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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: R14 468.2 million
Benchmark: CPI + 4% over a rolling 3 year period
Time Horizon: 3 years
*As at 31 October 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: R14 468.2 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 October 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.


Illustrative Cumulative Growth of an investment of R100

Performance

Annualised Total Return on a rolling monthly basis
(as at 31 October 2017)
Retail Class Fund (%) Benchmark (%)
1 year 11.86 8.76
3 year 9.28 9.26
5 year 10.27 9.44
10 year 8.72 9.98

Annualised return is the weighted average compound growth rate over the period measured
Highest and Lowest Annual Returns over 10 years
Highest Annual % 14.54
Lowest Annual % (3.60)

Minimum Disclosure Document (Fund Fact Sheet)

Illustrative Cumulative Growth of an investment of R100

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

Source of graph : Morningstar Direct

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

Source of graph : Morningstar Direct

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

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.

1. Naspers -N- 4.75%
2. BTI Group 1.21%
3. MTN 0.91%
4. Sasol 0.90%
5. FirstRand / RMBH 0.87%
6. Stanbank 0.85%
7. Old Mutual 0.80%
8. Steinhoff Int Hldgs N.v 0.80%
9. Anglos 0.63%
10. Mondi 0.61%
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- 4.75%
2. BTI Group 1.21%
3. MTN 0.91%
4. Sasol 0.90%
5. FirstRand / RMBH 0.87%
6. Stanbank 0.85%
7. Old Mutual 0.80%
8. Steinhoff Int Hldgs N.v 0.80%
9. Anglos 0.63%
10. Mondi 0.61%

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 July 2014 to 30 June 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) | 0.08% 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) | 1.33% 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

Our smart online system is working to make investing more profitable for you. The management fee you 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 growth is strong at 3.5% and is accompanied by low unemployment and improved consumer and business confidence. A notable feature of the improvement in global real economic activity in 2017 is the increase in fixed investment spending, amidst an upturn in business profits. The US economy remains resilient and on track to exceed 2% growth this year. This is in large part being driven by manufacturing production, which is at a thirteen-year high and is being assisted by strong export orders. The unwinding of the US reflation trade has put pressure on the US dollar and has helped emerging market currencies, including the rand. Emerging market bonds have seen the best inflows in six years. The rebalancing of the Chinese economy continues with strong double digit growth in retail spending while investment spending growth is slowing down into the single digits. The Chinese services economy is growing faster, attracting three quarters of fixed investment into the economy.

Global markets have remained buoyed by the $1.7 billion central bank injection this year and 13% increase in earnings growth. We have seen the fourth strongest bull market in the history of the US market with the S&P up over 250% since 2009. If the S&P posts a positive month in October then the Trump-fueled US rally will equal a 90-year record! The concern remains that, with the VIX or fear index at a record low, global investors are much too complacent at the moment. Hurricane Harry caused some damage at the end of August to the oil producing areas close to the Gulf of Mexico, lending some support to the oil price. But the greater threat must be the escalating tensions and the ‘war of words’ between the US and North Korean leaders with South Korea, Japan, China, Russia and other European nations all intricately involved. The risks associated with this stand-off between the US and North Korea are unlikely to dissipate soon.

Back on the home turf, we are seeing some recovery in real economy data, with the increase in electricity demand and positive vehicle sales growth being signs of marginally positive GDP growth after two consecutive quarters of negative growth. We are importing deflation with prices dropping 10% year-on-year and a much improved terms of trade assisted by a recovery from last year’s drought. This has driven the trade balance into positive territory. Concern remains that hefty hikes in electricity rates and taxes next year could stall a consumer recovery. In addition, politics continue to dominate the headlines for all the wrong reasons with the motion of no confidence on the President held by secret ballot in August further fueling speculation of a fiercely contested policy conference by the ruling party in December. Political uncertainty and recurring evidence of corruption, with the latest episode casting serious doubts over the integrity of audit firm KPMG, continue to weigh down on consumer and business confidence. All of this is likely to translate into low economic growth of below 1% this year. It is clear that a potential sovereign risk downgrade is weighing on real rates, which are at 1.5%, when the weak economic data would suggest that lower real rates would be applicable. Against this backdrop, the fact that rates were not cut at the end of September was a missed opportunity.

