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ContentsHow our reckless conservatism could
ruin our retirement 2
Room for thought … 4
Economic Review 6
South African Money Market 10
International 12
Asset Allocation 14
Equities 16
Bonds 19
Smoothed Bonus Products 21
Product Information 23
Sanlam Progressive Smooth Bonus Fund 25
Record of Proxy Voting 28
Governance Structure 34
Financial Strength 36
Smoothed Bonus – Roles 37
Further Information 38
2
How our reckless
conservatism
could ruin our
retirementDanie van Zyl
Head: Smooth Bonus Centre of Excellence
Sanlam Employee Benefits: Investments
Many South Africans are buckling down and becoming increasingly cautious around all money matters
including investments. Given all the negative headlines in the media, it may make complete sense. However,
from a long-term saving perspective, it doesn’t. Retirement fund members, especially those with many years
before retirement, may think that by investing conservatively, mostly in cash and money market portfolios, they
are protecting themselves. In reality they may be recklessly impairing their retirement savings goals. We refer
to this phenomenon as “reckless conservativism”. Reckless conservatism can have big negative implications
for retirement down-the-line. So, somehow, South Africans must be bolder and fight a natural inclination to risk
aversion.
It doesn’t take much deep diving to find that South Africans are struggling. A quick landscape barometer paints
a depressing picture of imminent retrenchments and high levels of indebtedness.
A study from TymeBank suggests 76% of South Africans are out of money by the middle of the month.
When times get tough like this, many South Africans instinctively react by becoming conservative with their
money.
Danie van Zyl, Head of Guaranteed Investments for Sanlam Employee Benefits, says, “Our recently published
Benchmark Survey showed that South Africans’ financial resilience has been steadily decreasing for the last
three years. Additionally, the five-year return on the FTSE/JSE All Share Index has been muted at just 6.8%
pa. Our data shows that persistent poor investment returns and market volatilityleads to many South Africans
to overcompensate with reckless conservatism. This means that some retirement fund members, especially
younger members, aren’t invested aggressively enough in the market. Our surveys over the past few years
have also shown that members seldom re-evaluate their investment strategy and may therefore inadvertently
remain conservatively invested for many years, losing out on returns.”
Boitshepo Gaitate, a behavioural economist from Genesis Analytics, highlights loss aversion as one of the key
drivers behind this conservatism. “Given that we typically feel the sting of losses twice as strongly as we feel
the joy of equal gains, we tend to lean towards conservative investment choices.
Additionally, with volatile economic performance, the representa-
tiveness heuristic bias contributes to our unbalanced reaction to
changes in economic indicators. We are constantly falling into the
trap of believing that certain events are more heavily-linked to
investment performance than they actually are in reality.”
The implications of reckless conservatism.The biggest risk is not being able to save enough for retirement. An overly conservative portfolio severely
reduces the likelihood of decent returns because there’s limited market exposure. Van Zyl says cash,
especially, struggle to provide a meaningful real return over the long-term.
It is not only younger members who struggle with the temptation to be ultra-conservative. Members who at
retirement opt for a living annuity on average still have a 20 – 30 year investment horizon. Too many of
these members cannot stomach a market downturn and invest too conservatively in retirement.
So how do we overcome our risk aversion?Gaitate believes that it comes down to i) how investment journeys are positioned and framed, ii) increasing
the likelihood of closing any intention-action gap through the use of commitment devices, and iii) a bit of
handholding. “Positioning investment journeys from the standpoint of future losses if one does not stay the
course - as opposed to highlighting gains – makes for more impactful conversations around investment
behaviour and improves long-term investment perceptions. While many people intend to make better
provisions for retirement, affordability is often a barrier. In a TED talk by Daniel Goldstein, commitment
devices are outlined as good tools for encouraging behaviour change towards better choices.”
The power of reassurance should not be underrated. Sometimes, we need an external person like a
financial adviser to give us a little push to be bolder when it’s in our best interests. While South African’s
are struggling to push through a difficult landscape, their mental bandwidth to make the right investment
choices becomes increasingly limited, says Gaitate. Advisers have a key role to play in this regard.
Van Zyl agrees and adds that there are ways to combine a conservative and more aggressive approach,
which should satisfy our desire for conservatism plus the need for market exposure. “A Living Annuity is a
good example. One of the worries is that few of us know if the day we retire will coincide with a market
crash. If it does, a portfolio can lose 15%-20% of its value overnight. If you continue to draw a fixed
retirement income from the living annuity it will have a lasting negative effect and reduce the amount of
income you can withdraw over your lifetime. This is because you are selling more “cheaper” units in your
portfolio to fund your income, thereby reducing the number of units that are available to participate in a
subsequent market recovery. However managing your living annuity with a protection component
(portfolios protecting against negative investment markets) and a market-related Component (a selection
of moderate aggressive to aggressive portfolios) can reduce this risk. The strategy involves drawing your
retirement income from the protection component, which means it’s protected from any market volatility. It
also means the market-related component is not income-linked, so has time to recover and keep yielding
you real long-term returns.”
He says smooth bonus portfolios are increasingly being used by worried retirement fund members. “These
portfolios can give you the peace of mind to invest in growth assets such as equities and property as your
investments returns are “smoothed”. The benefit of smoothing is that members get stable, more
predictable returns, so you don’t suffer from short-term market volatility.”
How does smoothing work? It delivers stable returns through monthly bonuses. In periods of strong
investment performance, some of the underlying investment return is held back. This then supplements
bonuses in periods of lower growth. So, regardless of the market, returns are stable.
His last words to South Africans?
“Fortune favours the brave. Seek a trusted partner to be alongside you on the journey
and give you the reassurance you need. A financial adviser is the ideal person to guide
you to get more comfortable with risk.”
3
.
Room for thought …
Sustainable Investing
In less than three months the next decade will be ushered in. While it presents us with an opportunity to
examine the decade that has passed, it also allows us to look forward and consider which trends will
transform the local and global asset management industry. There is growing consensus that sustainable
investing is going to become a mainstream discipline and a key trend in the 20s. Regulators across the
world have already set their expectations for the industry’s players with requirements of greater
transparency, investment process integration and reporting. Sustainability factors have also shown
evidence of enhancing performance within integrated investment processes over those that do not, while
avoiding risks that may not have been avoided otherwise.
In June 2019 the Financial Sector Conduct Authority issued Guidance Notice 1 of 2019: Sustainability of
Investments and Assets in the Context of a Retirement Fund’s Investment Policy Statement. In conjunction
with Regulation 28 it states that a fund should consider all factors that may materially affect the long-term
performance of any asset it invests in. While environmental, social and governance (ESG) factors,
alongside economic drivers, headline the considerations that are heeded, they do not form the exhaustive
list. The Guidance Notice states that, in respect of domestic assets, ESG factors also relate to the
advancement of broad-based black economic empowerment. The expectations from the regulator are that
a retirement fund’s process will be able to test areas of evaluation, monitoring and ‘active ownership’ in
pursuit of its sustainable investment objectives.
There are various strategies that can be called on when implementing a sustainable investing framework.
Retirement fund trustees will require a complete understanding to select strategies that are fit for purpose:
• Negative screening: An investor purposefully filters out the companies/entities that they deem to have a
negative effect on society. This approach may exclude industries involved in tobacco, thermal coal,
arms or gambling. Norms-based screening is related in approach, but excludes companies that break
international conventions.
• ESG integration: This approach is the most commonly used. Traditional investment analysis and
decision making at the individual instrument level is augmented with ESG performance indicators.
Another related approach, the ‘best-in-class’ ESG overlay, tilts towards specific ESG scores relative to
the overall market or industry peers within a quantitative or index approach.
• Thematic investing: As the name suggests a specific sustainability theme is selected, such as climate,
housing or water, based on a financial/economic motive or clients’ need to align the portfolio with their
specific values.
• Impact investing: This approach places money with entities that intentionally target measurable social or
environmental projects with direct impact.
While the challenges are significant, the leading sustainable asset management practitioners will develop
an authentic and credible approach articulating how sustainability is rooted in their investment philosophy.
By Jason Liddle
Head of Institutional Distribution
Sanlam Investments
4
Evidence-based proof of its integration in their investment approach, process and outcomes should support
their credibility. ‘Active ownership’ is a key area within the framework where engagement, intervention and
voting act as the voice of the investor. While comprehensive proxy voting guidelines/policies and a
disciplined and robust engagement approach are the table stakes, influence over the decision making of the
company’s board is the ultimate desired outcome. Sanlam has continued to provide a respected ‘voice’ on
behalf of our clients for many years targeting better outcomes. rustees need to avoid thinly-resourced
functions that focus more on compliance and instead employ authentic practitioners that drive a mandate to
activate, enable and equip investment professionals in making better decisions, using a sustainable investing
lens. Sanlam Investments has and continues to invest in new tools and the right talent to harness ESG data
and drive our internal research. Asset managers will also look to differentiate themselves by expanding their
ESG investment process reach to all asset classes – an important requirement or expectation from the
regulator.
