OFFSHORE PROPERTY COMPANIES SOME ARE MORE EQUAL THAN OTHERS

MACROSOLUTIONS OFFSHORE PROPERTY COMPANIES SOME ARE MORE EQUAL THAN OTHERS EVAN ROBINS PORTFOLIO MANAGER MARCH 2016 The South African listed property sector is rapidly transforming from a domestic sector to one with significant offshore exposure. There are different ways of accessing offshore property exposure on the JSE, but not all are equal and there are pitfalls of which investors should be aware. We split offshore property exposure on the JSE into three categories: SA LISTED PROPERTY WITH OFFSHORE EXPOSURE Category Company Inward listed with significant trade outside SA Inward listed with little trade outside SA Listed SA with foreign assets Capital & Counties Capital & Regional Intu Redefine International Sirius Atlantic Leaf Delta International International Hotel Group Investec Australia Property MAS New Europe Property Investments New Frontiers Rockcastle Schroders Stenham Attacq Delta Emira Fortress Growthpoint Hyprop Investec Property Pivotal Rebosis Redefine Resilient SA Corporate Texton Tower Tradehold Vukile Definition: Inward-listed companies are defined as offshore-based dual-listed entities INWARD-LISTED COMPANIES WITH SIGNIFICANT TRADE OUTSIDE SA This is our preferred type of exposure. With most trade occurring outside of South Africa, the prices are predominantly set globally and not by local hothouse demand for foreign exposure (that is, local investors scramble for foreign exposure driving prices up). Most companies in this category are sizable companies with well-established property portfolios. Currently, none has an external management company extracting fees. Some of these companies have long been listed on our market for historical reasons. More recent entrants listed in SA to diversify their funding base opportunistically taking advantage of local investors strong appetite for offshore property exposure, which can make it easier and cheaper for these companies to raise capital. In some cases, SA-aligned shareholders first took a large stake of the offshore listing, possibly with a view to recapitalising the business from South Africa. Property companies listed in other markets looking for a secondary listing on the JSE may become a growing trend. A number of UK and European listed funds, some very sizable, have met with us to gauge SA investment interest in a secondary listing. It is important to remember that, while home-market liquidity can be strong, liquidity on the JSE may be weak. The SA Quoted Property currently has 12% of its portfolio exposed to this category of companies, while the SAPY Index holds no representation because the companies primary listings are outside of SA. INWARD-LISTED COMPANIES WITH LITTLE TRADE OUTSIDE SA As these companies are priced by SA investors, they may offer less value. This is because South Africans will pay more for the shares than hard-nosed global investors, who have access to a wider opportunity set. South African investors may have good reason to pay above fair value as these listings provide scarce rand-hedge exposure that is not subject to foreign exchange (forex) restrictions.

In many instances these companies have been deliberately listed by financial services firms in order to capitalise on the SA market s seemingly insatiable demand for offshore property and thereby earn management fees. We do not like external management companies as there is a conflict of interest and they leech income. These types of companies often have little competitive advantage in the countries in which they operate. They often purchase assets with limited upside potential to be gained in managing them. These assets typically look good on paper, with long lease terms, but the uncertainty is their value once these leases expire. There are costs incurred as these funds bulk up their portfolios and they may be capital hungry for years. New Europe Property Investments (NEPI), which does not have a management company, has demonstrated that a start-up run by South Africans can thrive in a foreign market, but it may be the exception rather than the rule. SA PROPERTY COMPANIES THAT OWN FOREIGN ASSETS Most SA listed property companies would like to increase their offshore exposure. The domestic environment is deteriorating and cost of capital is high relative to offshore markets. While it may be in a company s interest to go offshore, it may not be in the interests of shareholders. Shareholders can buy (superior) offshore exposure themselves and would be better served by management focusing on what they know best (the local property market), rather than trying to compete in the brutal global property market. History is littered with the failed offshore experiences of top SA companies. The international experience of property companies expanding aggressively out of their home markets is also poor. In some cases, South African REITs (and the market) are being attracted by the large immediate income boost, with the offshore funding costs (around 2%-4%) being so much lower than the property investment s initial yield (6% and higher). The greater the size and level of debt funding, the more beneficial the income growth benefit (Redefine s recent Polish deal will add 7% to their dividend). However, SA-owned offshore property in an environment of low global inflation has little rental growth opportunity. After the initial yield spread gain is locked in, income growth from these assets will be slow and the SA