Quarterly Report – 30 June 2015

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CONTENTS

FUND DEVELOPMENTS ...................................................................................... 2

MARKET COMMENTARY .................................................................................... 3

PERFORMANCE .................................................................................................. 5

ASSET ALLOCATION ........................................................................................... 6

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FUND DEVELOPMENTS

The Verso branded unit trust funds were renamed to Naviga. This was implemented with the exciting new changes that took place during the past year. We implemented the investment philosophy of Boutique Investment Partners (BIP) and this should improve the composition of the funds going forward. There were no major changes within the Verso BCI Income Planner. All the underlying fund managers have a flexible mandate which means they can actively manage the asset allocation and the bond duration. 15% of this fund is invested offshore to diversify the credit risk of the fund and most of this currency risk is hedged. The currency hedges also enhance the return of the fund due to the interest rate differential between South Africa and other developed markets. Naviga BCI Secure Growth FoF and Naviga Balanced Growth FoF are both underweight in local equities and overweight in offshore equities. There was a slight increase in the duration of the bond exposure with the inclusion of the STANLIB Bond Fund. Ashburton Indian Equity is one of the latest investment opportunities identified by Boutique Investment Partners and the current reforms in this economy should support the equity prices in India. Sesfikile Global Property was included during the quarter to complement the existing global property fund managed by Reitway. The GinsGlobal World Index is one of the new funds within Naviga BCI Secure Growth. This is a passive fund that tracks the global equity index. Naviga BCI Balanced Growth already contains a passive, or so called “smart beta”, exposure via the Satrix and Stylo funds. There were no changes within the Naviga BCI SA Equity or the Naviga BCI Equity FoF. The restructuring of the BCI Best Blend Global Equity FoF was still in process at the end of the first quarter and was finalised during April 2015. The diversification of this fund was improved by inclusion of both emerging markets and African stocks. The Ashburton Indian Equity Fund was a new addition to this BCI Best Blend Global Equity FoF. The structural reforms in this country should support their equity prices in the future. Historically, this equity market has achieved one of the highest returns on equity ratio (ROE). With increasing evidence that this economy has entered a new investment cycle, expectations are for the market to experience a positive mean reversion within its ROE metric. This should support healthy earnings growth going forward. Most independent investment strategy research houses have upgraded their view on India to a buy on this basis. The table below contains a summary of the changes during the second quarter of 2015:

Fund Asset Allocation Fund Selection

Naviga BCI Income Planner FoF None None

Naviga BCI Secure Growth FoF Slight increase in the duration of bonds and the exposure to property

New funds: STANLIB Bond Prudential Enhanced SA Property GinsGlobal World Index Fund Ashburton Indian Equity Sesfikile Global Property

Naviga BCI Balanced Growth FoF Slight increase in the duration of bonds and the exposure to property

New funds: STANLIB Bond Prudential Enhanced SA Property Ashburton Indian Equity Sesfikile Global Property

Naviga BCI SA Equity None None

Naviga BCI Equity FoF None None

BCI Best Blend Global Equity FoF None New fund: Ashburton Indian Equity

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MARKET COMMENTARY The chart below is sourced from independent investment strategy research house, the Bank Credit Analyst (BCA). It suggests that the American equity market (S&P 500) is experiencing the third longest bull market without a correction of at least 10% since 1932. While this should not be a concern when underlying valuations are attractive, our recent in-depth local and offshore investment idea evaluation framework, suggests that we are currently in a market environment where it remains very difficult to find attractive absolute valuations in any mainstream asset class across the globe. Most investment opportunities are only attractive on a relative basis, suggesting the risk of losing capital remains high. Our current view is that, against such a backdrop, any marginal change in fundamental information can easily act as a catalyst for either continued valuation overshoots, or a meaningful de-rating. Our view is that capital preservation should remain the cornerstone of any investment strategy in the current market environment.