The much-publicised failures of corporate governance in certain South African companies have led to
significant and impaired losses shared by retirement fund members. The improved and focused lens of a
disciplined sustainability framework should limit the likelihood of a similar experience. Addressing the
domestic socioeconomic imbalances is another area in which sustainable (impact) investing can play a
strong role. At Sanlam Investments, we are committed to our investors in helping them achieve their
sustainable investing objectives.
5
EconomicReview
By Arthur Kamp
Chief Economist
Sanlam InvestmentsGlobal
The mature global economic expansion battled to
maintain momentum in the third quarter of 2019.
Industrial production remained stagnant, while the
global services PMI data suggest services activity
has softened too.
On balance, the global all industry PMI (which
combines the manufacturing and services PMIs)
suggests world GDP was advancing at around
2.5% annualised late in the third quarter. At least,
there are tentative signs the all-industry PMI output
series has stabilised, even though the underlying
details on new orders and employment show a
decline through the third quarter. This suggests a
meaningful lift in output is not imminent in the
fourth quarter.
There are any number of culprits blamed for the
slowdown in activity, including escalating trade
protectionism, the fading impact of US fiscal
stimulus, increased uncertainty due to looming
events such as Brexit, and other political risks. The
latter includes Hong Kong where protests have
coincided with weaker retail spending and tourism
receipts.
Another political focal point is the ongoing Brexit
saga in the UK. Amid the gridlock, UK members of
parliament passed the ‘Benn’ Act in September
2019, which will compel Prime Minister Johnson to
request, by 19 October 2019, an extension to
Article 50 from 31 October 2019 to 31 January
2020, unless a deal is reached or members of
parliament vote to leave the European Union (EU)
without a deal. At present, an extension seems to
be the most likely outcome, along with a potential
call for an early election – although nothing is
certain.
The uncertainty surrounding the Brexit impasse is
clearly reflected in the Bank of England’s
September 2019 Monetary Policy Statement. The
bank warned that a no-deal Brexit would likely
weaken GDP growth, depreciate Pound Sterling
and push inflation higher.
On the other hand, the bank noted a ‘smooth’ Brexit
scenario would likely create excess demand
pressure in the medium term, which would warrant
‘gradual’ increases in interest rates. Faced with
these diametrically opposed possible outcomes, the
bank’s Monetary Policy Committee left the official
bank rate unchanged at 1.75%.
The developments above have been reflected in
weak business confidence surveys and stalling
capital expenditure. In turn, the dearth of new
investment growth has filtered through into softening
global employment growth. Meanwhile, the
moderation in jobs growth has slowed the advance in
retail spending, which had been especially strong
early in 2019.
In the US, non-farm payrolls have recorded firm
growth since around 2012. However, the annual
advance in payrolls softened significantly from 1.7%
in April 2019 to 1.4% in August 2019. The
unemployment rate edged higher to 3.7% in June
2019 (and remained unchanged in July and August)
from a possible cyclical low of 3.6% in May 2019.
This emerging softness in the labour market follows
a significant prolonged decrease in the level of
company profits relative to GDP, as measured in the
US national accounts, from 12.4% of GDP (with
inventory value adjustment and capital consumption
adjustment) in 3Q14 to 9.8% of GDP in 2Q19
(although the ratio did improve a bit in the second
quarter from 9.5% of GDP in 1Q19).
Monetary policymakers have responded to the
slowdown, led by the US Federal Reserve (Fed),
which is not only cutting its policy interest rate, but is
also set to expand its balance sheet once again. In
decreasing the target range for the federal funds rate
to 1.75-2.0% on 18 September 2019, the Fed listed
‘the implications of global developments for the
economic outlook as well as muted inflation
pressures’ as reasons for its decision. This follows
the Fed’s earlier decision to end its balance sheet
normalisation early.
6
In Europe, where a decisive downturn in
Germany’s leading indicator does not portend
anything good on the growth front, the European
Central Bank Governing Council cut the interest
rate on its deposit facility by 10 basis points to -
0.50% in September 2019, in addition to rebooting
its asset purchase programme at a pace of €20
billion per month as from 1 November 2019. At
this stage the programme is open-ended. Other
measures included the implementation of a two-
tier system for reserve remuneration in which part
of the banks’ holdings of excess liquidity will be
exempt from the negative deposit facility rate.
Elsewhere, developed market monetary policy
easing helped encourage emerging market
central banks to loosen policy. In India, in an effort
to arrest a weakening private sector credit
extension trend, amid a high level of non-
performing corporate loans, the Reserve Bank of
India cut its policy rate more aggressively than
expected in August 2019 by 35 basis points to
5.4%, and by a further 25 basis points in early
October 2019. The bank is likely to cut further,
given a contained inflation outlook, while also
providing liquidity to non-bank financial
corporations and banks if needed. At the same
time, corporate tax rates were cut underlining the
authorities’ concern about growth prospects
against the backdrop of moderate investment
spending.
In China, the People’s Bank of China also eased
monetary policy in September, cutting reserve
requirements and lending rates in response to
softening activity, including a slowdown in the
annual advance in industrial production to 4.4% in
August 2019 and weak export performance. The
approach of the bank is, nonetheless, cautious,
given the objective of deleveraging the economy
and maintaining financial system stability.
One immediate problem for China is the ongoing
deterioration in its trade relations with the US. On
1 September 2019, the US applied an additional
15% tariff on more than $100 billion of its imports
from China. Further tariff increases are expected
in the fourth quarter.
Nonetheless, we should not overlook another
underlying structural cause of China’s growth
slowdown as reflected in softer fixed investment
spending relative to GDP. Admittedly, to a
significant extent, weaker investment expenditure
must reflect the ongoing trade dispute. In
response, this may prompt an acceleration in
public sector fixed investment spending.
But, over and above this, China’s growth boom in
the opening decade of this century, which
underpinned the so-called commodity ‘super cycle’
at the time, left the country with a high level of
capital stock relative to GDP along with a high
investment ratio. This was bound to culminate in
slower productivity and, hence, overall GDP growth.
It is not clear whether the slowdown in global growth
will intensify in the quarters ahead. To start, in the
US, inversion of the US yield curve has historically
not been a good omen. Also, more broadly, belief in
the ability of monetary policymakers to sustain
growth is wearing thin.
In addition, in the UK, a no-deal Brexit – if it occurs –
would not only weigh on growth in the UK, but also
Europe more broadly. And, any further intensification
of trade protectionism would likely continue to
depress business confidence levels and investment.
It is not only China which is being targeted for tariff
increases. The US is set to decide on tariffs on auto
imports in mid-November 2019. Barring exclusions,
Europe would be hit if tariffs are imposed.
By the same token, the intensification of US import
protectionism must be hurting the US economy itself.
In an economy with surplus capacity tariff increases
could prompt a lift in import-competing production.
However, the US economy has been operating at or
close to full capacity. If import-competing industries
are to take advantage, resources must be shifted
from export-competing industries, implying no net
gain in production. Indeed, tampering with the
optimal allocation of resources under a free trade
system can be expected to lower productivity,
leaving growth weaker and inflation higher than it
otherwise would have been.
The US and China have been two key growth
engines for the global economy in recent years. But,
neither is expected to gather stronger momentum
heading into 2020, especially if the trade conflict
continues to escalate.
On a more optimistic note, the shift towards trade
protectionism, while damaging, is not uniform across
all regions. Moreover, although softer, the ratio of
US corporate profits to GDP remains relatively high,
while the absence of inflation pressure implies
monetary policy is likely to be loosened further in
both developed and emerging markets. This may be
enough to avoid a material further slowdown in
global economic activity.
7
But, there is a caveat. Inflation must remain
subdued. On balance, this is the case, although it
should be noted the US core consumer price
index (CPI) advanced at a firm clip of 0.3% per
month from June 2019 to August 2019. This has
not been reflected to the same extent in the core
personal consumption expenditures deflator,
which the Fed targets, given different weights for
key items such as healthcare. Nonetheless,
should this pace be maintained into 2020, the Fed
is likely to find it more difficult to argue the case for
maintaining an excessively loose monetary policy?
In any event, since the belief in the ability of
monetary policy to drive growth is wearing thin,
the point is it is not altogether clear what could
initiate an improvement in growth heading into
2020. If activity fails to lift and employment growth
continues to slow, attention will increasingly turn to
fiscal policy as a potential lever.
Very low or negative real interest rates in
developed markets make it easier for the fiscal
maths to add up, implying some space for fiscal
expansion even if debt levels are high. But, this is
only the case if real interest rates remain
depressed. Also, the sharp increase in
government debt levels since the global financial
crisis, against a backdrop of a decline in public
sector capital stock relative to GDP, implies
government balance sheets have weakened.