fund is reliant on continuous local currency depreciation to translate this income into rand income growth. Thus, while the initial income return may be high, the subsequent total return could be lacklustre. stylised chart below, which assumes rentals grow in line with inflation (and currency depreciation in line with inflation differentials), illustrates how the growth in real income from a geared SA property investment at a lower starting yield (net of debt) could exceed that of a global investment over time. ILLUSTRATIVE: REAL DIVIDEND PER 100 CURRENCY INVESTED SA (Asset initial yield 8%, Interest rate 10%, Rental growth/inflation 6%) Global (Asset initial yield 6%, Interest rate 3%, Rental growth/inflation 2%) Inflation-corrected dividend 14 12 10 8 6 4 2 0 Global South Africa Source: MacroSolutions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year In their eagerness to boost distribution growth by lowering interest costs, SA funds often sterilise some of their hard currency exposure. A company can dramatically lower its interest costs if it fully finances a euro asset with euro debt (or a cross-currency swap), compared with funding this investment at SA rand interest rates. However, as a result, it will have no net euro asset exposure until the value of the asset appreciates more than the liability. The company will still get the hard currency benefit of the dividend this euro investment produces. At MacroSolutions, with our customised, integrated multi-asset approach, we use the different components of listed property to tailor our portfolios to our clients different needs. This includes investing directly offshore. While we have long preferred offshore to SA property, not all SA-based offshore property offerings are equal and there are pitfalls of which investors should be aware. In addition, if developed market interest rates rise from the currently abnormally low levels, there could be a drop in globally exposed property companies net income, as a result of higher refinancing costs coupled with flat rental income (given low global inflation). The

MARKET COMMENTARY From a local perspective, all eyes were on Finance Minister Gordhan and the Budget Speech. Sentiment towards Treasury has turned more positive this year and the relationship between Government and business appears to have improved, as evidenced by the meeting to discuss the local economic growth path. The Budget Speech delivered on the expectations around fiscal consolidation, particularly as personal income tax rates and VAT were left unchanged and expenditure was reined in. The question now moves to the ability of Treasury to deliver on these plans. For February, local bonds ended marginally lower, giving back their positive gains from earlier in the month. Local property gained in the month and has erased the losses seen in January. Finally, the currency held fairly steady, having recovered somewhat from the lows in January. Globally, fears remain that global economic growth is too cold, thereby posing a threat to company earnings. The return from global equities (in US dollar terms) ended marginally negative for the month, having been much weaker earlier. Global bonds gained, with yields moving lower on the back of concerns around weaker growth, low inflation and hence a search for safe-haven assets. Following the US Federal Reserve raising rates in December the first hike in nine years it now appears that the hiking cycle is postponed until further notice, given the soggy growth environment. The Bank of Japan became the fifth central bank to adopt a negative interest rate policy (NIRP). This saw them breach the zero bound on their short-term lending rates, meaning that investors are now paying interest to keep their money in the bank. This is just another example of extreme central bank policy aimed at elevating their growth rates. Market volatility is likely to persist as investors evaluate the efficacy of these measures. OLD MUTUAL MAXIMUM RETURN FUND OF FUNDS (Peter Brooke) (Classification category: Worldwide Multi-Asset Flexible) The Maximum Return of s managed to navigate the very volatile markets in February, due to its well-diversified nature. This is a very deliberate strategy to bring down the fund s risk profile in the face of uncertain global markets. For instance, the fund is now equally weighted between local and international assets. This allocation balances the fact that the rand is no longer a one-way bet versus the obvious attraction of international diversification. We have also bought down the fund s exposure to growth assets and have more exposure to income-generating assets in South Africa. This reflects our belief that an absolute return will be very important in 2016, in what is expected to be a low return world. OLD MUTUAL FLEXIBLE FUND (Peter Brooke) (Classification category: South African Multi-Asset Flexible) The market remained exceptionally volatile in February, which is why we are pleased the Flexible managed to deliver a decent positive return over the month. Within South African equity, there was a massive divergence in returns, with resources shares shooting up and almost everything else falling. The fund benefited from its holding in Glencore, which we bought last year: after an initial decline, the 43% rise in February justified the purchase. These very extreme moves highlight the importance of sticking to one s longer-term view and keeping calm amidst the noise. Despite the better