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The Sanlam Investment Management Inflation Plus Fund is a multi asset low equity fund which aims to deliver smooth, positive real returns (adjusted for inflation) targeting CPI +4% over a rolling 3-year period. This Fund is best suited to investors with a medium-term investment horizon (3-5 yrs) who require capital stability and real income growth. For more information contact your financial adviser or broker.
This actively managed fund is a combination of investments in equity, bonds, money market instruments and listed property both locally and abroad. It can invest 25% offshore, while equity exposure is limited to 40%. This Fund uses derivatives to protect capital. The Fund aims to outperform inflation by a margin of 4% (after annual service fees) over any rolling 3 year period, while also aiming to prevent capital loss over any rolling 12 month period.
Illustrative Cumulative Growth of an investment of R100
Source of graph : Morningstar Direct
This graph illustrates how an investment of R100 would have grown had you invested for the time period displayed. Like everything in life, all investments can change and come with some degree of risk. That’s why we need this disclaimer, to tell you that past performances are not necessarily a guide to future performances, and that the value of investments/units/unit trusts may go down as well as up. The performance shown by this graph happened in the past and is not guaranteed. The performance is calculated by taking into account initial and ongoing fund manager fees and assumes that you reinvested all the income earned by the fund over this period.
The other line on the graph is for the performance of the designated benchmark of the fund – normally either an index or other funds in the industry that are comparable to the fund you’ve chosen.
The Manager has the right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. The actual fund performance can be viewed on the Minimum Disclosure Document. Annualised return is the weighted average compound growth rate over the period measured.
Head of Absolute Return - Sanlam Investments
Natasha joined Sanlam Investments as a senior portfolio manager in 2007 and has been involved with the Absolute Return Funds and the SIM Managed Solution Funds. Since joining the Absolute Return team in 2009, Natasha now leads the Absolute Return efforts within Sanlam Investments. In addition to her responsibilities at Sanlam Investments, she also served as a member of the Investment Committee of Botswana Insurance Fund Management from 2007 to 2012.
Natasha started her career as an investment analyst at Greenwich Asset Management in 1998. She has served in many roles over the course of her asset management career, including resources analyst, head of resources/mining, and portfolio manager of resources, general equity, balanced, absolute return and multi-manager funds. She has 19 years of industry experience and has been managing multiple third party funds in both the institutional and retail fund space at SIM.
Natasha holds a B.Sc. (Chem) and a Master in Business Administration (MBA). She completed her MBA degree in 1997 taking top honours in the Investments and Portfolio Management and Advanced Industrial Relations streams.
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This is the percentage of the value of the Financial Product that was incurred as expenses relating to the administration of the Financial Product. 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 TER’s.
This is the percentage of the value of the Financial Product that was incurred as costs relating to the buying and selling of the assets underlying the Financial Product. Transaction Costs are a necessary cost in administering the Financial Product and impacts Financial Product 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 Financial Product, the investment decisions of the investment manager and the TER.
This is the percentage of the value of the Financial Product that was incurred as costs relating to the investment of the Financial Product.
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Sanlam Investment Management (SIM) is the local active asset management house within Sanlam Investments. When choosing a fund managed by us, you have on your side one of SA’s largest and most reputable, risk conscious investment teams, consistently meeting or exceeding our benchmarks. Sanlam Collective Investments has appointed SIM as the asset manager for its unit trust funds, catering for the full spectrum of risk profiles.
The key theme of Q2 2018 has been the escalation of trade tensions resulting from US President Donald Trump’s hostile view of his country’s trade relations with its major trading partners. Following tariffs on solar panels and washing machines in January, Trump upped the ante by imposing tariffs on steel and aluminium imports of 25% and 10% respectively, effective from 1 June. Europe, Canada and China have responded by imposing tariffs on American imports of similar value. More recently, Trump has threatened to impose a 20% tariff on European automobile imports at June’s G7 Summit. The resulting air of uncertainty was largely responsible for the strengthening of the US Dollar, generally tepid equity markets and broad outflows from emerging market (EM) assets in Q2. The unease around EMs was exacerbated by the fact that elections took place in several key EMs in the quarter (including Turkey, Malaysia and Colombia).
