Enter Title Here - Alexander Forbes...Aon Hewitt $3.1 3 Cambridge Associates $2.6 Russell...
Transcript of Enter Title Here - Alexander Forbes...Aon Hewitt $3.1 3 Cambridge Associates $2.6 Russell...
1
March 2019
Group risk benefits and investment insights
HOT TOPICS
Our speakers
Niall O' Sullivan
Chief Investment Officer, Mercer
Delegated Solutions Europe
Leroy Munetsi Chief Operating Officer
Corporate & Employee Benefits
Gyongyi King
Chief Investment Officer
Investments
Isaah Mhlanga
Executive Chief Economist
Investments
2
Our speakers
Niall O' Sullivan
Chief Investment Officer, Mercer
Delegated Solutions Europe
Leroy MunetsiChief Operating Officer
Corporate & Employee Benefits
Gyongyi King
Chief Investment Officer
Investments
Isaah Mhlanga
Executive Chief Economist
Investments
H E A LT H W E A LT H C A R E E R
M E R C E R
B U I L D I N G G L O B A L P O R T F O L I O S
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5
“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time
and still retain the ability to function”
F.Scott Fitzgerald
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S T R A T E G I C R E L A T I O N S H I P | C O M B I N I N G L O C A L K N O W L E D G E W I T H
G L O B A L E X P E R T I S E T O I M P R O V E O U T C O M E S F O R C L I E N T S
Enhance return
Reduce risk
Adopt best practice
Reduce cost
Local leadership
Trusted advisor
Pan African company with a regional focus
Local market knowledge
Deep global research coverage
165+ manager researchers
Large breadth of experience
Global, aggregated buying power
4
7
G L O B A L R E A C H | M E R C E R ’ S B R O A D C A P A B I L I T I E S S P A N T H E
S P E C T R U M O F T O O L S & R E S E A R C H , A D V I C E A N D S O L U T I O N S
TOOLS AND RESEARCH
$6.3tnSubscriber Assets
ADVICE
DELEGAT ED SOLUT IONS
2,200Staff
1,000Discretionary Clients
2,800Advisory Clients
40+Years Experience
$10.6tnUnder Advisement
$240bnAssets under Delegation
• Global manager research• Performance analytics
• Operational due diligence
• Investment strategy• Asset allocation
• Portfolio construction• Manager selection
• Responsible investment
• Transitions, custody, FX
• Multi-client and custom fund implementations
• Alternative investments• Diversified portfolios
• Liability driven investments
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G L O B A L L E A D E R | M E R C E R ’ S I N V E S T M E N T B U S I N E S S I S
I N D E P E N D E N T L Y R E C O G N I Z E D A S A G L O B A L L E A D E R
# PROVIDER
ASSETS UNDER
DELEGATED
MANAGEMENT ($bn)
1 $212
2 Russell Investments $164
3 Aon Hewitt $152
4 Willis Towers Watson $115
5 Blackrock $105
6 SEI Investments $103
7 State Street Global Advisors $92
8 Goldman Sachs Group (GS) $82
9 Wells Fargo $81
10 Northern Trust Asset Management $69
Source: Pensions & Investments survey. Based on outsourced assets with full or partial discretion as of 31 March 2018
# PROVIDER
GLOBAL ASSETS
UNDER
ADVICE
($tr)
1 $10.6
2 Aon Hewitt $3.1
3 Cambridge Associates $2.6
4 Russell Investments $2.5
5 Callan LLC $2.3
6 RVK Inc. $2.3
7 Willis Towers Watson $2.2
8 Pension Consulting Alliance Inc. $1.3
9 Meketa Investment Group Inc. $1.1
10 NEPC Investment Consulting $1.0
Source: Pensions & Investments Global AUA Rankings Survey as of 30 June 2018
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G L O B A L M A N A G E R R E S E A R C H T E A M
*Average years of experience excludes analysts and support/admin staff.Data as of 1 January 2019
165Mercer research representatives
105Research specialists with
MBA, CFA, actuarial, masters, or industry designations
9*Average years
with Mercer
17*Average years of
financial experience
11Countries with
Mercer research representatives
26Cities with
Mercer research representatives
>50Research specialists
with fund management experience
9Years of institutional
ESG integration
10
Value added since inception to 30 September 2018 has been positive for 96% (66 out of 69) of the product categories covered by the analysis.
