angles & perspectives - PSG

ANGLES & PERSPECTIVES THIRD QUARTER 2016

Contents

1. Introduction – Anet Ahern

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2. Investing in the age of turbulence – Shaun le Roux

2

3. Low equity funds are in the sweet spot – Lyle Sankar and Ian Scott

5

4. Cisco – a simple investment with significant scope for growth – Philipp Wörz

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5. The PSG Equity Fund: long-term market-beating returns

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6. Portfolio holdings as at 30 September 2016 14 7. Percentage annualised performance to 30 September 2016 (net of fees)

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8. Risk/return profile

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9. Unit trust summary

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10. Contact information

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Every decision we make is based on what we believe is in the best long-term interests of our clients.

Introduction

Anet Ahern

Anet has 30 years’ experience in investment and business management. After starting her career at Allan Gray in 1986, where she fulfilled various roles in trading and investment management, she worked as a portfolio manager at Syfrets, and later BoE Asset Management, where she was CIO and CEO. She also spent six years at Sanlam, where she was the CEO of Sanlam Multi Manager International, with assets totalling R100 billion in local and global mandates. Anet joined PSG Asset Management as CEO in 2013.

‘You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.’ Warren Buffett

Our approach to investing in turbulent times reflects our general investment approach As a particularly eventful 12 months draw to a close, this edition of Angles & Perspectives examines our approach to investing in turbulent times. For those of you who have attended our recent ‘Outlook’ events, some of the content will ring a bell, and this would please us no end! Our approach to investing during times like these, and actually at all times, incorporates the following: • Always remember that emotions can make you buy high and sell low, so keep a cool head. • Beware the dangers of forecasting, so don’t rely on it too much. • Always focus on the investor objective. For example, for pensioners real returns are more important than relative returns. • Think long term. Most of what invades our minds in the short term is noise in retrospect. • Diversify. Outcomes are uncertain, and complimentary investments help to make the journey smoother. • Always buy with a margin of safety. The price you pay for an investment is crucial. • Grab the opportunities that arise in times of panic. If there are no opportunities, wait patiently.

heart of how we align ourselves with our clients. We make sure that every holding of every portfolio works towards this goal with the right margin of safety. Philipp Wörz walks us through the investment opportunity that we see in Cisco, a dominant player in the networking industry. We believe the opportunity exists because the market perceives the firm as a much more commoditised provider than we do. We conclude with a focus on the PSG Equity Fund, of which Shaun has been the manager since 2002. Sticking to our proven process enables us to find rewarding opportunities for our clients This year, we have handled the disturbing events both globally and here in South Africa, and the task of investing clients’ hard-earned money with the same approach we have taken for years – we always remember that our first goal is to remain the best stewards of clients’ wealth. This means we continue to put clients first in everything we do, we take a long-term approach, and we do our work when it comes to researching investment opportunities. We thank you for your support throughout the year and wish you a peaceful festive season and a prosperous 2017.

All our investment decisions are underpinned by certain fundamental principles We open this edition with Shaun le Roux who recaps the risks inherent to investing in a difficult, noisy environment. Next we have a recap of our asset allocation process by Ian Scott and Lyle Sankar from our fixed income team. The basis of our asset allocation process is our long-term outlook for inflation. Real returns (above inflation) over the right time horizon are at the

THIRD QUARTER 2016 | 1

Investing in the age of turbulence: positioning portfolios when the politics is confusing and the stakes are high

Shaun le Roux

Shaun is the Fund Manager of the PSG Flexible Fund and the PSG Equity Fund.

These are challenging times to be making investment decisions We would characterise the current political and macroeconomic climates in South Africa and abroad as both disturbing and noisy. Recent political events in the west, with Brexit and the US presidential election as the most recent examples, indicate high levels of discontent and rising enthusiasm for right-wing populist rhetoric. The long-term impact of these political trends on future policy, and therefore the respective economies, is inherently unpredictable but will likely be material. This risk is further compounded by a tepid global economy that has failed to fully shake off the symptoms of the global financial crisis and has been subject to a long, intense period of deleveraging. Domestically, we have witnessed some very disturbing turns within the South African political landscape. The current divisions within the ruling party are of deep concern because the stakes are so high. The severity of the situation is being exacerbated by the weak state of the domestic economy. Poor or sinister political decisions could mean a recession is inevitable. Our clients are very concerned about the impact of these developments on the future returns of their portfolios, and rightly so. These are challenging times to be making investment decisions. This is evidenced by the significant discrepancies in the views and positions of market participants.

Brexit showed us the inherent danger of trying to forecast short-term financial outcomes If Brexit has taught us anything, it is the danger of trying to make financial forecasts. Not only did the markets misread the outcome of the vote, but most subsequent predictions about the short-term financial impact have been wide of the mark. The long-term consequences of Brexit are clearly very unpredictable and, as a result, long-run forecasts are also inherently fraught with danger. While current political trends in Europe, including Brexit, will certainly have a widespread impact on the region’s economies over the long run, the outcomes are very difficult to predict with accuracy and the road ahead will likely have many twists and turns.

