FutureGrowth Asset Management

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March 2016Senate Group

Click to edit Master title styleClick to edit Master subtitle styleCorporate overview


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A large, dedicated

investmentteam


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Investment team structure

Updated: 30 November 2015

Andrew Canter (CIO)Portfolio Managers

Daphne BothaJames HowardJason Lightfoot

Mei-Chi LiouMichael Van Rensburg

Nazley BardienWikus Furstenberg

Paul Semple

Credit & Equity TeamOlga Constantatos

James HowardJason Lightfoot

Mei-Chi LiouPaul Semple

Conway WilliamsRingetani Ndlovu

Thina TiyoGershwin Long

Iqeraam PetersenAngelique KalamSmital Rambhai

Dolf van WijngaardeYasmine Ganief

Amrish NarrandesSarah De VilliersWafeeqah Mallick

Irfaan AbbasDidintle Mosupyoe

Sue HopkinsChantal Wood

Tarryn Mentoor

Interest Rate TeamWikus Furstenberg

Daphne BothaRhandzo Mukansi

Yunus January

Dealing TeamMichael Van Rensburg

Nazley BardienRasheda Jacobs

Nadia Ismail Desigan ReddyMandy Scholtz

Specialist InvestmentAdministrators

Michelle GreenSheree DavidsNarayan VyasThato KhaoleMelissa Moore

Click to edit Master title styleClick to edit Master subtitle styleInterest rate view and strategy


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Key investment themes (most turned out worse)l Chinese rebalancing

l Great monetary easing

l Global economic growth

l Local economic growth

l Local headline inflation (trend)

l SA current account

l Monetary policy

l Fiscal policy (rolling 3yr)

Slow rebalancing Hard landingReturn to 10+

Trend Below trend Recession

Trend Below trend Recession

4.5% 5.5% 7.0%

Neutral EasingTightening

Consolidation Stabilization Slippage6

FG

Improving Muddle through Disaster

FG

Low for long QE‘Normalization’FG

FG

FG

FG

FG

FG


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Commodity marketsFalling oil price buffered some of the blow…but not by enough


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Current account & Fiscal budget balances…leaving us with a current account deficit that is still too wide for comfort


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Real policy rate versus current account balanceTheoretically, the SARB has to tighten policy by at least 200bps


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SA real repo rate

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SARB still “injecting” too much liquidity into system…due to low growth


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USDZAR: Purchasing power parityLeaving the bulk of the required adjustment to the currency


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Local inflation forecast

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Persistent rand weakness contributes to risk of inflation


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Fiscal Revenue and Expenditure trendsMajor concern always had been current expenditure…


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Sovereign debt & contingent liabilitiesThe SOE problem…


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Sovereign bond rating metrics

(Fiscal Policy)

?


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Local currency spreads versus ratings

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Spreads have widened to levels last seen in 2000-2002…


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5-year CDS spreads/S&P foreign currency ratingsCost of insurance against SA sovereign default has surged…


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Fair value estimate (10-year RSA Treasury yield)Assuming a foreign currency sovereign downgrade…


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Global 10-year nominal treasury ratesSA looks attractive…

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Global 10-year real treasury rates…until you adjust for inflation.

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-Old Mutual Income Fund

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Fund structure: Latest


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SA fixed rate non-government bond market

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ABIL debacle served as catalyst for more general spread widening


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NCD spot and monthly rates

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Priced by both forward and spot money markets

Increasing exposure for money market and income funds


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1.32% 1.42% 1.52% 1.62% 1.72% 1.82% 1.92% 2.02% 2.12% 2.22% 2.32% REAL YLD7.0% 6.5% 6.0% 5.6% 5.1% 4.6% 4.2% 3.7% 3.2% 2.8% 2.3% 2.7%7.4% 6.9% 6.5% 6.0% 5.5% 5.1% 4.6% 4.1% 3.7% 3.2% 2.7% 3.2%7.9% 7.4% 6.9% 6.4% 5.9% 5.5% 5.0% 4.5% 4.1% 3.6% 3.1% 3.6%8.3% 7.8% 7.3% 6.8% 6.4% 5.9% 5.4% 4.9% 4.5% 4.0% 3.5% 4.0%8.7% 8.2% 7.7% 7.3% 6.8% 6.3% 5.8% 5.4% 4.9% 4.4% 4.0% 4.4%9.1% 8.6% 8.2% 7.7% 7.2% 6.7% 6.2% 5.8% 5.3% 4.8% 4.4% 4.8%9.6% 9.1% 8.6% 8.1% 7.6% 7.1% 6.7% 6.2% 5.7% 5.2% 4.8% 5.2%

