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Hamilton van Breda
Head of Retail Sales
November 2012
Senate Group
TAA Philosophy, Process
and People
We are prudent value investors
Valuation based approach to pricing of assets
• Use known facts (historical and current data), rather than trying to
forecast the future
• Use long run anchors of where assets should be priced and buy when
the current valuation is below the fair value.
Construct portfolios on risk conscious basis
Consistent philosophy & unemotional application of process will lead to
consistent performance
Our Investment philosophy
Asset Allocation in practice
First step – establish a long run fair value for each asset class
4
Long Run Equilibrium Assumptions for South African Assets
5 Source: Prudential Portfolio Managers
Increasing risk
Incre
asin
g R
eal
Retu
rns
Term
premium
Inflation
premium
Default
premium
Property risk
premium
Equity risk
premium
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Cash Index-linked Bonds
Government Bonds
Corporate Bonds (A)
Property Equity
2.50 2.75
3.50
5.00
6.75
8.00
Asset Allocation in practice
First step – establish a long run fair value for each asset class
Second step – compare the current valuation to these long run anchors
• Looking for significant relative mis-pricing of assets
• Identifying situations where:
• perceptions of risk temporarily shift
• price moves exaggerate fundamental developments
• fundamental expectations themselves subject to biases
6
Current SA returns vs. equilibrium
Source: Prudential Portfolio Managers – 05.11.2012
Inc
rea
sin
g R
ea
l re
turn
s
Increasing risk
Investment Process Overview
The local Asset Allocation team, in conjunction with Prudential’s global teams, decides on
exposure to individual markets, asset allocation, government vs corporate bonds and currencies
Asset Allocation Team
Marc Beckenstrater
David Knee
Michael Moyle
Albert Arntz
Grace Debeila
Bi-weekly Asset
Allocation
meetings
Ad-hoc discussions
in response to
market movements
Quarterly GMF
meetings in
London
Intra-quarterly
teleconferences
with London and
Singapore
Global
Tactical Asset Allocation Team
David Knee
Head of Fixed Income
Head of TAA
Marc Beckenstrater
Chief Investment Officer
Michael Moyle
Head of Real Return
Albert Arntz
Portfolio Manager
Grace Debeila
TAA Analyst
South African Team
Kelvin Blacklock CIO, GAA
Joanna Ong
Investment Director
Riki Frindos
Investment Director
Nicholas Ferres
Investment Director
Rajagopal Raman
Quantitative Analyst
Amod Shah
Junior Portfolio Manager
Florence Yap
Product Manager
Asian Team
John Betteridge
Director of Portfolio Management
Group
Dave Fishwick
Head of Global Macro Team
Tony Gaughan
Managing Director
Head of Global Macro Team
Eric Lonergan
Macro Team Member
Jenny Rodgers
Global Equity Analysis
Juan Nevado
Director of Strategy and Economics
Tony Finding
Analyst
London Team
Global Asset Allocation Specialists
Market Valuations
Growth pessimism at multi-decade high
UK Earnings Yield versus Real Required Rate of Return on 10Y Government Bond