The rand weakened over the quarter from R13.10/$ to R13.50/$ at the end of September. The benchmark SA 10-year bond yield declined from 8.77% to 8.55% over the quarter. This move was supported by SA’s high real yields, expectations of a lower inflation trajectory into year-end and the global backdrop. The SA Reserve Bank (SARB) surprised the markets by delivering a repo rate cut of 0.25% to 6.75% at its July meeting. The decision was supported by inflation reducing from 5.4% to 5.1% in June with further moderation expected. The SARB was also surprised at the very weak growth outcome of the first quarter of -0.6%. In an unexpected move again, the SARB’s Monetary Policy Committee (MPC) left the repo rate unchanged at 6.75% at its September meeting with three of its members voting for a cut, and three members voting for unchanged rates. The MPC’s tonality was hawkish and, although unanticipated by the market, does confirm and complement its basis of data-dependence. Given the possibility of further credit rating downgrades, growth disappointments, further political uncertainty and a potential impact on the currency and foreign capital flows, the SARB would be loathe to cut too aggressively to prevent compressing real rates. The combination of low growth and low inflation breeds an environment conducive to interest rate cuts. However, we believe that the current loosening cycle will remain shallow and this, together with a lack of confidence on the part of consumers and businesses, is unlikely to boost growth meaningfully. The front-end of the yield curve re-priced aggressively higher, leaving the curve flatter after many months of steepening. For the quarter to September, nominal bonds returned 3.7%, cash returned 1.8% and inflation-linked bonds added 1.2%. On the international front, the MSCI Emerging Market Index was 8.0% firmer in US dollar terms while the MSCI World Index returned 4.8%. Locally, the FTSE/JSE All Share Index rallied strongly to deliver a return of 8.9% on a total return basis with SA Resources 17.8% higher, SA Industrials up 7.4% and SA Financials 5.1% higher over the quarter.

Asset allocation

We retained our position in conventional bonds as the asset class offers an approximate 3% real yield, which is attractive when compared to domestic bonds of similarly rated countries. Inflation is under control and well within the target inflation band. Cash continued to be enhanced over the quarter via the addition of good quality select credit assets at attractive yield pick-ups over money market rates.

Gross equities exposure was higher over the quarter with effective equities exposure little changed. Given estimates of earnings growth, the SA equity market currently trades at a 15 times one-year forward price earnings (PE) multiple. Naspers now makes up 21.2% of the FTSE/JSE Shareholder Weighted All Share Index (SWIX). If we exclude Naspers, then the forward PE of the market is about 13. Based on this, the SA equity market is fairly priced. This is further supported by the bottom-up valuation of the SWIX, where we aggregate the fair values of its constituents as calculated by our SIM analysts. The higher expected prospective returns are due to the improved earnings prospects of the resources companies given higher commodity prices; the derating of companies with domestic earnings; and an increase in the valuation of Naspers, given earnings surprises from Tencent, its largest holding.

Globally we maintain our preference for equities and property over fixed income assets, with a favourable bias to European assets from a relative valuation perspective.

Investment strategy

In August we changed our view on the potential returns from bonds over the next six and 12 months. We increased the real returns required from bonds from 2% to 3%. The higher risk premium is driven by high political risk in the short term and a deteriorating fiscal position in the medium term. In October the Finance Minister will deliver his first medium-term budget policy statement. The market will be looking for confirmation that the bailouts of SAA will be deficitneutral and where the savings have come from. In the first five months of the fiscal year revenue has tracked 15% below expectations. The market will be looking to the minister to adjust spending to take account of the new realities. There will be little tolerance for much wider deficits than those tabled in February. Deficits approaching 4% will hasten rating downgrades.

Against this backdrop, South African conventional bonds offering a real yield of close to 3% seem fairly priced and continue to offer a favourable yield when 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 a declining inflationary environment. That said, although local bonds are attractively valued, we believe that they could offer better value into year-end given the risk events at play. Nominal bonds are preferred to inflation-linked bonds on a relative value basis.

We believe that the SA equity market is selectively attractive and offers decent upside from current levels. However, given our goal of protecting client’s capital over a rolling 12-month period and the increased sensitivity of our funds to capital drawdowns, we continue with our strategy of protecting a fair portion of our local equities via derivative overlays. Internationally, US markets are overpriced on most valuation metrics while European equities remain cheap on several key valuation measures relative to developed market peers. We therefore continue to be favourably positioned with respect to Europe within our global equity and property allocation.

Equities

The FTSE/JSE All Share Index (ALSI) bounced back strongly in the third quarter of 2017 with a return of 8.9% quarter-on-quarter after a mildly negative showing of 0.4% in the prior quarter. Within equities, SA Resources rose 17.8%, SA Industrials increased 7.4% and SA Financials were 5.1% higher over the quarter.

