 year) Performance: Total returns to 31 December 217 (%) Top detractors (%) Top contributors (%) Term Absa Large Cap Benchmark Sector median Rank 3. Quarter 3.3 6.7 6. 11/11 2. 1 year 13.6 23.1 22.2 1/11 3 years 8. 9.2 8.4 /1 2. years 12.2 11.8 1.9 1/8. -. -1. -1. -.83 -.81-1.7 1. 1....24.34.43..7 Industry allocation compared to the FTSE/JSE Top 4 Index at 31 December 217 4% 3% -2. 2% -2. -3. -2.7-2.27 1% % -1% Fund Benchmark Relative Top weightings vs benchmark as at 31 December 217 Top underweight (%) Top overweight (%) 8-1 -2-3 -4-1.94-1.72-1.23-1.1 7 6 4 3 2 1 1.47 2.8 2.48 2.86 4.88 1-year sector attribution Fund 14.78 Benchmark 23.7 Relative return -8.29 Sector Relative return contribution Basic Materials -.68 Industrials.12 Consumer Goods -4.24 - -6 Health Care.46 Consumer Services -3.49 Telecommunications.6-7 -8-7. Technology -.92 Financials.8 Additional.12 Cash & Money Market -.8 Fund -8.29 INVESTMENT REPORT
Absa Africa Equity Fund Fund comments The fourth quarter of 217 saw gains across most markets in Africa. Top performers were Egypt (+7.3%) and Nigeria (+7.3%). This capped off a stellar year in which investors were rewarded for their years of patience in the asset class with synchronized bull markets across North and Sub- Saharan Emerging and Frontier equity markets. The strengthening of the South African rand against the dollar meant that in rand terms, the MSCI EFM Africa ex South Africa benchmark was down 6.3% for the quarter (+2.6 in US dollars) and up 11.% for the year (+22.3% in US dollars). In rand terms, the fund was down -3.6% for the quarter and up 12.8% for the year (+2.1% in US dollars net of fees), outperforming by 2.7% and 1.8% for the quarter and the year, respectively. SYNCHRONISED BULL MARKETS IN NORTH AND SUB-SAHARAN EMERGING AND FRONTIER EQUITY MARKETS FUND EXPOSURES Underweighting in Nigeria for the duration of 217 Egypt = largest exposure #1 performing fund over 3 years INVESTMENT REPORT 1
Consumer Discretionary Utilities Health Care Energy Consumer Staples Financials Materials Telecommunication Services Absa Africa Equity Fund Regional/sectoral split as at 31 December 217 Region/Sector Egypt Kenya Morocco Mauritius Namibia Nigeria Tanzania Senegal South Africa Zambia Financials 18.7% 2.3% 1.% 7.% 2.6% 9.6% - - - - Consumer Discretionary 1.6% - - - -.9% - - - - Consumer Staples 12.1% - 9.1% - - - - - - - Consumer Staples - 1.9% - - - - 1.% 4.% 2.2% - Materials - - - - - - - - -.3% Industrials - - - - - - - - - - Energy 1.% - - - - 8.% - - - - Health Care 6.7% - - - - - - - - - Utilities -.4% - - - - - - - - Information Technology - - - - - - - - - - Other - - - - - - - - - - Cash -3.1% - - -1.4% - 1.%.% -1.% -.9% - Bonds 8.2% - - - - - - - - - Grand Total 4.1% 9.6% 1.6%.7% 2.6% 2.4% 1.% 3.% 1.2%.3% Relative sector weightings as at 31 December 217 Performance: Total returns to 31 December 217 (%) Top underweight (%) 16 14 12 1 Top overweight (%) 8.7 8.89 Term Absa Africa Equity FF A Benchmark Sector median Rank Quarter -3.6-6.3-4.8 2/ 1 year 12.8 11. 1. 2/ 3 year -2. -.2-3.6 1/ 8 6.93 6. -2-4 -6 4 2 2.4-8 -1-12 -9.8-8.47-14 -16-14. INVESTMENT REPORT 11
Absa Property Equity Fund Fund comments The fund delivered a total return of 26.8% for the 217 year. This equates to an outperformance of both the listed property index by 9.6% and the median manager by 11.7%. In terms of relative asset class performance, the SA listed property sector delivered positive growth in 217 with a 17.2% total return performance, underperforming equities (21.%) but outperforming bonds (1.2%) and cash (7.%). However, over the longer period, listed property has continued to be one of the best performing asset classes, returning 14.9% p.a. over the last 1 years, beating the returns on equities (1.7%), bonds (8.6%) and cash (7.1%). #1 performing fund over 1, 3 and years YEAR RETURN 22.2 % p.a. LISTED PROPERTY Historical yield Forward yield 6.3% 6.7% 1 YEAR RETURN 14.9 % p.a. INVESTMENT REPORT 12
