ASSET MANAGEMENT INVESTMENT REPORT - Absa Summary Market summary 01 Fund performance 01 House asset...

ASSET MANAGEMENT

INVESTMENTREPORT

4th QUARTER 2017

www.abam.co.za

CONTACT DETAILSSandton Campus South, 2nd Floor,

15 Alice Lane, Sandton, Johannesburg, 2196

Tel no: +27 (0) 800 111 456 Fax no: +27 (0) 86 532 2607

Email: [email protected] completed in January 2018

A word from our MDBy Ann Leepile

Keeping our cool in 2018

The beginning of a new year is an opportunity for any

business or individual to look back on the past year and

assess achievements, mistakes and resolutions for the

coming year.

Meet the authorAnn Leepile

MD: Absa Asset Management

As an active management business, we need to be well

positioned for all market scenarios but ultimately as

active managers, we are paid by our clients to take

“active” positions in the market. We are happy that on

the whole, we were able to produce good alpha for our

clients without having taken on too much risk and that

our active positions were rewarded with impressive

performance.

Six franchises were formed to focus on

the strengths and capabilities within the

investment team

The markets seem to have a knack for throwing some

interesting surprises our way as the year winds down.

This December was no different; the ANC Elective

conference had all market participants glued to their

seats in anticipation, Naspers rumours of ill-gotten

contracts and the Steinhoff scandal created major

ructions in the market, just as people were hoping to

start winding down.Assets under management at an all-time

high

As a business we are happy to report our assets under

management were over R130bn for the first time at the

end of December 2017. This was on the back of a pretty

challenging year for all active fund managers. We run

on a franchise model comprised of six franchises,

Equities, Africa, Property, Fixed Interest, Balanced and

Absolute Return. I am happy to report that of the six

franchises, four of them have produced funds with

performance in the first quartile for the 2017 year, which

will stand us in good stead for future asset raising in

2018. In line with the positive performance numbers we

are seeing, we were able to add over ten new

institutional clients and many new retail clients onto our

books over the past year. We thank them for having

entrusted us with their money and we hope this will be

the beginning of some very long and successful

relationships.

Assets under management at an all-time

high

Some great new people have joined the

family

We welcomed some new staff into the ABAM family in

the last quarter of the year. We hope that clients will feel

their addition to our business in a positive way.

What we hope 2018 will bring is continued embedment

of our franchise model, further positive asset flows into

our business and a strengthening of the Absa Asset

management brand as a multi-capability, pragmatic

value house.

Once again, I would like to assure you of our continued

commitment to our clients and our people, this business

gets stronger and stronger each year and together with

your support as our valued clients, we expect that to

continue.

INVESTMENT

CONTENTS

REPORT

Summary

Market summary 01

Fund performance 01

House asset allocation 02

Snapshot

Forecasts and tactical positioning 02

Markets at a glance 03

Absa Select Equity Fund 04

Absa Core Equity Fund 06

Absa Large Cap Fund 08

Absa Africa Equity Fund 10

Absa Property Equity Fund 12

Absa Balanced Fund 14

Absa Absolute Fund 16

Absa Bond Fund 18

Absa Money Market Fund 20

01

South African Asset Classes

Equities 22

Property 23

Bonds 24

Cash 25

22International Asset Classes

Equities 26

Bonds 27

Cash 28

Currencies 29

Emerging markets 30

26

Glossary 31

SUMMARY

INVESTMENT REPORT | 1

Local Global

FUND PERFORMANCES TO 31 DECEMBER 2017

MARKET SUMMARY

3 months 1 year (p.a.) 3 years (p.a.) 5 years (p.a.)

Fund Size (R million)

% Return Benchmark Median % Return Benchmark Median % Return Benchmark Median % Return Benchmark Median

Equity Funds

Absa Large Cap 3.3 6.7 6.5 13.6 23.1 22.2 8.5 9.2 8.4 12.2 11.8 10.9 1 073

Absa Property Equity 7.3 8.3 7.1 26.8 17.2 15.1 21.1 11.7 11.1 22.2 13.9 13.5 4 321