The unsettled global mood added insult to injury for South Africa’s own domestic concerns, with the ‘Ramaphoria’ of Q1 making way for the sobering realisation that a number of serious challenges remain before the local economy can stage a meaningful recovery. Higher fuel prices (resulting from a combination of rising crude oil prices and a weak Rand) and the impact of the 1% VAT hike (effective from 1 April) meant the consumer was not in a happy place. A lengthy strike by bus drivers that made commuting difficult for millions of workers, and rolling blackouts caused by Eskom workers enraged with a proposed 0% wage increase, added to the general misery felt by many.
Despite some of the effects of Ramaphoria wearing off, the president and his new Cabinet continued their efforts to improve confidence in his government by taking measures such as appointing new boards at some state-owned enterprises (SOEs) including Transnet, confirming Phakamani Hadebe as the permanent CEO at Eskom, and appointing a panel of respected economic advisors. He also announced his intention to host an investment conference later this year, where US$100 billion of private sector investment would be sought. Whether these proposed measures will have the desired impact on the country’s limping economy remains to be seen.
After a strong Q4 2017 (+3.2%), GDP growth in Q1 2018 came in at a very disappointing - 2.2%, with the agriculture, mining and manufacturing sectors making the biggest contribution to this decline. Despite this, no relief was provided by the South African Reserve Bank, with the Monetary Policy Committee leaving the repo rate unchanged at its May meeting, citing the likely inflationary pressures posed by higher fuel prices and the weak Rand (despite the fact that current CPI prints remain anchored within the target band).
For the quarter to June, the FTSE/JSE Shareholder Weighted Index (SWIX) added 2.1% quarter-on-quarter. Within equities, SA Resources were 19.6% higher, SA Industrials increased by 5% and SA Financials were 6% lower over the quarter. The SA Listed Property Index, after a sharp sell-off in Q1, declined even further during Q2 with a -2.2% return. The Rand depreciated by 15.7% over the three-month period to end the quarter at R13.71/$. Nominal bonds and inflation-linked bonds were down 3.8% and 5% respectively while cash delivered 1.8%. On the international front, the MSCI World Index posted a return of 1.7% in US Dollar terms and the MSCI EM Index declined 7.9%.
Towards the end of the quarter as bonds weakened, we used the opportunity to up our exposure to this asset class. Local nominal bonds currently offer close to a 4% real yield, which in our opinion is attractive and offers a fair enough compensation to investors for the additional risk, especially when compared to the domestic bonds of most other EMs. Cash continued to be enhanced throughout the quarter through the addition of select credit assets, offering very decent yield pick-ups over money market rates.
The fund’s equity exposure remained fairly similar to the previous quarter. Given estimates of earnings growth, the local market is now fairly priced with the one-year forward priceearnings (P/E) ratio at just under 15x.
On the international front, our preference for equities and select property over fixed-income assets remains. According to most valuation metrics the US equity market is looking stretched - this is despite the fiscal boost provided by the Trump administration. Grounded by relative valuations, global developed market (DM) equities, however, still offer better prospective returns over bonds. Even though 10-year US Treasuries are now close to fair value, sovereign bonds in the other major developed countries are trading at yields well below our 2% long-run inflation assumption. Given our 1% real required return from DM bonds, these remain therefore unattractive. Also, as the US Federal Reserve (Fed) hikes the federal funds rate, bonds become less attractive on a relative basis.
2018-to-date has certainly proven to be a tale of two halves with the SWIX delivering a return of 2.1% in Q2 after a particularly severe return of -6.8% in Q1. SA nominal bonds were hard hit, returning -3.8% in Q2 post a stellar return of 8% in the previous quarter. Throughout the first half of 2018’s market environment, the SIM Absolute Return Funds were fairly well positioned, with an emphasis on drawdown minimisation.
During the quarter, South African 10-year bonds weakened along with other EM bonds. SA 10-year conventional bonds are now 1% higher than what they were in March. Their current 10-year yield of 9.25% is well above the long-run inflation target and the prospective real return on offer, which is more than 4%. This is attractive relative to historical averages. Bonds have now sold off to a point where the 10-year conventional bond trades at a real yield of greater than 3%, assuming a long-run inflation target of 5.25%. Since 1921 the mean inflation in SA has been 5.25%, and since January 2009 it has been 5.5%. We consider a 3% real return to be fair for SA’s 10-year conventional bonds and prefer nominal bonds over inflation-linked bonds on relative valuation measures over the medium term. The cash component of the fund continued to benefit from the select addition of bank and corporate paper at levels well above cash rates.
