MARKET & FUND COMMENTARY 07.2014 Risk appetite was hardly affected over the quarter, with capital inflows continuing, as the JSE All Share Index returned 5.4%, with small caps (4.5%) underperforming large caps (5.6%). Resources (RESI20) rose 4.1%, industrials (INDI25) were 6.6% higher and financials (FINI15) returned 5.3%. Globally, equities continued to push higher with the MSCI World Equity Index (US$) rising 2.3% while the Global Government Bond Index (US$) rose 0.3% during the quarter. Declining SA yields, on the back of foreign inflows over the course of the quarter, boosted returns on fixed income assets, with the All Bond Index returning 3.2% and the SA Listed Property Index rising 4.0%, boosted by a return to risk-taking and corporate activity in the sector. The Rand depreciated by 1.8% against the USD during the quarter. With CPI rising to 6.6% on a year ago in June, potential for wage-prices to spiral, potential currency weakness pass-through and rising inflation expectations do not bode well in the shortterm. Table 1: Total return of selected SA indices to 31 July 2014 Quarter 1 Year 3 Years 5 Years 10 Years SA Equity 5.4 28.3 21.8 19.6 20.8 Top 40 5.6 29.3 22.0 19.4 20.5 Small Caps 4.5 26.2 24.0 21.6 23.0 Resources 10 4.1 33.9 8.5 9.4 15.7 Industrial 25 6.6 26.3 32.0 28.4 26.1 Financial 15 5.3 32.8 27.5 21.3 18.9 SA Property 4.0 12.7 18.5 19.5 23.2 SA Bonds 3.2 7.2 8.5 9.4 9.3 SA Prefs 2.0 10.4 7.5 7.7 - SA Cash 1.3 5.0 5.0 5.5 7.0 US Dollar / Rand 1.8 8.6 17.0 6.6 5.5 Euro / Rand -1.8 9.4 14.8 5.3 6.7 GB Pound / Rand 1.8 20.8 18.1 6.9 4.7 Source: I-Net Bridge & Cordatus Capital In its July MPC meeting, the SA Reserve Bank increased the repo rate by 25bp to 5.75%, noting that SA monetary policy tsars continue to face the challenge posed by balancing weak economic growth and rising inflation. The ZAR has stabilised within a narrow range lately, with a lack of rand volatility reflecting the drop in global FX volatility. The ZAR remains sensitive to moves in US bonds, US equities and the EUR-USD exchange rate. (see Graph 1 on page 5).
Table 2: Returns on Cordatus Portfolios ending 31 July 2014 Month Quarter 6 Months 1 Year 2 Years (ann) 3 Years (ann) Cordatus SA Equity Portfolio 0.0 2.7 13.4 23.1 22.5 21.3 3 Laws Climate Change Equity Pres Fund 2.0 3.3 10.2 20 - - Benchmark [1] 0.9 5.4 15.5 28.3 25.6 21.8 Cordatus Global Equity Portfolio [GBP] -0.4 1.7 5.2 6.4 13.4 - Benchmark [2] GBP -0.3 2.2 5.9 4.8 15.8 - Prescient Wealth Balanced FoF A1 1.3 4.1 9.8 21.2 23.1 - Benchmark [3] 0.6 4.2 10.7 20.1 21.3 - Prescient Wealth Income FoF A1 0.7 2.6 5.4 9.5 10.8 - Benchmark [4] 0.6 1.8 3.6 7.1 7.3 - Cordatus Worldwide Flexible Pres FoF A1 1.0 5 9.9 21.8 - - Benchmark [5] 1.3 2.6 6.8 11.5 - - Cordatus Worldwide Flexible Pres Fund A1-0.8 3.2 6.5 21.6 - - Benchmark [5] 1.3 2.6 6.8 11.5 - - 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% Performance across our multi-asset portfolios (Balanced, Income and Flexible) over the past year has been pleasing with 95% of our clients residing in these mandates. Equity (both local and offshore) mandates are trailing benchmarks as cash drag and the defensive equity posture being adopted weighs on returns in a strong market. While not happy about this situation, we are satisfied that absolute returns have delivered inflation beating results in both ZAR and GBP for clients over the last 3 years, which should be the ultimate goal of any long-term investor. The JSE returns have been driven by a very narrow share selection (70% of ALSI returns coming from Top10 shares by market capitalisation at the end of June) and the accumulated capital gains of investors in share portfolios makes it very difficult to realign client portfolios without triggering massive capital gains tax. This dilemma is a constant factor which we review at every quarterend meeting with investors and leads to much debate. In short, equity portfolios remain concentrated, geographically diversified and liquid. Table 3: Broad Asset Allocation of Cordatus Portfolios ending 31 July 2014 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 97 43 67 75 88 Equity 0 83 41 47 40 6 Property 0 0 0 1 4 7 Bonds 0 0 0 6 12 40 Cash 0 11 2 12 19 35 Other 0 3 0 1 0 0 Offshore 100 3 57 33 25 12 Equity 88 3 50 26 21 4 Property 5 0 0 3 0 0 Bonds 0 0 0 1 1 3 Cash 7 0 7 1 3 5 Other 0 0 0 2 0 0 Page 2 of 6 Cordatus Capital Monthly Investment View July 2014