Absa Select Equity 7.6 7.4 5.4 13.5 21.0 12.7 4.7 9.3 5.9 7.9 11.9 9.8 3 307

Absa SA Core Equity 6.9 9.6 5.4 17.5 21.2 12.7 46

Multi Asset Funds

Absa Absolute A 2.2 1.8 1.4 6.4 8.6 8.5 5.4 9.3 6.6 6.8 9.4 8.2 9 334

Absa Balanced R 2.8 2.1 1.7 10.4 9.6 9.4 6.7 10.3 6.2 8.6 10.4 8.8 2 079

Absa Flexible Growth 2.9 2.1 2.5 9.6 9.6 9.4 6.6 10.3 6.0 9.2 10.4 8.9 2 910

Absa Flexible Income 1.9 1.8 1.9 8.5 7.5 8.5 7.5 7.1 7.5 6.1 6.5 6.5 1 384

Absa Tactical Income A 1.9 2.0 1.9 65

Absa Inflation Beater 2.5 0.9 1.4 9.0 4.6 8.5 6.1 5.3 6.6 6.1 5.4 8.2 398

Absa Managed A 2.6 2.3 2.1 10.1 10.6 10.1 6.5 11.3 6.5 9.0 11.4 9.8 92

Interest Bearing Funds

Absa Bond 2.2 2.2 2.1 11.3 10.2 10.0 8.1 6.9 6.7 6.6 6.3 6.4 2 459

Absa Core Income A 2.0 1.9 1.9 9.6 7.7 8.6 520

Absa Income Enhancer 2.0 1.8 1.9 9.2 7.5 8.6 7.9 7.1 7.9 6.6 6.5 7.0 599

Absa Inflation Linked Income A 1.8 1.4 2.1 9.0 6.6 10.0 880

Absa Money Market 1.8 1.8 1.8 7.6 7.5 7.7 7.2 7.1 7.2 6.4 6.5 6.5 66 205

International Funds

Absa Africa Equity A -3.6 -6.3 -4.8 12.8 11.0 10.0 -2.0 -0.2 -3.6 461

Absa Global Core Equity FF A -2.4 -3.2 -3.4 7.1 11.4 10.4 6 746

Absa Global Multi Asset FF A -6.0 -7.8 -6.9 -6.0 -6.6 -2.3 1 036

Absa Global Property FF A -3.7 -3.2 -4.7 2.3 11.4 0.4 156

Absa Global Value -4.1 -3.2 -3.4 8.2 11.4 10.4 12.7 12.4 9.8 19.9 21.1 17.8 876

Absa Euro Income -6.4 -7.3 2.0 2.5 1.0 1.8 5.0 5.9 19

Absa Sterling Income -6.2 -7.0 -0.5 0.6 -2.2 -1.8 3.9 4.2 98

Absa US Dollar Income -8.3 -8.4 -8.8 -8.7 2.3 3.2 7.6 8.5 90

In South Africa the quarter was dominated by the ANC

elective conference. The rand, bonds and domestic

equities responded strongly to what was interpreted as a

market friendly outcome. The rand strengthened by

10.7% during December and helped the bond market to

recover from the ratings downgrades earlier in the

quarter.

Global equity markets ended the year on a positive note.

The MSCI World Index returned 5.6% during the final

quarter and ended the year up 22.8% in US dollars.

Global earnings has recovered strongly during 2017

supported by synchronized global economic growth, low

inflation and highly accommodative monetary policy.

SNAPSHOT


South Africa

ASSET ALLOCATION

Asset Class Allocation Comments

Equity UnderweightMarkets significantly overvalued both locally and globally. Low global rates

and excess money supply is driving elevated PE’s.

Listed Property Overweight

Recent de-ratings have seen property yields showing better value than

bonds and equities. A weak economy however poses a risk to domestic

property counters. European property remains very attractive.

Bonds Overweight

Bonds performed strongly in the year. However, emerging market bonds

still look attractive. South African bonds are vulnerable to future potential

downgrades. We see upside risk to global interest rates in coming years.

Cash OverweightA good defensive asset as cash is still the “safe” asset class, which gives

optionality if markets sell off.

Foreign Full weight

Full exposure to foreign assets is maintained as a hedge against further

rand weakness/ volatility that may emerge as a result of political events.

There is a substantial possibility that there may be further downgrade

announcements from the various ratings agencies.

2016A 2017E 2018E 2019E

South Africa

Real retail spending 1.90% 0.8% 1.70% 2.10%

Real Investment 0.0% 0.7% 0.75% 2.10%

GDP growth 0.30% 0.7% 1.50% 1.90%

CPI – average 6.40% 5.2% 5.00% 5.20%

Prime – EOP 10.50% 10.5% 10.25% 10.25

Rand/USD – EOP 13.69 13.50 14.26 14.16

MARKETS


AT A GLANCE

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

a

All Bond total returns

3-yr rolling return 5-yr rolling return

5

6

7

8

9

10

11

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

a

Money market total returns


4

5

6

7

8

9

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

a

CPI and CPI food 5-yr rolling inflation rates

CPI CPI Food

8

16

32

64

128

256

60

120

240

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Oil

($/b

arr

el) n

atu

ral lo

g s

cale

Metals and Oil

Metals $ index Brent crude oil

Meta

ls (

2000=

100)

natu

ral dog s

cale

500

1000

1500

2000

2500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Gold and Platinum

$ Gold Platinum spot (US$/oz)

-10

-5

0

5

10

15

20

25

500

2000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

Index (

natu

ral lo

g s

cale

)

Morgan Stanley world equity index

Index 5-yr rolling total return

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

0 3 6 9 12 15 18 21 24 27 30

Yie

ld

Years

All Bond index yield curve

31 Dec 17 30 Sep 17

0

10

20

30

40

50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

Alsi total returns



Absa

Fund comments

Select Equity Fund

Performance was

helped by

• The Absa Select Equity Fund ranked in the second

quartile of funds listed in the Morningstar SA General

Equity Fund category. The local equity market was

buoyant during the year, along with global markets,

driven by broad-based strength across all the major

sectors.

• The fund benefitted from being positioned in mining

majors Glencore and Anglo American, which gained

nearly 40% during the year, boosted by stronger

commodity prices over the period.