Accordingly, any fiscal expansion must focus on
capital expenditure (including human capital), to
protect government balance sheets and to lift long-
term potential growth.
Ultimately, though, the underlying problem for the
developed economies is low productivity growth
since the global financial crisis in addition to
ageing workforces. Absent a marked improvement
in productivity, the impact of monetary and fiscal
policy on potential growth has limits.
South AfricaThe most significant economic development in the
third quarter was the release of the National
Treasury’s economic growth strategy for public
comment in late August 2019. The document was
subsequently discussed and, by and large,
‘endorsed’ in principle at the ruling ANC party’s
National Executive Committee meeting in late
September 2019. This does not imply the paper’s
recommendations will be implemented as is.
There is, for example, still considerable
uncertainty around the funding model for
financially unsound state-owned companies
(SOCs), notably Eskom. But, overall, this is a
significant step in the right direction.
At its core, the document proposes a social
compact, which is essential if the economy is to
succeed. It has debatable policy prescriptions, but
these do not distract from its key message, which
is promotion of competitiveness and productivity –
the ultimate drivers of economic growth. Further, it
recommends restructuring and privatisation as a
means to address failing SOCs. And, it is firmly
supportive of consistent, sound macroeconomic
policy – as opposed to attempting to boost growth
in the short term through inappropriate fiscal and
monetary policies, leading to even worse long-term
economic outcomes. The paper also recognises
that regulatory barriers to entry are inhibiting
growth of micro, small and medium enterprises
(SMMEs) and recommends exempting SMMEs
from certain laws, notably labour laws. There is
welcome emphasis on reducing red tape.
In the interim, data released by Statistics South
Africa show real GDP advanced 3.1% seasonally
adjusted and annualised in 2Q19, following an
outright decline of 3.1% annualised in 1Q19. Fixed
investment spending, at least, recorded a positive
increase of 6.1% annualised, from a low base.
Consumer spending was also positive, increasing
2.8% annualised – in line with the 2.4% advance in
real personal disposable income. South Africa’s
terms of trade slipped in the second quarter, but
the improvement in the third quarter, implied by the
fall in oil prices relative to the prices of key
commodity exports, should provide support to
domestic purchasing power. Nonetheless, it is
evident that the supply-side of the economy
remains weak, as the improvement in domestic
demand has been accompanied by a deterioration
in the current account deficit from 2.9% of GDP in
1Q19 to 4% in 2Q19.
Subsequent data releases in the third quarter,
including a plunge in the manufacturing PMI to a
level of 41.6 – its lowest level since the global
financial crisis – confirm the second-quarter GDP
bounce in large part reflects a degree of
normalisation following electricity outages in the
first quarter.
Meanwhile, the subdued level of investment
spending, reflecting depressed business
confidence levels, weak profits growth (4.8% year-
on-year in 2Q19 in current prices) and an
inadequate rate of return on investment, helps
explain South Africa’s high unemployment rate,
which climbed to 29% in 2Q19. Worryingly, the
country’s structural unemployment rate is above
20%. Even during the period of sustained strong
real economic growth in the early 2000s the
unemployment rate remained above this level.
8
The weakness of the labour market is reflected in
the tepid 4.8% advance (current prices) in total
worker remuneration in the year to 2Q19. Along
with a record high effective personal income tax
rate, in aggregate, and high real interest rates,
soft remuneration growth remains a constraint on
households, although the country’s improved
terms of trade, if sustained, should help.
On balance, real GDP growth is expected to
advance by just 0.6% in 2019, followed by some
improvement to 1.5% in 2020, provided the terms
of trade remain elevated and global growth holds
up at its current level. The balance of risks,
however, appear tilted to the downside.
Against the background of soft economic activity
and high real interest rates, the South African
Reserve Bank (SARB) is beginning to guide
actual inflation outcomes (and inflation
expectations) lower. Core inflation (CPI excluding
food and non-alcoholic beverages, fuel and
energy) advanced by just 4.3% in the year to
August 2019, while headline CPI also
increased 4.3%. Looking ahead, headline CPI is
expected to average 4.3% in 2019 (4.7% year-
end) and 5% in 2020 (5.1% year-end) with a
temporary peak of 5.3% in February 2020.
Ostensibly, this should provide the SARB with
some room to ease monetary policy. But, the
bank left its repo rate unchanged at the
conclusion of its Monetary Policy Committee
(MPC) meeting in September 2019, as South
Africa’s deteriorated fiscal position gives pause
for thought.
Looking ahead, a benign inflation outlook
(especially for core inflation), the tilt towards
monetary policy easing by central banks around
the globe, as well as the slow pace of income
growth and private sector credit extension growth
may prompt an interest rate cut of 25 basis points
when the SARB’s MPC meets in November. But,
much will depend on the content of the October
Medium-Term Budget Policy Statement (MTBPS)
and the behaviour of the Rand.
Currently, the Rand is trading at more than a
standard deviation weaker than its current estimate
for purchasing power parity (PPP)
(Rand/US$13.35). Assuming the SARB continues
to do what is required to anchor inflation
expectations we expect the Rand to converge on
its PPP level over time. The PPP year-end
estimate for the Rand at end 2020 is
Rand/US$13.70.
Heading into the fourth quarter, though, fiscal
policy remains a focal point. South Africa’s fiscal
metrics have deteriorated and the modest
economic growth rate projected into next year is
insufficient to help stabilise the government’s
financial position. Another significant revenue
shortfall is expected in the current fiscal year.
Indeed, a main budget deficit of around 6% of GDP
is forecast for both 2019/20 and 2020/21 on current
information due to increased bailouts to Eskom and
persistent low income growth (compared with the
initial budgeted deficits of 4.7% of GDP in 2019/20
and 4.5% of GDP in 2020/21). At the same time,
the government debt ratio is forecast to continue
climbing well above 60% of GDP in the medium
term (around 70% of GDP including its debt
guarantee exposure). This underlines the
importance of the upcoming October MTBPS.
9
South AfricanMoney Market
By Donovan van den Heever &
Johan Verwey
Portfolio Managers
In the second quarter, SA’s gross domestic product (GDP) grew by 3.1% year-on-year (y/y), recovering almost fully
from the similar sized dismal contraction in the first quarter. The factors responsible for the recovery were
predominantly the opposite of those in 1Q2019, namely recovery from a low base and the positive impact of
reduced power cuts by Eskom on mining and manufacturing production.
Headline CPI inflation remained surprisingly low over the quarter, improving to 4.3% y/y in August, from 4.5% y/y in
June. In July it was even as low as 4% y/y, mainly as a result of lower fuel price inflation and also surprisingly lower
electricity and food price inflation.
With inflation at lower levels, the South African Reserve Bank (SARB) cut the repo rate with 25 basis points (bps) at
its July Monetary Policy Committee (MPC) meeting, from 6.75% to 6.50%, providing the economy with much-
needed support. At its September MPC meeting, the SARB kept the repo rate unchanged at 6.50%, following a
unanimous vote. They are of the opinion that risks to the inflation outlook are balanced. Their 2019 inflation forecast
was lowered to 4.2%, the 2020 forecast remained unchanged at 5.1% and the 2021 forecast was increased slightly
to 4.7% from 4.6%. They kept the 2019 growth forecast unchanged at 0.6%, lowered the 2020 forecast to 1.50%
from 1.80%, and lowered the 2021 forecast to 1.80% from 2%. Speaking to Bloomberg earlier in the month, SARB
Governor Lesetja Kganyago mentioned that the jump in GDP was from a low base, and consequently the SARB is
not changing its 2019 growth forecast of 0.6%.
Eskom remains the biggest risk for the SA economy, which was reiterated again with the release of their FY2019
results, recording a R20.7 billion loss. Early in the quarter, Finance Minister Tito Mboweni tabled the Eskom Special
Appropriations Bill, which provides for an additional R59 billion for this fiscal year and 2020/21. They also did not
provide any information on the planned unbundling and reform. The Chief Restructuring Officer was only appointed
at the end of July. This shows that they are struggling to come up with solutions on how to take the struggling
parastatal forward. National Treasury also announced that they will increase its weekly SA government bond
issuance by R1.51 billion, of which a substantial portion will be used to support Eskom.
At the Sub-Saharan summit, Moody’s stated that the chances of a downgrade in the next 12-18 months are small.
According to them, worst-case fiscal metrics are 70% debt to GDP and a fiscal deficit of 7% of GDP, and the best
case is debt to GDP of 65%, which is still similar to other BBB- rated countries at 60%. The Moody’s rating outlook
is currently ‘Stable’, but there is a good chance that it can be changed to ‘Negative’. National Treasury recently
issued US$5bn of Eurobonds, which will help to reduce SA’s fiscal deficit significantly.
Market review
10
Government is close to finalising a programme for the redistribution of state-owned land. If implemented
successfully, this will be positive for the economy, investors and rating agencies. President Cyril Ramaphosa
also recently announced the appointment of an Economic Advisory Council which will aid the government and
Presidency in the development and implementation of growth-boosting policies.