Fortressb Vukile Greenbay Prop Ltd Equites Property Fund Mas Real Estate Growthpoint Props Redefine Fortress Income Fund A Attacq Limited Hyprop Equites Property Fund Nepi Rockcastle Plc Redefine Properties Limited Mas Real Estate Inc Greenbay Properties Arrowhead Properties Limited A Absa Money Market Ut Rockcastl Nepi Accelerate Property Fund Absa Property Equity Fund Relative return contributors (1 year) Performance: Total returns to 31 December 217 (%) Top detractors (%). -1. -.4 -.43 -.3 Top contributors (%) 6. 4.97. 4. 3. 2. 1.4 1.8 1.79 2.1 1.. Term Absa Property Equity A Benchmark Sector median Rank Quarter 7.3 8.3 7.1 17/43 1 year 26.8 17.2 1.1 1/39 3 years 21.1 11.7 11.1 1/31 years 22.2 13.9 13. 1/23-2. -1.34-1.34-3. -4. -. -6. Top weightings vs benchmark as at 31 December 217 Top underweight (%) -2-4 -6-8 -1-12 -14-16 -18-2 -17.39-12.29-3.14-2.68-4.83 Top overweight (%) 2 18 16 14 12 9.33 1 7.7 8 6.3 6.37 6 4.96 4 2 INVESTMENT REPORT 13
Absa Balanced Fund Fund comments Global equity markets ended the year on a positive note. The MSCI World Index returned.6% during the final quarter and ended the year up 22.8% in US dollars. By comparison, global bonds (the perceived safe haven asset class) performed relatively poorly. The JP Morgan Global Aggregate Bond Index returned 1% during the final quarter and 7% for the full year. The rand, bonds and domestic equities responded strongly to what was interpreted as a market friendly electoral conference. The rand strengthened by 1.7% during December and bonds generated a total return of 11% during 217. Equity was the star performer with a total return of 2.7%. This return was heavily concentrated in Naspers and the mining stocks. RAND UP 1.7% IN DECEMBER DOMESTIC EQUITIES BANKS +8.4% IN DECEMBER INDUSTRIALS (-4%) RESOURCES (-.%) FUND IS CONSERVATIVELY POSITIONED HOLDING HIGH LEVELS OF CASH, BONDS AND DEFENSIVE, HIGH QUALITY, UNDERVALUED EQUITIES. INVESTMENT REPORT 14
ABInBev JSE African Rainbow Capital Woolies Spar Group Naspers Shoprite Sanlam Firstrand Vodacom Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecommunications Financials Technology Absa Balanced Fund Gross return contributors (1 year) Performance: Total returns to 31 December 217 (%) -.9 International cash Term Absa Balanced R Benchmark Sector median Rank.8 Domestic cash Quarter 2.8 2.1 1.7 19/8 1 year 1.4 9.6 9.4 28/8.88 International equity 3 years 6.7 1.3 6.2 18/62 years 8.6 1.4 8.8 26/49 2.73 Domestic bonds -2.. 2. 4. 6. 8. 7.2 Domestic equity % 4% Industry allocation compared to the Capped Swix as at 31 December 217 Asset allocation as at 31 December 217 3% Domestic equity 33.7% 2% Domestic bonds 2.2% Domestic property 1.7% Domestic cash 8.3% 1% % International equity 2.2% -% International fixed interest and property.9% International money market.9% -1% Fund Benchmark Relative Total 1% Top weightings (excluding property) vs Capped Swix as at 31 December 217 Top underweight (%) -1-1 -2-1.8-1.79-1.62-1.9-2 Top overweight (%) 4.39 4 3.32 4 3.13 2.97 2.87 3 3 2 2 1 1 8% 6% 4% 2% Bond comparison to the All Bond Index at 31 December 217-3 -3 % -4-2% -4 Fund All Bond Index Difference - -4.23-4% 12+ Yr Sector 7-12 Yr Sector 3-7 Yr Sector 1-3 Yr Sector INVESTMENT REPORT 1
