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Sanlam Investment Management
Inflation Plus Fund

There are many things that can affect the economy. And if you’re a cautious investor who still wants bold results, you need an investment fund that can stay the course, no matter what happens.

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.

Quick Facts About The Fund*

Sanlam Investment Management (SIM) Inflation Plus Fund

Launch Date: 01 April 1999
Fund Size: R13 940 million
Benchmark: CPI + 4% over a rolling 3 year period
Time Horizon: 3 years
*As at 31 August 2017
Risk Profile: Cautious
Fund Classification: SA – Multi Asset – Low Equity
Min Investment Amount: Lump sum: R10 000 | Monthly: R500
Total Expense Ratio (TER): 1.25%
Launch Date: 01 April 1999
Fund Size: R13 940 million
Benchmark: CPI + 4% over a rolling 3 year period
Time Horizon: 3 years
Risk Profile: Cautious
Fund Classification: SA – Multi Asset – Low Equity
Min Investment Amount: Lump sum: R10 000 | Monthly: R500
Total Expense Ratio (TER): 1.25%
*As at 31 August 2017

Fund Strategy

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.


Cumulative Growth Over Time

Performance

Annualised Total Return as at 31 August 2017 on a rolling monthly basis
Retail Class Fund (%) Benchmark (%)
1 year 6.26 8.83
3 year 8.24 9.12
5 year 10.01 9.64
10 year 8.72 10.08

Annualised return is the weighted average compound growth rate over the period measured
Highest and lowest annual returns over 10 years
Highest Annual % 13.38
Lowest Annual % 2.38

Minimum Disclosure Document (Fund Fact Sheet)

Cumulative Growth Over Time

Sanlam Investment Management
(SIM) Inflation Plus Fund
Consumer Price Index (CPI) +4%

Source of graph : Morningstar and Sanlam Investments

Sanlam Investment Management (SIM) Inflation
Plus Fund
Consumer Price Index (CPI) +4%

Source of graph : Morningstar and Sanlam Investments

Sanlam Investment Management (SIM)
Inflation Plus Fund
Consumer Price Index (CPI) +4%

Source of graph : Morningstar and Sanlam Investments

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.

1. Naspers -N- 4.28%
2. BTI Group 1.32%
3. Sasol 0.92%
4. Steinhoff Int Hldgs N.v 0.90%
5. MTN 0.87%
6. FirstRand / RMBH 0.82%
7. Stanbank 0.80%
8. Old Mutual 0.77%
9. Mondi 0.64%
10. Remgro 0.51%
Cash And Money Market Assets
International Assets
Equities
Bonds 3 - 7 Years
Bonds 0 - 3 Years
Bonds 12+ Years
Inflation Linked Bonds
Property
Bonds 7 - 12 Years
Preference Shares
1. Naspers -N- 4.28%
2. BTI Group 1.32%
3. Sasol 0.92%
4. Steinhoff Int Hldgs N.v 0.90%
5. MTN 0.87%
6. FirstRand / RMBH 0.82%
7. Stanbank 0.80%
8. Old Mutual 0.77%
9. Mondi 0.64%
10. Remgro 0.51%

Natasha Narsingh

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.

Natasha Narsingh

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.

Traditional Investing (when you invest via a Financial Adviser or other)

Retail Class (%)

Advice initial fee (max.) 1.14%
Manager initial fee N/A
Advice annual fee (max.) 1.14%
Manager annual fee 1.14%
Total Expense Ratio (TER) 1.25%

Advice fee | Any advice fee is negotiable between the client and their financial advisor. An annual advice fee negotiated is paid via a repurchase of units from the investor.

Obtain a personalised cost estimate before investing by visiting www.sanlamunittrustsmdd.co.za and using our Effective Annual Cost (EAC) calculator. Alternatively, contact us at 0860 100 266.

Sanlam Reality members may qualify for a discount on the Manager annual fee.

Total Expense Ratio (TER) | PERIOD: 1 April 2014 to 31 March 2017

Total Expense Ratio (TER) | 1.25% of the value of the Financial Product 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.

Transaction Cost (TC) | 0.09% of the value of the Financial Product 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.

Total Investment Charges (TER + TC) | 1.34% of the value of the Financial Product was incurred as costs relating to the investment of the Financial Product The portfolio manager may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. This fund is also available via certain LISPS (Linked Investment Service Providers), which levy their own fees. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down.

Please note that African Bank (ABL) has had a name change to African Phoenix Investments Ltd (AXL), with the effective date being 01/02/17. The suspension of the bank has been lifted.