V A L U E A D D E D O F O U R A - R A T E D M A N A G E R S
V A L U E A D D E D B Y C A L E N D A R Y E A R
V A L U E A D D E D F O R P E R I O D S E N D I N G 3 0 S E P T E M B E R 2 0 1 8
Figures are annualised for periods longer than 1 year
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11
D I S C I P L I N E D R A T I N G S P R O C E S S
IDEA GENERAT ION
PORT FOLIO CONST RUCT IO N
IMPLEMENT AT IO N
BUSINESS MANAGE ME NT
C A N D I D AT E S
GATHE R DATA (MercerInsight®)
P R IORIT IS E CANDIDATE S
WORLDWIDE DUE DILIGENCE
RATINGS A Above-average prospects of outperformance
B+Above-average prospects of outperformance, but with
some reservations
B Average prospects of outperformance
C Below-average prospects of outperformance
N Not rated
R Early-stage research / research no longer maintained
R AT I N G S
12
B U I L D I N G B E T T E R P O R T F O L I O S
F I N D I N G T H E B E S T
I D E A S
B U I L D I N G R O B U S T
P O R T F O L I O S
E N H A N C E D
G O V E R N A N C E
U N D E R S T A N D I N G Y O U R G O A L S
D E L I V E R I N G S U P E R I O R O U T C O M E S
7
13
M SCI WORL D VAL UE VS M SCI WORL D
R E M E M B E R I N G H O W T O T A K E R I S K
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
S&P 500 REALISED VOLATILITY
Source: Bloomberg
14
S&P 500 REAL ISE D VOL AT IL I T Y M SCI WORL D VAL UE VS M SCI WORL D
C O N V I C T I O N I N A C T I V E M A N A G E R S
Source: Aaron Reynolds “The Truth About Top Performing Mutual Fund Managers”, July 2011
PERCENTAGE OF HIGH -PERFORMING MUT UAL FUNDS UNDERPERFORMING T HEIR BENCHMARK OVER ANY 3 -YEAR PERIOD
85%
50%
25%
Underperforming by 1% p.a Underperforming by 3% p.a Underperforming by 5% p.a
0.0%
25.0%
50.0%
75.0%
100.0%
IF YOU PICK AN UNDERPERFORMER
IF YOU PICK AN OUTPERFORMER
IF YOU PICK AT RANDOM
PROBABIL ITY OF PICKING AN OUTPERFORMING MANAGER
(RELATIVE TO PEER GROUP)
3 YEAR HORIZON 5 YEAR HORIZON
0.0%
25.0%
50.0%
75.0%
100.0%
BEST PAST PERFORMERS
GOOD PAST PERFORMERS
POOR PAST PERFORMERS
WORST PAST PERFORMERS
PE
ER
GR
OU
P P
ER
CE
NT
ILE
AVERAGE 5 YEAR PAST & FUTURE PERFORMANCE ( RE LA T I V E T O P E E R G RO UP
AVERAGE PAST PERFORMANCE AVERAGE FUTURE PERFORMANCE
8
15
S&P 500 REAL ISE D VOL AT IL I T Y M SCI WORL D VAL UE VS M SCI WORL D
Source: Bloomberg
C O N V I C T I O N I N F A C T O R S
50%
100%
150%
200%
250%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
MSCI WORLD VALUE VS MSCI WORLD
16
F A C T O R H U N T I N G
0
0.1
0.2
0.3
0.4
0.5
-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3
Before incentives come into play
1 in 40 chance of False Positive
100
100 False PositivesImagine 4,000 people testing
€
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17
F A C T O R H U N T I N G
74% 42%
Circulation Period
Post-Publication Period
“Does academic research destroy stock return predictability?”McLean & Pontiff (JF,2016)
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L O W V O L A T I L I T Y E Q U I T Y – A R E W A R D E D P R E M I U M
There is a wide universe of defensively oriented strategies that could be considered “low beta”, or at least at the defensive end of “beta-one”.
- 1.00 - 0.75 - 0.50 - 0.25 0.00 +0.25 +0.50 +0.75 +1.00 +1.25 +1.50
Short biased
Market Neutral
Low Beta
Beta One
High Beta
Beta
Str
ate
gy
Variable Beta
MinimumVariance
Quality
Small Caps
Emerging Markets
Trend -following Growth
Thematic Growth
Relative Value
Contrarian Value
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19
There are three main approaches to “low volatility” investing:
Variable Beta (partially invested equity)
• “Beta” is a measure of a stock or portfolio’s sensitivity to the broader market index
• Absolute return type investing which includes strategies which are structurally equity biased but contain tactical investing in fixed
income/cash/gold
Minimum Variance (“Systematic”)
• Portfolio of shares (usually “built” by quantitative screening) where the share prices themselves have low volatility characteristics, i.e. the
individual shares are usually less volatile than the market as a whole and the combined portfolio is materially less volatile
Quality
• Fully invested “long only” equity portfolios made up of shares in companies operating in businesses which have stable earnings, a high
return on equity and low borrowing
We believe that a balanced low volatility equity portfolio should look to allocate to all three approaches across a range of different investment managers
C O N S T R U C T I N G L O W V O L A T I L I T Y P O R T F O L I O S
20
9.6%8.6%
9.2%
11.5%
0%
2%
4%
6%
8%
10%
12%
14%
Return S.I. Volatility
Example Fund MSCI World
D O E S I T W O R K ?