Local fixed income and property The bond market experienced a poor year to date performance, both locally and offshore. The local All Bond Index (ALBI) returned 1.55% for the first halve of the year, which is just close to half the return achieved by local cash, and a quarter of the return achieved by local listed property over the same period. The sanctions against Iran were removed after they agreed to reduce their nuclear plans. This will result in Iran resuming its oil exports. This will increase oil supply during a time when inventory levels are at record high levels, which will likely exert further downward pressure on oil prices. The recent oil price weakness could be the result of this. The combination of weakening oil prices, and a generally weak commodity index, is largely positive for inflation and consequently inflation expectations. Should inflation expectations reverse downwards, this will likely be a catalyst for a continuation in the bond market strength and continued equity market valuation overshoots. Local Equity Market Local equities, as reflected by the All Share Index, held up well in the weakness experienced over the past quarter. At a sector level, the industrial sector, despite currently having the most expensive underlying valuations, turned out to be the more defensive sector and biggest driver of local equity performance over the past quarter. The mid cap sector was the weakest performing sector, largely the result of the dominance of local listed property stocks within this index. The resources sector continued to extend its losses with the one year performance now reflecting a loss of just under 30%. Earnings within the resources sector recently experienced some sharp negative revisions and are now at their lowest levels over the past decade. Persistent weak global aggregate demand, excess supply and prevailing US Dollar strength, among several other factors, make it difficult to call this the bottom of earnings cycle. Additionally, the current extreme

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level of performance divergence between defensive equity sectors and cyclical equity sectors makes it very challenging to position aggressively against this sector. This is especially the case when alternative equity sectors do not have meaningfully more attractive underlying valuations. Relative to a large selection of major equity markets across the globe, the local industrial sector as well as the local financial sector currently stand out as having the most attractive return on equity metrics. This reflects superior levels of profitability for companies operating in these sectors, and possibly suggests that, despite valuations looking expensive, they could continue to trade at a premium for extended periods of time although they run the risk that the profitability is not sustainable. Offshore Currency Markets Challenging local fundamentals have resulted in persistent Rand weakness relative to most of the major currencies. Over the past quarter, the most notable losses were experienced relative to UK sterling as well as the Euro. During the past year, the Rand depreciated by 14% against the US Dollar. Barring a sudden and significant deterioration of underlying fundamentals within these economies, this trend of Rand weakness will likely persist into the foreseeable future. This will likely continue to act as a buffer against potential losses experienced by underlying offshore assets whose valuations are increasingly becoming less and less attractive. Offshore-developed Markets One of the key drivers of market sentiment, in addition to continued anxiety around the US Fed interest rate decision, was the Greek bail out debacle. Greece tried to secure additional funding from the IMF as well as the ECB on terms that were much opposed by the public. The Greek government arranged a referendum in which the citizens rejected the terms. The “No Vote” was not appropriately anticipated by the market and turned out to be a catalyst for a mild correction across most capital markets. Within developed markets, the German DAX was the weakest performer with a loss of just under 5% for the quarter. Despite the IMF as well as the ECB agreeing in principle to extend additional support to the Greek government, subsequent to the referendum held on the 5th of July, it is highly likely that markets will continue to reflect anxiety around Greece for much longer than is anticipated. On a more positive note however, the constructive response by the IMF, the ECB as well as European policy makers suggests that this is unlikely going to be a systemic risk both within the Eurozone as well as across the globe. This could be the reason for the recent relief rally across most European equity markets. Offshore Emerging Markets Of the major emerging equity markets, the BRIC – Brazil, Russia, India and China, the Indian equity market posted the weakest return with -2% for the quarter. The BIP Investment Strategy initiated an allocation to this equity market into this mild weakness encouraged by relatively attractive valuations as well as very supportive structural reforms occurring within this economy. These reforms are designed to transform the underlying Indian economy from being consumer driven to being investments driven. This is in contrast to China which is restructuring their underlying economy from being investments driven to being consumer driven. Putting these differences in policy focus aside, both policy initiatives are expected to lay the foundation of supportive tailwinds to economic growth which will likely see current return on equity metrics becoming even more superior, relative to other equity markets across the globe. This combination of constructive structural reforms together with decent fundamental valuations has resulted in these two investment opportunities being retained as our current high conviction investment ideas. In addition to supportive structural economic reforms are other factors such as lower oil prices as well as the overall weak commodity prices that will inflate corporate margins and improve corporate profitability and thus earnings growth. This is in contrast to the US equity market where a persistently strong US Dollar amongst other factors, such as the imminent hike in interest rates, are exerting negative pressure on corporate margins. Offshore Property Rising bond yields across the globe were the main headwind to this asset class over the past quarter. This saw developed listed property markets pull back by close on 8%, and in the process resulting in meaningfully improved yields and thus valuations. The FTSE EPRA/NAREIT Developed Rental Index for example is currently trading at an attractive dividend yield of 5% in US Dollars. This is a very attractive yield in this current low interest rate environment and should continue to provide strong fundamental support for this asset class.