During the quarter the US Federal Reserve cut interest rates twice by 25 bps. They stated that this is not
necessarily the start of an extended rate cutting cycle. The objectives of the rate cuts are to insure their economy
against downside risks from weak global growth and trade policy uncertainty, to help offset the effects that these
factors currently have against the economy, and to promote a faster return of inflation to their 2% target. The
European Central Bank also cut their benchmark interest rate by 10 bps and restarted their stimulus programme,
intending to buy €20 billion of bonds per month.
Core CPI remained unchanged at 4.3% y/y during the quarter. PPI inflation decreased from 5.8% y/y in June to
4.5% y/y in August. The Rand weakened to 15.17 against the US Dollar from 14.11 during the quarter. The 10-
year SA government bond yield weakened to 8.92% from 8.69%. The trade balance increased from a surplus of
R2.1 billion to one of R6.84 billion. The unemployment rate increased from 27.6% in 1Q2019 to 29% in 2Q2019.
The money market yield curve shifted down after the 25-bps rate cut in July. After the September MPC meeting,
where the SARB kept the repo rate unchanged, the curve steepened a little again. Now, with the SARB’s inflation
expectations for 2020 and 2021 still being above the midpoint (4.5%) of the target range (3-6%), the market is
only expecting one 25-bps rate cut over the next year.
What SIM did
All maturities were invested across the money market yield curve, exploiting the term premium as well as adding
some higher-yielding fixed-term negotiable certificates of deposit (NCDs). Quality corporate credit, which traded
above the three-month JIBAR rates, was added to the portfolio. We preferred a combination of floating rate notes
in the portfolio together with some fixed-rate NCDs. The combination of corporate credit, high-yielding NCDs and
floating rate notes will enhance portfolio returns.
SIM strategy
Our preferred investments would be a combination of fixed-rate notes, floating rate notes and quality corporate
credit to enhance returns in the portfolio. Although the curve steepened a little, fixed-rate notes are still not
providing enough compensation for their additional interest rate risk compared to floating rate notes.
11
6.346.63
6.79
7.287.43
7.66
6.59
6.91 7.03
7.47.58 7.74
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
0 1 3 6 9 12
Yie
ld
Months
Money Market Yields
30 Sep 19
30 Jun 19
Source: I-Net
International
By Justin Greeley
Head of Fund Solutions
Sanlam Investments
Market reviewThe first half of 2019 saw markets make good
progress, and so it was always going to be a
challenge for the third quarter to continue at the
same pace. The duration of the economic cycle is
clearly playing a role in investors’ expectations for
the future, and this has been coupled with an
identifiable slowdown in global economic activity.
The US–China ‘trade war’ escalated during the
third quarter, to such an extent that markets were
relieved when, in early September, the two sides
agreed to recommence trade talks. However, the
preceding tensions and uncertainty have certainly
plagued markets over the third quarter. For now,
the timing of any resumption to the dispute remains
unclear. At a fundamental level, even more
concerning has been the clearly identifiable
slowdown in global economic growth, which now
appears to be materially impacting the US,
although not yet pulling the entire economy to
recessionary levels. The trade dispute is clearly a
factor in this, but the broader slowdown in China is
also worth noting.
In response to the economic slowdown, the US
Federal Reserve implemented two interest rate
cuts during the quarter. These can be seen as pre-
emptive moves to prevent any further material
deterioration and to boost confidence. However,
the impact of these cuts has yet to be felt, but also
needs to be seen in the context of the low interest
rate environment since 2009. In Europe, the
European Central Bank also paved the way during
the quarter for the announcement of a range of
monetary easing measures in September, including
a formal interest rate cut. These moves in the front-
end of the bond curves helped support longer-
dated moves across the curves and so the quarter
generally saw a move down in developed market
sovereign bond yields. Elsewhere, Brexit remains
unresolved, and may not be by the current deadline
(at the time of writing) of 31 October.
Volatility has picked up during the quarter, especially
during August, but has not reached levels outside
current normal bounds. On the geopolitical front the
attacks on Saudi oil facilities in September led to a
spike in the oil price, but this quickly reversed within a
few days.
Despite the clear macro challenges, equity markets
did move higher during the quarter, posting a gain of
0.53% for the period, as measured by the MSCI
World Index. This clearly masked the intra-quarter
volatility, which saw equity markets gain 0.50% in
July, but then fall back by 2.05% in August, only to
recover 2.13% in September – a bumpy ride. The
2019 year-to-date returns record a healthy 17.61%
return, but this also encapsulates the recovery from
the fourth quarter of 2018, and so the one-year
returns are significantly more modest at 1.83%. At a
regional level there was clear differentiation during
the quarter in US Dollar terms. Japan led the way
rising 3.13%, while North America gained 1.36%,
thus also outperforming the wider market. However,
Europe declined 1.80%, but it was the Pacific
excluding Japan region that took the major fall,
decreasing 5.20% for the period – the protests in
Hong Kong being a significant factor. More broadly,
emerging markets declined by 4.25% for the quarter,
and hence are lagging their developed market
counterparts by almost 12% for 2019 so far.
Turning to global sectors, it was clearly evident that it
was a defensively-led rally that helped markets to
progress for the quarter. Utilities were the best
performing sector rising 6.45%, followed closely by
Real Estate gaining 6.22%. Consumer Staples was
then the next best sector returning 4.01%. However,
then there was another step down to Information
Technology and Communication Services, which
delivered 2.26% and 1.36% respectively. Together,
these were the sectors that outperformed the broader
market. In sharp contrast the Energy sector fell
5.78%, while Materials were down 3.26%.
12
Healthcare, somewhat surprisingly, was the next
weakest sector declining 1.25%, though Industrials
also posted a decline of 0.68%. Consumer
Discretionary and Financials both managed to
generate positive absolute returns of 0.26% and
0.28% respectively, although both underperformed
the wider market.
Like equity markets the strong performance of
bond markets year to date looked unsustainable,
but bond markets, as measured by the Bloomberg
Barclays Global Aggregate Bond Index, did post a
positive return of 0.71% for the quarter. This was
driven by the overall downward movement in
sovereign yields. July saw bond markets decline
by 0.28%, while August saw a strong return of
2.03% in a month that was clearly risk-off. Then
September witnessed many of those returns being
eroded as bond markets declined 1.02% for the
month. As a result, for 2019 year-to-date global
bond markets have delivered a return of 6.32%,
and 7.6% over the last one-year period.
The US 10-year Treasury started the quarter with a
yield just above 2%, but this fell below 1.50% during
August, before recovering above 1.80% in
September, before falling again in the second half of
September to end the quarter in the 1.6% to 1.7%
range.
Within the global corporate bond space, the
continuation of lower yields and a reasonable, but
slowing, economic picture enables global corporates
to outperform the wider bond market. For the quarter,
the Bloomberg Barclays Global Aggregate Corporate
Bond Index rose 1.21%. Unlike the wider market it
just managed to produce a positive return in July, but
like the broader market saw most of its gains
reversed in August, before pulling back somewhat in
September. For 2019 to date, global corporates have
delivered over a 9.5% return.
All performance numbers are in US Dollars unless
stated otherwise.
513
AssetAllocation
By Gerhard Gruywagen
Chief Investment Officer
Sanlam Investments
Our positioning
Local investmentsRelative to other emerging markets with a similar
sovereign credit rating the real returns on offer
from South African assets are attractive. They are
also favourably priced relative to their history. For
this reason, we have an overweight position in SA
assets funded by SA cash.
Local equities
We retained our overweight position in South
African equities, counterbalanced by an
underweight position in international equities,
which is overvalued in our opinion.
Based on consensus earnings forecasts, the one-
year forward price-to-earnings (P/E) ratio of our
benchmark (50% SWIX, 50% Capped SWIX) has
now dropped to 11, if we exclude Naspers and
Prosus. With Naspers and Prosus, it is at 12.3.
The current dividend yield of the market,
excluding Naspers and Prosus, is at 4.95%,
which is the highest it has been since 2008.
Local bonds
We maintained our overweight position in SA
bonds. SA 10-year bonds are trading at a nominal
yield of 8.85%. Assuming a long-run inflation rate
assumption of 5.25%, they are offering a long-run
real return of 3.6%.
Inflation-linked bonds
We retained our overweight position in inflation-
linked bonds. The 3.4% real yield of 10-year
inflation-linked bonds is very attractive. Since
1900, conventional SA bonds gave a real return
of about 2%. Inflation-linked bonds do not carry
the risk of unexpected inflation, as is the case
with conventional bonds.
Local listed property
SA domestic listed property companies are priced for
significant future dividend cuts. We think the
markets’ expectations of the size of future dividend
declines are somewhat overdone.