Volatility reduction of
25% SI
Q4 2018• MSCI World: -13%• Example Fund: -10%
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21
S U S T A I N A B I L I T Y F R A M E W O R K
P O L I C Y & P R O C E S S
22
F O U R S T R A T E G I E S F O R I M P L E M E N T A T I O N
Integration
Include ESG factors in
investment
analysis/decisions to assess
materiality
Investment Exclusions
Screen out sectors or
companies deemed
irresponsible or misaligned
with values
Stewardship
Actively engage with
companies failing to
address ESG risks through
voting and engagement
Allocate to sustain.
themes/impact investments,
e.g. renewable energy,
water, social housing
P O L I C Y & P R O C E S S
12
23
T H O U G H T L E A D E R S H I P I N V E S T M E N T
2004 - 2009
Responsible Investment
team formed and initial years on
PRI development and ESG
evidence and education
2010-11
ESG Ratings by strategy
implemented and climate
change and SAA report
published
2013Sustainable
Opportunitiesvehicle launched
2014
Sustainable Growth
framework launched
2014
Sustainability key
component of Mercer’s
global equity beliefs /
advice
2015
Mercer’s major Investing
in a Time of Climate
Change report is
published
2017
Mercer represented on
FSB Climate Disclosure
Task Force*
2017Mercer launches
Sustainable Global Equity
Fund
*See: www.fsb-tcfd.org
2015
Sustainable
Investment Policy
for Europe
Delegated Solutions
released
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T Y R A N N Y O F T H E D I S C O U N T R A T E
$-
$100 000
$200 000
$300 000
0 10 20 30 40 50 60 70 80 90
No Deal NPV: c.$2m
Deal NPV: c.$5m
PROFITS PER YEAR UNDER DEAL AND NO DEAL
9.44% 9.54% 9.56% 9.66% 9.71% 9.74% 9.75% 9.77% 9.84% 9.90% 9.94%
x Health Care x IT S&P 500 x Discretionaries x Materials x Financials
ANNUALIZED RETURNS ON THE S&P 5001989 - 2017
13
25
U S E Y O U R A D V A N T A G E S
KNOW YOUR LIABILITIES
KNOW YOUR LIQUIDITY PROFILE KNOW YOUR LIABILITIES
R
26
G R O W I N G I N V E S T O R A P P E T I T E I N P R I V A T E M A R K E T S
37%42%
26%
39%
0%
10%
20%
30%
40%
50%
60%53% 54%
32%
55%
0%
10%
20%
30%
40%
50%
60%
Institutional Investor’s Plan for 2018Investors planning to invest more capital than prior
year
Institutional Investor’s Allocation in the Longer TermInvestors planning to invest more capital than prior
year
Source: 2018 Preqin Global PE&VC Report
14
27
SUPERIOR, RISK ADJUSTED RETURNS
GREATER DIVERSIFICATION
ACCESS TO OPPORTUNITIES
W H Y P R I V A T E M A R K E T S ?
28
O P P O R T U N I T Y S E T
Ex
ce
ss r
etu
rn p
ote
nti
al
Main investment objective Capital gainCurrent yield
Hig
hM
od
era
te
Venture Capital
Private EquityOpportunistic
Real Estate
Timber/Agriculture
Illustrative
Private Debt
SeniorPrivate Debt
Asset classes thathelp drive performance
Balanced performance/income focus
Asset classes that helpgenerate stable cash flows
and match long-term liabilities
Infrastructure
15
29
DISPERSION OF RETURNS
CLOSED-END FUNDS
AND ACCESS
BUILDING AND MAINTAINING AN
ALLOCATION
I N V E S T M E N T C H A L L E N G E S
30
P A R A D O X O F S K I L L
Pure luck
Pure skill
Source: Mercer and Michael Maboussin
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L O N G H O R I Z O N E Q U I T Y I N V E S T I N G
B U F F E T ’ S A L P H A
VALUELEVERAGEREGULATORY
ALPHASTRUCTURAL
ALPHA
Our speakers
Niall O' Sullivan
Chief Investment Officer, Mercer
Delegated Solutions Europe
Leroy MunetsiChief Operating Officer
Corporate & Employee Benefits
Gyongyi King
Chief Investment Officer
Investments
Isaah Mhlanga
Executive Chief Economist
Investments
17
c
When economic cycles turn, market performance Isaah Mhlanga | Executive Chief Economist | [email protected]
Outline
A review of 2018 economic and market performance
Key global market drivers for 2019 and beyond
South Africa’s economic outlook
Unsettling discussions: separating facts from rhetoric on crucial policy issues
18
A review of 2018 economic and market performance
The year 2018 started with a synchronized economic growth story …
… then Trump trade policy put breaks on a long history of globalisation
….imposition of import tariffs on autos, solar panels, washing machines steel, aluminum
The US-Mexico-Canada (USMCA) trade agreement was born out of the renegotiation of the North American Free Trade Area (NAFTA)
Argentina and Turkey debt and currency crisis spilled over into emerging markets.
China’s growth slowed to the lowest level in three decades, Brexit negotiations and Italy fiscal problems increased risk for Europe…
… The US Fed hiked rates four times leading to a 4.6% gain in the US dollar against major currencies
It didn’t matter where you were invested, the majority of major asset class returns were negative
Breaking down the S&P 500, it is clear that nearly every sub-sector struggled. Even the technology sector eventually capitulated by the end of the year
Source: Bloomberg and Alexander Forbes Investments
19
In currency markets the US$ appreciated against almost all currencies
The U.S. dollar and the Japanese yen proved their safe heaven status.