Source: Datastream , Factset and Bloomberg – 30.09.2012
Investors paying very high price for supposed risk free assets
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
31-J
an
-90
31-J
an
-91
31-J
an
-92
31-J
an
-93
31-J
an
-94
31-J
an
-95
31-J
an
-96
31-J
an
-97
31-J
an
-98
31-J
an
-99
31-J
an
-00
31-J
an
-01
31-J
an
-02
31-J
an
-03
31-J
an
-04
31-J
an
-05
31-J
an
-06
31-J
an
-07
31-J
an
-08
31-J
an
-09
31-J
an
-10
31-J
an
-11
31-J
an
-12
Re
al Y
ield
%
UK EY1 UK 10yr Real Bond Yield
Current global valuation relative to equilibrium
Source: M&G Investments and Prudential Portfolio Managers – 05.11.2012
FTSE/JSE All Share Index Price and Earnings
Source: I-Net Bridge, Bloombergs, Prudential Estimates
World and SA Price to Book
Source: Bloomberg 30.09.2012
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Ja
n 8
0
Ja
n 8
1
Ja
n 8
2
Ja
n 8
3
Ja
n 8
4
Ja
n 8
5
Ja
n 8
6
Ja
n 8
7
Ja
n 8
8
Ja
n 8
9
Ja
n 9
0
Ja
n 9
1
Jan 9
2
Ja
n 9
3
Ja
n 9
4
Ja
n 9
5
Ja
n 9
6
Ja
n 9
7
Ja
n 9
8
Jan 9
9
Ja
n 0
0
Ja
n 0
1
Ja
n 0
2
Ja
n 0
3
Ja
n 0
4
Ja
n 0
5
Ja
n 0
6
Ja
n 0
7
Ja
n 0
8
Ja
n 0
9
Ja
n 1
0
Ja
n 1
1
Ja
n 1
2
SA Price to Book World Price to Book
Average annual long-term (>10year) Treasury yields
Source: BofA Merrill Lynch Global Equity Strategy; US Treasury Composite; Haver
2%
4%
6%
8%
10%
12%
14%
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Average: 5%
10/10/2012
2.6%
SA Corporate Bond Valuations
Source: Standard Bank
SA Bond Valuation
Source: Bloomberg
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Ja
n 0
1A
pr
01
Ju
l 01
Oct 0
1Ja
n 0
2A
pr
02
Ju
l 02
Oct 0
2Ja
n 0
3A
pr
03
Ju
l 03
Oct 0
3Ja
n 0
4A
pr
04
Ju
l 04
Oct 0
4Ja
n 0
5A
pr
05
Ju
l 05
Oct 0
5Ja
n 0
6A
pr
06
Ju
l 06
Oct 0
6Ja
n 0
7A
pr
07
Ju
l 07
Oct 0
7Ja
n 0
8A
pr
08
Ju
l 08
Oct 0
8Ja
n 0
9A
pr
09
Ju
l 09
Oct 0
9Ja
n 1
0A
pr
10
Ju
l 10
Oct 1
0Ja
n 1
1A
pr
11
Ju
l 11
Oct 1
1Ja
n 1
2A
pr
12
Ju
l 12
Oct 1
2
SA10 less Equilibrium Std Dev -1 Std Dev +1
SA Yield Curve Slope
Source: I-Net Bridge
10Y – cash
30Y – cash
30Y – 10Y
Breakeven Inflation
Source: I-Net Bridge
R208 - R197
Inflation
Inflation Linked Bond Yields vs Equilibrium
Source: I-Net Bridge and Prudential Portfolio Managers 30.09.2012
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jan
02A
pr 0
2Ju
l 02
Oct
02
Jan
03A
pr 0
3Ju
l 03
Oct
03
Jan
04A
pr 0
4Ju
l 04
Oct
04
Jan
05A
pr 0
5Ju
l 05
Oct
05
Jan
06A
pr 0
6Ju
l 06
Oct
06
Jan
07A
pr 0
7Ju
l 07
Oct
07
Jan
08A
pr 0
8Ju
l 08
Oct
08
Jan
09A
pr 0
9Ju
l 09
Oct
09
Jan
10A
pr 1
0Ju
l 10
Oct
10
Jan
11A
pr 1
1Ju
l 11
Oct
11
Jan
12A
pr 1
2Ju
l 12
Inflation Linked Bond Yield
Prudential equilbruim for Inflation Linked Bonds
Global Credit Valuations Still Elevated
Source: Morgan Stanley, Moody’s, The Yield Book, NBER , Bloomberg/Merrill Lynch
US = 245
SA = 141
0
100
200
300
400
500
600
700
800
900
01 J
an 2
5
01 J
an 2
8
01 J
an 3
1
01 J
an 3
4
01 J
an 3
7
01 J
an 4
0
01 J
an 4
3
01 J
an 4
6
01 J
an 4
9
01 J
an 5
2
01 J
an 5
5
01 J
an 5
8
01 J
an 6
1
01 J
an 6
4
01 J
an 6
7
01 J
an 7
0
01 J
an 7
3
01 J
an 7
6
01 J
an 7
9
01 J
an 8