10.0% 9.5% 9.0% 8.5% 8.0% 7.6% 7.1% 6.6% 6.1% 5.6% 5.2% 5.6%10.4% 9.9% 9.4% 8.9% 8.5% 8.0% 7.5% 7.0% 6.5% 6.1% 5.6% 6.0%10.8% 10.3% 9.8% 9.4% 8.9% 8.4% 7.9% 7.4% 6.9% 6.5% 6.0% 6.4%11.3% 10.8% 10.3% 9.8% 9.3% 8.8% 8.3% 7.8% 7.3% 6.9% 6.4% 6.9%11.7% 11.2% 10.7% 10.2% 9.7% 9.2% 8.7% 8.2% 7.8% 7.3% 6.8% 7.3%12.1% 11.6% 11.1% 10.6% 10.1% 9.6% 9.1% 8.7% 8.2% 7.7% 7.2% 7.7%12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.6% 9.1% 8.6% 8.1% 7.6% 8.1%13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 8.5%13.4% 12.9% 12.4% 11.9% 11.4% 10.9% 10.4% 9.9% 9.4% 8.9% 8.4% 8.9%13.8% 13.3% 12.8% 12.3% 11.8% 11.3% 10.8% 10.3% 9.8% 9.3% 8.8% 9.3%14.2% 13.7% 13.2% 12.7% 12.2% 11.7% 11.2% 10.7% 10.2% 9.7% 9.2% 9.7%14.7% 14.1% 13.6% 13.1% 12.6% 12.1% 11.6% 11.1% 10.6% 10.1% 9.6% 10.1%15.1% 14.6% 14.0% 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 10.5%15.5% 15.0% 14.5% 14.0% 13.4% 12.9% 12.4% 11.9% 11.4% 10.9% 10.4% 11.0%

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RSA CPI-linked return matrix (R212, 2022)Expected returns over 12-month period

End of period

inflation rate changes

R212 yield

changes


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Yield curve slope – nominal bonds

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Yield spread: RSA 30-year fixed rate bond and 3-month JIBAR


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Fixed rate bond returns

Repo rate: +100bpsLong end: +100bps

Repo rate: +100bpsLong end: +50bps

Expected returns over 12-month period


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-

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Fixed rate bond returns

Repo rate: +150bpsLong end: -50ps

Repo rate: +100bpsLong end: 0bps

Expected returns over 12-month period


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-OM retail funds

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Fund structures: Latest

Click to edit Master title styleClick to edit Master subtitle styleSovereign credit rating dynamics


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SA local currency government bond ownershipForeign ownership of domestic debt at 3-year low

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32% of R1.4tn = R0.5tn


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Sovereign credit rating scaleMoody's S&P Fitch

Long- Term RatingsAaa AAA AAA PrimeAa1 AA+ AA+Aa2 AA AAAa3 AA- AA-A1 A+ A+A2 A AA3 A- A-

Baa1 BBB+ BBB+Baa2 BBB BBBBaa3 BBB- BBB-Ba1 BB+ BB+Ba2 BB BBBa3 BB- BB-B1 B+ B+B2 B BB3 B- B-

Caa1 CCC+ Substantial riskCaa2 CCC Extremely speculativeCaa3 CCC-

CCC

C DDD/ DD/ D

Ca

D

CCC

High grade

Upper medium grade

Lower medium grade

Non- investment grade (Speculative)

Higher speculative

In default (low posibility of recovery)

In default

SA FC

SA FC SA FC

SA LCSA LC SA LC

BZ FC

BZ FC

BZ FC

S:\Bonds\Fixed Income Research\Economic Analysis\SA – Rating Metrics


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/ High hurdle to South Africa exiting emerging market bond indices

/ Citi Bank’s World Government Bond Index (WGBI) & Barclays’ Global Aggregate (Global Agg) Index

- Investment grade, local currency bonds considered [thus local as opposed to foreign currency rating]

- WGBI inclusion criteria requires at least investment grade rating from either S&P or Moody’s- Global Agg. inclusion criteria requires at least investment grade rating from either S&P, Moody’s

or Fitch

/ JP Morgan’s Global Diversifies Index (EMBI) & Barclays’ Emerging Market Local Currency Government Bond Index (EMLGBI)

- Index inclusion criteria ambivalent to credit ratings - Inclusion criteria:

- Classified as lower/middle income country (World Bank) and non-advanced country (IMF) - Respective bond market must have significant market depth and liquidity- Include all of investment grade, high yield & unrated debt securities

EM bond index inclusion criteria

Click to edit Master title styleClick to edit Master subtitle styleDisclaimer

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Futuregrowth Asset Management (Pty) Ltd (“Futuregrowth”) is a licensed discretionary financial services provider, FSP 520, approved by the Registrar of the Financial Services Board to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. The fund values may be market linked or policy based. Market fluctuations and changes in exchange rates may have an impact on fund values, prices and income and these are therefore not guaranteed. Past performance is not necessarily a guide to future performance. Futuregrowth has comprehensive crime and professional indemnity in place. Performance figures are sourced from Futuregrowth and I-Net Bridge (Pty) Ltd. This document is for information purposes only and is not intended as an offer or recommendation to buy or sell or a solicitation of an offer to buy or sell a financial product or security. The recipient is advised to assess the information with the assistance of an advisor if necessary, with regard to its compatibility with his/her own circumstances in view of any legal, regulatory, tax and other implications. Personal trading by staff is restricted to ensure that there is no conflict of interest. All employees of Futuregrowth are remunerated with salaries and standard short and long-term incentives. No commission or incentives are paid by Futuregrowth to any persons. All inter-group transactions are done on an arm’s length basis. Futuregrowth has comprehensive crime and professional indemnity insurance. Futuregrowth prepared this document in good faith. Although the information in this document is based on sources considered to be reliable, Futuregrowth makes no representation or warranty, express or implied, as to the accuracy or completeness of this document, nor does it accept any liability which might arise from making use of this information.

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