This view is expressed through a small overweight
position in the three largest SA REITs, namely
Growthpoint, Redefine and Hyprop. They have a
current average dividend yield of 11.7%, and a one-
year forward dividend yield of 10.4%, which are
attractive relative to bonds yields.
Global investmentsEven though the Rand is undervalued against
developed market currencies, we do not think this
undervaluation is significant enough to introduce an
overweight position in Rand assets relative to
offshore assets.
Global equities
We maintained our underweight position in global
equities. US equities are expensive when using long-
run valuation measures. The US market’s Graham
and Dodd P/E multiple, price-to-book ratio and profit
margins are well above their long-run means. On a
relative basis, European and UK equity markets are
cheaper in terms of these traditional valuation
measures.
The dispersion in the P/E ratios of stocks on both the
US and European markets are at historical highs.
One would expect the P/E ratios to differ between
shares, as the companies have different growth
prospects.
14
When the P/E dispersion is at extreme lows, it
means that all companies trade at a very similar
P/E ratio. As not all companies have the same
earnings growth prospects, it is unlikely that all of
them are correctly priced in this case. Ample
opportunities should therefore be available for
active managers.
When the P/E dispersion is at extreme highs, as is
the case now, it implies that the dispersion in the
expected earnings growth of companies is at high
levels relative to history. Possibly more stocks than
usual are therefore mispriced because of unrealistic
earnings growth expectations – whether too high or
too low.
The technology sector in the US is trading at a high
P/E multiple. We are of the view that it is pricing in
too much growth relative to technology sectors in
emerging markets, and particularly in China. We
therefore have an overweight position in emerging
market technology stocks to compensate for our
underweight position in US stocks.
We also believe that the growth prospects of the
financial sector in Europe are underestimated and
therefore we have a small overweight position in
this sector. European financial companies are
extremely cheap versus their history, they are
attractive relative to financial companies in other
markets, and they are also cheap relative to other
sectors in Europe.
Global bonds
We have an underweight position in global bonds in
preference to international cash. We believe a fair
long-run real return from developed market
sovereign bonds is 1%. Currently, global developed
marked bonds are priced well below this, based on
an inflation expectation of about 2% – a level that is
implicitly targeted by the central banks.
Even though being underweight in global bonds
makes sense from a pure long-run valuation
perspective, we are concerned that long bonds
might stay mispriced for a considerable time.
During the past quarter we therefore reduced the
magnitude of this underweight position by
specifically adding to US long bonds.
US long bond yields are currently high relative to
most other developed markets.
Ten-year yields are negative in, for example, Japan,
Germany, France and Switzerland.
Periods of positive GDP growth have always been
followed by recessions. The US is experiencing the
longest economic cycle in its history with 122
months of positive real GDP growth. Typically,
monetary policy and fiscal policy are used to combat
recessions.
These tools were used extensively over the past
decade in fear of a depression after the 2008
financial crisis.
More than 10 years later, the fiscal situation of
developed market governments has not improved.
The balance sheets of central banks remain inflated
following quantitative easing and policy rates remain
very low. Therefore, fewer tools are currently
available for combatting a future recession.
In response to a slowdown in the US economy it is
therefore possible that the US Federal Reserve
might introduce negative policy rates as we have
seen in a few other countries. Long bond yields can
be regarded as an expectation of future short-term
interest rates plus a risk premium. So, if short-term
interest rates are expected to remain low for a
protracted period due to central bank actions, long
bonds could become mispriced on a relative basis.
Global property
We have a 0.5% holding (an overweight position) in
a global developed market portfolio of developed
(rental-yielding) REITs. The portfolio’s one-year
forward dividend yield is about 4.6%, with positive
rental growth prospects. The rental-yielding REIT
sector is attractive relative to global developed
market bonds. However, as listed property assets
are considerably more volatile than developed
market bonds, we opted for a modest overweight
position given our current concern about the
valuation of developed market equities.
Risks and
opportunities aheadAs discussed above, globally we are concerned
about the impact of a recession on the world
economy, especially as it is unclear how
policymakers would and can respond to alleviate the
blow.
Locally the funding difficulties at Eskom remain a
major risk. Thus, even though South African
domestic assets appear cheap, they might be
appropriately priced given South Africa’s electricity
supply issues.
15
EquitiesBy Patrice Rassou Head of Equities
Sanlam Investments
An Eye for an Eye
Global overviewThe US Federal Reserve (Fed) cut rates for the first time in over a decade at the end of July, but this did not prevent
President Donald Trump from castigating Fed Chair Jerome Powell for being behind the curve. The US economy has
weakened but is not in a recession due to fiscal support offsetting the adverse impact of the trade war. The inversion of
the US yield curve is perceived as sounding the toll for a near-term global recession. The trade war impact is real with
US imports from China down 15%, while Chinese imports from the US are down 30% year-on-year. As the economy
drifts lower as a result of lower manufacturing production, the Fed may have more urgency to intervene. Non-farm
payrolls remain resilient, which points to the fact that the US is not on the brink of a recession. It remains key that core
goods inflation remains stable around 3% to give room to the Fed to cut rates. It’s becoming clear that a trade war has
negative consequences for US growth and core inflation.
To make matters worse, Trump resumed the trade war with China with both superpowers launching into another round
of tariffs. China unexpectedly retaliated by imposing import tariffs on US$75billion of US goods. In addition, the Chinese
have to deal with civil disobedience in Hong Kong. This fanned up fears that the fragile global economy may dip further
as a lethal cocktail of central bank dilly-dallying and a trade war dents business confidence further. Commodity prices
took a dive with key iron ore benchmark prices plunging some 20% in a matter of weeks and the key industrial metal,
copper, hitting two-year lows. The key global manufacturing indices have dived and are at five-year lows.
A global downturn is igniting fear in global investors with approximately US$14 trillion of negative-yielding bonds
globally. Simply put, investors will get less than their initial capital at maturity. These make up a quarter of the Barclays
Global Aggregate Index of investment-grade bonds. There is still so much fear of an economic collapse that investors
in the developed world are willing to pay a premium to hide their money in government bonds, knowing that they will
incur a loss. But it’s not bad news for everyone – many sovereigns have been able to issue 100-year bonds at rates of
close to 1%! This is why there is increasing talk of the ‘Japanification’ of the global economy since the Bank of Japan
introduced negative rates 20 years ago.
On the equity front the listing of US companies which are loss-making has been raising eyebrows with a record 81% of
initial public offerings (IPOs) last year being those of loss-making companies – beating the 68% of loss-making
companies which listed during the dotcom bubble. Uber, which listed recently, was the IPO of a company with the
largest losses and WeWork, which listed in September, was the company with the second-largest level of pre-IPO
losses on record. For interest’s sake, the third-largest listing belongs to Lyft, highlighting an unhealthy appetite by
investors for companies that have unprofitable business models. But the listing of much-celebrated Silicon Valley 15-
year veteran Palantir Technologies has been postponed to 2022, indicating that market appetite for unprofitable
companies seeking to list is waning.
Chinese GDP growth slowed to 6.2%, lower than the levels of the global financial crisis as the impact of the economic
rebalancing and the trade tensions take their toll. Food inflation is coming through but underlying inflation is turning
down as imports are in deflation. Chinese manufacturing growth has slowed from 10% to close to zero. The
government has also reined in the shadow banking sector but it remains high with credit at over 200% of GDP and non-
performing loans remain stubbornly high.
In the UK, Eurosceptic Boris Johnson has become the prime minister after being elected as leader of the Tories. There
appears a greater likelihood of a no-deal Brexit or, at the very least, yet another postponement of the October decision
deadline.
16
The market has discounted this in large part with a weaker Sterling. As business decisions get postponed, the UK
should dip into a technical recession. The drone attack in Saudi Arabia in September led to the largest intraday spike
in the oil price on record with some 5% of global oil supply impacted. This came soon after US and Iranian
skirmishes in the Strait of Hormuz, through which a third of global seaborne crude passes.
South Africa – In a debt spiralThe quarter was dominated by the major slippage on the fiscal side with the R59 billion government support for
Eskom adding to a widening budget deficit and concerns that the debt-to-GDP ratio will prove increasingly difficult to
stabilise. While reaffirming the SA sovereign rating at BB+, Fitch nonetheless revised the outlook from stable to
negative at the end of July. Finance Minister Tito Mboweni has tabled some proposals to drive economic growth,
given that it’s a burning platform.
We expect some deterioration with the fiscal deficit having already slipped from 4.7% to 5.7%. While the global
picture has been supportive and flows have kept yields artificially high, income growth in SA is the weakest since the
1970s. Inflation is also on a downward trend towards 4% p.a. with lower oil and food inflation offsetting double-digit
increases in some administered prices. The debt-to-GDP ratio is at risk of passing the 50% mark with additional
support for Eskom up to R50 billion this year and even higher next year. The primary budget balance is deteriorating
to -2%, which is the worst position in five years and will not stabilise the debt-to-GDP ratio. Treasury managed to
issue expensive Dollar debt at the end of the quarter. Revenue collection is 3% behind budget with corporate taxes
slugging and VAT collection actually down. Unemployment has also spiked to 21% from 20% over the past decade.