How do we construct our portfolios in times of turbulence? In an environment where trying to predict the future is fraught with danger, how do we construct our portfolios? The simple answer is: like we always have done. We construct portfolios in a bottom-up fashion. This means that we look at individual securities and assess the risk-weighted likelihood

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of that security meeting a required return over a particular investment term. In assessing the margin of safety we attempt to always make an objective assessment of the current facts. Our portfolios are made up of a diversified blend of securities that we think are likely to meet each fund’s objective or mandate. Macroeconomic and political developments can have a considerable impact on short-term price movements. However, it is only in isolated instances that long-term returns are materially affected. Typically, long-term returns are more heavily influenced by the price paid. Accordingly, we always prefer to buy with a margin of safety, take a long-term view and look out for opportunities that arise from shorter-term periods of panic or uncertainty. The reason that we prefer to buy an asset with a margin of safety is because it acts as the buffer against unpredictable and unforeseen future events. Conversely, owning expensive assets can significantly reduce the likelihood of achieving acceptable long-term returns.

The impact of Brexit on our portfolios In our minds, it was clear that the Brexit vote could have material long-term political consequences for Britain and Europe. We did not try predict the outcome of the referendum but instead focused our attention on whether the securities we owned at the time had a wide enough margin of safety to protect our portfolios against an adverse outcome. When the ‘leave’ vote prevailed and financial markets digested the consequences, punishing the British pound, UK domestic assets and European banks in the process, we aggressively applied our minds to screening for investment opportunities. We prefer to buy quality and insist on a margin of safety. Unfortunately, most of the higher-quality stocks, including listed property shares, did not fall to levels that we considered attractive entry points for our clients. We did, however, use the opportunity to increase our exposure to Sainsbury’s, a high-quality franchise that operates within a sector that has been through tough times and that can be bought at a very attractive price. Buying a good business at a cheap valuation level, particularly after a bout of pound weakness, bodes well for the long-term returns of our clients.

Current risks that could affect future portfolio returns We believe that there are two areas of concern that could affect future investment returns and are worth discussing: South African politics and overpriced asset classes. South African politics South African investors often make the mistake of thinking that day-to-day movements in the rand or local bonds and equities are a function of domestic economic or political developments.

However, the reality is that, over time, capital flows to and from a country like South Africa are largely driven by global trends, including interest rate levels, commodity prices and risk appetite. Offshore investors tend to only focus on domestic political risk in times of crisis. Unfortunately, the dismissal of our Finance Minister in December 2015 and the subsequent machinations within the ANC have met the definition of a domestic political crisis and we have seen very aggressive moves in the rand and domestic assets. Effectively, the South Africa risk premium has risen and this has flowed through to the prices of domestic bonds and related equities. Currently, a lot of attention is being focused on the likelihood of a sovereign credit downgrade for South African government bonds. Again, we feel there is little to be gained from trying to predict the outcome of what is a close call. Notwithstanding this, we believe that a sovereign downgrade is already priced into South African bonds. As Graph 1 shows, the five-year credit default swap spreads for South Africa are exceeding those of Russia and Turkey, and matching Brazil. All three of these countries have a sub-investment grade sovereign debt rating. Instead of trying to guess what will happen, we have focused on determining what has been priced into assets and whether we can buy high-quality assets at a margin of safety in such a way that our clients are more likely to achieve their longterm investment objectives. Accordingly, we have been buyers of South African government bonds at attractive long-term real returns amidst the spike in yields late last year and early

this year. We have also grabbed the opportunity to buy solid domestic equity franchises at very attractive prices, including FirstRand, as well as other banks. The biggest risk with respect to local politics is a successful attack on the independence of the treasury and the South African Reserve Bank. Currently, the integrity of these very important financial institutions is still intact and we are being presented with clear evidence that treasury is operating in an independent and responsible fashion. Nevertheless, we are closely monitoring developments because a change in the status quo would have a material impact on financial markets and the price of the rand. It is because of these kinds of unpredictable outcomes that we diversify our portfolios and tend to hold healthy levels of cash, which can be employed in times of panic. Overpriced asset classes One of the challenges of making investment decisions in the current climate is assessing the impact of very low global bond yields on asset prices. With around $12 trillion worth of sovereign bonds trading on negative yields, we are clearly living in a time of peculiar and distorted asset pricing. Artificially low yields and high prices imply a very poor outlook for longterm returns from these assets. We are also cautious of other asset classes, including a portion of the equity market, that are trading off the global bond curve and where valuations are also very elevated. This is particularly the case for global equities that are perceived to have the most stable, bond-like cash flows or the most visible and robust growth trajectories.