We believe the SA equity market to be selectively attractive, offering fair upside from current levels. Our approach is to focus on company fundamentals and seize opportunities where quality companies are being sold off on pessimistic sentiment and to sell stocks which are attracting all-time high ratings in order that we stay the course of continuing to add value in the long term.
On the international side, we see US markets to be erring on the expensive side. US companies on average have become riskier during the last few years as they issued debt to buy back stock. However, looking at the global landscape from a pure relative valuation perspective, we continue to maintain a constructive view and allocation to global equities and select property over DM fixed-income assets.
One of the main goals of our SIM Absolute Return Funds, is to provide capital protection over a 12-month rolling basis. Looking ahead, where we see risk mitigation remaining the order of the day, we believe that our consistent strategy of maintaining a fair degree of explicit risk protection in the fund, via the use of derivative overlays, should continue to prove its value. In the longer term, our goal remains to achieve returns comparable to cost of living adjustments, with the least risk possible (and certainly with risk lower than that of the equity market). To this end, we are constantly on the lookout for and alive to opportunities that present themselves within the various asset classes and markets within our investable universe.
The SWIX posted a return of 2.1% for the three months to end June 2018, helping claw back some of the losses sustained in Q1. This brings returns for the year to date from equities to a negative 4.8%. Within the broad equity sectors, SA Resources had a superb quarter with a return of 19.6%, SA Industrials returned 5% while SA Financials fell by 6% for the period under review.
It has certainly been a tepid return from the market as a whole over this quarter, despite a 20.5% return from heavyweight Naspers. Naspers has actively cashed in some of its investments. After realising $10 billion from selling down 2% of their Tencent stake to 31% the previous quarter, the big news has been the sale of 11.2% of Flipkart (India) to Walmart (US) for some $2.2 billion, which amounts to an internal rate of return of approximately 32% p.a.
On the local bourse, the more diversified, globally exposed large caps have fared much better than the more SA-focused mid and small caps this quarter. In addition, with the private sector on an investment strike and capital stock having dropped to a low 20% of GDP, our construction companies have been under severe pressure, with Basil Read entering business rescue, Aveng having to undergo a dilutive rights issue at 10c (with its market cap collapsing to R500 million, reflecting the cash it raised) and being subject to a bid from Murray & Roberts. In addition, Group Five’s market cap collapsed to a mere R100 million as it also considers an equity raise. Only Murray & Roberts has been able to hold its own due to the hostile bid from German grouping Aton with the share price spiking from 950c to 1700c after the bid was announced.
The SIM house view portfolio had a decent quarter outperforming its benchmark by 114 basis points (bps). The fund has benefited from an overweight position in resources stocks, with the SA Resources Index up 19.6% this quarter. The underweight position in financials also helped with the SA Financial Index down 6% this quarter. We have a muted underweight position in industrial stocks with the SA Industrial Index up 5% this quarter, led in large part by Naspers, which is the largest holding in the fund.
Resources stocks contributed positively to performance this quarter given the backdrop of strong global growth, supply discipline and weaker producer currencies. Some of the top contributors to fund performance came from overweight positions held in BHP Billiton (+31.9%), Sasol (+24.7%) and Anglo American (+11.3%), while the fund also benefited from underweight positions held in SA Inc. stocks such as Massmart (-31.1%), The Foschini Group (-22.2%) and Steinhoff Africa Retail (-20.3%).
On the downside, our overweight position to select financial stocks detracted from value. Old Mutual plc unbundled its UK wealth business, Quilter, leaving behind a largely SAfocused financial services group. The stock was sold off in the emerging market downdraft and despite the Quilter listing seeing sizeable demand locally, the Old Mutual Ltd stock is likely to see some flow back as UK investors divest due to the fact that Old Mutual is not part of UK indices. Also, Banks pulled back with Barclays Africa (-12.8%) and Standard Bank (-10.1%) detracting from performance after a strong run in the beginning of the year.