The General Miners were up 28.8% during the quarter, driven by positive data from China and a rebound in commodity prices. This helped drive Anglo American up 42.2% after delivering strong half-year numbers. Kumba Iron Ore was 39.8% higher on the back of strong interims and a rebound in the iron ore price. With billionaire Anil Agarwal boosting his stake in Anglo American by $2 billion and BHP Billiton the subject of corporate activists, there is increasing pressure on mining houses to deliver value to shareholders. There were, however, contrasting fortunes for the precious metal producers. Good numbers from Gold Fields, driven by its Australian mines, saw the share price soar by 32.2%. On the downside, there were disappointing results from Implats, which saw its share price drop by 15.9%. The spectre of electric vehicles continues to weigh on sentiment around platinum stocks, despite a complete phasing out of diesel cars and the combustion engine being some years away.

The SIM houseview portfolio delivered returns of just over 7% this quarter, marginally beating its SWIX benchmark in difficult conditions. Year to date this outperformance aggregates to 1.5% relative to the SWIX. A notable positive contributor to fund performance over the quarter was Naspers, our largest holding, having posted a return of 15% after delivering solid numbers. Globally there is positive sentiment towards IT stocks and Naspers’ investment in Tencent, the Chinese internet company, continues to drive the share price higher. Naspers continues to reshuffle the rest of its portfolio, which is being priced at a negative implied value by the market, unbundled its stake in the local printing business Novus and increased its stake in the European company Delivery Hero. Old Mutual, one of our largest positions in the financial sector, was up a pleasing 9.1% with the managed separation of the group early next year taking shape. The group is focusing on a separate listing of its UK wealth business, which would help re-rate the counter. A detractor from performance was MMI holdings, which was down 9.8% after reporting disappointing results with weak performance in group risk and poor persistency in the retail business, resulting in very weak sales. This has led to question marks around the sustainability of the group’s high dividend yield. Steinhoff International disappointed with the share price coming off 10.5%, once again afflicted by unsubstantiated accusations of malpractice in Europe. The market shrugged off the successful listing of its African retail businesses, STAR, at the end of September, which added R16 billion to its coffers and should have resulted in a re-rating of the rest of the group, which is now trading on a single earnings multiple and operates mainly in developed markets.

SIM equity strategy

The fund has 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. Many positions are in businesses with self-help stories at play and where the value unlock is within management’s control. An example of this is the managed 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 overly bearish.

Equity outlook

Given estimates of earnings growth, the SA equity market currently trades at a 15 times one-year forward earnings (PE) multiple. Naspers now makes up 21.2% of the SWIX Index. If we exclude Naspers, then the forward PE of the market is about 13. Based on this the SA equity market is fairly priced. According to a bottom-up valuation of the SWIX, where we aggregate the fair values of its constituents as calculated by the SIM analysts, SA equities are undervalued. This is as a result of:

  1. improved earnings prospects of the resources companies given higher commodity prices;
  2. the derating of companies with domestic earnings; and
  3. an increase in the valuation of Naspers, given earnings surprises from Tencent; which is its largest holding.

From a pragmatic perspective we acknowledge that there is a clear element of myopia ruling our markets at this point in time. Short-term news and lack of investor confidence have an amplified impact on the markets and there is a clear aversion to bad news. Counters which have delivered results below expectation are being marked down heavily and a number of former market darlings have suddenly been marked down by investors. For instance, Brait, which was seen as a proxy to investing alongside billionaire Christo Wiese abroad, is down 38.1%, while Wiese’s other investment, Steinhoff, is also down 15% year-to-date. If we contrast the fortunes of overseas markets to our market, it is clear that investor confidence is an important behavioural factor driving investment markets. As value investors, our investment process is geared to protect our clients’ capital and exploit such opportunities by focusing on the long-term fundamentals.

International

Available data shows that the global economic expansion continued in the third quarter with real GDP growth around a trend-like 3%. In the US, the Fed kept interest rates steady but announced its decision to begin the process of balance sheet normalisation from October. Economic activity remained robust with healthy retail sales growth and consumers supported by the continued job creation and increasingly significant wealth effects on the back of the equity market rally and steady growth in average house prices. President Trump’s proposals for significant tax cuts created excitement in the last week of September. Although scant on detail, the proposals promised to simplify the tax code, drop the corporate tax rate, primarily benefit lower and middle income households and businesses among a host of other promises. The market reacted very positively to the news! The Eurozone gained further momentum, led by a resurgent industrial sector, with some support from consumer spending. The European Central Bank kept interest rates unchanged in September but President Draghi countered this dovish move by stating the Governing Council will be deciding on the future of the quantitative easing program in October. In Germany, Angela Merkel was re-elected as Chancellor, but the CDU/CSU and SPD parties experienced material loss of support as the euro-sceptic/right-wing AfD Party gained ground amongst voters, implying a coalition government will need to be formed. Amongst emerging market economies, available data suggests China’s growth momentum slowed in the third quarter, illustrated by a material decrease in the country’s net trade balance, amidst relatively less supportive domestic fiscal and monetary policies.