Absa Absolute Fund Fund comments The fund improved its rolling 1-year performance as at the end of December 217 by 2.1% relative to the target return of CPI+4%, compared to the same period as at the end of September 217. The improvement came as a result of increased focus on risk premium harvesting and portfolio optimization to deliver CPI+4% while minimizing risk of capital loss. STRONG RECOVERY IN AGRICULTURE AND MINING SECTOR GDP NERSA grants Eskom electricity tariff increase of only.2% TOP QUARTILE for Q4 217 INVESTMENT REPORT 16
Nov-6 Nov-7 Nov-8 Nov-9 Nov-1 Nov-11 Nov-12 Nov-13 Nov-14 Nov-1 Nov-16 Nov-17 Absa Absolute Fund Gross return contributors (1 year) Performance: Total returns to 31 December 217 (%) -.13 -.4.4.49 3.3 International cash International equity International bonds Domestic cash Domestic bonds Term Absa Absolute A CPI+4% Sector median Rank Quarter 2.2 1.8 1.4 34/147 1 year 6.4 8.6 8. 12/138 3 years.4 9.3 6.6 9/1 years 6.8 9.4 8.2 69/79 4.29 Domestic equity -1.. 1. 2. 3. 4.. Asset allocation as at 31 December 217 Domestic equity 22.2% Domestic bonds.2% Domestic cash 18.6% International equity 7.% International bonds 1.4% International money market.1% Total 1% Top equities (excluding property) as at 31 December 217 % of Portfolio BHPBil.6 Naspers.6 Old Mutual. Alexander Forbes Group Holdings. MTN Group 4.8 Fund generated negative returns To 31 December 217 Since inception Periods % Any quarter 11/131 8% Any 6 months 1/128 1% Any 1-year rolling period /122 % Any 2-year rolling period (ann.) /11 % Any 3-year rolling period (ann.) /98 % Cumulative performance to 31 December 217 31 29 27 2 23 21 19 17 1 13 11 9 Absa Absolute Fund CPI CPI + 4% Total 26.6 Source: Morningstar; All figures are net (after fees) INVESTMENT REPORT 17
Absa Bond Fund Fund comments The Bond fund maintained a tactically defensive position over the quarter given the potential for intense volatility surrounding political, fiscal and ratings risks over the quarter. The fund will continue to adjust its duration and exposure as required over the year ahead. For domestic fixed income markets the October Medium Term Budget Policy Statement delivered a harsh yet realistic assessment of the domestic economy. With R21bn of revenue shortfalls and a budget deficit of 4.3% of GDP this year, severe steps are required to address the weakness at next year s budget as gross government debt to GDP is expected to reach 6%. HIKES THE REPO RATE 2 BASIS POINTS OIL PRICE $66 BY YEAR END DOWNGRADE SA LONG TERM LOCAL AND FOREIGN CURRENCY RATINGS TO SUB- INVESTMENT GRADE The MPC left rates on hold in November INVESTMENT REPORT 18
Absa Bond Fund Bond comparison to the All Bond Index as at 31 December 217 Performance: Total returns to 31 December 217 (%) 1-3 Yr Sector 3-7 Yr Sector Term Absa Bond Fund Benchmark Sector median Rank Quarter 2.2 2.2 2.1 1/34 1 year 11.3 1.2 1. 3/33 3 years 8.1 6.9 6.7 3/22 years 6.6 6.3 6.4 8/18 7-12 Yr Sector 12+ Yr Sector -6% -4% -2% % 2% 4% 6% 8% Difference All Bond Index Fund Cumulative performance to 31 December 217 1 14 13 12 11 1 9 Absa Bond Fund All Bond Index Source: Morningstar; All figures are net (after fees) INVESTMENT REPORT 19