2
01 J
an 8
5
01 J
an 8
8
01 J
an 9
1
01 J
an 9
4
01 J
an 9
7
01 J
an 0
0
01 J
an 0
3
01 J
an 0
6
01 J
an 0
9
01 J
an 1
2
US BBB Spreads SA A Spreads
Performance
Source: I-Net Bridge
SA Listed Property Investment Case
PPM Multi-Asset class funds have recently sold property and purchased downside protection
After these events our funds are broadly neutral weight the asset class
(i.e. balanced marginally overweight and real return underweight)
Negative
• Absolute valuation expensive relative to historical levels
• Weak office property fundamentals (high albeit stable vacancy factors)
• Operating cost pressures
Positive
• Property return prospects look reasonable against cash
• Recovery in distribution growth expected in the coming year
• Stable or improving retail and industrial property fundamentals
SA Property Valuation
Source: INET Bridge, Prudential Estimates
Rand Real Effective Exchange Rate
Source: I-Net Bridge
70
80
90
100
110
120
130
140
150
160
170
De
c 6
9
De
c 7
0
De
c 7
1
De
c 7
2
De
c 7
3
De
c 7
4
De
c 7
5
De
c 7
6
De
c 7
7
De
c 7
8
De
c 7
9
De
c 8
0
De
c 8
1
De
c 8
2
De
c 8
3
De
c 8
4
De
c 8
5
De
c 8
6
De
c 8
7
De
c 8
8
De
c 8
9
De
c 9
0
De
c 9
1
De
c 9
2
De
c 9
3
De
c 9
4
De
c 9
5
De
c 9
6
De
c 9
7
De
c 9
8
De
c 9
9
De
c 0
0
De
c 0
1
De
c 0
2
De
c 0
3
De
c 0
4
De
c 0
5
De
c 0
6
De
c 0
7
De
c 0
8
De
c 0
9
De
c 1
0
De
c 1
1
De
c 1
2
Risk – Return
Source: INet Bridge, Prudential
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0%
Annualised Standard Deviation
An
nu
alis
ed R
eal R
etu
rn
SA Cash SA ILBs
SA Property
SA Equity
SA Bonds
Foreign Equity
Foreign Bonds
Foreign Cash
Balanced
Fund
Inflation
Plus Fund Enhanced
Income
Fund
Dividend Maximiser
Fund
Prudential Enhanced Income
Fund
Enhanced Income Strategic Benchmark
Asset Class
Strategic Asset
Allocation
Indicative
Ranges
SA Cash 50% 0 to 100%
SA ILBs 10% 0 to 100%
SA Government Bonds 10% 0 to 100%
SA Corporate Bonds 15% 0 to 75%
SA Property 5% 0 to 25%
International Fixed Income 10% 0 to 20%
of which:
Government Bonds 5% 0 to 20%
Corporate Bonds 5% 0 to 20%
International Cash 0%
Equity 0% 0 to 10%
Total 100%
Source: Prudential Portfolio Managers
Enhanced Income Fund Performance (after fees) to 30 September 2012
Fund ALBI
1-3 Years STEFI
3 months 3.6% 1.7% 1.4%
6 months 6.7% 4.7% 2.8%
12 months 11.5% 9.2% 5.6%
3 years 10.6% 8.9% 6.3%
Since inception 1 July 2009 (ann.) 10.7% 8.8% 6.2%
Source: Prudential Portfolio Managers, Morningstar
Enhanced Income Fund Asset Allocation as at 30 September 2012
Source: Prudential Portfolio Managers
48%
12%
2%
23%
5%
9%
0% 1%
50%
10% 10%
15%
5%
10%
0% 0%0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
SA Cash SA ILBs SA GovernmentBonds
SA CorporateBonds
SA Property Foreign Bonds Foreign Cash Foreign Equity
Fund Asset Allocation Strategic Asset Allocation
FR
N
35%
Prudential Inflation Plus Fund
Inflation Plus Fund Objectives
Prime objective
• Outperform inflation by 5% per annum before fees over rolling 3
year periods
Secondary objective
• Aim for no capital loss over a rolling 12 month period.