month, the fund s 12-month return has dropped to 0.5%, which is well below the inflation plus target. However, this return must be seen in the light of the available investment opportunities, with local equity, bonds and property declining 5%, 3.7% and 2%, respectively, over the past 12 months. The fund s ability to deliver returns above its underlying investments is a function of active asset allocation, including increased cash holdings and diversification through international assets. It is this active management that is crucial to enabling the fund to deliver on its inflation plus targets over the longer term. The fund s three- and five-year returns are both 11.9% a year. OLD MUTUAL BALANCED FUND (Graham Tucker) (Classification category: South African Multi-Asset High Equity) The fund made up some of the lost ground this month following an eventful December and a difficult January. Over the longer term, the fund has delivered good real returns albeit lower than those seen in the years immediately after the global financial crisis. By the end of February, the fund had delivered performance in line with its performance target over three years and was well ahead of it on a five-year basis. We have been cautioning our clients around a lower return world for some time now. Looking forward, we argue that the environment remains challenging and that returns will most likely remain muted. In our view, the key to navigating these difficult times is to maintain a diversified portfolio, exposed primarily to quality businesses with strong drivers of earnings. As such, the portfolio maintains a high global equity weight with a preference for European stocks. European growth is improving off a low base and we expect this to remain supportive for these equity markets going forward. Within the local equity portion of the fund, we remain invested in similarly exposed companies (Mondi, Steinhoff and Investec, for instance). We have been light on resources for some time now, as the fundamental picture has been poor. In our view, the recent strong performance is not supported by an improvement in the fundamentals. As such, we are not chasing this move, although, in the past three months we have narrowed the underweight position relative to the FTSE/JSE Shareholder Weighted All Share Index through the addition of AngloGold and Anglo American Platinum. SA Inc. also remains an area of concern for us. GDP growth this year is expected to, once again, be low (possibly less than 1%). Although the urgency of this situation is better understood, growth will not turn quickly. Consequently, we remain underweight to that portion of the equity market linked to the SA economy. However, with more confidence around Treasury, attractive real yields in the region of 3% and a hawkish South African Reserve Bank, we purchased local bonds in the month. There remains the risk of our growth outlook slipping further and leading to a ratings downgrade. Hence, the buying has been marginal and the fund maintains an underweight stance. Cash remains a large portion of the fund s portfolio, given the numerous risks to markets at present. But with uncertainty comes opportunity and we are constantly looking for opportunities to invest in growth assets on behalf of our clients in order to grow their real wealth.

MARKET COMMENTARY CONTINUED OLD MUTUAL MODERATE BALANCED FUND (Classification category: South African Multi-Asset Medium Equity) The performance of the fund over the past year has been disappointing. Over the 12 months, the fund s performance has benefited from a large allocation to global assets, with the rand depreciating significantly over this period. The fund has also benefited from a relatively low allocation to local equities, which underperformed cash over the year. However, performance was adversely affected by the sell-off in South African bonds over the past year, as markets priced in the potential for South Africa s credit rating to be downgraded. The recent Budget presented by Minister Pravin Gordhan showed welcome intent at controlling expenditure, but it disappointed markets by not announcing significant tax increases bonds and the rand weakened as a result. We remain comfortable, though, that bond markets already priced in a downgrade of South Africa s credit rating to junk and expect government bonds to deliver a reasonable return over the coming year. At just below 9.5%, South African 10-year bonds offer a prospective real return of more than 3%, assuming long-term inflation of 6%. We remain cautious on the outlook for equities, in particular South African equities. While better value has emerged in parts of the local equity market, such as banks, the overall market still trades at an elevated price-earnings ratio, which is typically indicative of lower future returns. And while resources stocks have rallied recently, this is as yet still to be validated by better global growth fundamentals. When thinking about the kind of company we prefer to own, we typically look for companies that provide steady growth and a healthy dividend. If, in addition, a special dividend is declared, the result is so much more pleasing. One such example in your portfolio has been the inclusion of JSE Limited since September 2015. The company recently published its results showing excellent earnings growth in excess of 40% and, on top of that, declared a special dividend. The share price has reflected this good news to the benefit of your fund. Overall, the