Absa Money Market Fund Fund comments The money market yield curve flattened toward the end of the quarter. The 1 year NCD rate traded at a high of 8.3% after the MPC s decision not to cut interest rates and more hawkish statement. The 3mth Jibar rate moved 17 basis points higher to 7.18% while the 1 year NCD rate closed at 7.8%. The weighted average duration on the money market fund continues to be kept relatively close to the maximum permitted weighted average duration of 12 days. MPC keeps the repo rate on hold at 6.7% The South African Reserve Bank (SARB) revised its inflation forecast higher to.2% and.% in 218 and 219 from.% and.3% respectively S&P DOWNGRADE SOUTH AFRICA S LONG-TERM LOCAL AND FOREIGN CURRENCY RATING BY ONE NOTCH TO SUB-INVESTMENT GRADE (JUNK) Moody s placed South Africa on review for a possible downgrade INVESTMENT REPORT 2
Apr- Apr-1 Apr-2 Apr-3 Apr-4 Apr- Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Apr-13 Apr-14 Apr-1 Apr-16 Apr-17 Absa Money Market Fund Duration allocation Issuer exposures at 31 December 217 Cash - 3 months 3-6 months 6-9 months 9.3% 13.14% 17.77% 6.63% Nedcor P- 1.za, 2.6% Standard Bank P-1.za, 23.21% Investec P- 1.za, 19.2% Absa P-1.za, 21.% Firstrand P- 1.za, 1.61% SA Gov P- 1.za,.31% 9-12 months 3.1%..1.2.3.4..6 Performance: Total returns to 31 December 217 (%) Term Absa Money Market Benchmark Sector median Rank Quarter 1.8 1.8 1.8 23/32 1 year 7.6 7. 7.7 22/31 3 years 7.2 7.1 7.2 13/2 years 6.4 6. 6. 22/24 Cumulative performance to 31 December 217 43 41 39 37 3 33 31 29 27 2 23 21 19 17 1 13 11 9 Absa Money Market Fund STeFI Composite Source: Morningstar; All figures are net (after fees) INVESTMENT REPORT 21
%pa Index: Jan 26=1 % months in time period South African ASSET CLASSES SA equities Equity was the star performer during 217, having generated a total return of 2.7%. This return was heavily concentrated in Naspers and the mining stocks. Banks returned +8.4% in December while Industrials (-4%) and Resources (-.%) were negatively impacted by rand strength. The industrial index was also negatively impacted by Steinhoff s spectacular fall from grace. 4 3 2 1 Distribution of SA equity returns (January 26 to December 217) -6-3 3 6 9 12 1 Monthly returns (%) 3 Historical PE ratios of FTSE/JSE sectors 2 1 Last 1 years As at: 31 Dec 217 1 Price indices 26 27 28 29 21 211 212 213 214 21 216 217 All Share Financials Resources 2 Industrials 6 Alsi total returns 4 2 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return INVESTMENT REPORT 22
%pa %pa South African ASSET CLASSES SA property After the recent de-rating, property yields are showing better value than either bonds or equities. However, the weak economy poses a risk to domestic names. 3-year rolling returns 4 3 2 1-26 27 28 29 21 211 212 213 214 21 216 217 Listed Property index FTSE/JSE Top 4 Index All bond index STeFI Index -year rolling returns 4 4 3 3 2 2 1 1 26 27 28 29 21 211 212 213 214 21 216 217 Listed Property index FTSE/JSE Top 4 Index All bond index STeFI Index INVESTMENT REPORT 23
% pa % % pa % months in time period South African ASSET CLASSES SA bonds For domestic fixed income markets, the October Medium Term Budget Policy Statement (MTBPS) delivered a harsh yet realistic assessment of the domestic economy. Ratings agencies assessed the budget as a significant departure from the path of fiscal consolidation, causing S&P to downgrade South Africa s long-term local and foreign currency ratings, now both at sub-investment grade. 4 Distribution of SA bond returns (January 26 to December 217) 2-3 -1 1 3 7 9 Monthly returns (%) 12 Bond yields 1 8 6 26 27 28 29 21 211 212 213 214 21 216 217 R29 (31.3.236) R186 (21.12.22/26/27) - -1 +1 standard deviation average Real yield gap* -1 standard deviation -1 26 27 28 29 21 211 212 213 214 21 216 217 *Real long bond yield R186) (using CPI) minus earnings yield on equity 2 All Bond total returns 1 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return INVESTMENT REPORT 24