The bullish sentiment that followed the election of Cyril Ramaphosa at the helm of the ruling party and catapulted local retailers and financial shares, dissipated this quarter. The fundamental tenet of our investment philosophy is to be fearful when the market is greedy in order to avoid being over-emotional when investing. Being patient and sticking to our guns by retaining our overweight position in resources stocks has proven to be the correct approach for the first half of this year; while buying into Ramaphoria would have detracted from performance. Our valuation methods rely on fact and also look through the cycle in order to avoid focusing too much on short-term news. The mid-year company results are likely to present a bleak picture for businesses overly reliant on a weak SA economy, but if the valuations are attractive enough, we will be able to stock pick these opportunities. We remain focused on investing in good quality companies with diversified earnings streams which will be able to withstand economic shocks long term.
The local market is fairly priced with the one-year forward P/E of the JSE of just under 15x with some select pockets of value. By aggregating the individual company valuations of the SIM equity analysts, the market comes out attractively priced, but this is to a large extent due to Naspers and to a lesser extent MTN and British American Tobacco. The SIM analysts are of the opinion that Naspers is trading at close to 55% of its fair value, British American Tobacco is trading at 60% of its fair value and MTN at 70% of its fair value.
For the year to date, the major driving factor behind world markets has been the increase in US bond yields from 2.41% (on the 10-year bond) to 2.86% by the end of Q2. Added to this were the two Fed rate hikes of 25 bps each in March and June of 2018, which provided a notable explanation for the volatility in world equity markets over this period. Following on from this, the major theme during Q2 was that of a stronger Dollar, with the euro depreciating by 5.3% relative to the greenback, sterling by 6% and the yen by 4.1% (over the quarter). The price of gold followed suit, falling by $72, but market volatility was exacerbated by the close to $10 increase in the price of Brent oil (increasing the cost of living globally).
Eurozone risks have escalated during the course of 2018, with the focal point being political tensions in Italy, which we have to remind ourselves is not Greece. The latter had a debt problem that was a containable 2% of the European Central Bank (ECB)’s balance sheet, but Italy is an economy 10 times that of Greece’s and comprises 15% of economic activity within the Eurozone. Moreover, Italy’s debt of 130% of GDP makes it the third largest debtor in the world, with obvious implications each time there is a bout of uncertainty pertaining this sovereign. US ISM picked up from 59.3 to 60.2 over the quarter, indicative of a still-expansionary environment, resulting in a Fed that may be tempered in its hastiness to raise rates quickly. The imposition of US tariffs on imports has been a major event during Q2, with the Trump administration announcing steel and aluminium tariffs from Canada, Mexico and the European Union (EU). As a consequence, one of the major risks to world equity markets is retaliation by in particular China, which could precipitate into a prolonged trade war. The Japanese economic malaise continued, with its first-quarter GDP print showing an unexpected contraction, once again shaking confidence in that economy. This has spurred the Bank of Japan into a fresh round of stimulus to stimulate its economy but also to counteract the planned tax hike to take place in 2019.
For the quarter in Dollar terms, the MSCI World Index recorded a return of 1.7% while the MSCI EM Index declined 7.9%. Global bonds, as measured by the Bloomberg Barclays Capital Aggregate Bond Index, declined 2.8% over the quarter. The local currency weakened by a notable 15.7% from a level of R11.85/$ at the end of March to R13.71/$ at the close of June.
Looking to our portfolios, we remain constructive on risk assets over fixed income from a relative valuation perspective. Since 1970, global equity markets have given a 4% real return, with most of the real return explained by the market’s dividend yield. Over the past five years, global equity markets (MSCI World) gave an annualised real return of more than 7%. Almost half of this return is due to a revaluation of equities, with the rest due to dividend yield and dividend growth. Although global equity markets and specifically the US market have rerated to seemingly expensive levels relative to their long-run history, we retain our preference for equities over global bonds based on equities still remaining favourable on relative valuation measures. Our select global property basket currently has an average dividend yield of circa 6.7%. This is attractive when compared to the yields on offer from DM sovereign bonds.