When you invest online

Traditionally, investment advice come with a fee of up to 1%. But our smart online system is working to make investing cheaper and more profitable for you and hence no initial or annual advice fees will be charged. The management fee you do pay is based on the fund selected and calculated on your total contributions, and then applied to the overall value of your portfolio.

YOUR INVESTMENT WILL NOT CHARGE THE FOLLOWING FEES

  • No initial account set-up fees – usually charged at 2%.
  • No switching fees
  • No exit fees
  • No account changes fees
  • No rebalancing fees
  • No commissions
  • No debit order fees
  • No fund manager rebates

SO YOU’RE ONLY CHARGED THE RELEVANT FUND-MANAGEMENT FEE

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.

Market review

Global equity markets had another good quarter with developed markets up over 10% for the year-to-date and continental Europe outperforming again in the second quarter. European politics certainly look much calmer than they have been in a while. The threat of populism seems to have receded with the Dutch having elected a mainstream candidate and Emmanuel Macron emerging victorious in the French presidential elections, driving the CAC 40 Index to its highest levels since 2008. The threat of an unhinging of the European Union (EU) has been postponed despite the UK elections unexpectedly yielding a hung parliament and fears that the Five Star Movement in Italy could also win the polls next year. In the US, the appetite for growth assets continued unabated, whetted by low US bond yields. The US bond market is once again pricing borrowing costs below 2% as Fed tightening is seen as less of a threat. This has seen the VIX ‘fear index’ move to super low levels and has driven the S&P 500 Index to hit record highs in June. Even though the Trump administration’s pro-growth tax reform legislation has struggled to make headway, the initial worst case fears on trade have not yet come to pass.

Back home, sustained political uncertainty and further credit rating downgrades hang gloomily over us. Following the cabinet reshuffle at the end of March, the second quarter was particularly harsh on the credit ratings front. In April S&P Global Rating downgraded our foreign currency debt to sub-investment grade or junk status and in June Moody’s followed with a downgrade of both our local and foreign currency debt to just one notch above junk status. Crucially, Moody’s assesses South Africa’s local currency debt to still be investment grade. However, both S&P and Moody’s have a negative outlook on their ratings. Should South Africa be downgraded again, the country’s debt would no longer be eligible for the World Government Bond Index and this would result in an estimated R100 billion plus of outflows. The yield on the benchmark R186 bond ended the quarter 6 basis points lower than in March. The credit default swaps markets show that South African debt was already regarded as sub-investment prior to the actual downgrades and hence the muted reaction to the downgrade.

The rand strengthened somewhat over the quarter from R13.42/$ to R13.10/$ at the end of June. Local yields started the quarter at elevated levels with the yield on South African government bonds trading above 9% on the back of the political changes and uncertainty towards the end of March. Local yields subsequently traded stronger during April, May and most of June. The trend reversed towards the end of June and the local market pulled back sharply during the last week of the quarter on the back of comments from the international central banks - most notably the European Central Bank - which alluded to less accommodative monetary policy going forward. This resulted in a ‘risk off’ environment in global markets, with international bond yields trading higher and South African bonds following suit. Talking to performances for the quarter, nominal bonds returned 1.5%, inflation- linked bonds added 1.0% and cash returned 1.9%. For the quarter as a whole, the MSCI World Index added 4.0% in US dollar terms while the MSCI Emerging Markets Index returned 6.4%. Locally, the FTSE/JSE All Share Index declined 0.4% on a total return basis during the second quarter and within equities, SA Industrials posted a return of 2.2%, SA Financials were flat (0%) while the SA Resources Index declined 7%.

Asset allocation

With a strong local currency and favourable inflation numbers earlier during the quarter, we used the opportunity to slightly lighten our nominal bond exposure. This was done more from a tactical, prudent perspective rather than as a relative valuation measure. Cash continued to be enhanced through investments in select corporate debt as specific opportunities presented themselves and at favourable yield pick-ups over money market rates.

Over the quarter we marginally reduced the amount of downside protection on the fund’s domestic equity component. We believe SA equities to be less overvalued relative to developed market peers. The SA equity market (SWIX) trades on a current (rolled) price-to-earnings (P/E) ratio of about 15.5. Given earnings forecasts, based on current improved commodity prices, the P/E ratio could drop to about 13.5 in a year’s time. Furthermore, companies which primarily derive their earnings from South Africa have become cheap. Current dividend yields from banks and insurance companies are above historical dividend yields and the financial sector now trades about 15% to 20% below fair value. Globally we retain our preference for European equities, where there seems to be both better pricing as well as better economic prospects supporting earnings relative to other markets.