0.1%
0.0%
-0.2%
-2.0%
-2.1%
-3.0%
-3.9%
-4.0%
-4.1%
-4.5%
-5.1%
-5.2%
-5.4%
-5.7%
-6.8%
-7.5%
-8.1%
-8.7%
-11.3%
-13.7%
-14.6%
-17.3%
-28.3%
-50.6%
Thai Baht
Mexican Peso
Hong Kong Dollar
Singapore Dollar
Malaysian Ringgit
Taiwanese Dollar
Peruvian Sol
Romanian Leu
South Korean Won
Bulgarian Lev
Philippine Peso
Czech Koruna
Chinese Renminbi
Indonesian Rupiah
Polish Zloty
Hungarian Forint
Colombian Peso
Indian Rupee
Chilean Peso
South African Rand
Brazilian Real
Russian Ruble
Turkish Lira
Argentine Peso
Emerging economiesAdvanced economies
Source: Bloomberg and Alexander Forbes Investments
South African asset class returns followed global trends, with bonds and cash returning positive in 2018
6.6 7.7
-8.5 -8.4 -9
-25.3
15.5
-8.8
-17.5-14.6
-9.7 -8.3 -9
0.3 0
-6.8 -5.5
-13.5-10.2 -8.7
-30
-20
-10
0
10
20
30
Ca
sh
Bon
ds
Equ
itie
s
All
Sha
re In
dex
TO
P40
In
de
x
Ca
ppe
d s
wix
Lo
cal pro
pe
rty
JS
E R
esou
rce
s
JS
E F
ina
ncia
ls
JS
E In
du
str
ials
Sm
all
Ca
ps
Mid
Ca
ps
La
rge C
aps
Sty
les
S&
P V
alu
e
S&
P L
ow
Vo
l
S&
P M
om
entu
m
S&
P Q
ualit
y
S&
P S
A M
ulti-
facto
r In
dex
FX
US
DZ
AR
EU
RZ
AR
GB
PZ
AR
2018 3yrs%
Source: Bloomberg and Alexander Forbes Investments
20
Typical of turning economic cycles, macro fundamentals remain strong despite financial markets underperformance
Source: Bloomberg and Alexander Forbes Investments
Outlook for 2019
Better than 2018, with downside risks from local political, policy
and global uncertainties
21
Key global market drivers for 2019: (1)Slow economic growth
Source: Bloomberg and Alexander Forbes Investments
40
45
50
55
60
65
2016/04 2016/07 2016/10 2017/01 2017/04 2017/07 2017/10 2018/01 2018/04 2018/07 2018/10 2019/01
Japan manufacturing PMI EZ manufacturing PMI US manufacturing PMI
China manufacturing PMI G4 PMI (GDP weighted) Emerging Markets PMI
PMI > 50 = expanding activity
PMI<50 = contracting activity
Index
The outlook for 2019 market performance is better than 2018 with significant downside risks
Source: IMF World Economic Outlook and Alexander Forbes Investments
1.0
1.5
2.0
2.5
2017 2018 2019 2020 2021 2022 2023
4.0
4.3
4.5
4.8
5.0
2017 2018 2019 2020 2021 2022 20233.0
3.3
3.5
3.8
4.0
2017 2018 2019 2020 2021 2022 2023
Global growth Advanced markets Emerging and developing markets
o Global economic growth at 3.7%, moderate to 3.5% in 2019.
o Driven by advanced markets at 2.3% - US outperformed, Eurozone and Japan moderated
o Emerging markets peaked at 4.6% - India outperformed; China and Emerging Europe were weak
22
Key global market drivers for 2019: (2) A turn in US dollar cycle
Source: IMF World Economic Outlook and Alexander Forbes Investments
EM growth minus DM growth
o 2018 was an anomaly induced by US tax stimulus
o The US dollar has peaked and is expected to weaken going forward
o Weak US dollar supports emerging market economic growth and therefore bullish emerging market equities
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2012 2014 2016 2018 2020 2022
% EM minus DM growth
US dollar index
-10
-5
0
5
10
15
2011 2014 2017 2Q19 1Q20 4Q20
%
Unsustainable US tax stimulus
US dollar appreciation
US dollar depreciation
Key global market drivers for 2019: (3) stable inflation rates
Source: IMF World Economic Outlook and Alexander Forbes Investments
EM growth minus DM growth
o Stable inflation rates across many countries, supported by stable currencies and still low oil prices
o Pass through effects from weak currencies have halved over time
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2012 2014 2016 2018 2020 2022
% EM minus DM growth
-10
-5
0
5
10
15
2011 2014 2017 2Q19 1Q20 4Q20
%
US dollar index
0
2
4
6
8
2010 2012 2014 2016 2018 2020
World
Advanced economies
Emerging market and developing economies
%
Inflation rates
23
Key global market drivers for 2019: (4) Gradual (or flat) interest rate increases
Source: Bloomberg and Alexander Forbes Investments
Central bank monetary policy
o The US Fed reduced expected rate hikes from three to one.
o Fed funds pricing 77% probability of no change in rates and 23% probability of a cut by 1Q2020.
o Bloomberg analyst forecast a 40bp increase by the end of 2019 followed by a cut of 10bp to 2.80%
o A 40bp and 75bp hike by ECB and BoE by the end of 2020. This will likely be postponed.