Global markets remain

resilient, which should

benefit the local market

Absa

Relative return contribution (1 year)


Top weightings vs benchmark as at

31 December 2017

Performance: Total returns to 31 December 2017 (%)

Select Equity Fund

1-year sector attribution

-10%

0%

10%

20%

30%

40%

Oil

& G

as

Basic

Mate

rials

Ind

ustr

ials

Con

su

mer

Go

od

s

Hea

lth

Ca

re

Con

su

mer

Serv

ices

Tele

com

mu

nic

atio

ns

Fin

an

cia

ls

Tech

no

log

y

Fund Benchmark Relative

Industry allocation compared to the Alsi

31 December 2017

Fund 15.37

Benchmark 20.95

Relative return -5.58

Sector Relative return contribution

Basic Materials 0.19

Industrials -0.19

Consumer Goods -0.33

Health Care -0.48

Consumer Services -5.25

Telecommunications 0.56

Technology 0.41

Financials 0.55

Additional -0.32

Cash & Money Market -0.72

Fund -5.58

TermAbsa Select

EquityBenchmark

Sector

medianRank

Quarter 7.6 7.4 5.4 47/182

1 year 13.5 21.0 12.7 73/165

3 years 4.7 9.3 5.9 93/128

5 years 7.9 11.9 9.8 81/103

-6.56

-0.63 -0.63 -0.60-0.36

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Naspe

rs

Netc

are

Rein

et

Inve

stm

en

ts

AB

InB

ev

San

lam

Top 5 detractors (%)

0.33 0.350.61 0.66

0.94

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Gle

nco

re

Firstr

and

Gre

enb

ay

Mr

Price

Ste

inh

off

Top 5 contributors (%)

-12.71

-3.40

-2.61-1.93

-1.60

-14

-12

-10

-8

-6

-4

-2

0

Naspe

rs

BH

P B

illito

n

Ric

he

mo

nt

San

lam

Rem

gro

Top 5 underweight (%)

2.332.67 2.69

3.093.88

0

2

4

6

8

10

12

14

Firstr

and

Ang

lo

Old

Mu

tual

Rein

et

Bid

co

rp

Top 5 overweight (%)


Absa

Fund comments

SA Core Equity Fund

Commodity process

strong

Overweight

positions

• The Absa SA Core Equity Fund returned 17.5% for

the year, ranking in the top quartile in its peer group.

The local equity market rallied in 2017, with all

sectors delivering solid returns.

• Steinhoff’s share price collapsed on news of

accounting irregularities, the fund carried a small

overweight position in the counter. Given the lack of

information at this point in time, we have maintained

our position in Steinhoff and will continue to

reassess our holding, which is now only 0.6% of the

fund, as and when information comes to light.

• On the back of strong commodity prices, mining

houses like Glencore and Anglo American delivered

returns of nearly 40% for the year. The fund holds

meaningful positions in both these counters.

WEIGHED ON

PERFORMANCE

1st quartile over 1

year

Absa




31 December 2017


SA Core Equity Fund


-10%

0%

10%

20%

30%

40%

Oil

& G

as

Basic

Mate

rials

Ind

ustr

ials

Con

su

mer

Go

od

s

Hea

lth

Ca

re

Con

su

mer

Serv

ices

Tele

com

mu

nic

atio

ns

Fin

an

cia

ls

Tech

no

log

y


Industry allocation compared to the Swix

31 December 2017

Fund 18.30

Benchmark 21.21



Basic Materials 0.56

Industrials 0.52


Health Care 0.21



Technology -1.51

Financials 0.86


Fund -2.91

TermAbsa SA Core

EquityBenchmark

Sector

medianRank

Quarter 6.9 9.6 5.4 61/182

1 year 17.5 21.2 12.7 34/165

-1.62 -1.58 -1.56

-0.55

-0.31

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

EO

H

Naspe

rs

Ste

inh

off

Investe

c

Dis

co

ve

ry


0.25 0.25 0.28

0.40 0.40

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Mo

nd

i

Ran

d M

erc

han

tIn

vestm

ents

Impe

ria

l H

old

ings

Barc

lays A

fric

a

Bra

it


-7.16

-1.87

-1.22 -1.14 -1.02

-8

-7

-6

-5

-4

-3

-2

-1

0

Naspe

rs

Barc

lays A

fric

a

Gro

wth

po

int

Nep

i R

ockcastle

Rem

gro


1.67 1.76 1.812.32

2.81

0

1

2

3

4

5

6

7

8

Foschin

i

Bid

co

rp

San

lam

British A

me

rica

n T

ob

acco

Investe

c



Absa

Fund comments

Large Cap Fund

CONTRIBUTING POSITIVELY

TO RELATIVE PERFORMANCE

• The Absa Large Cap Fund had a soft fourth quarter

with the fund returning around 3.3% compared to its

benchmark which delivered 6.7%.

• Over 10 years the annualized relative performance

of 11.4% outperforms the benchmark at 10.3%.

Overweight position in

Steinhoff. Underweight

positions in Naspers and

Standard Bank.