% pa % % % months in time period South African ASSET CLASSES SA cash The money market yield curve flattened toward the end of the quarter. The 1 year NCD rate traded at a high of 8.3% after the MPC s decision not to cut interest rates and more hawkish statement. The 3-month Jibar rate moved 17 basis points higher to 7.18% while the 1 year NCD rate closed at 7.8%. 4 Distribution of SA money market returns (January 26 to December 217) 2.4..6.7.8.9 1. Monthly returns (%) 9 NCD yield curve and implied forward rates 8 7 6 1 3 7 9 11 13 1 17 19 21 23 NCD rates Implied 3 month rates Tenor in months Prime and NCD rates 16 14 12 1 8 6 4 26 27 28 29 21 211 212 213 214 21 216 217 Prime 3 month NCD 12 month NCD 11 STeFI Index total returns 9 7 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return INVESTMENT REPORT 2
%pa % months in time period Index: Jan 26=1 International ASSET CLASSES International equities Global equity markets ended the year on a positive note. The MSCI World Index returned.6% during the final quarter and ended the year up 22.8% in US dollars. Global earnings has recovered strongly during 217 supported by synchronized global economic growth, low inflation and highly accommodative monetary policy. 4 3 3 2 2 1 1 Distribution of world equity returns (January 26 to December 217) -6-3 3 6 9 12 Monthly returns (%) 3 2 2 1 1 Equity price indices USA UK Japan Germany MSCI 26 27 28 29 21 211 212 213 214 21 216 217 Source: I-Net Bridge 4 4 3 3 2 2 1 PE ratios 1 USA UK Japan Germany MSCI 26 27 28 29 21 211 212 213 214 21 216 217 Source: Bloomberg World equity total returns (USD) 3 2 2 1 1 - -1-1 26 27 28 29 21 211 212 213 214 21 216 217 3-yr rolling return -yr rolling return INVESTMENT REPORT 26
% %pa % months in time period % International ASSET CLASSES International bonds The Federal Reserve Bank followed through on guidance, hiking the repo rate 2 basis points at the December meeting, while maintaining the forecast of a further three 2 basis point hikes in 218. The European Central Bank kept its policy rates unchanged at both fourth quarter monetary policy meetings and confirmed that stimulus through monthly asset purchases would remain until at least September 218. Distribution of world bond returns (January 26 to December 217) 6 1-year government bond yields 4 3 3 2 2 1 1-3 -1 1 3 7 Monthly returns (%) 4 3 2 1-1 26 27 28 29 21 211 212 213 214 21 216 217 UK Germany USA Japan 4 3 2 1-1 Yield spreads with USA (US yield - foreign yield) -2 26 27 28 29 21 211 212 213 214 21 216 217 UK Germany Japan World bond returns (USD) 12 1 8 6 4 2-2 -4 26 27 28 29 21 211 212 213 214 21 216 217 3y rolling return yr rolling return INVESTMENT REPORT 27
% %pa % months in time period % International ASSET CLASSES International cash The FOMC followed through on the expected rate-hike in December and raised its benchmark interest rate for the third time this year by.2% to a target range of 1.2% to 1.%. The Bank of England s Monetary Policy Committee (MPC) followed the Fed s path of normalization and raised interest rates for the first time in more than 1 years in November, in what was seen as a dovish hike. 4 4 3 3 2 2 1 1 Distribution of USD cash returns (January 26 to December 217).1.6.11.16.21.26.31.36.41.46 Monthly returns (%) Call rates 1.4 1.2 1..8.6.4.2. -.2 -.4 -.6 29 21 211 212 213 214 21 216 217 UK Euro USA Japan 3-month interest rates 7 6 4 3 2 1-1 26 28 21 212 214 216 UK Euro USA Japan 6 4 3 2 1-1 26 27 28 29 21 211 212 213 214 21 216 217 UK Euro USA Japan INVESTMENT REPORT 28