(Best efforts; not guaranteed)
*Objective CPI+6% until 31 July 2009, CPI+5% from 1 August 2009.
Inflation Plus Fund
Performance since inception to 30 September 2012
R10
0 In
itia
l In
ve
stm
en
t
494.0
15.1%
323.4
10.9%
187.3
5.7%
80
120
160
200
240
280
320
360
400
440
480
Jun-0
1
Sep-0
1
De
c-0
1
Ma
r-02
Jun-0
2
Sep-0
2
De
c-0
2
Ma
r-03
Jun-0
3
Sep-0
3
De
c-0
3
Ma
r-04
Jun-0
4
Sep-0
4
De
c-0
4
Ma
r-05
Jun-0
5
Sep-0
5
De
c-0
5
Ma
r-06
Jun-0
6
Sep-0
6
De
c-0
6
Ma
r-07
Jun-0
7
Sep-0
7
De
c-0
7
Ma
r-08
Jun-0
8
Sep-0
8
De
c-0
8
Ma
r-09
Jun-0
9
Sep-0
9
De
c-0
9
Ma
r-10
Jun-1
0
Sep-1
0
De
c-1
0
Ma
r-11
Jun-1
1
Sep-1
1
De
c-1
1
Ma
r-12
Jun-1
2
Sep-1
2
Pru Inflation Plus Objective Inflation
Inflation Plus Fund Quarterly Returns
Source: INet, Prudential Portfolio Managers
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Q301
Q102
Q302
Q103
Q303
Q104
Q304
Q105
Q305
Q106
Q306
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111
Q311
Q112
Q312
Prudential Inflation Plus Fund Equity Bonds
Fund Equity Bonds
Return 15.3% 16.4% 11.0%
Volatility 6.0% 18.1% 6.7%
Inflation Plus Fund
Asset Allocation as at 30 September 2012
13%
16%
8%
14%
9%
32%
8%
23%
8% 8%
15%
18%
26%
4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
SA Equity Foreign Equity SA Property SA Bonds Foreign Bonds SA IL Bonds SA Cash
Fund Asset Allocation Strategic Asset Allocation
Total Equity 28.9%
Total Foreign 24.4%
Prudential Dividend Maximiser
Fund
A rigorous, consistent process across asset classes which exploits mispricing opportunities
prudently.
Stages
Investment process
1. Value Assessment
2. Understanding
the Fundamentals
3. Portfolio Construction
4. Monitor and Control
Asset
Allocation Equity Bonds
Equilibrium
anchors Valuation Screens
Spreads
Inflation
Real return
analysis, inflation,
risk premium
Long run ROE,
ROA, margins
(DDM)
Balance Sheet
Cash Flow
analysis
Exposure to risky assets
Unintended Bets and Drift
We have 2 objectives in the Dividend Maximiser
1. To provide our clients with a dividend yield greater than that of the market
2. To grow our clients capital and dividends in-line with the market
Standard Bank – An example of the type of company that meets our objectives,
at the right price
Source: I-Net Bridge
DY = 2%
DY = 3%
DY = 4.5%
Standard Bank Share Price
Standard Bank in 1984
Dividend = R 4.50
Div Yield = 2 % = Implied Price of R225
Div Yield = 3 % = Implied Price of R150
Div Yield = 4.5% = Implied Price of R100
-7000
3000
13000
23000
33000
43000
53000
63000
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
JSE and Dividend Growth
Over long periods, reinvested dividends are the
major part of your return.
R100 invested in 1969 in the JSE will have
grown to over R62 000 in 43 years, the majority
of which is dividends.