Moody’s may well move us to negative watch by November if these trends continue.
After one of its longest downcycles since 1945 with some 67 months of decline, we keep looking for some green
shoots in the local economy. That said, the rebound in GDP growth of 0.9% year-on-year in the second quarter was
unexpected. We desperately need the rebound to continue over the next two quarters in the face of low business
confidence for 70% of businesses, in order to post GDP growth of around 0.7% for the year. Production is not
improving with the August ABSA Manufacturing PMI in August and other leading indicators still pointing downwards.
JSEThe beginning of the year has seen foreigners sell over US$5 billion of equities and bonds as economic growth
remains moribund and rating agencies claw at our doors. The political situation also remains tenuous with the so-
called ‘fight-back’ faction in the ruling party and the Public Protector’s findings against the president and the minister
of public enterprises distracting government from urgent economic matters. Given this backdrop, the Rand has
weakened and the JSE suffered some losses with the FTSE/JSE Shareholder Weighted Index (SWIX) down 4.3%
this quarter, which aggregates to a zero return over the past year.
The earnings season saw a strong showing by the miners. Despite strong results, we saw Indian billionaire Anil
Agarwal and Anglo American’s biggest shareholder place his 2% holding in the market at a 4% discount. While this
took the market by surprise, this was offset by the unexpected announcement that Anglo would undertake a US$1
billion share buyback (2.7% of market cap). Sasol’s woes continued with the delay in releasing its financial results
mid-August leading the share to dive 16% on the day. The market remains uncertain as to the debt burden
accumulated by the company following cost overruns at its Lake Charles operations in the US.
The results season was dominated by the change in lease accounting caused by IFRS 16, which has the effect that
leases amortised over the term of the debt and the present value of the leases are treated as debt.
The Independent Communications Authority of SA (ICASA) will be implementing the long-awaited new spectrum
framework over the next year. Broadly it is negative for Telkom and pricing will be under pressure, but good for the
industry in the long term as capacity gets increased. The industry will have to pay for the extra spectrum with the
benefits accruing in the long term.
The National Health Insurance (NHI) Bill was proposed, which will make the state the sole purchaser of all
healthcare services effectively displacing medical aid schemes and broadening access to healthcare to a larger
portion of the population.
Government spends 4.5% of GDP on healthcare with 40% of healthcare spend derived from private medical aids
(R200 billion). Therefore, to make up that shortfall, government will have to increase taxes and eliminate the R27
billion medical aid tax credit.
In an attempt to unlock value, Naspers listed its offshore assets under the name Prosus on the Euronext stock
exchange in Amsterdam during the last week of September. While the group will retain at least 73% of the assets the
aim is to:
• Attract fresh shareholders in Europe where there is a dearth of technology assets (as opposed to the US or Asia)
17
• Provide greater visibility as to the valuation of the unlisted internet assets
• The absolute weight of Naspers will drop to 19% in the SWIX index, while Prosus will be a new inward-listed
entity with a 3.4% weight in the index.
The risk, however, remains that Naspers will continue to trade at a large discount to its underlying assets – even
though Prosus will have a listed price.
Offshore diversification has been no panacea either. The UK has been especially problematic with companies
like Famous Brands, Brait and Rebosis having to count the cost of their expansions. Standard Bank is trying to
offload its London operations to ICBC and Old Mutual eventually came back to home base. Speaking about Old
Mutual, the spat between the board and its CEO, Peter Moyo, took an unexpected turn when the courts initially
ruled that the CEO should be reinstated only for the company to challenge the judgement and fire the CEO a
second time. The share came under severe pressure as the market struggled with the leadership vacuum.
The most surprising piece of news flow this quarter is the offer from PepsiCo to buy Pioneer Foods at a hefty
premium. If one adds the buyout of Clover, the depressed local valuations of SA-focused stocks are certainly
attracting opportunistic bidders. But industrial bellwether Shoprite didn’t fare as well, dropping 16% in the week
following dismal results where poor volumes from South Africa were matched by losses in the rest of Africa as a
cocktail of weak local currencies and Dollar-denominated debt conspired to drain cash flows from the group.
Portfolio performanceThe Moderate Equity house view portfolio slightly outperformed by 52 basis points (bps) this quarter and the
performance year to date remains strong with the portfolio beating its benchmark by over 200 bps. The SWIX
index had a tough quarter, down 4.3%. Industrial stocks were down 2.5%, which was better than the index. The
largest 15 financial stocks were down a hefty 7.7% as the Rand weakened and resources stocks were down
some 6.4%.
Our largest position, Naspers, unlocked some value with the listing of its offshore internet holdings in
Amsterdam. This follows a successful listing of its MultiChoice assets as management takes action to unlock
value. Our overweight position in British American Tobacco added to performance, up 14% this quarter. The
market is now coming to grips with the fact that competitors selling vaping products in the US are likely to be
subject to strict regulation.
The overweight position in selected resources stocks continues to be supportive given the positive Chinese
growth picture, strong commodity prices and weak Rand. Our overweight position in Impala Platinum, up 37%
this quarter and 246% over the past year, is illustrative of how a contrarian position accumulated over the past
few years, when extreme pessimism prevailed and most investors liquidated their positions at almost any price,
can pay off. Our other key overweight position, Sibanye Gold (+25%), was buoyed by strong precious metal
prices. However, a delay in the release of its financial results meant that Sasol was down another 28%, after
declining 22% the previous quarter.
On the financial side, we continue to retain an underweight position in the more expensive stocks such as
Capitec, which was down 1%. The public spat between Old Mutual, an overweight counter, and its CEO weighed
down on the stock, which was down 6.8%.
ConclusionIn an era of big data, we have created a technology platform which collates data from multiple sources and is
validated by our analysts. Data are then interpreted and interrogated in order to draw insights with a view to
identifying the most undervalued and overvalued companies based on a number of scenarios. We have also
incorporated a number of environmental, social and governance (ESG) considerations in our process to gain
deeper insights into our companies. While there are a lot of headlines about how machines will replace human
beings in a number of professions, our research shows that stock markets are driven both by fundamentals and
emotions and that it is important that raw data collated by our systems are correctly interrogated and interpreted
by our analysts in order for the correct investment decisions to be made. As an active manager, we have the
unique advantage of being able to put together portfolios with the appropriate expected returns to meet your
investment objective. And, at the end of the day, the outperformance of our funds over the past decade is the
clearest testimony that our continuously evolving process involving both man and machine remains very
effective in delivering on your long-term investment goals.
18
BondsBy Mokgatla Madisha
Head of Fixed Income
Sanlam Investments
The hunt for yield
gains momentum
Developed market bond yields continued to trend
lower. Yields on the benchmark US 10-year bond
declined 34 basis points (bps) from 2% at the end
of June to 1.66%. In Europe, the yield on the
German 10-year Bund touched a new all-time low
of -0.716%. The difference between the US 2-
year and 10-year bond collapsed 20 bps and
briefly inverted, before the curve re-steepened.
However, the inversion between the 10-year bond
yield and the US Federal Reserve (Fed) overnight
rate has persisted since mid-May. An inverted
yield curve has preceded every recession in the
US over the past 50 years.
Despite rate cuts and the subsequent fall in bond
yields, US rates remain the highest among G10
countries. A combination of better growth and
higher yields relative to the peers led to a stronger
Dollar, which gained 3.4% on a trade-weighted
basis.
Globally the stock of negative-yielding debt
touched new highs at $17 trillion, however, with
the sell-off in September negative-yielding debt
declined to about $14 trillion.
On 17 September the Fed’s secured overnight
financing rate (repo rate) touched 10% intraday.
The repo rate is the rate at which the primary
dealers finance long positions. Under normal
market conditions this rate should trade at similar
levels to the effective federal funds rate. The
dislocation that occurred in September was
blamed on quarterly tax payments and settlement
of a large T-bill auction. The Fed responded by
injecting up to $75 billion of liquidity, the first time
if has done so since the credit crises. The Fed
also announced that this liquidity facility will be
available until 4 November.
Local market review
In July, the finance minister announced plans to
increase support for Eskom by an additional
R59 billion over the next two years. An allocation of
R26 billion was made for the current year in addition
to the R23 billion announced in the February budget.
The increased support for state-owned companies
(SOCs) and lower revenue collection by the South
African Revenue Service increased the funding
requirement for National Treasury. Weekly nominal
bond auctions were increased to R4.53 billion from
R3.3 billion, while the inflation-linked bond auction
volume increased to R1.07 billion from R0.67 billion.