GLOBAL GEOPOLITICS

REMAINS A RISK FOR

MARKETS

Trump presidency

Brexit negotiations

US/Korean tension

Absa




31 December 2017


Large Cap Fund


-10%

0%

10%

20%

30%

40%

Oil

& G

as

Basic

Mate

rials

Ind

ustr

ials

Con

su

mer

Go

od

s

Hea

lth

Ca

re

Con

su

mer

Serv

ices

Tele

com

mu

nic

atio

ns

Fin

an

cia

ls

Tech

no

log

y


Industry allocation compared to the FTSE/JSE

Top 40 Index at 31 December 2017

Fund 14.78

Benchmark 23.07



Basic Materials -0.68

Industrials 0.12


Health Care 0.46



Technology -0.92

Financials 0.85

Additional 0.12


Fund -8.29

TermAbsa Large

CapBenchmark

Sector

medianRank

Quarter 3.3 6.7 6.5 11/11

1 year 13.6 23.1 22.2 10/11

3 years 8.5 9.2 8.4 5/10

5 years 12.2 11.8 10.9 1/8

-2.75

-2.27

-1.07

-0.83 -0.81

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Ste

inh

off

Naspe

rs

EO

H

Sta

nda

rd B

ank

British A

me

rica

n T

ob

acco


0.240.34

0.430.55

0.70

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Life H

ealth

ca

re

Rem

gro

Gre

enb

ay

Nep

i R

ockcastle

Barc

lays A

fric

a


-7.00

-1.94-1.72

-1.23 -1.15

-8

-7

-6

-5

-4

-3

-2

-1

0

Naspe

rs

Rem

gro

Sta

nda

rd B

ank

Gro

wth

po

int

Bid

ve

st


1.47

2.082.48

2.86

4.88

0

1

2

3

4

5

6

7

8

Bid

co

rp

Ang

lo A

meri

can

Pla

tinu

m

Barc

lays A

fric

a

Firstr

and

British A

me

rica

n T

ob

acco



Absa

Fund comments

Africa Equity Fund

FUND EXPOSURES

Underweighting in Nigeria for

the duration of 2017

Egypt = largest exposure

SYNCHRONISED BULL MARKETS IN

NORTH AND SUB-SAHARAN EMERGING

AND FRONTIER EQUITY MARKETS

• The fourth quarter of 2017 saw gains across most

markets in Africa. Top performers were Egypt

(+7.3%) and Nigeria (+7.3%). This capped off a

stellar year in which investors were rewarded for

their years of patience in the asset class with

synchronized bull markets across North and Sub-

Saharan Emerging and Frontier equity markets.

• The strengthening of the South African rand against

the dollar meant that in rand terms, the MSCI EFM

Africa ex South Africa benchmark was down 6.3%

for the quarter (+2.6 in US dollars) and up 11.0% for

the year (+22.3% in US dollars).

• In rand terms, the fund was down -3.6% for the

quarter and up 12.8% for the year (+25.1% in US

dollars net of fees), outperforming by 2.7% and 1.8%

for the quarter and the year, respectively.

#1 performing fund over

3 years

Absa

Regional/sectoral split as at 31 December 2017


Relative sector weightings as at

31 December 2017Performance: Total returns to

31 December 2017 (%)

Africa Equity Fund

Region/Sector Egypt Kenya Morocco Mauritius Namibia Nigeria Tanzania Senegal South Africa Zambia

Financials 18.7% 2.3% 1.5% 7.0% 2.6% 9.6% - - - -

Consumer Discretionary 1.6% - - - - 0.9% - - - -

Consumer Staples 12.1% - 9.1% - - - - - - -

Consumer Staples - 1.9% - - - - 1.0% 4.5% 2.2% -

Materials - - - - - - - - - 0.3%

Industrials - - - - - - - - - -

Energy 1.0% - - - - 8.5% - - - -

Health Care 6.7% - - - - - - - - -

Utilities - 5.4% - - - - - - - -

Information Technology - - - - - - - - - -

Other - - - - - - - - - -

Cash -3.1% - - -1.4% - 1.5% 0.0% -1.0% -0.9% -

Bonds 8.2% - - - - - - - - -

Grand Total 45.1% 9.6% 10.6% 5.7% 2.6% 20.4% 1.0% 3.5% 1.2% 0.3%

-14.00

-9.58-8.47

-16

-14

-12

-10

-8

-6

-4

-2

0

Fin

an

cia

ls

Ma

teria

ls

Tele

com

mu

nic

atio

n S

erv

ice

s

Top underweight (%)

2.54

5.00

6.93

8.70 8.89

0

2

4

6

8

10

12

14

16

Con

su

mer

Dis

cre

tion

ary

Utilit

ies

Hea

lth

Ca

re

Ene

rgy

Con

su

mer

Sta

ple

s

Top overweight (%)Term

Absa Africa

Equity FF ABenchmark

Sector

medianRank

Quarter -3.6 -6.3 -4.8 2/5

1 year 12.8 11.0 10.0 2/5

3 year -2.0 -0.2 -3.6 1/5


Absa

Fund comments

Property Equity Fund

#1 performing

fund over 1, 3

and 5 years

5 YEAR RETURN

22.2 % p.a.

10 YEAR RETURN

14.9 % p.a.

• The fund delivered a total return of 26.8% for the 2017 year.

This equates to an outperformance of both the listed

property index by 9.6% and the median manager by 11.7%.

• In terms of relative asset class performance, the SA listed

property sector delivered positive growth in 2017 with a

17.2% total return performance, underperforming equities

(21.0%) but outperforming bonds (10.2%) and cash

(7.5%). However, over the longer period, listed property has

continued to be one of the best performing asset classes,

returning 14.9% p.a. over the last 10 years, beating the

returns on equities (10.7%), bonds (8.6%) and cash (7.1%).