US yield curve close to inversion but not there yet
-5
-3
-1
1
3
5
1980 1985 1990 1995 2000 2005 2010 2015
3m10y 3Y10Y
Shaded areas represent periods of recessions
US yield curve inversion
0
1
2
3
4
5
6
7
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Fed target ECB rate UK bank rate
%
Where will the next crisis come from?
Source: Alan Greenspan, Bloomberg TV, January 31, 2018
“There are two bubbles: We have a stock
market bubble, and we have a bond market
bubble…what’s behind the bubble? Well the
fact, that, essentially, we’re beginning to run an
ever-larger government deficit. As a share of
GDP debt has been rising very significantly and
we’re just not paying enough attention to that.”
—January 31, 2018
Bubbles better than
anyone else
24
US corporate balance sheets are not in good shape!
Shaded regions represent periods of U.S. recession
Source: Bloomberg and Alexander Forbes Investments
% of GDP
Third most overvalued stock market
Shaded regions represent periods of U.S. recession
Source: Bloomberg and Alexander Forbes Investments
25
We are more than 90% of the way through the U.S. Economic cycle
Source: Bloomberg and Alexander Forbes Investments
Key drivers of uncertainty in global economic markets outlook
Shifts in energy price dynamics – uncertainty on whether we can rely on oil as a
positive supply shock
Global monetary policy normalization and the US dollar cycle
Tightening global financial conditions and implications for high deficit countries
Trade wars and supply chain disruptions
Implications of global economic growth slowdown and China’s changing
economic growth drivers
26
South Africa’s economic outlook dependent on structural reforms
o Fiscal consolidation unavoidable
o The reform of state owned enterprises
o Fee-free education inadequate solution
for skills
o Minimum wages are now law
o Intentions to look into prescribed assets
o The nationalisation of the SARB
o Land expropriation without compensation
The winning party must get at least 60% to be
able to push structural reforms
Fiscal consolidation unavoidable and requires compromises and trade-offs
3.8%
2.0%
7.2%
1.7%
4.2%
1.0%
-0.3%-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
LocalEquity(ALSI)
LocalBonds
LocalProperty
LocalCash
GlobalEquity
GlobalBonds
Rand -Dollar
Source: Stats SA, Bloomberg and Alexander Forbes Investments
Est. 0.70
1.51.9
2.2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2012 2014 2016 2018 2020
%
1 ye
ar
Pause in monetary
policy tighteningReduced
liquidityWeaker economic
growthImprovement in asset class returns*
*Performance returns shown above are the base case real return assumptions for a five-year period as produced by Alexander Forbes Investments. Any projections contained in the
information are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be
realised in the future. Historical returns are no guarantee of future performance.
Moderating global growth and modest recovery in local growth imply low return expectations
27
Monetary policy supportive to business environment but business confidence remains weak
Source: Stats SA and Alexander Forbes Investments
No pressure for the SARB to increase interest rates SA Inflation to remain contained within the 3%-6% target band
0
5
10
15
20
25
30
2005 2007 2009 2011 2013 2015 2017 2019
Prime rate (%) Real prime rate%
0
5
10
15
20
25
2005 2007 2009 2011 2013 2015 2017 2019
Headline inflation%
Weak business confidenceCorporate credit extension remain weak
-10
0
10
20
30
40
2005 2007 2009 2011 2013 2015 2017
Corporate credit%y/y
90
100
110
120
130
140
150
2005 2007 2009 2011 2013 2015 2017 2019
SACCI BCI
Fiscal consolidation unavoidable and requires compromises and trade-offs
Budget deficit Government spending and revenue
-200
-150
-100
-50
0
50
1991 1994 1997 2000 2003 2006 2009 2012 2015
Rbn
0
200
400
600
800
1000
1200
1400
1600
1991 1994 1997 2000 2003 2006 2009 2012 2015
Government spending Government revenueRbn
+126%
+95%
o Fiscal deficit ballooned after the financial crisis
o Spending consistently rose throughout the years
o Revenues declined during the financial crisis and never caught up with spending
Source: National Treasury and Alexander Forbes Investments
28
Fiscal consolidation: debt service costs crowding productive spending
Public debt Interest costs
0
500
1000
1500
2000
2500
3000
1991 1994 1997 2000 2003 2006 2009 2012 2015
Total net government debt
Total gross government debt
Rbn