Graph 1: Five-year credit default swap spreads (priced in US dollars) 700 600 500 400 300 200 100 JAN '13

JUL '13

JAN '14

JUL '14 Russia

JAN '15 SA

JUL '15 Brazil

JAN '16

JUL '16

Turkey

Source: Bloomberg


Cool heads are required in these times of turbulence and noise

The market cap weighted indices in South Africa are dominated by companies that trade at very elevated valuation levels. This is especially the case for the rand hedge, large cap industrial companies, most of whom have rewarded rand investors handsomely over recent years. Graph 2 shows the priceearnings (P/E) ratio of the FTSE/JSE Industrial 25 Index or INDI 25, whose collective value comprises 62% of the FTSE/JSE All Share Index (ALSI). Although the very high P/E ratio and relative size of Naspers does distort this index at the time of writing, a passive investor in an ALSI tracker fund should be aware that they are allocating 62% of their capital to shares trading at 28 times earnings on a weighted average basis. The long-term returns from this collection of businesses do not meet our hurdles, valuations appear stretched and we think we can find better opportunities for our clients at more acceptable levels of risk.

Emotions are running high and we think it is absolutely essential that investors have very clear objectives in terms of required long-term returns and what constitutes acceptable levels of risk. They must not allow macroeconomic and political developments to throw them off course so that they end up selling low or buying high. We consider risk levels to be very elevated in pockets of the investment universe and we are avoiding overpriced securities that are unlikely to generate acceptable future returns. We are actively grabbing opportunities that arise as a result of the poor sentiment, confident that diversification and a longer-term time horizon will enable us to continue achieving our clients’ objectives without taking on excessive risk.

Graph 2: The price-earnings (P/E) ratio of the FTSE/JSE Industrial 25 Index 30 28 26 24 22 20 18 16 14 12 10 2004

2005

2006

2007

2008

2009

2010

INDI 25 P/E Sources: Bloomberg, PSG Asset Management (13 September 2016)

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2011 Average

2012

2013

2014

2015

2016

Low equity funds are in a sweet spot Lyle Sankar

Ian Scott

Lyle joined the Fixed Income team at PSG Asset Management in 2014. He performs credit and fixed income analysis and serves as the primary money market trader for all PSG funds. Ian joined PSG in 2013 as Head of Fixed Income. He first joined Stanlib in 1999 as a money market dealer, from where he moved to capital markets and was then promoted to Senior Portfolio Manager – Fixed Interest.

We follow a simple approach to asset allocation At PSG Asset Management we have a very simple approach to asset allocation, which we portray in Graph 1. For every individual investment opportunity that we consider, we derive a required return on the basis of the company’s moat, its management as well as its ability to service debt. To derive this required rate, we start with inflation (the gold line) and then add a premium based on the riskiness of the investment (the black line). We only invest when the expected return from the investment exceeds the required return. We apply this approach to equity investments as well as bonds and cash instruments. Whether we are buying shares in a company (equity) or lending it money (bonds) the same metrics are relevant. Bear in mind that ‘cash’ is a loan to the bank, so the risk level of cash is only as low as the bank is solvent. As opportunities arise that offer expected returns in excess of our required return, we allocate from our cash resources. The fund’s asset allocation is the result of this process. Each of our funds have certain mandated maximum exposures per asset class. The more opportunities that arise across the asset class curve the better for our multi asset funds. The PSG Stable Fund has been spoilt for choice of late. In this article we take you on a short journey across the asset class curve and discuss why the respective opportunities have been so compelling.

Inflation is the foundation of our decision-making process Since our process revolves around real returns, our long-term inflation assumption is a key input to our decision-making. By this we mean it is a peg in the ground from where we can start to lay the foundation. The South African Reserve Bank (SARB), as the custodian of inflation and the repo rate, has earned credibility through many economic cycles by ensuring an average inflation rate of close to 6% (the upper end of the target band). Even over the past twoand-a-half years the SARB has increased rates by 2% despite the low-growth backdrop, indicating that they are committed to their mandate of price stability. All things considered, we believe that going forward inflation should on average continue to be around the 6% mark. Negotiable certificates of deposit (NCDs) allow us to optimise our cash holdings We tend to hold large amounts of cash as we wait for attractive real yields to appear. We consequently have a very detailed cash process to ensure that we are optimising returns while maintaining liquidity, and avoiding any significant credit risks. In this process we largely use bank NCDs of various durations. In the past our NCDs have made a meaningful contribution to fund returns and we believe that it is very likely that the current yields on offer in the NCD market will continue to provide a real return. The NCD market is anchored by the repo rate and therefore priced for an expectation of local inflation. The market has been concerned about our local inflation outlook, given the volatility in the rand, political risk, emerging market sell-offs and

Graph 1: Our required rate of return versus long-term inflation expectations

Return

PSG Asset Management required rate of return

Long-term inflation expectation

Cash

Short-term credit

Medium-term bonds

Longer bonds

Property

Equities

Maturity Source: PSG Asset Management THIRD QUARTER 2016 | 5

Graph 2: Negotiable certificates of deposit (NCD) real yields over five years (as at 1 January 2016) 5% 4.05% 3.65%