LISTED PROPERTY

6.3% 6.7%

Historical yield Forward yield

Relative return contributors (1 year)



31 December 2017


AbsaProperty Equity Fund

-1.34 -1.34

-0.45 -0.43 -0.35

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Arr

ow

he

ad

Pro

pe

rtie

s L

imite

d A

Absa M

one

y M

ark

et

Ut

Rockca

stl

Nep

i

Acce

lera

te P

rope

rty F

un

d


1.54 1.581.79

2.10

4.97

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Equ

ite

s P

rope

rty F

und

Nep

i R

ockcastle P

lc

Red

efine

Pro

pe

rtie

s L

imite

d

Ma

s R

ea

l E

sta

te In

c

Gre

enb

ay P

rope

rtie

s


-17.39

-12.29

-4.83

-3.14 -2.68

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Gro

wth

po

int P

rop

s

Red

efine

Fort

ress In

co

me F

un

d A

Atta

cq

Lim

ite

d

Hyp

rop


4.966.30 6.37

7.75

9.33

0

2

4

6

8

10

12

14

16

18

20

Fort

ressb

Vukile

Gre

enb

ay P

rop L

td

Equ

ite

s P

rope

rty F

und

Ma

s R

ea

l E

sta

te


TermAbsa Property

Equity ABenchmark

Sector

medianRank

Quarter 7.3 8.3 7.1 17/43

1 year 26.8 17.2 15.1 1/39

3 years 21.1 11.7 11.1 1/31

5 years 22.2 13.9 13.5 1/23


Absa

Fund comments

Balanced Fund

DOMESTIC EQUITIES

FUND IS CONSERVATIVELY

POSITIONED HOLDING HIGH

LEVELS OF CASH, BONDS AND

DEFENSIVE, HIGH QUALITY,

UNDERVALUED EQUITIES.

RAND UP 10.7% IN

DECEMBER

BANKS +8.4% IN

DECEMBER

RESOURCES (-0.5%)

• Global equity markets ended the year on a positive

note. The MSCI World Index returned 5.6% during

the final quarter and ended the year up 22.8% in US

dollars. By comparison, global bonds (the perceived

safe haven asset class) performed relatively poorly.

The JP Morgan Global Aggregate Bond Index

returned 1% during the final quarter and 7% for the

full year.

• The rand, bonds and domestic equities responded

strongly to what was interpreted as a market friendly

electoral conference. The rand strengthened by

10.7% during December and bonds generated a

total return of 11% during 2017. Equity was the star

performer with a total return of 20.7%. This return

was heavily concentrated in Naspers and the mining

stocks.

INDUSTRIALS (-4%)

Absa

Gross return contributors (1 year)


Top weightings (excluding property) vs Capped

Swix as at 31 December 2017


Balanced Fund

Asset allocation as at 31 December 2017

7.25

2.73

0.88

0.58

-0.09

-2.0 0.0 2.0 4.0 6.0 8.0

Domestic equity

Domestic bonds

International equity

Domestic cash

International cash

Domestic equity 33.7%

Domestic bonds 20.2%

Domestic property 10.7%

Domestic cash 8.3%

International equity 25.2%

International fixed interest and property 0.9%

International money market 0.9%

Total 100%

-40%

-20%

0%

20%

40%

60%

80%

12+ Yr Sector 7 - 12 Yr Sector 3 - 7 Yr Sector 1 - 3 Yr Sector

Fund All Bond Index Difference

Bond comparison to the All Bond Index

at 31 December 2017

TermAbsa

Balanced RBenchmark

Sector

medianRank

Quarter 2.8 2.1 1.7 19/85

1 year 10.4 9.6 9.4 28/80

3 years 6.7 10.3 6.2 18/62

5 years 8.6 10.4 8.8 26/49

-4.23

-1.80 -1.79-1.62 -1.59

-5

-4

-4

-3

-3

-2

-2

-1

-1

0

Naspe

rs

Sho

pri

te

San

lam

Firstr

and

Vod

acom


4.39

3.323.13

2.97 2.87

0

1

1

2

2

3

3

4

4

5

5

AB

InB

ev

JS

E

Afr

ica

n R

ain

bo

w C

apital

Woo

lies

Spa

r G

roup


-15%

-5%

5%

15%

25%

35%

45%

55%

Oil

& G

as

Basic

Ma

terials

Indu

str

ials

Co

nsu

me

r G

oo

ds

He

alth

Care

Co

nsu

me

r S

erv

ice

s

Tele

com

mu

nic

ation

s

Fin

ancia

ls

Tech

no

log

y


Industry allocation compared to the Capped

Swix as at 31 December 2017


Absa

Fund comments

Absolute Fund

STRONG RECOVERY

IN AGRICULTURE AND

MINING SECTOR GDP

NERSA grants Eskom

electricity tariff increase of

only 5.2%

TOP

QUARTILE

for Q4 2017

• The fund improved its rolling 1-year performance as

at the end of December 2017 by 2.1% relative to the

target return of CPI+4%, compared to the same

period as at the end of September 2017.

• The improvement came as a result of increased

focus on risk premium harvesting and portfolio

optimization to deliver CPI+4% while minimizing risk

of capital loss.