Index (nalural log scale) %pa Index: Jan 26=1 Index: Jan 26=1 International ASSET CLASSES Currencies The British pound weakened after the Bank of England s decision to raise interest rates. The US dollar traded 1.34 against the pound from 1.3 at the beginning of the quarter. The rand however strengthened against the pound ending the quarter at 16.71 from 18.16. Equity price indices 3 2 2 1 1 26 27 28 29 21 211 212 213 214 21 216 217 USA UK Japan Germany MSCI Emerging market equity price indices 3 3 2 2 1 1 26 27 28 29 21 211 212 213 214 21 216 217 BRL CNY INR PLN RUB TRY THB ZAR 4 Morgan Stanley world equity index and Emerging markets indices 2 3-year rolling bond returns (USD) 1 1 1 2 26 27 28 29 21 211 212 213 214 21 216 217 MSCI Emerging markets - 26 27 28 29 21 211 212 213 214 21 216 217 World Emerging markets INVESTMENT REPORT 29
Index (nalural log scale) %pa Index: Jan 26=1 Index: Jan 26=1 Emerging MARKETS Emerging markets growth relative supports stronger currencies and bonds. Equity price indices 3 2 2 1 1 26 27 28 29 21 211 212 213 214 21 216 217 USA UK Japan Germany MSCI Emerging market equity price indices 3 3 2 2 1 1 26 27 28 29 21 211 212 213 214 21 216 217 BRL CNY INR PLN RUB TRY THB ZAR 4 Morgan Stanley world equity index and Emerging markets indices 2 3-year rolling bond returns (USD) 1 1 1 2 26 27 28 29 21 211 212 213 214 21 216 217 218 MSCI Emerging markets - 26 27 28 29 21 211 212 213 214 21 216 217 World Emerging markets INVESTMENT REPORT 3
GLOSSARY OF TERMS Alsi Bonds Cash Coupon FTSE/JSE All Share price index Securities issued by a government (but also big corporations) with a fixed tenor (specified maturity date and coupon (interest) Money market investments (such as NCDs) with a tenor of less than a year The fixed amount of interest paid on a bond Currencies USD United States dollar ZAR JPY GBP EUR CHF South African Rand Japanese Yen British pound sterling Euro Swiss franc Dividend yield Earnings yield Earnings growth Forward rate NCD PE ratio q/q Return Dividend per share divided by the price per share Inverse of the PE ratio Year-on-year % growth in earnings per share The interest rate that the market expects to prevail within a given number of months usually calculated from the yield curve Negotiable Certificate of Deposit. A money market instrument, typically within a 3, 6, 9 or 12-month maturity Price per share divided by the earnings per share Quarter-on-quarter basis Usually all-in or total return is implied, i.e. capital gain and income. When calculating historical returns, monthly percentage changes are averaged (using the geometric mean) and annualised Source: Morningstar Risk Saar y/y Yield Yield gap Calculated as the standard deviation of returns Seasonally adjusted annualised rate Year-on-year basis The interest rate applicable on bonds trading in the secondary market. This is equal to the total return that will be obtained if the instrument is kept to maturity The difference between the bond yield and earnings yield on shares INVESTMENT REPORT 31