Source: Prudential Portfolios Managers
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
Jul-9
9
De
c-9
9
Ma
y-0
0
Oct-0
0
Ma
r-01
Aug-0
1
Jan-0
2
Jun-0
2
No
v-0
2
Apr-0
3
Sep-0
3
Feb
-04
Jul-0
4
De
c-0
4
Ma
y-0
5
Oct-0
5
Ma
r-06
Aug-0
6
Jan-0
7
Jun-0
7
No
v-0
7
Apr-0
8
Sep-0
8
Feb
-09
Jul-0
9
De
c-0
9
Ma
y-1
0
Oct-1
0
Ma
r-11
Aug-1
1
Jan-1
2
Jun-1
2
Price I
ndex
Inflation ALSI General Equity Unit Trust Mean Prudential Dividend Maximiser A
Cumulative Performance Since inception
1034
19.6%
681
15.8%
727
16.4%
207
5.7%
Source: Morningstar and Prudential Portfolio Managers
Excess Return per year = 3.8%
Inflation
General
Equity Unit
Trust Mean
JSE All Share
Dividend Maximiser
Risk (annualised standard deviation %)
An
nu
al re
turn
(%
)
The risk benefits of a focus on dividends
Source: Morningstar
Domestic Equity Value Sector - 5 years to 30 September 2012
Cadiz Mastermind A Investec Value R MET Equity Value A
Momentum Value A
Nedgroup Inv Value R
Old Mutual Value R
Prudential Dividend Maximiser A
Sasfin Value
SIM Value R
STANLIB Value A
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0%
Sector relative performance
Source: I-Net Bridge
Dividend Maximiser Fund Composition – Sector as at 30 September 2012
Source: Prudential Portfolio Managers
Top Holdings and Actives as at 30 September 2012
Top 10 Holdings
MTN GROUP LTD 8.5%
SASOL LTD 7.9%
BHP BILLITON PLC 6.9%
ANGLO AMERICAN PLC 5.8%
OLD MUTUAL PLC 5.1%
STANDARD BANK 4.9%
BRITISH AMERICAN TOBACCO 3.9%
NASPERS LTD-N 3.5%
ABSA GROUP LTD 3.5%
RICHEMONT-DR 3.3%
53.3%
Top 5 Overweight Positions
METROFILE
OLD MUTUAL PLC
ABSA GROUP LTD
GOLDFIELDS LTD
STANDARD BANK
Top 5 Underweight Positions
FIRSTRAND LTD
ANGLOGOLD ASHANTI
REMGRO LTD
NAMPAK LTD
STEINHOFF INTL
Fund Holdings Summary
• Resources
• Maintain preference for diversified mining companies over single commodity stocks
» overweight Anglo American, BHP Billiton, Exxaro
» underweight Kumba Iron Ore, ACL, ARI, ASR
• Fund remains underweight platinum
» holding in Lonmin
• Overweight Mondi
• Overweight Sasol
• Financials
• Fund has moved overweight domestic banks
» active positions in ABSA and Standard Bank
» overweight to Nedbank taken through Old Mutual
• Maintain overweight positions in global financials Investec and Old Mutual
Fund Holdings Summary
• Industrials
• Core positions in cheap interest rate sensitive stocks such as Imperial, Supergroup and AVI
• Expensive Shoprite, Massmart and Truworths
• Overweight Richemont
• Special situation: Metrofile / Adcock / Netcare
• Selection of recovery stocks Sun International and selected construction stocks
Disclosure Statement
Dividend Maximiser relative to Satrix Divi Plus
Source: I-Net Bridge
How does the Prudential Dividend Maximiser Fund differ from the
Dividend Plus Index?
FTSE/JSE Dividend Plus Index:
• FTSE/JSE launched the Dividend Plus Index in August 2006. The Dividend Plus is a
yield weighted index designed to select and measure the performance of the higher
yielding shares on the JSE.
• The index selects the top 30 high yield instruments based on a one year forecast
dividend yield.
Prudential Dividend Maximiser Fund:
• Considers not only the forecast dividend yield, but also the cash generating ability of
a company and it’s valuation.
• Position sizes in the fund are then calculated after considering these factors, and
based off the General Equity Unit Trust Mean. We do NOT weight according to
dividend yield.