Gross return contributors (1 year)

Asset allocation as at 31 December 2017

Top equities (excluding property)

as at 31 December 2017


AbsaAbsolute Fund

4.29

3.53

0.49

0.04

-0.04

-0.13

-1.0 0.0 1.0 2.0 3.0 4.0 5.0

Domestic equity

Domestic bonds

Domestic cash

International bonds

International equity

International cash

Domestic equity 22.2%

Domestic bonds 50.2%

Domestic cash 18.6%

International equity 7.5%

International bonds 1.4%

International money market 0.1%

Total 100%

% of

PortfolioBHPBil 5.6

Naspers 5.6

Old Mutual 5.5

Alexander Forbes Group Holdings 5.0

MTN Group 4.8

Total 26.6

Fund generated negative returns

To 31 December 2017

Since inception Periods %

Any quarter 11/131 8%

Any 6 months 1/128 1%

Any 1-year rolling period 0/122 0%

Any 2-year rolling period (ann.) 0/110 0%

Any 3-year rolling period (ann.) 0/98 0%

TermAbsa

Absolute ACPI+4%

Sector

medianRank

Quarter 2.2 1.8 1.4 34/147

1 year 6.4 8.6 8.5 120/138

3 years 5.4 9.3 6.6 90/100

5 years 6.8 9.4 8.2 69/79

90

110

130

150

170

190

210

230

250

270

290

310

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

No

v-1

0

No

v-1

1

No

v-1

2

No

v-1

3

No

v-1

4

No

v-1

5

No

v-1

6

No

v-1

7

Absa Absolute Fund CPI CPI + 4%

Source: Morningstar; All figures are net (after fees)

Cumulative performance to 31 December 2017


Absa

Fund comments

Bond Fund

HIKES THE REPO

RATE 25 BASIS

POINTS

DOWNGRADE SA LONG

TERM LOCAL AND

FOREIGN CURRENCY

RATINGS TO SUB-

INVESTMENT GRADE

• The Bond fund maintained a tactically defensive

position over the quarter given the potential for

intense volatility surrounding political, fiscal and

ratings risks over the quarter. The fund will continue

to adjust its duration and exposure as required over

the year ahead.

• For domestic fixed income markets the October

Medium Term Budget Policy Statement delivered a

harsh yet realistic assessment of the domestic

economy. With R210bn of revenue shortfalls and a

budget deficit of 4.3% of GDP this year, severe steps

are required to address the weakness at next year’s

budget as gross government debt to GDP is

expected to reach 60%.

OIL PRICE $66 BY

YEAR END

The MPC left

rates on hold in

November



AbsaBond Fund

Performance: Total returns to 31 December 2017 (%)Bond comparison to the All Bond Index as at

31 December 2017

95

105

115

125

135

145

155

Absa Bond Fund All Bond Index


-60% -40% -20% 0% 20% 40% 60% 80%

12+ Yr Sector

7 - 12 Yr Sector

3 - 7 Yr Sector

1 - 3 Yr Sector

Difference All Bond Index Fund

TermAbsa Bond

FundBenchmark

Sector

medianRank

Quarter 2.2 2.2 2.1 15/34

1 year 11.3 10.2 10.0 3/33

3 years 8.1 6.9 6.7 3/22

5 years 6.6 6.3 6.4 8/18


Absa

Fund comments

Money Market Fund

MPC keeps the repo

rate on hold at

6.75%

The South African Reserve Bank

(SARB) revised its inflation forecast

higher to 5.2% and 5.5% in 2018 and

2019 from 5.0% and 5.3% respectively

S&P DOWNGRADE SOUTH

AFRICA’S LONG-TERM LOCAL

AND FOREIGN CURRENCY

RATING BY ONE NOTCH TO

SUB-INVESTMENT GRADE

(JUNK)

Moody’s placed South

Africa on review for a

possible downgrade

• The money market yield curve flattened toward the

end of the quarter. The 1 year NCD rate traded at a

high of 8.35% after the MPC’s decision not to cut

interest rates and more hawkish statement. The

3mth Jibar rate moved 17 basis points higher to

7.158% while the 1 year NCD rate closed at 7.80%.

• The weighted average duration on the money market

fund continues to be kept relatively close to the

maximum permitted weighted average duration of

120 days.

Absa


Money Market Fund


3.10%

17.77%

13.14%

56.63%

9.35%

0.0 0.1 0.2 0.3 0.4 0.5 0.6

9 - 12 months

6 - 9 months

3 - 6 months

0 - 3 months

Cash

Duration allocation

90

110

130

150

170

190

210

230

250

270

290

310

330

350

370

390

410

430

Apr-

00

Apr-

01

Apr-

02

Apr-

03

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

Apr-

15

Apr-

16

Apr-

17

Absa Money Market Fund STeFI Composite



Absa P-1.za, 21.00%

Firstrand P-1.za,

15.61%

Investec P-1.za,

19.25%

SA Gov P-1.za, 0.31%

Nedcor P-1.za,

20.60%

Standard Bank P-1.za,

23.21%

Issuer exposures at 31 December 2017

TermAbsa Money

MarketBenchmark

Sector

medianRank

Quarter 1.8 1.8 1.8 23/32

1 year 7.6 7.5 7.7 22/31

3 years 7.2 7.1 7.2 13/25

5 years 6.4 6.5 6.5 22/24


South African

SA equities

ASSET CLASSES

0

10

20

30

40

-6 -3 0 3 6 9 12 15

% m

onth

s in tim

e p

eriod

Monthly returns (%)

Distribution of SA equity returns (January 2006 to December 2017)

0

10

20

30Historical PE ratios of FTSE/JSE sectors

Last 10 years As at: 31 Dec 2017

0

500

1000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index:

Jan 2

006=

100

Price indices

All Share Financials Resources 20 Industrials

0

20

40

60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

Alsi total returns


Equity was the star performer during 2017, having

generated a total return of 20.7%. This return was heavily

concentrated in Naspers and the mining stocks. Banks

returned +8.4% in December while Industrials (-4%) and

Resources (-0.5%) were negatively impacted by rand

strength. The industrial index was also negatively

impacted by Steinhoff’s spectacular fall from grace.