Investment strategy

Up until now we were of the opinion that conventional ten-year bonds are fairly priced if a prospective real return of 2% was on offer. Given the political uncertainty in the country, we believe this number should now be higher. This is not due to an increased risk of default, as governments are always able to service their own currency debt (i.e. they are in control of the printing presses). But mismanagement of an economy can manifest itself in rising inflation, which could be made worse through an accompanying weakening currency. Given the policy uncertainty, SA’s inflation risk premium has risen.

With this as the backdrop, South African conventional bonds offering a real yield of nearly 3%, seem fairly priced and do continue to offer an attractive yield compared to domestic bonds of similarly rated countries. We remain of the opinion that local fixed-income assets are still an attractive investment to consider within the global context of a low-yielding environment. Locally, we see real yields of between 2% and 3% on offer against a backdrop of declining inflation. Breakeven inflation levels have come down from previous highs, but we still prefer nominal bonds over inflation-linked bonds over the medium term. We believe that the SA equity market is selectively attractively valued. Internationally, US markets are expensive on most metrics while European equities remain cheap relative to other markets on all valuation measures. We therefore continue to hold an overweight position in Europe, within our global equity allocation.

Equities

After a strong start to the year, the second quarter of 2017 saw the FTSE/JSE All Share Index (ALSI) move sideways with a quarter-on-quarter return of -0.4% versus +3.8% for the first quarter. SA Industrials were once again the top performers, posting a return of 2.2% on the back of strong performances from the likes of heavyweights Naspers (+9.9%), Steinhoff (+4.5%) and British American Tobacco (+1.4%) among others. SA Financials were outright flat (0.0%) with Banks up 0.9% and Life Insurers down 1.9% while SA Resources fell a steep 7.0% buckling under increased uncertainty following the release of the third draft of the Mining Charter in June. The SIM houseview portfolio performed well this quarter beating the SWIX benchmark and this now aggregates to more than 2% outperformance over one year without taking significant risk in the portfolio. Some of the notable positions that did our funds well over the quarter were Naspers, our largest equity holding (+9.9%). Naspers’ associate Tencent, which is vying for the top spot as the largest emerging market stock together with Alibaba, reported earnings up 46%, showing that the company’s growth trajectory remains intact. Tencent is solidifying its gaming and social network offering, while its advertising business has become a new growth vector. With Naspers owning a third of Tencent, we therefore offer our clients the opportunity to gain exposure to this global technology theme without having to take money offshore. Steinhoff International (+4.5%) outperformed for the quarter, despite posting a noisy set of results which incorporated a series of acquisitions. However, the stock is still down substantially for the year with the main concern relating to the acquisition of Mattress Firm, the largest retailer of mattresses in the US. We remain confident that the global scale benefits of these acquisitions are under-appreciated by the market and that the stock now trades at levels where much of the bad news is discounted into the price.

This quarter was not a very favourable one for financial stocks, given the turmoil which followed the Cabinet reshuffle. We used the opportunity of Barclays Plc selling down its shares in Absa, which was done at an attractive discount, to build a sizeable position in the stock. On a valuation basis, the stock trades at a discount to its peers and offers a dividend yield of some 8%, a premium to its peers. The fact that it was the largest book build in the history of the JSE, and still oversubscribed, shows that there is further appetite for SA assets if they are priced correctly.

SIM equity strategy

We have built positions in companies with geographically diversified footprints, with a strong rand hedge component and that dominate their respective industries, such as Naspers, British American Tobacco and Steinhoff international. The recent sell-off in financial stocks has provided us with the opportunity to accumulate quality financial stocks at attractive valuations and high yields such as Barclays Africa and Standard Bank. A number of businesses which we have invested in are self-help stories, where the value unlock is within management’s control, such as the management separation strategy at Old Mutual plc. As value investors, our focus remains on accumulating stocks where valuations are well below their intrinsic value as a result of other investors getting excessively bearish. During the quarter, we were able to increase our exposure to and hence reduce our underweight positions in some high-quality companies which are now out of favour. For instance, Tiger Brands, a leading producer of market-leading manufactured food products, lost the confidence of investors after it had to dispose of Dangote Flour Mills Plc for US$1 - after paying some US$200 million for it and incurring huge losses. With the Nigerian asset now sold and a new CEO on board, the company can focus on its core business. Another such value purchase over the quarter was Aspen. A once highly rated stock, Aspen was the darling of the local market as they announced deal after deal offshore. Given its huge debt burden, the company is now focusing on sweating its assets and allegations of price gouging in the EU have dented investor appetite. Continuing to apply our patient value discipline provided us with the opportunity to buy these attractive assets at lower prices. We also took profits in some counters where we have done very well in the past year but which approached our estimate of intrinsic value, for instance Northam, which is one of our preferred platinum plays and was up 113% from the beginning of January 2016 to April 2017.