Prior to the increased issuance announcements
bond yields had traded to 14-month lows. The
benchmark R186 traded to 7.97% before selling off
to 8.47%. The yield curve shape did not react much
to the increased bond supply, however, the flattening
that would have been expected as bond yields
moved higher did not happen. Fitch changed South
Africa’s rating outlook from stable to negative due to
the increased support for Eskom, while Moody’s also
said the move was credit-negative.
The FTSE/JSE All Bond Index returned 0.78% for
the quarter, underperforming the STeFI cash index
return of 1.83%. The three- to seven-year sector
delivered the best return ending the quarter at
1.29%. The yield on the benchmark R186 rose
0.235% to 8.32% while the R2035 (16-year bond)
yield rose 0.17% to 9.61%.
With inflation remaining relatively subdued, demand
for inflation protection has been week. The inflation-
linked index returned just 0.25% for the quarter.
Yields on the I2029 (10-year bond) rose 0.24% from
3.17% to 3.41%. The yield on the ultra-long I2050
reached a new high of 3.65% in September before
ending the quarter at 3.63%. Credit spreads
continued to tighten even as fundamentals have
deteriorated.
19
While we do not expect an eminent reversal of the
trend, we have noticed that auctions are starting
to price within price guidance, rather than below,
and market orders to sell are getting longer. We
used the opportunity to selectively reduce
exposure.
Bond market outlook
Contrary to our expectations, local factors were
the main determinates of performance over the
past three months, particularly revenue shortfall
and bailouts of SOCs, which pushed projected
fiscal deficits for 2019/20 to about 6%. As we
head into the Medium-Term Budget Policy
Statement the market will fret about National
Treasury’s ability to get spending under control.
Failure to show a credible fiscal consolidation path
will result in heightened rating down-grade risk. The
underperformance of South African bonds relative to
emerging market peers has resulted in attractive
valuations and this should support the market in any
sell-off.
In developed markets we think the Fed will continue
to ease monetary policy to support growth in the
face of continuing tensions and slowing growth.
Locally we do not expect the South African Reserve
Bank to cut the repo rate in the remaining meeting
this year.
We continue to favour nominal bonds over inflation-
linked bonds and credit.
20
Smoothed BonusPortfolios
Product RangeStable Bonus Portfolio
The Stable Bonus Portfolio (SBP) offers investors
stable, smoothed returns with a partial guarantee on
benefit payments. A bonus, which consists of a vesting
and non-vesting component is declared monthly in
advance. Bonuses cannot be negative.
Monthly Bonus Fund
The Monthly Bonus Fund (MBF) protects investors
against short-term volatility by smoothing out
investment returns, while providing valuable guarantees
on benefit payments. Fully vesting bonuses are
declared monthly in advance. Bonuses cannot be
negative.
SMM Vesting Fund
The SMM Vesting Fund is a multi-managed smoothed
bonus fund, which provides exposure to leading
investment managers. Investors are protected against
short-term volatility by smoothing out investment
returns, whilst providing guarantees on benefit
payments. Fully vesting bonuses are declared monthly
in advance. Bonuses cannot be negative.
Sanlam Absolute Return Plus Fund
Sanlam Absolute Return Plus Fund provides risk-
averse members with exposure to Sanlam’s Inflation
Linked Fund with a capital guarantee. This is achieved
through extensive use of derivative (hedging)
instruments and the declaration of a monthly fully
vesting bonus. Bonuses cannot be negative. At
termination, the full value of net contributions plus
declared bonuses are paid.
Members benefit from the underlying portfolios’
investment returns through regular bonus declarations.
These regular bonuses are designed to provide a
smoothed return to members over time. This reduces
the volatility of investment returns (i.e. extreme ups and
downs in the market) relative to an investment in
market-linked portfolios.
During periods of strong investment performance, a
portion of the underlying investment return is held back
in reserve and is not declared as a bonus. This reserve
is then used to declare higher bonuses during periods
of lower return than would otherwise have been the
case.
The benefits of smoothing include:
• Reducing the exposure to short-term market
volatility.
• Lessening the risk of investing in or disinvesting
from the market at the wrong time due to
circumstancesbeyond a member’s control.
It is important to note that smoothing merely changes
the timing of when investment returns are released and
does not reduce or increase the returns. Over time, the
bonuses should produce a similar return to the
underlying investment in the fund (after deduction of the
guarantee costs).
Smoothing terminology
Book value
The book value is the net contributions accumulated at
the bonus rate declared.
Market value
The market value is the amount obtainable on the open
market by the sale of the underlying assets.
Funding level
The products’ funding level is the ratio of market value
to book value. This is used in the bonus declaration
formula.
Bonus
A monthly increase to a client’s book value, expressed
as a percentage. Bonuses are declared before the start
of the month to which they apply, and are allocated at
the end of the month.
Benefit payments
The book value is paid on death, disability, resignation,
retrenchment or retirement. There is no limit on the
amount of benefit payments at book value. Other exits,
such as termination or investment switches will occur at
the lower of book and market value.
21
Fees
Guarantee fee
Investment administration fees
Monthly Bonus Fund and Stable Bonus Portfolio
The investment manager may be incentivised with performance fees (capped at 0.3% p.a.).
Details of the performance fees actually paid over the past calendar year are available on request.
Portfolio Guarantee fee
Monthly Bonus Fund & SMM Vesting Fund 1.60%
Stable Bonus Portfolio 0.90%
Portfolio Guarantee fee
SMM Vesting 0.55%
Sanlam Absolute Return Plus 1.00%
Size of investment Fee
Less than R100m 0.425%
R100m to R300m 0.375%
R300m plus 0.325%
22
Productinformation
Portfolio July-19 Aug-19 Sep-19
Periods to 30 September 2019
(annualised)
1 year 3 years 5 years
Smoothed Bonus Partially Vesting
Sanlam Stable Bonus Portfolio 0.644% 0.566% 0.560% 6.84% 7.66% 8.94%
Smoothed Bonus Fully Vesting
Monthly Bonus Fund 0.586% 0.508% 0.498% 6.16% 7.04% 8.46%
SMM Vesting 0.572% 0.504% 0.429% 4.49% 6.23% 7.77%
Derivative Based Fully Vesting
Sanlam Absolute Return Plus 1.260% 0.210% 0.700% 7.31% 8.46% 9.04%
Inflation 0.36% 0.27% 0.27% 4.13% 4.70% 4.96%
Performance: Bonuses % (Gross of fees)
23
% of fund
Stable Bonus Portfolio Monthly Bonus Fund SMM Vesting
Naspers 4.1 Naspers 4.2 Naspers 3.5
FirstRand 1.6 FirstRand 1.6 Prosus 1.3
British American Tobacco 1.5 British American Tobacco 1.5 British American Tobacco 1.3
Standard Bank Group 1.4 Standard Bank Group 1.4 FirstRand 1.2
Prosus 1.3 Prosus 1.3 Anglo American 1.2
Anglo American 1.2 Anglo American 1.2 Standard Bank Group 1.2
MTN Group 1.1 MTN Group 1.1 Impala Platinum Holdings 1.1
Sasol 1.0 Sasol 1.0 MTN Group 0.6
Consol Holdings 0.8 Consol Holdings 0.8 Sasol 0.6
Impala Platinum Holdings 0.8 Impala Platinum Holdings 0.8 Bid Corporation 0.6
Top ten equity holdings as at 30 September 2019
Cash3%
Bonds20%
Credit5%
Inflation-linked
4%
Property7%
Equities33%
Foreign28%
Cash3%
Bonds20%
Credit5%
Inflation-linked
4%
Property7%
Equities33%
Foreign28%
Cash6%
Bonds31%
Property6%Equities
28%
Private Equity
1%
Foreign28%
Bonds10%
Inflation-linked
1%
Money Market51%
Property1%
Equities18%
Foreign19%
Stable Bonus Portfolio Monthly Bonus Fund
SMM Vesting Sanlam Absolute Return Plus
24
The SanlamProgressiveSmoothBonus Fund
The Sanlam ProgressiveSmooth Bonus Fund is aworld first, black managed,smoothed bonus product.Thismulti-manager, diversifiedinvestment portfolio offersprotection againstshortterm market volatility and aguaranteed return over thelonger term. The ProgressiveSmooth Bonus Fund ismanaged by 27four InvestmentManagers and is guaranteed bySanlam.
How ItWorksThe Progressive Smooth Bonus Fund
works to smooth volatile investment
returns by declaring guaranteed
monthly bonuses. These monthly
bonuses reduce the rollercoaster ride
that investors experience in market-
linked portfolios, ensuring a much
smoother return profile. Suchfunds have
performed particularly well for investors
in the volatile and uncertain global
economic context brought on by the
2008 financial crisis.
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Fund BenefitsThe fund is a ‘win-win’ solution that’s
well suited for progressive retirement
funds that see the transformation of
the financial services industry as a
national priority, and retirement fund
members that value the benefit of
smoothed returns. By supporting and
allocating funds to black asset
managers, the Sanlam Progressive
Smooth Bonus Fund provides these
managers with a platform to compete
against stablished managers in the
industry in order to transform the
profile of the South African
investment management landscape.