+293%
0
20
40
60
80
100
120
140
160
180
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Debt service costsRbn
+177%
Source: National Treasury and Alexander Forbes Investments
o Rising debt service costs constraining public investment and economic growth
Fiscal consolidation: unsustainable and limited options
40
45
50
55
60
65
70
75
80
85
2013/14 2015/16 2017/18 2019/20 2021/22 2023/24
% of GDPBudget 2018 Scenario A Scenario B
Scenario C MTBPS 2018
Economic growth scenarios
o Budget 2018 ~ 2.2%
o 2018 MTBPS ~ 2.4%
o Scenario A ~ 1.8%
o Scenario B ~ 0.6%
o Scenario C ~ 3.1%
Source: National Treasury and Alexander Forbes Investments
o Increase taxes to raise more revenues ~ cant do PIT, CIT and VAT
o Let inflation rise ~ the SARB’s mandate is to keep inflation between 3%-6%, not an option
o Boost economic growth through structural reforms
29
The rand valuations suggest it should appreciate over the short-term
Source: Bloomberg, INET and Alexander Forbes Investments
o Rand undervalued against the US dollar
o Over valued against the pound
o The US dollar cycle turning would support ZAR strength
-1.5
3.2
0.0
-16.7
10.0
-8.8
-25 -20 -15 -10 -5 0 5 10 15 20 25
EUR
JPY
CHF
GBP
USD
ZAR
Over valued
Currency valuations as at 31 Dec 2018
Rand valuation against the US dollar over time
-30
-20
-10
0
10
20
30
1990 1995 2000 2005 2010 2015
%
Undervalued
Overvalued
Bond-positive global backdrop to counter domestic factors
2.41 2.26 2.25 2.4 2.77 2.89 2.9 2.69 2.79
2.34 2.53 2.49 2.48 2.1 2.55 2.77 3.07 2.78
4.11 3.98 3.99 4.313.53
3.27 3.39 3.46 3.68
8.86 8.77 8.73 9.198.4 8.71 9.06 9.22 9.25
0
1
2
3
4
5
6
7
8
9
10
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Current10y UST SA sovereign premium SA FX premium 10y SA yield
%
o A pose by the US fed should result in improved risk appetite
o But fiscal risks remain
o Valuations are weighed by issuance, moderate growth and Eskom risks to the fiscus
o Fair value is at 8.6% ~ post budget and election, positive policy surprises will lower yields
Source: Bloomberg and Alexander Forbes Investments
30
SA equities poised for a recovery from both valuation and macro
o Economic growth improving, though marginally
o Valuations look attractive following 2018 declines
o At 16, the Price Earning ratio not far from long-term average of 14
-5%
0%
5%
10%
15%
20%
25%
30%
1995 2000 2005 2010 2015 2020
Blended SA equity forecast real ALSI 5yr returns ann.
Source: Bloomberg and Alexander Forbes Investments
Unsettling discussions: separating fact from rhetoric
o Land expropriation without compensation
• Policy document excluded commercial farm land, it was not by error
• Banks have exposure of more than R160bn to commercial agriculture
o The nationalisation of the South African Reserve Bank
• The mandate and independence of the SARB is a creature of the constitution
• Nationalising the SARB changes ownership but not its mandate (many central banks owned by their
governments)
o Prescribed assets
• The first type are imposed to provide funding for social or developmental investments whose return and
risk profile make them unattractive to pension funds.
• The second type of prescribed assets are legislated to protect pension fund member’s retirement funds
by limiting the amount of exposure to risk in one asset class. Regulation 28 fits in this good prescription
• Not new in South Africa but was abolished in 1989
31
Thank you
[email protected] | @IsaahMhlanga
Our speakers
Niall O' Sullivan
Chief Investment Officer, Mercer
Delegated Solutions Europe
Leroy MunetsiChief Operating Officer
Corporate & Employee Benefits
Gyongyi King
Chief Investment Officer
Investments
Isaah Mhlanga
Executive Chief Economist
Investments
32
c
Group Report Back – Portfolio performance
Prepared by: Gyongyi King, Chief Investment Officer
Global shares were confronted with a challenging 2018: 1 Year to 31 December 2018
-100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 200.0%
One year return (USD)
Only 7.5% of MSCI AC World constituents managed to deliver a positive absolute return
Positive returning sharesNegative returning shares
33
SA shares followed global trends: single stock performance 1 Year to 31 December 2018
Aspen
NEPI Rockcastle
Tiger Brands
MTNBritish American Tobacco
Anglogold Ashanti
Anglo American
BHP Billiton
Nedbank
Clicks
ALSI 40
Return
A handful of JSE-listed equities managed inflation-beating returns
Just how bad were the markets in 2018?