4% Yield to maturity

4.40%

3.11% 3%

2.53%

2%

1.45%

1%

0

1

2

3

4

5

Modified duration (years) Source: PSG Asset Management

food prices spikes. These concerns were at their pinnacle during January this year. Graph 2 shows the real yields that were on offer across the NCD curve at the time (on the assumption that the average inflation rate will be 6% over the cycle). We saw this as a clear mispricing and shopped aggressively across the curve, meaning we backed the SARB rather than the market hype. Given the good liquidity of this asset class with prices offered daily by South African banks, the PSG Stable Fund has been able to lock in significant real yields of up to inflation plus 4% for five years. The fund has consequently increased its fixed rate NCD exposure during 2016 from around 9% to around 35%. Also, the NCD rates do not adequately reflect the current macroeconomic picture of low global yields, low growth and tempered inflation. We therefore continue to allocate to NCDs with terms of one year and longer. Corporate credit spreads have widened, enabling us to buy bonds below fair value Corporate spreads of typically cyclical companies and bank senior unsecured paper have risen over the past two years. We perform detailed bottom-up research on the bond issuers to determine a fair yield. Rising rates combined with excessive market caution around more cyclical companies have offered (and continue to offer) us the opportunity to buy the bonds of quality companies below our estimate of their fair value. Bank bonds have however been the standout opportunity. Graph 3 shows bank senior unsecured bond spreads over the three-month Johannesburg Interbank Agreed Rate (Jibar). This indicates how the market has priced the risks of new bond issuances by the major South African banks. It is obvious that 6|

these spreads have risen over the past three years, which should indicate rising risk in this sector. Contributing factors are the failure of African Bank, the phasing in of more onerous banking regulations as well as concerns over South Africa’s economic and political situation. A deeper look into the fundamentals of the South African banks however indicate quite the opposite - risk has reduced. Provisioning policies have become far more conservative, Tier 1 capital ratios have improved and leverage has reduced significantly. We therefore increased our exposure to the major South African banks in a period where spreads for fixed and floating rate bank bonds are extended over a higher base (spread above Jibar or the reference government bonds). As a result, we have been able to reduce the credit risk in our corporate credit book in the PSG Stable Fund, while at the same time locking in higher real yields. Fear and uncertainty created an opportunity to invest in local government bonds Further stimulus from central banks over the past year has driven bond yields into negative territory in many parts of the developed world. Coupled with a low-growth, low-inflation environment, this has set the scene for extraordinary low bond yields. On the other hand, we have seen emerging market currencies weaken, short-term inflation rise, and local bond yields react negatively. South Africa has had to deal with these factors while at the same time face political turmoil and sovereign rating concerns. Together, these factors have created a lot of fear and uncertainty in the local bond market. However, we saw this as an opportunity to increase our allocation to government bonds. Just over a year ago, when the inflation and interest rate outlook seemed rosier, South African government real bond yields were low and we had no allocation to these bonds in our funds. Due to the increasing fear and uncertainty

Graph 3: Bank senior unsecured bond spreads (October 2009 - August 2016) 250

Basis points

200

150

100

50

OCT '09

FEB '11

JUL '12

Bank 1

Bank 2

NOV '13 Bank 3

APR '15 Bank 4

AUG '16

Bank 5

Source: PSG Asset Management

Graph 4: South African bonds – nominal bond yields 11%

Bond yields December 2015

Yield to maturity

10%

9%

8% Bond yields April 2013

7%

6% 0

5

10

15

20

25

30

35

Years to maturity Source: PSG Asset Management


in the local market, government bonds started to price in a lot of negative news. As a result, government bonds started to offer real yields in excess of 3%. This is an attractive offering considering the low credit risk and high trading liquidity, as shown in Graph 4.

record of growing its dividend. Over the last 5 and 10 years it has managed to grow its dividend at a compound annual growth rate of 22.8% and 13.1% respectively. The PSG Stable Fund also holds Nedbank, which offers a compelling dividend yield of 5.1%.

A number of reasons convinced us to continue adding to our bond position. It became evident that the SARB Monetary Policy Committee would be executing on their mandate of inflation targeting. It seemed probable to us that the current interest rate cycle would be slower and shallower than previous cycles. Fears around South African politics ensured that a downgrade remains priced into local bond yields – despite South Africa not having a ‘junk’ rating. We are also not convinced that a downgrade is a certainty. In addition, the longer-term bond exposure provides a hedge against a disinflationary environment in developed markets, which could be detrimental for global equities. The South African yield curve remains steep and high real yields can be locked in without excessive interest rate risk. Furthermore, being in liquid instruments gives us the benefit of being able to re-allocate when more opportunities arise.