We aim to invest with managers
meeting the following criteria:
• Greater than 50% effective black
(South African) ownership with
equivalent voting rights;
• Greater than 50% black (South
African) board members; and
• Greater than 50% black
(South African) investment
professionals.
Product Information:30 September 2019
Gross Bonuses(%)
Enjoy the benefits of asmooth investmentreturn:• Stable monthly bonuses
• Market-related performance
• Guarantees on benefit payments (resignation,
retirement, retrenchment, disability and death)
• Peace of mind irrespective of marketconditions.
Gross Bonus* CPI Inflation
1 month 0.5% 0.3%
3 months 1.9% 0.9%
6 months 3.8% 2.2%
1 year 6.2% 4.1%
* Gross bonuses net of guarantee fee, gross of investment fee
26
AssetComposition
Top 10Holdings
ManagerSelection
Cash9%
Bonds24%
Property7%
Equities36%
Foreign24%
Asset Class Managers
RSA EquityKagiso, Sentio, Benguela,
Aeon, Aluwani
RSA Bonds Argon
RSA Property Sesfikile
RSA Cash Prowess
International Equity 27four
International Property Sesfikile
% of Equity
Naspers 4.9
Standard Bank 2.1
Prosus 1.8
British American Tobacco 1.7
Anglo American 1.6
MTN Group 1.2
Mondi 1.1
FirstRand 1.1
Sasol 1.0
Northam Platinum 0.9
27
Record of Proxy VotingIn terms of the mandate you have given us, we vote your shares according to SIM’s Proxy Voting guidelines. A
full record of the “Against” votes cast by SIM is shown below. A complete record of all votes cast on your
shares is available on request.
28
Governance Structure
Asset & Liability CommitteeSanlam’s Asset Liability Committee (ALCO)
provides a strategic framework for the
management of Sanlam’s Smoothed Bonus
business. This includes determining the strategic
asset allocation and the setting of benchmarks and
risk parameters for Sanlam Investment
Management (SIM).
A sound governance structure is needed to manage discretionary participation business, which forms a
substantial proportion of Sanlam Life’s liabilities. The Sanlam Life Insurance Limited Board (“Sanlam
Life Board”) is ultimately responsible for the governance of discretionary participation business, but a
number of parties assist in this regard, including:
• the Board’s Audit, Actuarial and Risk Committee;
• the Board's Policyholders' Interest Committee;
• the Asset Liability Committee (ALCO);
• the Statutory Actuary; and
• the external auditors and their actuarial resources
Directive 147.A.i (LT) issued by the Financial Services Board requires insurers to define, and make
publicly available, the Principles and Practices of Financial Management (PPFM) that are applied in the
management of their discretionary participation funds.
The Sanlam Life Board has tasked its Policyholders’ Interest Committee to monitor compliance with the
PPFM on its behalf. The PPFM may change as the economic or business environment changes. Any
change to a Principle or Practice will be approved by the Sanlam Life Board, on recommendation from
the Statutory Actuary and the Policyholders’ Interest Committee.
The Asset-liability committee (ALCO), comprising Sanlam Life employees with actuarial, investment and
client solution backgrounds, oversees the investment policy for the various smoothed bonus portfolios.
AuthorityThe ALCO is mandated by the Sanlam Life Board
to oversee the investment management of the
portfolios mentioned within the Approval
Framework of Sanlam Personal Finance and
Sanlam Employee Benefits. It is a management
committee which reports on its deliberations and
activities to the Policyholders’ Interest as well as
the Audit, Actuarial and Risk committees of the
Sanlam Life Board.
34
Responsibilities for investment decisionThe role of ALCO is inter alia to:
• Find an appropriate balance between competitive investment returns and an acceptable degree of risk given
the nature of the policy liabilities.
• Establish, monitor and update investment parameters outlined in Investment Guidelines that reflect the
objectives of the funds under consideration.
• Assess the Sanlam Group’s ability to meet its empowerment financing targets in terms of the Financial Sector
Charter.
• Balance the interests of shareholders and policyholders with regard to the relevant portfolios.
• Obtain feedback and reporting on markets, investment actions undertaken and the performance and
attribution of the underlying funds.
• Ensure compliance with legislation and policyholder reasonable benefit expectations.
• Debate potential new types of investment opportunities that may further optimize the portfolios’ risk return
profile.
CompositionThe ALCO is a joint forum on which executives from Sanlam Life and SIM are represented. The Committee
comprises of:
• Statutory Actuary (chairman)
• Chief Executive: Actuarial
• Other representatives of Sanlam Life:
− Sanlam Personal Finance Client Solutions
− Sanlam Structured Solutions
− Actuarial
− Risk Management
• Head: Asset Liability Solutions of SIM
• Other representatives of SIM
Responsibility for investment decisions
Decision Responsibility
Strategic asset allocation ALCO
Benchmarks per asset class ALCO
Tactical asset allocation SIM
Stock selection SIM
Risk parameters ALCO
35
Financial Strength
Sanlam Employee Benefits is part of Sanlam Life, a South African insurance giant. Our
policies are backed by the considerable financial strength of Sanlam Life, providing
security and peace of mind.
The capital levels of Sanlam Life are shown below:
31 December 2018
Solvency Capital Requirement (SCR): 221%
Sanlam Life has a Standard & Poor’s (S&P) credit rating of zaAAA.
36
SmoothedBonus –Roles
Rhoderic NelBCom Certificate in Finance & Investments
CEO SEB Investments
Sanlam Employee Benefits: Investments
Danie vanZylB.Com (Hons), FIA, FASSA
Head: Guaranteed Investments
Sanlam Employee Benefits: Investments
Samantha NaidooActuarial Specialist
Sanlam Employee Benefits:
Investments
Bethuel KoraseActuarial Specialist
Sanlam Employee Benefits: Investments
Lorraine LoubserAssistant: Guaranteed Investments
Sanlam Employee Benefits: Investments
Susan GeorgeContracts
Sanlam Employee Benefits: Investments
37
38
FurtherInformation
Visit our website at:
http://sanl.am/sebi
Protection-focused Solutions
Structured investmentsand retirement fund solutions for a comfortable retirement.
Our guaranteed investments provide retirement fund memberswith smoothed, real returns and capital
protection to protect and grow retirement savings. The portfolios offer full or partial guarantees on benefit
payments for death, disability, resignation, retrenchment and retirement. Bespoke asset liability matching or
liability- driven investment solutions cater for both pre- and post-retirement liabilities. Our annuities provide
guaranteed, regular income for life.
SmoothedBonusPortfoliosProtect your investment
from short-term downturns
andvolatility through
monthly bonuses that that
are designed to providea
smooth return.
More
AnnuitiesReceive a regularincome
throughout retirement for
peace of mind. You can
choose to increase your
income by a level
percentage, or an increase
linked toe either inflation or
underlying investment
portfolio’s growth.
Asset-LiabilityMatchingSolutionsMatch liabilities by investing in
assete that move in linewith
the liabilities, taking into
account future
required increases. The full
range of liability- driven
investment strategies caters for
each client’s specific risk-return
objectives, making use of
different enhancing strategies for
outperformance.
Lifestage SolutionGrow your retirement savings by investing in a solution that
automatically switches you into appropriate risk- return
portfolios throughout your life.
Post-Retirement MedicalAid (PRMA)SolutionsThis is a comprehensive solution, wich could
entail removing the liability from the balanced
sheet, or setting up a plan asset or various
funding solutions funded via an asset liability
matchingstrategy.
More More
More More
call usAny queries may be mailed to:Sanlam Employee Benefits: Investments
Private Bag X8
Tyger Valley
7536
Call us at: (021)950-2500
If you have any recommendations to enhance this
document, please write to the above address.
Any queries regarding legal compliance issues should be made
in writing and addressed to:
The Compliance Officer
Sanlam Employee Benefits
PO Box 1
Sanlamhof
7532
South Africa
Disclaimer
Sanlam Life Insurance Ltd is an authorised financial services provider.
This survey is for the use of Sanlam and its clients only and may not be published externally
without permission first obtained from Sanlam. While all reasonable attempts are made to
ensure the accuracy of the information, neither Sanlam nor any of its subsidiaries makes any
express or implied warranty as to the accuracy of the information. Past performance is not
necessarily a guide to future returns. Investment returns can be positive or negative. The
material is meant to provide general information only and not intended to constitute
accounting, tax, investment, legal or other professional advice or services. This information
should not be acted on without first obtaining appropriate professional advice. The use of this
document and the information it contains is at your own risk and neither Sanlam nor any of its
subsidiaries shall be responsible or liable for any loss, damage (direct or indirect) or expense
of any nature whatsoever and howsoever arising.