-6.2%
-14.5%-16.9%
-1.5%
2.6%
-26.4%-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
US Equity (S&P 500) Europe, Australia, Far EastEquity
Emerging Market Equity US Corporate Bonds US Cash Local Equity (SWIX)
of global assets
posted negative
returns
90%Best
performing
asset class
219
Major currencies appreciated
against the USD
60%of SA stocks
posted negative
returns
*Returns shown above are in US dollar terms
34
Markets across the world offered no place to hide
-16.0% -14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0%
Japanese Stocks
Commodities
MSCI EM Index
Australian Stocks
Chinese Stocks
UK Stocks
Global Stocks
Developed Market Stocks
French Stocks
US Stocks
Xetra Dax
Global Hedge Funds
US Dow Jones Industrials
Gold
Global Bonds
Global Market returns (in local currency)
78 out of 82 major global equity markets returned negative returns in local currency
Excess returns of South African equities vs. cash
21.1%
11.8%
-2.9%
20.0%
15.3%
1.7%
-1.2%
-4.8%
13.4%
-15.8%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Excess returns of SA equities relative to SA cash
Excess Return Average Excess Return (since 1900) Average Excess Return (last 10 years) Average Excess Return (last 5 years)
35
Cash has outperformed equities occasionally over the last 30 years
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
01-N
ov-1
999
01-M
ar-
2000
01-J
ul-2000
01-N
ov-2
000
01-M
ar-
2001
01-J
ul-2001
01-N
ov-2
001
01-M
ar-
2002
01-J
ul-2002
01-N
ov-2
002
01-M
ar-
2003
01-J
ul-2003
01-N
ov-2
003
01-M
ar-
2004
01-J
ul-2004
01-N
ov-2
004
01-M
ar-
2005
01-J
ul-2005
01-N
ov-2
005
01-M
ar-
2006
01-J
ul-2006
01-N
ov-2
006
01-M
ar-
2007
01-J
ul-2007
01-N
ov-2
007
01-M
ar-
2008
01-J
ul-2008
01-N
ov-2
008
01-M
ar-
2009
01-J
ul-2009
01-N
ov-2
009
01-M
ar-
2010
01-J
ul-2010
01-N
ov-2
010
01-M
ar-
2011
01-J
ul-2011
01-N
ov-2
011
01-M
ar-
2012
01-J
ul-2012
01-N
ov-2
012
01-M
ar-
2013
01-J
ul-2013
01-N
ov-2
013
01-M
ar-
2014
01-J
ul-2014
01-N
ov-2
014
01-M
ar-
2015
01-J
ul-2015
01-N
ov-2
015
01-M
ar-
2016
01-J
ul-2016
01-N
ov-2
016
01-M
ar-
2017
01-J
ul-2017
01-N
ov-2
017
01-M
ar-
2018
01-J
ul-2018
01-N
ov-2
018
Rolling five-year returns
Local Equities Local Bonds Local Cash
SteFi vs ALSI rolling 5 year returns to the end of December 2018
Cash beats Equities 20% of the time over rolling 5 year periods since January 1960
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Nov-1
983
May-1
984
Nov-1
984
May-1
985
Nov-1
985
May-1
986
Nov-1
986
May-1
987
Nov-1
987
May-1
988
Nov-1
988
May-1
989
Nov-1
989
May-1
990
Nov-1
990
May-1
991
Nov-1
991
May-1
992
Nov-1
992
May-1
993
Nov-1
993
May-1
994
Nov-1
994
May-1
995
Nov-1
995
May-1
996
Nov-1
996
May-1
997
Nov-1
997
May-1
998
Nov-1
998
May-1
999
Nov-1
999
May-2
000
Nov-2
000
May-2
001
Nov-2
001
May-2
002
Nov-2
002
May-2
003
Nov-2
003
May-2
004
Nov-2
004
May-2
005
Nov-2
005
May-2
006
Nov-2
006
May-2
007
Nov-2
007
May-2
008
Nov-2
008
May-2
009
Nov-2
009
May-2
010
Nov-2
010
May-2
011
Nov-2
011
May-2
012
Nov-2
012
May-2
013
Nov-2
013
May-2
014
Nov-2
014
May-2
015
Nov-2
015
May-2
016
Nov-2
016
May-2
017
Nov-2
017
May-2
018
Nov-2
018
Source: Alexander Forbes Investments ALSI SteFI
36
Is it wise to move to cash investments when a market anomaly occurs?
Cash beats equities on a 5 year period only 8% of the time from a starting point of five year real returns in excess of equities after
an anomaly has occurred which means 92% of the time equities outperform.
92%
8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ALSI Stefi
Outp
erf
orm
ance o
f equitie
s v
s c
ash o
n f
ive-y
ear ro
llin
g b
asis
pro
vid
ed fiv
e y
ear
rollin
g c
ash r
etu
rns a
re a
head o
f equitie
s
Source: Alexander Forbers Investments
Select AF Investments portfolio performance – 1 Year to 31 Dec 18
Product/portfolio Portfolio Benchmark Relative performance
Main portfolios
Performer -0.7% -1.9% 1.2%
AF High Growth -4.5% -4.2% -0.3%
Pure Equity Local -12.3% -10.9% -1.3%
(Multi-asset (Balanced portfolios)
Performer Local -4.5% -4.4% 0.0%
Accelerator -3.6% -5.4% 1.8%
Conserver 4.5% 2.2% 2.2%
Moderate Balance -0.8% -1.1% 0.3%
Multi-asset (Absolute returns)Real Return Focus 3.3% 9.2% -5.9%*
Stable Focus 4.1% 8.2% -4.1%*
Fixed Income
Inflation Linked Bond 1.1% -0.4% 1.5%
Pure Fixed Interest Local 8.7% 7.7% 1.0%
Income 9.5% 9.2% 0.3%
Banker 8.8% 6.6% 2.2%
Property Property portfolio -22.1% -25.3% 3.2%
Global portfoliosGlobal Equity 5.2% 4.9% 0.3%
Global fixed Income 15.9% 15.8% 0.1%
Alternatives + Africa
Caveo Africa 7.0% -0.2% 7.2%
Private Markets SA 7.7% 7.7% 0.0%
Sakhisizwe 13.8% 9.3% 4.5%
AF Investment Focus QI HFoF** -0.6% -4.6% 4.0%
AF Investment Performance QI HFoF** 1.7% 0.0% 1.7%
*Stable Focus and Real Return Focus are benchmarked against a CPI + target
**Hedge Fund return numbers are shown as hard NAVs
37
5 year asset class return expectations – looking better, but still challenging to achieve CPI + 5%
3.8%
2.0%
7.2%
1.7%
4.2%
1.0%
-0.3%-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Local Equity(ALSI)
Local Bonds Local Property Local Cash Global Equity Global Bonds Rand - Dollar
1 ye
ar
5 ye
ar
Tightening
monetary policy
Reduced
liquidity
Weaker economic
growth
*Performance returns shown above are the base case real return assumptions for a five-year period as produced by Alexander Forbes Investments
Note: Any projections contained in the information are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes
Investments, so may not be realised in the future. Historical returns are no guarantee of future performance.