Although many quality South African companies are overpriced by our calculations, there are a couple of companies in the logistics and automobile sector that we believe offer value. Both Imperial (at a 4.8% dividend yield) and Super Group are attractively priced and managed in the long-term interests of shareholders.

Over the past year, due to our actions in both the NCD and government bond market, we have significantly shifted the fixed income exposure of the PSG Stable Fund from floating to fixed. This is evident in Graph 5. Local equity holdings are attractively priced FirstRand is the largest holding in the PSG Stable Fund and is a good example of how the fund invests in companies with a margin of safety. The bank’s dividend yield is currently 5% and it has R13.8 billion surplus capital, which means that it is very unlikely that the dividend will be cut. FirstRand has a track

Globally numerous companies are ticking all our investment boxes The PSG Stable Fund invests globally and we have found numerous US industrials that meet our investment criteria. Due to the low shale oil and gas prices there have been many knockon effects in this sector. Colfax and Union Pacific are standout opportunities. Both companies are exceptionally well managed and come with a very reasonable price tag. The fund’s second largest holding is Berkshire Hathaway, a company in which we have been invested for many years. In Berkshire Hathaway our investors get access to a very well-managed, well-diversified portfolio of companies with a proven track record. The PSG Stable Fund continues to take advantage of opportunities across asset classes The PSG Stable Fund has pounced as the opportunities arose in the various asset classes. We have now locked in attractive real yields, added quality equities at attractive prices, and continue to hold cash if there is more stormy weather that brings good assets at good prices.

Graph 5: PSG Stable Fund fixed income (FI) exposure (September 2015 – September 2016) 100% 90% 80%

% FI exposure

70% 60% 50% 40% 30% 20% 10% SEP '15

OCT '15

NOV '15

DEC '15

JAN '16

FEB '16

% FI floating rate exposure Source: PSG Asset Management 8|

MAR '16

APR '16

MAY '16

% FI fixed rate exposure

JUN '16

JUL '16

AUG '16

SEP '16

Cisco – a simple investment with significant scope for growth

Philipp Wörz

Philipp joined PSG in 2007 as an Equity Analyst. Philipp is the Co-Fund Manager of the PSG Global Equity and PSG Global Flexible Sub-Funds.

In a large investment universe, simplicity is often more effective 'The business schools reward difficult, complex behaviour more than simple behaviour, but simple behaviour is more effective.’ Warren Buffett

To deliver above-average investment performance, one of the characteristics of our investment process is to keep things as simple as possible. Being based in Cape Town, keeping it simple is especially important when it comes to global investing and distilling investment cases, given the wide universe of available investment opportunities. Long-standing clients will by now be well aware of the characteristics we look for in investment opportunities. Here is a reminder: we believe that our sweet spot is to buy high-quality companies (with both a strong Moat and Management) that are temporarily out of favour and therefore trading at a wide Margin of Safety. Cisco Systems falls firmly in this sweet spot. We have held Cisco in our portfolios for some years and it has been a solid contributor to performance. Cisco has demonstrated its sustainable competitive advantage Cisco was founded in 1984. As the dominant player in the networking industry, the company has grown its earnings per share (EPS) by over 14% per year over the last 20 years, as shown in Graph 1. This is a clear indication of the company’s ability to successfully navigate the ever-evolving technology sector.

As networks have become more complex and organisations have increasingly adopted technology to make the transition to digital operations, Cisco has been able to leverage its large installed base (footprint) of equipment and dominant market shares – approximately 60% in switching to approximately 75% in enterprise routing. In essence, according to Cisco, most business networks use switches to connect computers, printers and servers within a building or campus. A switch serves as a controller, enabling networked devices to talk to each other. Through information sharing and resource allocation, switches save businesses money and increase employee productivity. A router on the other hand, while it looks similar to a switch and performs some similar functions, is used to connect networks and directs traffic on the internet. In addition, the company offers other enterprise-related products and services in an environment where competitors lacking Cisco’s breadth and architectural advantage have been unable to meaningfully compete. This has enabled Cisco to become one of the top two IT security companies globally. Technology transitions should continue supporting Cisco’s competitive position The major transitions affecting modern organisations that should drive multi-year growth opportunities to Cisco include the following:

Graph 1: Cisco’s earnings per share (EPS) growth (1995 - 2016) 2.5

2.0

1.5

1.0

0.5 0.0

1996

1998

2000

2002

2004

2006

2008

EPS - non-GAAP (generally accepted accounting principles)

2010

2012

2014

2016

EPS - PSG adjusted

Sources: Bloomberg, Cisco company reports, PSG Asset Management THIRD QUARTER 2016 | 9

• security – a top IT priority for many organisations • digital transformation – the application of technology to

build new business models networking – moving toward more programmable, flexible and virtual networks • cloud – connecting public and private cloud environments • software-defined