South African

SA property

ASSET CLASSES

-5

5

15

25

35

45

55

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

3-year rolling returns

Listed Property index All bond index

FTSE/JSE Top 40 Index STeFI Index

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

5-year rolling returns

Listed Property index All bond index

FTSE/JSE Top 40 Index STeFI Index

After the recent de-rating, property yields are showing

better value than either bonds or equities. However, the

weak economy poses a risk to domestic names.


South African

SA bonds

ASSET CLASSES

0

20

40

-3 -1 0 1 3 5 7 9

Monthly returns (%)

Distribution of SA bond returns (January 2006 to December 2017)

% m

onth

s in t

ime p

eriod

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

a

Bond yields

R209 (31.03.2036) R186 (21.12.2025/26/27)

-15

-10

-5

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Real yield gap*

-1 standard deviation

average

+1 standard deviation

*Real long bond yield R186) (using CPI) minus earnings yield on equity

0

10

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

a

All Bond total returns


For domestic fixed income markets, the October Medium

Term Budget Policy Statement (MTBPS) delivered a

harsh yet realistic assessment of the domestic economy.

Ratings agencies assessed the budget as a significant

departure from the path of fiscal consolidation, causing

S&P to downgrade South Africa’s long-term local and

foreign currency ratings, now both at sub-investment

grade.


South African

SA cash

ASSET CLASSES

0

20

40

0.45 0.55 0.65 0.75 0.85 0.95 1.05% m

onth

s in tim

e p

eriod

Monthly returns (%)

Distribution of SA money market returns (January 2006 to December 2017)

6

7

8

9

1 3 5 7 9 11 13 15 17 19 21 23

%

Tenor in months

NCD rates Implied 3 month rates

NCD yield curve and implied forward rates

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Prime and NCD rates

Prime 3 month NCD 12 month NCD

5

7

9

11

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

a

STeFI Index total returns


The money market yield curve flattened toward the end

of the quarter. The 1 year NCD rate traded at a high of

8.35% after the MPC’s decision not to cut interest rates

and more hawkish statement. The 3-month Jibar rate

moved 17 basis points higher to 7.158% while the 1 year

NCD rate closed at 7.80%.


International equities

InternationalASSET CLASSES

0

5

10

15

20

25

30

35

40

-6 -3 0 3 6 9 12

% m

onth

s in tim

e p

eriod

Monthly returns (%)

Distribution of world equity returns(January 2006 to December 2017)

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index:

Jan 2

006=

100

Equity price indices

USA UK JapanGermany MSCI

Source: I-Net Bridge

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

PE ratios

USA UK Japan

Germany MSCI

Source: Bloomberg

-15

-10

-5

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

World equity total returns (USD)


Global equity markets ended the year on a positive note. The MSCI World Index returned 5.6% during the final quarter

and ended the year up 22.8% in US dollars. Global earnings has recovered strongly during 2017 supported by

synchronized global economic growth, low inflation and highly accommodative monetary policy.


ASSET CLASSES

International bonds

International

0

5

10

15

20

25

30

35

40

-3 -1 0 1 3 5 7

% m

onth

s in tim

e p

eriod

Monthly returns (%)

Distribution of world bond returns(January 2006 to December 2017)

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

10-year government bond yields

UK Germany USA Japan

-2

-1

0

1

2

3

4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Yield spreads with USA(US yield - foreign yield)

UK Germany Japan

-4

-2

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

World bond returns (USD)

3y rolling return 5yr rolling return

The Federal Reserve Bank followed through on guidance, hiking the repo rate 25 basis points at the December meeting,

while maintaining the forecast of a further three 25 basis point hikes in 2018. The European Central Bank kept its policy

rates unchanged at both fourth quarter monetary policy meetings and confirmed that stimulus through monthly asset

purchases would remain until at least September 2018.


ASSET CLASSES

International cash

International

0

5

10

15

20

25

30

35

40

45

50

0.01 0.06 0.11 0.16 0.21 0.26 0.31 0.36 0.41 0.46

% m

onth

s in tim

e p

eriod

Monthly returns (%)

Distribution of USD cash returns (January 2006 to December 2017)

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

UK Euro USA Japan

-1

0

1

2

3

4

5

6

7

2006 2008 2010 2012 2014 2016

%

3-month interest rates

UK Euro USA Japan

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Call rates

UK Euro USA Japan

The FOMC followed through on the expected rate-hike in December and raised its benchmark interest rate for the third

time this year by 0.25% to a target range of 1.25% to 1.50%.

The Bank of England’s Monetary Policy Committee (MPC) followed the Fed’s path of normalization and raised interest

rates for the first time in more than 10 years in November, in what was seen as a dovish hike.


ASSET CLASSES

International

Currencies

The British pound weakened after the Bank of England’s decision to raise interest rates. The US dollar traded 1.34 against

the pound from 1.35 at the beginning of the quarter. The rand however strengthened against the pound ending the quarter

at 16.71 from 18.16.