local equity portfolio remains biased towards global industrials like Naspers (which offers excellent growth prospects), more defensive local industrial companies like Rhodes Food Group and Bidvest, and banks (which, in our view, are attractively valued, soundly capitalised and well positioned to withstand the tough economic outlook). OLD MUTUAL STABLE GROWTH FUND (Classification category: South African Multi-Asset Low Equity) Notwithstanding a disappointing performance over the past year, the fund continues to perform ahead of its inflation target over three-year periods or longer. Over the past year, the fund has benefited from its significant allocation to global assets. It has also benefited from its significant underweight allocation to local equities, which underperformed cash over the year. However, the fund s performance was negatively impacted by its significant allocation to long-dated government bonds, which sold off as markets priced in the likelihood of South Africa s credit rating being downgraded from investment grade to junk status. While the recent Budget presented by Minister Pravin Gordhan delivered welcome intent to control expenditure, it disappointed by not delivering significant tax increases bonds and the rand weakened as a result. However, we think at current levels, South African bonds have priced in a credit rating downgrade and for South African investors, they offer attractive real returns. At just below 9.5%, and assuming long-term inflation of 6%, 10-year bond yields offer a real return of over 3%, which is attractive in our view. We continue to favour global over local equities. While better value has emerged in parts of the local equity market, such as banks, the overall market still trades at an elevated price-earnings ratio, which is typically indicative of lower future returns. And while resources stocks have rallied recently, this is as yet still to be validated by better global growth fundamentals. When thinking about the kind of company we prefer to own, we typically look for companies that provide steady growth and a healthy dividend. If, in addition, a special dividend is declared, the result is so much more pleasing. One such example in your portfolio has been the inclusion of JSE Limited since September 2015. The company recently published its results showing excellent earnings growth in excess of 40% and, on top of that, declared a special dividend. The share price has reflected this good news to the benefit of your fund. Overall, the local equity portfolio remains biased towards global industrials like Naspers (which offers excellent growth prospects), more defensive local industrial companies like Rhodes Food Group and Bidvest, and banks (which, in our view, are attractively valued, soundly capitalised and well positioned to withstand the tough economic outlook). OLD MUTUAL REAL INCOME FUND (Classification category: South African Multi-Asset Low Equity) The fund s performance over the past year has been disappointing, but over the longer term it continues to deliver returns in excess of its real return target. Given an environment of much lower returns from risk assets with heightened volatility, the fund has considerably scaled back its exposure to growth assets, with less than 1% of the fund invested in equities. While equities have, over the past few years, contributed meaningfully to the fund s performance, we think a more cautious asset allocation is warranted in the current environment. That said, the fund continues to hold a reasonable allocation to property, within which we have a preference for global property. Global property offers a dividend yield of about 4%, which is a considerable spread over global nominal or real bond yields. With an attractive yield pick-up and some growth, we think global property remains well positioned in a world of low interest rates. Over the past few years, the fund allocation to global assets has benefited its performance, given the underlying strong performance of these assets and the weakness in the rand. However, the extent of the rand s depreciation over recent years means that further rapid depreciation is becoming less rather than more likely. Furthermore, the return on offer from local fixed income assets is considerably more attractive, with 12-month cash yielding 8.6% and bonds yielding 9.4%. Consequently, the fund has significantly reduced its offshore exposure. Overall, the fund s positioning is relatively cautious, with a significant allocation to cash and money markets, some exposure to local government bonds and some exposure to property.

THREE-YEAR PERFORMANCE: (TO 29 FEBRUARY 2016) ASSET ANALYSIS: (TO 29 FEBRUARY 2016) 14.0% 100% 12.0% 11.9% p.a. 12.2% p.a. 10.0% 9.4% p.a. 9.7% p.a. 75% 8.0% 8.1% p.a. 8.3% p.a. 6.8% p.a. 7.0% p.a. 50% 6.0% CPI 4.0% 25% 2.0% 0.0% Flexible Flexible Life Balanced Balanced Life Stable Growth Stable Growth Life Real Income Real Income Life Sources: Investment Group & Morningstar 0% Stable Real Maximum Moderate Flexible Balanced Growth Income Return Balanced Stable Real Flexible Life Balanced Life Growth Life Income Life SA Equities Property Preference Shares Commodities Convertible Bonds Nominal Bonds Inflation-linked Bonds Cash International Africa Sources: Investment Group & Morningstar Performance to 29 February 2015 1 year 3 years (p.a.) 5 years (p.a.) Highest** Average** Lowest** Description TER* TC* Flexible A 0.5% 11.9% 11.9% 54.0% 15.3% -26.9% 2.37% 0.24% Flexible