Alternatives bolster outlook
Public
Equity
Private
Equity Difference
Mercer 2017 - 20 year assumptions 8.7% 11.8% 3.1%
Blackrock 2014 7.5% 10.5% 3.0%
Blackrock 2017 3.9% 5.4% 1.5%
Morgan Stanley 2013 8+%
Morgan Stanley 2017 6.3% 7.6% 1.3%
State Street 2017 6.0% 7.3% 1.3%
JP Morgan 2018 6.4% 9.2% 2.8%
AON 2017 6.5% 8.6% 2.1%
BARRA risk model
Expected Return
Global Experience
South African Experience
Mercer Experience
Source: Mercer, SAVCA, Various and Alexander Forbes Investments
38
Greater offshore allocation offers a wider opportunity set
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Maximum allowed offshore exposure for SA retirment funds
Offshore Africa
Allocation to alternatives has been supportive of greater portfolio diversification
Cash
Up to 100%
Equities
Up to 75%
Commodities
Up to 10%
Property
Up to 25%
Alternatives
Up to 15%
30% Global assets
15% hedge funds and private equity
39
We seek to utilise all available sources of excess return:
• Active, passive and smart beta investment building blocks are combined in an optimal way
• Utilising passive and smart beta enables access to returns at lower costs
• Where client mandates allow for it, we make use of alternative asset classes to enhance the overall
risk/return profiles of portfolios
Our investment approach is risk centred, optimising the return outcomes within a given risk budget
We believe in using the complete information set (market derived information, macro analysis, other
sources of information) in making our investment decisions
How we construct our client solutions
Tailwinds:
• Market valuations look softer
• Good opportunity for diversification within alternatives
• Wider breadth of investment universe after relaxation of regulation to 30% maximum offshore allowable
limit
• SA inflation remains well-contained
Headwinds:
• Earnings outlook remains subdued
• We expect volatility to remain elevated
• EMs are open to shocks in a liquidity tightening environment
Near-term outlook
40
Retirement Funds
GROUPAlexander Forbes
Alexander Forbes Annual Retirement Fund Survey 2019 – Key Insights
Annual Retirement Fund Survey
1994Manager Watch
Performance-Only
Survey – a market first!
1998 Manager Watch™ Survey
revamped
Participation criteria set
Large Manager Watch™
− Launched June 1998
− Top 10 active balanced
managers
RDP Survey (later renamed
Targeted Development
Investments Survey
Enhancements post-1998
Risk profiling
SA-only and Global-only portfolios
Benchmark returns
Risk-adjusted measures
2001Absolute
Return Survey
2003Specialist
Bond Survey
2002Money Market
Survey
2004Hedge
FoF Survey
2006International
Survey
2007Medical
Aid Survey
2010BEE Survey
Property
SurveySurveys
Revamped
2012LDI Survey
2013Formalised
Survey
Governance
2014Equity Funds
Analysis
2015Survey
Rules
Survey Rules
Updated, New
LMW Definition
2017New Survey
Technology
2018Shari’ah
Survey
2019Africa Survey
Development
14 Surveys
60 Managers
412 Funds
41
Key insights
Largest asset
managers in
South Africa
50% of AUM belongs to
Top 5
Offshore
allocation
Of asset managers close
to max 30% offshore
allowance
1827
Best return in 2018: -1.06%SA Active
Equity
managers
BEE
Level
1
Level
2
No
t ra
ted
60
Top
20
AUM
asset
managers
15.5% was the lowest
allocation
Shari’ah equity returns
Fund of Hedge Funds
-1.34%
6.36% 5.78%
-8.73%
3.82%5.06%
1 year 3 years 5 years
Average SA Shari'ah Equity Funds in the AF Shari’ah survey Average SA Equity Funds in the AF SA Equity survey
Hedge Funds
Bonds
Equities
Property
0%
2%
4%
6%
8%
10%
12%
14%
0% 2% 4% 6% 8% 10% 12% 14%
Investment returns at 31 December 2018
Outperformed equites and
property with lower risk when
markets were under pressure
42
Maximum, minimum and average fees charged
Highest
Discuss with your
consultant:
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
DomesticBIV - Seg
Global BIV- Seg
GlobalAbsoluteBIV - Seg
Global BIV- Pooled
DomesticBIV -
Pooled
SpecialistDomestic
Equity
DomesticAbsolute
SpecialistDomestic
FixedInterest
SpecialistDomestic
MoneyMarket
Max Min Average
Lowest
Are your fees reasonably
priced?
Are your fees competitive?
Are your fees appropriate
given your objectives?
March 2019
Thank you