Source: Boutique Investment Partners

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PERFORMANCE TABLE A: MARKET RETURNS TO 30 JUNE 2015

Asset Class Second Quarter: 2015 12 Months

JSE All Share -0.20% 4.79%

Resources -4.88% -28.84%

Financial -2.28% 20.87%

Industrial 1.65% 14.04%

SA Bonds -1.40% 8.21%

SA Property -6.23% 26.98%

SA Cash 1.47% 5.94%

CPI 2.60% 4.57%

International Equity (USD) 0.31% 1.43%

International Bonds (USD) -1.18% -7.09%

International Cash (USD) 0.01% 0.02%

Rand/Dollar 0.18% 14.09%

TABLE B: FUND RETURNS TO 30 JUNE 2015

Portfolios

Second Quarter 2015

12 Months 3 Year¹ Since Inception¹

Fund Benchmark Fund Benchmark Fund Benchmark Fund Benchmark

BCI Money Market 1.57% 1.47% 6.14% 5.94% 5.55% 5.42% 6.51% 6.32%

Naviga BCI Income Planner 1.43% 1.56% 6.25% 6.27% 6.60% 5.66% 8.08% 7.34%

Naviga BCI Secure Growth 0.58% 3.29% 6.79% 7.57% 9.64% 8.57% 10.20% 8.76%

Naviga BCI Balanced Growth -0.53% 3.51% 6.57% 8.57% 11.78% 9.57% 12.70% 9.88%

Naviga BCI SA Equity -1.42% -0.12% 5.15% 10.20% 10.18% 20.64% 11.26% 16.94%

BCI Best Blend Global Equity 0.47% 0.49% 8.21% 15.72% 25.09% 30.34% 12.63% 15.44%

Naviga BCI Equity 0.05% 0.08% 6.51% 11.79% 12.54% 23.27% 12.00% 23.55%

1) Returns longer than 12 months are annualised

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ASSET ALLOCATION

NAVIGA BCI INCOME PLANNER

31 March 2015 30 June 2015

NAVIGA BCI SECURE GROWTH

31 March 2015 30 June 2015

NAVIGA BCI BALANCED GROWTH

31 March 2015 30 June 2015

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NAVIGA BCI SA EQUITY

31 March 2015 30 June 2015

BCI BEST BLEND GLOBAL EQUITY

31 March 2015 30 June 2015

NAVIGA BCI EQUITY

31 March 2015 30 June 2015

*The Naviga BCI SA Equity Fund, as well as the BCI Best Blend Global Equity Fund, are used as equity blocks within other Naviga funds.

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Disclaimer: Collective investments are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to future performance. Collective investments are traded at ruling prices and can engage in scrip lending. Forward pricing is used. A schedule of fees and charges and maximum commissions is available on request from company/scheme. Commission and incentives may be paid and if so, are included in the overall cost. This Fund may be closed to new investors. A fund of funds collective investment may invest in other collective investments, which levy their own charges, which could result in a higher fee structure for these portfolios. Graphs and performance figures are sourced from Morningstar for lump sum investments including income distribution, at NAV to NAV basis and does not take any initial fees into account. Income is reinvested on the ex-dividend date. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Collective investments’ prices are calculated on a Net Asset Value (NAV) basis and auditors’ fees, bank charges and trustee fees are levied against the portfolio. The portfolio manager may borrow up to 10% of market value of the portfolio to bridge insufficient liquidity as a result of the redemption of participatory interests.

Naviga Solutions (Pty) Ltd is an authorised financial services provider, FSP 381.

Directors: C. Burger, N. Burger • Reg. no. 2001/005392/07 • Catnia Building, Bella Rosa Village, Bella Rosa Street, Bellville, 7530 t: +27 (0)21 007 1737 • f: +27 (0)86 502 2506 • e: info@naviga.co.za • www.naviga.co.za