250

1000

4000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index (

nalu

ral lo

g s

cale

)

Morgan Stanley world equity index and Emerging markets indices

MSCI Emerging markets

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

3-year rolling bond returns (USD)

World Emerging markets

0

50

100

150

200

250

300

350

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index:

Jan 2

006=

100

Emerging market equity price indices

BRL CNY INR PLN

RUB TRY THB ZAR

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index:

Jan 2

006=

100


USA UK Japan Germany MSCI


EmergingMARKETS

250

1000

4000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Index (

nalu

ral lo

g s

cale

)

Morgan Stanley world equity index and Emerging markets indices

MSCI Emerging markets

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%pa

3-year rolling bond returns (USD)

World Emerging markets

0

50

100

150

200

250

300

350

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index:

Jan 2

006=

100

Emerging market equity price indices

BRL CNY INR PLN

RUB TRY THB ZAR

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index:

Jan 2

006=

100


USA UK Japan Germany MSCI

Emerging markets growth relative supports stronger currencies and bonds.

Alsi FTSE/JSE All Share price index

Bonds Securities issued by a government (but also big corporations) with a fixed tenor (specified

maturity date and coupon (interest)

Cash Money market investments (such as NCDs) with a tenor of less than a year

Coupon The fixed amount of interest paid on a bond

Currencies USD United States dollar

ZAR South African Rand

JPY Japanese Yen

GBP British pound sterling

EUR Euro

CHF Swiss franc

Dividend yield Dividend per share divided by the price per share

Earnings yield Inverse of the PE ratio

Earnings growth Year-on-year % growth in earnings per share

Forward rate The interest rate that the market expects to prevail within a given number of months – usually

calculated from the yield curve

NCD Negotiable Certificate of Deposit. A money market instrument, typically within a 3, 6, 9 or

12-month maturity

PE ratio Price per share divided by the earnings per share

q/q Quarter-on-quarter basis

Return Usually all-in or total return is implied, i.e. capital gain and income. When calculating historical

returns, monthly percentage changes are averaged (using the geometric mean) and annualised

Source: Morningstar

Risk Calculated as the standard deviation of returns

Saar Seasonally adjusted annualised rate

y/y Year-on-year basis

Yield The interest rate applicable on bonds trading in the secondary market. This is equal to the total

return that will be obtained if the instrument is kept to maturity

Yield gap The difference between the bond yield and earnings yield on shares

GLOSSARY


OF TERMS

INVESTMENT


REPORT DISCLAIMER

Absa Fund Managers Limited (AFM) is a registered Collective Investment Scheme Manager and a full member of the Association

for Savings and Investment SA.

Collective Investment Schemes (CIS) are generally medium to long-term investments. Past performance is no indication of future

performance, and actual events may differ materially from that which is contained in the information. The value of participatory

interests may go down as well as up and past performance is not necessarily a guide to future performance. Fluctuations or

movements in exchange rates may also cause the value of underlying international investments in a fund to move up or down.

The value of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their

dependence on the performance of underlying assets or other variable market factors. AFM does not provide any guarantee

either with respect to the capital or the return of a fund.

Performance is calculated for the portfolio ⁄ class of portfolios. Illustrative performance information is included for illustrative

purposes only; individual investor performance may differ as a result of initial and ongoing fees, the actual investment date, the

date of reinvestment and dividend withholding tax. All figures quoted are from Morningstar and ⁄ or IRESS, for the period ending

December 2017 (unless otherwise stated), calculated on a NAV to NAV basis, with income distributions reinvested on the ex-

dividend date. Annualised figures refer to the average yearly return of an investment over a given time period, all actual annual

figures (if not shown) are available on request.

Investments in funds with foreign securities may involve various material risks, which include potential constraints on liquidity and

the repatriation of funds, macroeconomic, political, foreign exchange, tax and settlement risks and potential limitations on the

availability of market information and there may be tax to be levied on certain of the benefits accruing to the investor from the

funds and AFM may be required to deduct and pay over to the authorities any such tax from such benefits before paying any

balance to or for the benefit of the investor. The investor understands that the legal and tax environment is continually changing,

and that AFM cannot be held responsible for any changes to the law which might have an effect on their investment, and which

did not exist at the time their investment was made. CIS are financial products and not investments in insurance policies with an

insurer, and therefore cooling off periods do not apply. AFM has a right to close the fund to new investors in order to manage it

more efficiently in accordance with its mandate. Additional information on the fund including, but not limited to, brochures,

application forms, annual and half-yearly reports are available free of charge from the AFM website or from AFM upon request.

In respect of the Absa Money Market Fund

The money market fund is not a bank deposit account, a constant unit price of R1 (one rand) will be maintained although, owing

to circumstances, it may be amended to a lower amount, the total return to the investor is made of interest received and any gain

or loss made on any particular instrument, in most cases the return will merely have the effect of increasing or decreasing the

daily yield but in cases of abnormal losses it can have the effect of reducing the capital value, the yield is calculated using an

annualised seven day rolling average and excessive withdrawals may place liquidity pressures and in such circumstances a

process of ring fencing of withdrawal instructions and managed pay-outs over time may be followed. The investment return is not

guaranteed and is dependent on the performance of the underlying investments. This fund will not have more than 25% in any

one single entity.

Absa Asset Management / Absa Fund Managers

COMPILED BY:

Absa Asset Management

Sandton Campus South, 2nd Floor, 15 Alice Lane, Sandton, Johannesburg, 2196

Tel no: +27 (0) 800 111 456 Fax no: +27 (0) 86 532 2607 E-mail: [email protected] www.abam.co.za

ASSET MANAGEMENT INVESTMENT REPORT - Absa Summary Market summary 01 Fund performance 01 House asset...

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