Bond yields in DMs were mixed, US 10-year yields rose from 2.74% to 2.86%, while yields in Europe, Britain and Japan rallied. Bond yields in the US were pressured by increased supply and chances of more rate hikes. However, 10-year yields ended the quarter well off their highs as the curve continued to flatten. An inverted yield curve is considered a predictor of economic recession.
The strong Dollar pressured EM currencies like the Rand, Brazilian real and the Turkish lira, which are perceived to have weak fundamentals. Yields on Turkish bonds rose more than 200 bps even as the central bank raised the policy rate first by 300 bps and then by 125 bps to counter a 20% fall in the currency and inflation of 12%. After outperforming EM peers in the first quarter, South African bonds and the local currency sold off in the second quarter as foreign investors liquidated their holdings by R30 billion and R33.7 billion in May and June respectively. The yield on the benchmark R186 bond rose 83 bps during the quarter from 8%, resulting in a -3.8% return for the FTSE/JSE All Bond Index. The Rand lost 15.7% against the US Dollar during the quarter.
Consumer price inflation printed at 4.5% in April and 4.4% in May. The increase in inflation from 3.8% in March was driven mainly by tax increases and administered prices.
In the local corporate bond market, issuance continued to come in below trend in the first two months of the quarter, dominated by SOEs, corporates and securitisations. After being largely absent from the bond markets in late 2017 and early 2018, Eskom took advantage of renewed appetite in its bonds by issuing a new three-year bond in April and continuing to tap its existing bonds. Land Bank raised an additional R1.38 billion through a tap and a private placement of existing bonds, while the Industrial Development Corporation followed suit, raising R1.7 billion in April. Corporate issuers included Mercedes-Benz (R3.5 billion in April and May), Telkom (R1.5 billion), and a number of property companies, while securitisations included Nqaba Finance (R817 million), Thekwini Fund 15 (R1.2 billion), and Nitro 6 (R2 billion). Given sluggish issuance and robust demand, credit spreads continued to trend lower over the first two months of the quarter. Despite this, we continued to add to our exposure to select credit assets where risk-adjusted returns seemed attractive, and took advantage of higher bond and negotiable certificate of deposit yields over the quarter to enhance portfolio returns.
The outlook for DM bonds remains poor given a combination of lower liquidity as central banks buy less government bonds, increasing inflation and larger deficits in the US. We think yields in the US will end 2018 closer to 3%, perhaps even a little higher. However, guidance from the ECB to keep rates on hold until the end of summer 2019 will have a dampening effect on yields in Europe. Tit-for-tat imposition of trade tariffs between the major economies could lead to an all-out trade war and a slowdown in global trade, which would not be good for EMs as risk aversion would lead to more capital flight toward DMs. Current oil prices, if sustained, pose a threat to our constructive view on bonds, and realised inflation would be higher than we expect.
On the domestic front, inflation risks have risen too. The National Energy Regulator of South Africa has granted Eskom additional revenues of R32.7 billion over and above the annual increases. What is not clear at this stage is over what time frame Eskom will be allowed to recover this additional revenue.
For our funds, cash continued to be enhanced throughout the quarter with the additions of select credit assets offering attractive yield enhancements over money market rates. Our position in nominal bonds was increased as the asset class offers a real yield of close to 4%.
The fundamental question is whether we are at the start of a sustained derating of the market; this is not, however, our base case view. Global growth remains solid and global PMIs (in the US and EU) are in expansionary territory. Currently, risks are in the spotlight, however, highlighting the importance of risk protection, which is key in the way we manage the SIM Absolute Return Funds. We consider the main risks to our investment view to be the potentially negative impact on global GDP, global inflation and earnings of companies from increasingly hostile trade tensions between the US and China, as well as the impact of the withdrawal of global liquidity in the form of rising bond yields in the US and scheduled tapering by the ECB. We continue to monitor these developments closely within the context of the fund and continue to seek portfolio diversification and protection against this backdrop of increased uncertainty and volatility.
Natasha Narsingh and Lethabo Leoka head up the Absolute Return funds at Sanlam Investments. The flagship fund is the SIM Inflation Plus Fund, which has two objectives that are very attractive to investors looking for a smoother return profile.