Life 0.7% 12.2% 12.4% 1.97% Target: CPI + 5% to 7% p.a. 11.4% 10.4% 10.6% CPI + 5% p.a. over rolling 3 years UT Peer Average -1.0% 9.2% 10.6% South African - Multi-Asset - Flexible Balanced A 0.2% 9.4% 10.9% 45.5% 14.2% -23.2% 2.37% 0.10% Balanced Life 0.4% 9.7% 10.9% 0.93% Target: CPI + 4% to 5% p.a. 10.4% 9.4% 9.6% CPI + 4% p.a. over rolling 3 years UT Peer Average 1.6% 10.1% 10.8% South African - Multi-Asset - High Equity Moderate Balanced A 1.6% 2.3% 2.3% 2.3% 1.62% 0.26% Target: CPI + 3% to 4% p.a. 9.4% CPI + 3% p.a. over rolling 3 years UT Peer Average 2.5% South African - Multi-Asset - Medium Equity Stable Growth A 3.0% 8.1% 9.5% 18.6% 9.1% -5.3% 2.01% 0.08% Stable Growth Life 3.2% 8.3% 9.8% 1.72% Target: CPI + 2% to 3% p.a. 8.4% 7.4% 7.6% CPI + 2% p.a. over rolling 3 years UT Peer Average 4.4% 8.4% 9.3% South African - Multi-Asset - Low Equity Real Income A 3.5% 6.8% 8.7% 15.4% 9.4% -0.7% 1.43% 0.15% Real Income Life 3.7% 7.0% 1.26% Target: CPI + 1% to 2% p.a. 7.4% 6.4% 6.6% CPI + 1% p.a. over rolling 3 years UT Peer Average 4.4% 8.4% 9.3% South African - Multi-Asset - Low Equity Maximum Return of 6.7% 23.6% 14.7% 6.7% 2.27% 0.08% s A Benchmark*** 3.7% UT Peer Average 14.3% Worldwide - Multi-Asset - Flexible CPI 6.4% 5.4% 5.6% * TER is a historic measure and includes the annual service fee. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER may not necessarily be an accurate indication of future TERs. Transaction Cost (TC) is a necessary cost in administering the fund and impacts fund returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of fund, the investment decisions of the investment manager and the TER. TERs as at 31 December 2015. ** Rolling 12-month returns (Since inception) *** 60% FTSE/JSE Shareholder Weighted All Share Index, 35% MSCI All Country World Index, 5% STeFI Composite Index Sources: Morningstar and FOR MORE INFORMATION, VISIT: www.macrosolutions.co.za Investment Group (Pty) Limited PO Box 878, Cape Town 8000. Tel: +27 21 509 5022 Fax: +27 21 509 4663 www.oldmutualinvest.com Investment Group (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Investment Group is a wholly owned subsidiary of Limited. Reg No 1993/003023/07. The investment portfolios are market linked. Products are either policy based or unitised in collective investment schemes. Investors rights and obligations are set out in the relevant contracts. In respect of pooled, life wrapped products, the underlying assets are owned by Life Assurance Company (South Africa) Limited, who may elect to exercise any votes on these underlying assets independently of Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Investment Group has comprehensive crime and professional indemnity insurance, as part of the Group cover. For more detail, as well as for information on how to contact us and on how to access information, please visit www.oldmutualinvest.com. STATUTORY INFORMATION You should ideally see the funds as a medium- to long-term investment. The fluctuations of particular investment strategies affect how a fund performs. Your fund value may go up or down. Therefore, we cannot guarantee the investment capital or return of your investment. How a fund has performed in the past does not necessarily indicate how it will perform in the future. The fees and costs that we charge for managing your investment are disclosed in the relevant fund s minimum disclosure document or table of fees and charges, both available on our public website or from our contact centre. The cut-off time for client instructions (e.g. buying and selling unit trusts) is at 15:00 each working day. These are also the times we value our funds to determine the daily ruling price. Daily prices for Unit Trust Managers (RF) (Pty) Ltd (OMUT) funds are available on the OMUT public website and in the media. Unit trusts are traded at ruling prices, may borrow to fund client disinvestments and may engage in script lending. The daily price is based on the current market value of the fund s assets plus income minus expenses (NAV of the portfolio) divided by the number of units on issue. Income funds derive their income primarily from interest-bearing instruments as defined. The yield is a current yield and is calculated daily. A fund of funds is a portfolio that invests in other funds which levy their own charges, which could result in a higher fee structure for the fund of funds. Some funds hold assets in foreign countries and therefore may have risks regarding liquidity, the repatriation of funds, political and macro-economic situations, foreign exchange, tax, settlement, and the availability of information. The Net Asset Value to Net Asset Value figures are used for the performance calculations. The performance quoted is for a lump sum investment. The performance calculation includes income distributions prior to the deduction of taxes and distributions are reinvested on the ex-dividend date. Performances may differ as a result of actual initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Annualised returns are the weighted average compound growth rates over the performance period measured. Performances are in ZAR and as at 29 February 2016. Sources: Morningstar and Investment Group. Unit Trust Managers (RF) (Pty) Ltd (OMUT) is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. is a member of the Association for Savings and Investment South Africa (ASISA). OMUT has the right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. March 2016