INVESTMENT REPORT DISCLAIMER Absa Asset Management / Absa Fund Managers Absa Fund Managers Limited (AFM) is a registered Collective Investment Scheme Manager and a full member of the Association for Savings and Investment SA. Collective Investment Schemes (CIS) are generally medium to long-term investments. Past performance is no indication of future performance, and actual events may differ materially from that which is contained in the information. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to future performance. Fluctuations or movements in exchange rates may also cause the value of underlying international investments in a fund to move up or down. The value of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their dependence on the performance of underlying assets or other variable market factors. AFM does not provide any guarantee either with respect to the capital or the return of a fund. Performance is calculated for the portfolio class of portfolios. Illustrative performance information is included for illustrative purposes only; individual investor performance may differ as a result of initial and ongoing fees, the actual investment date, the date of reinvestment and dividend withholding tax. All figures quoted are from Morningstar and or IRESS, for the period ending December 217 (unless otherwise stated), calculated on a NAV to NAV basis, with income distributions reinvested on the exdividend date. Annualised figures refer to the average yearly return of an investment over a given time period, all actual annual figures (if not shown) are available on request. Investments in funds with foreign securities may involve various material risks, which include potential constraints on liquidity and the repatriation of funds, macroeconomic, political, foreign exchange, tax and settlement risks and potential limitations on the availability of market information and there may be tax to be levied on certain of the benefits accruing to the investor from the funds and AFM may be required to deduct and pay over to the authorities any such tax from such benefits before paying any balance to or for the benefit of the investor. The investor understands that the legal and tax environment is continually changing, and that AFM cannot be held responsible for any changes to the law which might have an effect on their investment, and which did not exist at the time their investment was made. CIS are financial products and not investments in insurance policies with an insurer, and therefore cooling off periods do not apply. AFM has a right to close the fund to new investors in order to manage it more efficiently in accordance with its mandate. Additional information on the fund including, but not limited to, brochures, application forms, annual and half-yearly reports are available free of charge from the AFM website or from AFM upon request. In respect of the Absa Money Market Fund The money market fund is not a bank deposit account, a constant unit price of R1 (one rand) will be maintained although, owing to circumstances, it may be amended to a lower amount, the total return to the investor is made of interest received and any gain or loss made on any particular instrument, in most cases the return will merely have the effect of increasing or decreasing the daily yield but in cases of abnormal losses it can have the effect of reducing the capital value, the yield is calculated using an annualised seven day rolling average and excessive withdrawals may place liquidity pressures and in such circumstances a process of ring fencing of withdrawal instructions and managed pay-outs over time may be followed. The investment return is not guaranteed and is dependent on the performance of the underlying investments. This fund will not have more than 2% in any one single entity. COMPILED BY: Absa Asset Management Sandton Campus South, 2nd Floor, 1 Alice Lane, Sandton, Johannesburg, 2196 Tel no: +27 () 8 111 46 Fax no: +27 () 86 32 267 E-mail: unittrust@absa.co.za www.abam.co.za INVESTMENT REPORT 32