When we began researching Cisco, a particular quote about the company by Boeing’s Chief Information Officer at the time, Kim Hammonds, resonated well with us and captured what we were gleaning from our analysis: ‘We no longer think of you as the plumber, it's more like the heart of the enterprise. You're mission critical.’ (Cisco 2011 Financial Analyst Conference) Further evidence of Cisco’s moat is the fact that it earns an exceptionally high gross profit margin of 63%; and for every dollar of sales, the business is generating 20 cents of free cash flow (which can be returned to shareholders or reinvested in the business). This makes any future growth very valuable. Management’s focus on acquisitions and strong cash payouts will benefit shareholders Long-time CEO John Chambers successfully led Cisco from 1995 to 2015, when he retired to become Executive Chairman. While it is still early days, current CEO Chuck Robbins, who joined the company in 1997, has impressed with his open leadership style and acceleration of Cisco’s build, partner and buy strategy. ‘Build’ refers to internal innovation, which is driven by Cisco’s $6.2 billion annual research and development spend. The tech industry is characterised by having a multitude of competitors that are also partners of Cisco, such as Microsoft, Apple,

IBM and Ericsson. Since Robbins’ appointment as CEO in July 2015, acquisition activity has accelerated, with Cisco acquiring software- and security-centric companies. As Graph 2 shows, technology trends evolve and we support the new CEO’s strategy to continue capturing these through strategic acquisitions. Companies return cash to shareholders by paying dividends and/or buying back shares. While Cisco had a track record of repurchasing its own shares between 2002 and 2010, thereby reducing its share count by 23%, buybacks are generally a less reliable source of shareholder returns. When Cisco paid its first dividend in 2011 (as shown in Graph 3), we therefore viewed it as a strong signal from management that it was going to be returning cash in a more predictable manner. Cisco’s dividend increased to $0.99 per share over the last 12 months. In the third quarter of the 2016 financial year, its quarterly dividend also increased to $0.26 per share, an increase of 23.8% from the previous quarter. At the 30 September price of $31.72, Cisco’s annualised dividend yield is 3.3%, while buybacks have added another 1.7% for a total pay-out yield of 5% in 2016. Skewed market perceptions enabled us to buy Cisco with a significant margin of safety A number of years ago the market was overly fearful about Cisco’s position in the transition of networking technologies. There was a perception that the company would rely significantly on hardware product sales, which are subject to the pressure of Chinese entrants into the market and softwaredefined networking players.

Graph 2: Technology transitions since the early 1980s

Video

Any device

Cloud

Internet of Application- everything centric

Virtual Mobile Packet Switched Routed

Bridged

Shared

Circuit

Fixed

Dedicated

Voice and data

Moving to IP Source: Cisco presentation

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PC

DC

Networkcentric

Unconnected

Graph 3: Cisco dividend and net buyback per share (1990 - 2016) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5

1990

1992

1994

1996

1998

2000

2002

2004

Buyback per share, net

2006

2008

2010

2012

2014

2016

Dividend per share

Sources: Bloomberg, PSG Asset Management

While it was important to take cognisance of these risks, this provided the opportunity to buy the company at a valuation of under 10 times earnings. This catered for the eventuality that absolute profits can decline while an outcome of no or low growth would result in substantial upside – a situation of large asymmetry. Fast forward to today and we see that Cisco has delivered well on its strategy of growth and large pay-outs to shareholders, with its share price rising from about $17 in 2011 to $31.72 at the end of September 2016. Since the company is still largely perceived to be a hardware company, while in fact approximately 40% of the business is from software and services, Cisco should continue to be rated higher as it transitions its business. Cisco offers good growth at a large discount Even though Cisco is a large company, with a market capitalisation of $160 billion, it mostly flies under the radar, possibly due to its relatively dull near-term growth record. However, what has attracted us is that Cisco has grown earnings per share at about 8% per year over the past 10 years

and should continue to do so going forward. It is trading at 14.7 times earnings or 12.5 times earnings if we exclude the company’s substantial cash reserves of $22 billion (cash fully taxed, net of debt). We have written about the divergence in valuations between defensive and cyclical companies previously. What strikes us about Cisco is that its growth profile and outlook is not too different from other highly rated companies such as Unilever or Reckitt Benckiser, as shown in Table 1. Both these companies were holdings in our portfolios previously and are now trading at a premium of more than 50% to Cisco. Investing does not need to be complicated Cisco dominates the networking industry and should benefit from the ongoing trend of businesses digitising their operations to remain relevant in a competitive marketplace. The company has a strong track record of growth and a proven ability to adapt its business to the market. We believe that Cisco’s transition to a larger mix of software and services should continue to support its valuation, which is attractive in both a global context and especially when compared to the average South African company, even though we believe it is a far superior business.