Asset allocation during the last quarter has been challenging. The main interventions during this period have been increasing offshore exposure and cash across all mandates at the expense of local equity. This has been the primary factor behind trailing benchmark performance in the past 6 months. The patient investor, we believe, will reap the benefits of a more conservative stance given current valuations and risks over the short-term. TOTAL EXPENSE RATIO S ( TER ) The TER of a fund is a measure of the fund s assets that have been sacrificed as payment for services rendered in the management of the fund, expressed as a percentage of the daily average value of the portfolio, calculated over a period of usually a financial year. Costs Included in the calculation of the TER and deducted from the fund s assets are; Management fees (including performance fees if applicable) Fixed operating costs such as: o Custody and Trustee fees o Audit fees o Bank charges, other than those charged by an investor s bank o Value Added Taxes Liquidity costs: o Net negative interest charges (this is applicable in the unlikely event of a fund owing interest to a bank as a result of temporary liquidity pressure) For investments in other funds: o Weighted portion of the underlying portfolio s TER (for funds of funds) o Upfront fees if any o Exit fees or reduction of redemption if any Where income is earned by the providers of scrip lending services and if this income is not passed back to the portfolio, such an amount that is retained by the provider must be included. Cordatus does not use this service in portfolios. Now that the Cordatus range of worldwide flexible funds has passed the 1 year milestone, we are able to calculate the TER of the funds. These TER s are included on the fund factsheet we produce monthly and are updated quarterly. TER s are shown inclusive of VAT at 14%. The breakdown of the Cordatus Worldwide Flexible Pres Fund TER for the year to June 2014 is shown in the table below. As this Fund buys instruments directly on the market, it does not incur any underlying manager fees. As a fund size increases, the fixed component of the TER declines. CWFF A1 A2 Note: Other Fund Fees: 0.00 0.00 Direct share portfolio Management Fees: 0.72 1.14 Investment manager and fund administrator Other Fixed Fees: 0.20 0.18 Includes trading, custody, audit, bank, etc charges TER 0.92 1.32 The breakdown of the Cordatus Worldwide Flexible Pres Fund-of Funds TER for the year to June 2014 is shown in the table below. As this Fund invests into third-party managers, the FoF incurs average-weighted underlying manager fees. Trading costs however are nil at the FoF level, as they are absorbed by the underlying manager. Page 3 of 6 Cordatus Capital Monthly Investment View July 2014
CWFP A1 A2 Note: Other Fund Fees: 1.28 1.28 Weighted underlying manager fee Management Fees: 0.49 1.14 Investment manager and fund administrator Other Fixed Fees: 0.06 0.02 Includes trading, custody, audit, bank, etc charges TER 1.83 2.44 AFRICAN BANK LIMITED ( ABL ) EXPOSURE With a shocking trading update, the CEO stepping down and Ellerines opting for business rescue it has been a tough time for holders of ABL equity and debt. We have reviewed our holdings in ABL by both checking holdings and telephonically confirming with the managers that we invest in on behalf of investors. In short; None of our fixed income managers hold any ABL debt. The only equity manager we utilise holding ABL is Coronation. Coronation and other managers holding ABL equity and/or debt, have been proactive in sending out their current ABL exposure at fund level as at 6 th July 2014. Using this date is both disingenuous and misleading, as to the risk investors have faced. For a more realistic take on the position within our unit trust range, we have pegged the positions held by Coronation at 30 June 2014, when the share was trading at R6,79. Our investor s exposure to ABL across our funds at the 30 th of June is as follows; PWM Balanced FoF 0.22% PWM Income FoF 0.08% Cordatus WW Flex FoF 0.09% Cordatus WW Flex Fund 0.00% Source: INet BFA The only investors who could be enjoying this situation are those bereft of positions with potential CGT losses (i.e. ABL) if triggered. Loss-harvesting should be seriously looked at this tax year by all investors. Page 4 of 6 Cordatus Capital Monthly Investment View July 2014
CHARTS & GRAPHS WE FIND INTERESTING AT THE MOMENT GRAPH 1: ZAR lower currency volatility usually results in a stronger rand, as does a rising global economy and higher local interest rates. Problem is, it is just not happening at the moment! Rising US bond yields do not bode well for the ZAR, should this relationship persist. Source: INet BFA GRAPH 2: SAVI the SA Volatility Index which provides a gauge of SA equity market sentiment (i.e. a risk forecast) has been dropping over the last 5 years, introducing investor complacency. Things are a changing! Source: INet BFA Page 5 of 6 Cordatus Capital Monthly Investment View July 2014
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 protection. Regards, The Cordatus Team Craig, Rolfe, Kim and Arthur NOTES: 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 6 of 6 Cordatus Capital Monthly Investment View July 2014