For the quarter in dollar terms, the MSCI Emerging Markets Index (MSCI EM) recorded a return of 8.0% while the MSCI World Index returned 4.8%. This brings total MSCI EM outperformance over the World Index for the 12 months to September to 4.3%. Global bonds as measured by the Bloomberg Barclays Capital Aggregate Bond Index rose 1.8% over the quarter. The local currency closed the quarter at R13.50 to the US dollar from R13.10 at the end of June. After savouring a period of relative stability the rand weakened over the latter part of the quarter mostly driven by shifts in investors’ perceptions of the major currencies, given the rising expectations that most major central banks will be starting to normalise their monetary policies after more than a decade of having extraordinarily stimulatory measures.

Looking to our international universe, we retain our preference for international equities, in particular European equities, from a relative value perspective, as well as select international property stocks. The US market looks expensive on most valuation measures such as Tobin's Q ratio (EV/replacement value), stock market capitalisation to GDP ratio and the Shiller PE ratio, which are all at about 1.5 times their standard deviation above their long-run average values. Even though European equity markets have performed well relative to the MSCI World Index, using valuation measures such as forward PE, Shiller PE and price-to-book ratios, Europe is still a fair degree cheaper. We therefore retain our overweight Europe position in our global equity portfolio. Our select global property exposure currently has an average dividend yield of 5.5%, which remains attractive, especially relative to global bonds and cash.

Bonds

The rand weakened over the quarter from R13.10/$ to R13.50/$ at the end of September. The benchmark SA 10-year bond yield declined from 8.77% to 8.55% over the quarter. This move was supported by SA’s high real yields, expectations of a lower inflation trajectory into year-end and the global backdrop. The SA Reserve Bank (SARB) surprised the markets by delivering a repo rate cut of 0.25% to 6.75% at its July meeting. The decision was supported by inflation reducing from 5.4% to 5.1% in June with further moderation expected. The SARB was also surprised at the very weak growth outcome of the first quarter of -0.6%. In an unexpected move again, the SARB’s Monetary Policy Committee (MPC) left the repo rate unchanged at 6.75% (prime at 10.25%) at its September meeting with three members voting for a cut, and three members voting for unchanged rates. The MPC’s tonality was hawkish and, although unanticipated by the market, does confirm and complement its basis of data-dependence. Given the possibility of further credit rating downgrades, growth disappointments, further political uncertainty and a potential impact on the currency and foreign capital flows, the SARB would be loathe to cut too aggressively to prevent compressing real rates. The combination of low growth and low inflation breeds an environment conducive to interest rate cuts. However, we believe that the current loosening cycle will remain shallow and this, together with a lack of confidence on the part of consumers and businesses, is unlikely to boost growth meaningfully. The front-end of the yield curve re-priced aggressively higher, leaving the curve flatter after many months of steepening. For the quarter to September, nominal bonds returned 3.8%, cash returned 1.8% and inflation-linked bonds added 1.2%. For our funds, cash continued to be enhanced through investments in select corporate debt as specific opportunities presented themselves and at yield pick-ups well above money market rates. Nominal bonds were slightly lower from a corporate maturity perspective during the quarter.

During the third quarter, primary market credit auctions received strong support with auctions clearing well below price guidance on the back of significant investor demand. Looking at the volume of bids submitted and range of bid levels, there is a substantial amount of capital available and looking for relatively fewer available opportunities. Issuance was dominated by the banks and financials, which made up more than half of the total. Some of the issuance was driven by regulatory capital considerations as a substantial amount of subordinated paper was placed, both Tier 2 debt and Additional Tier 1 debt. Subordinated issuances were well supported and cleared at significantly lower levels compared to where the paper was placed previously. Securitisations and corporates made up for most of the balance of the issuance, with state-owned enterprises (SOEs) lagging behind compared to previous years. Spreads on SOEs continue to trend higher and trade at elevated levels, as investor sentiment and governance issues have continued to weigh on the sector.

We believe credit to be fairly priced in general, with some corporate credit counterparties on the expensive side, but there are some specific opportunities that are attractive from both a valuation and quality measure. We believe that South African fixed-income assets remain an attractive investment to consider if compared to the domestic bonds of similarly rated countries. Locally, we see real yields of between 2% and 3% on offer against a backdrop of a declining inflation environment. That said, although local bonds are attractively valued, we believe that they could offer better value into year-end given the risk events at play. We prefer nominal bonds to inflationlinked bonds on a relative value basis.

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