Table 1: Earnings per share (EPS) growth and valuation of Cisco, Unilever and Reckitt Benckiser* 5 Years

10 Years

Cisco

8.3%

Unilever

5.8%

Reckitt Benckiser

3.5%

Price-earnings (P/E) ratio 8.4%

Net cash/market cap

14.7

23%

6.2%

22.1

-13%

12.3%

24.7

-3%

Sources: Bloomberg, company annual reports, PSG Asset Management *Notes: • Cisco P/E ratio to July 2016 • Unilever core EPS and P/E ratio to December 2016 • Reckitt Benckiser P/E ratio to December 2016 THIRD QUARTER 2016 | 11

The PSG Equity Fund: long-term market-beating returns Basic fund information: Fund name: PSG Equity Fund Fund size: R2.3 billion ASISA sector: South African – Equity – General Benchmark: FTSE/JSE All Share Total Return Index Managers: Shaun le Roux and Greg Hopkins The fund aims to provide investors with superior longterm returns The PSG Equity Fund aims to provide investors with superior long-term returns by investing in undervalued local and global companies that meet our investment criteria. Over the long term, equities are the asset class that generate the highest inflation-beating returns for investors. Subject to the limitation of investing no more than 25% of the fund outside South Africa, the fund will invest in companies on local and global exchanges that have the best possibility of generating solid long-term returns at acceptable levels of risk. We follow a simple, structured, disciplined, bottom-up process and philosophy We are unapologetic in emphasising that we strictly stick to our proven philosophy and process. Our primary goal is to always act as stewards of our clients’ capital. That means that we look after it with the highest standards of prudence and care. When it comes to investing our clients’ capital, our team of fund managers and analysts are constantly on the lookout for mispriced quality. Our Equity Investment Committee members spend the majority of their time searching for companies that will provide our clients with the returns they need over the long term. Using a screening process that we have developed over time, the managers and analysts search the globe for opportunities. When the most promising opportunities have been identified, one or more team members are allocated the task of performing a ‘deep dive’ on the company. If, after a rigorous analysis, the company appears to meet our strict investment criteria, we consider including it on our local or global buy lists and attach a conviction level to the idea. It is from these lists that the fund managers select the companies that are included in our portfolios. We only invest in companies that meet our 3 Ms When we analyse a company, we evaluate it on three bases: • whether the company has a Moat – some form of sustainable competitive advantage – and how strong the Moat is • how good the company’s Management is – and how aligned management’s interests are with those of the shareholders • whether the stock of the company is trading below our evaluation of the intrinsic value of the company, which enables us to invest with a Margin of Safety

12 |

Shaun le Roux

Greg Hopkins

Taking all this information into account, the Equity Investment Committee considers the stocks that team members propose for inclusion on the buy lists. The buy lists contain no more than 25 stocks each (local and global), which ensures that the lists feature only the best ideas. The most important determinant is price While we prefer to hold high-quality businesses, we are not prepared to overpay for this quality. The surest way to lose money is to overpay for an asset. We believe that the safest way to invest our clients’ money is to buy assets that are trading at less than they are worth. We believe that markets are inherently efficient and that, over time, companies will trade at what they are worth. However, over the short term (and sometimes for extended periods of time even), companies can trade at valuations that are more or less than they are worth. We are constantly looking for this mispricing where, based on a conservative calculation on our part, we believe that the price at which a company is trading is at a sufficient discount to its value, creating a margin of safety. This means that, even if our calculation is not quite correct, it’s unlikely that our clients will suffer permanent capital losses. One important distinction to make within this context is the difference between quality and cyclicality. When a company’s profits are cyclically depressed, the market will often overlook the inherent quality of the business and its management team. As the cycle changes over time, the company’s share price will return to levels that reflect the true quality of the business. When this happens, patient investors who were happy to take a contrarian view to the market will be rewarded. We invest globally, wherever there are opportunities We look for appropriate investment opportunities wherever they may be found. Subject to the limitations of how much the fund can own outside South Africa, we will invest in companies that, by our evaluation, will provide our clients with the greatest probability of solid inflation-beating returns. Not all economies grow or contract at the same pace. By not limiting ourselves to only investing in South Africa we are able to provide investors in the fund with: • a greater degree of diversification (which reduces risk) • access to some of the best companies in the world that are trading in geographies, economies and industries that are very different to the companies available in South Africa. For example, investors who only invest in companies listed in South Africa would miss out on opportunities in companies that generate most of their income from outside South Africa (for example, North America or Europe) or from specialist industries such as mobile phone manufacturing, biotechnology or nuclear power generation.

Since we are active managers, the fund will often look very different to the benchmark index While the fund has the FTSE/JSE All Share Total Return Index (ALSI) as its benchmark, we do not consider the presence or holding size of a company in the ALSI when constructing our portfolios. Our portfolios are constructed from the local and global buy lists and in accordance with the conviction attached to each investment idea. As such, our portfolios will often look very different to the ALSI. Also, the ALSI is based on the size of companies’ market capitalisation, which means that the bigger a company becomes, the greater its presence in the index. For the same reasons we only buy stocks that meet our investment requirements, irrespective of their popularity. By focusing only on quality companies that are trading at less than we believe

that they are worth we are confident that we are acting in the best long-term interests of our clients. This approach has delivered good returns for our clients over time. The fund has an enviable long-term track record The PSG Equity Fund is a top quartile performer over the period March 2002 to end August 2016 and has outperformed both the ALSI (by almost 4% per year) and the average general equity fund over this time. R100 000 invested in the PSG Equity Fund on 1 March 2002 would have grown to over R1.2 million by 30 September 2016. The same sum would have been worth around R815 000 if invested in the average general equity fund and around R746 000 if invested in an ALSI tracker fund.