Equity outlook

We believe that the SA market has become less overvalued relative to developed equity markets. Current dividend yields from banks and insurance companies are above historical dividend yields and the financial sector now trades about 15% to 20% below fair value. The dividend yields of the industrial and resources sectors remain well below their long-term levels.

The SA equity market (SWIX) trades on a current (rolled) price-to-earnings (P/E) ratio of about 15.5. Given earnings forecasts, based on current improved commodity prices, the P/E ratio could drop to about 13.5 in a year’s time. However, from a pragmatic perspective we acknowledge that political pronouncements will keep making the headlines and this will have a feedback loop into our markets and on business confidence. The credit rating agencies are meanwhile assessing the strength of our institutions with the discretion to send our economy into a further tailspin by relegating our local sovereign debt to junk status. Our investment process is geared to assess risks and invest in companies that have resilient business models that can withstand adverse macro circumstances in the long term. As value investors our focus remains on being contrarian and capitalising on opportunities as they arise.

International

Most developed markets have shown moderate growth in the second quarter. In the US, the housing market strengthened further, inflation receded on lower food prices to 1.9% year-on-year, the unemployment rate dropped to a 16-year low of 4.3% in May and the recovery in industrial production remained steady. The Fed raised rates by 0.25% to a range of 1.0-1.25%. The Eurozone economy too fared much better. Industrial production rose in April, but the manufacturing indices seem to suggest improving conditions in May and June. The European Central Bank revealed that they were optimistic on growth and inflation and expected tapering to start early next year. The threat of populism also receded as the Dutch elected a mainstream candidate and Emmanuel Macron swept to victory in the French presidential elections. Steady conditions prevailed in China, although concerns over high debt levels weighed on market sentiment.

For the quarter in dollar terms, the MSCI Emerging Markets Index (MSCI EM) returned 6.4% while the MSCI World Index posted a return of 4.0%. This brings total MSCI EM outperformance over the World Index for this year-to-date to 7.9%. Global bonds as measured by the Barclays Capital Aggregate Bond Index rose 2.6% over the quarter. The rand, in spite of local woes, has been supported by improved risk appetite towards emerging markets among global investors searching for yield. This saw our local currency end the quarter at R13.10 to the US dollar from R13.42 at the end of March (and R13.68 at the start of the year).

Looking to our international universe, we maintain our preference for international equities, especially European equities, on valuation grounds as well as select international property stocks. Within international equities, we remain of the view that the US equity market is expensive. The Graham & Dodd P/E multiple (current price divided by the average 10-year real earnings) for the US is at about 30 and has only been higher during the internet bubble of the 90s and in the run-up to the US stock market crash in 1929. In contrast, European equities remain cheap relative to other markets on most valuation measures. European companies on average trade on a 1.7 times price-to-book level, while US companies trade on a 3 times price-to-book. We therefore continue to hold an overweight position in Europe, within our global equity allocation. Our select international property holdings at an average dividend yield of about 5.5% continues to be favourably priced relative to global bonds and cash.

Bonds

The rand strengthened somewhat over the quarter from R13.42/$ to R13.10/$ at the end of June. Local yields traded stronger during April, May and most of June only to reverse the trend when the local market pulled back sharply during the last week of the quarter on the back of comments from the international central banks - most notably the European Central Bank - which alluded to less accommodative monetary policy going forward. This resulted in a ‘risk off’ environment in global markets, with international bond yields trading higher and South African bonds following suit. For the quarter, nominal bonds returned 1.5%, inflation-linked bonds added 1.0% and cash returned 1.9%. For our funds, nominal bonds were slightly reduced due to rand strength and cash continued to be enhanced through investments in select corporate debt as specific opportunities presented themselves and at favourable yield pick-ups over money market rates. Primary market credit auctions received strong support during May and June after issuance almost halted during April on the back of the local political events and South African credit rating downgrades, with locals erring on the side of caution given the uncertainties. Credit spreads in some sectors have continued to narrow marginally, but the overall trend remains largely sideways. We think credit is fairly priced in general, with some corporate credit counterparties perhaps more on the expensive side, but there are some specific opportunities that are attractive from a valuation as well as a quality point of view. We believe that South African fixed- income assets are still an attractive investment to consider within the global context of a low-yielding environment. Locally, we see real yields of between 2% and 3% on offer against a backdrop of declining inflation. Breakeven inflation levels have come down from previous highs, but we still prefer nominal bonds over inflation-linked bonds over the medium term.

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