Graph 1: PSG Equity Fund performance (1 March 2002 - 30 September 2016) 1 400 000 1 200 000 1 000 000 800 000 600 000 400 000 200 000

2002

2003

2004

2005

2006

2007

PSG Equity Fund

2008

2009

2010

2011

2012

2013

2014

2015

2016

FTSE/JSE All Share TR Index ZAR

Source: Morningstar Direct


Portfolio holdings as at 30 September 2016

PSG Equity Fund

PSG Flexible Fund

PSG Balanced Fund

Top 10 equities

Top 10 equities

Top 10 equities

Glencore plc FirstRand Ltd Old Mutual plc Discovery Holdings Ltd Imperial Holdings Ltd Super Group Ltd Nedbank Group Ltd Capital One Financial Corp Grindrod Ltd Hudaco Industries Ltd

Berkshire Hathaway Inc FirstRand Ltd Glencore plc J Sainsbury plc Old Mutual plc Discovery Holdings Ltd Imperial Holdings Ltd Super Group Ltd Capital One Financial Corp PSG Group Ltd

FirstRand Ltd Imperial Holdings Ltd Berkshire Hathaway Inc Old Mutual plc Super Group Ltd Dicovery Holdings Ltd Brookfield Asset Management Inc J Sainsbury plc Nedbank Group Ltd Colfax Corp

Asset allocation

Asset allocation

Asset allocation

• Domestic resources

12%


• Domestic financials

28%

• Domestic industrials

35%

• Domestic cash and NCDs • Foreign equity

1% 24%

Total 100%

5%


3%


21%


20%


25%


22%

• Domestic cash and NCDs

26%


11%

• Foreign equity

23%

• Domestic bonds

20%

• Foreign equity

24%

Total 100%

Total 100%

Performance

Performance

Performance

1400

700

1200

1200

600

1000

500

800

400

600

300

400

1000 800 600 400

200

200 0

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 PSG Equity Fund

14 |

FTSE/JSE All Share TR Index ZAR

100

200 '04 '05 '06 '07

'08 '09

PSG Flexible Fund

'10 '11

'12 '13 '14

'15 '16

Inflation +6%

0

'00

'02

'04

'06

'08

PSG Balanced Fund

'10

'12

'14

Inflation +5%

'16

PSG Stable Fund

PSG Diversified Income Fund

PSG Income Fund

Top 5 equities

Top 5 equities

Top 10 bond exposures

FirstRand Ltd Berkshire Hathaway Inc Imperial Holdings Ltd Brookfield Asset Management Inc Discovery Holdings Ltd

Berkshire Hathaway Inc FirstRand Ltd Nedbank Group Ltd J Sainsbury plc Discovery Holdings Ltd

Top 5 issuer exposures


Absa Bank Ltd Republic of South Africa Standard Bank of SA Ltd FirstRand Bank Ltd Capitec Bank Ltd

Republic of South Africa Absa Bank Ltd Standard Bank of SA Ltd Nedbank Ltd FirstRand Bank Ltd

Absa Bank Ltd Republic of South Africa Nedbank Ltd Standard Bank of SA Ltd FirstRand Bank Ltd Capitec Bank Ltd Imperial Holdings Ltd The Thekwini Fund (RF) Ltd Investec Bank Ltd MMI Group Ltd

Asset allocation

Asset allocation


Asset allocation

10%

• Domestic equity

4%


11%



37%

• Domestic bonds

• Domestic bonds

26%

• Foreign equity

5%

Total 100%

• Foreign equity

16%

Total 100%

• Fixed rate notes

64%

37%

• Floating rate notes

34%

54%

• Domestic cash and NCDs 2%

Total 100%

Performance

Performance

Performance

180 160 140 120 100 80

250

140

200

120

60 40 20 0

100

150

80

100

'11

'12

'13

PSG Stable Fund

'14

'15

'16

Inflation +3% over a rolling 3-year period

50

'06

'07

'08

'09

'10

'11


'12

'13

'14

'15

'16

Inflation +1%

60

'11

'12 PSG Income Fund

'13

'14

'15

'16

STeFI Composite Index (ZAR)


PSG Money Market Fund

PSG Global Equity Sub-Fund

PSG Global Flexible Sub-Fund


Top 10 equities

Top 10 equities

Standard Bank of SA Ltd Nedbank Ltd Absa Bank Ltd FirstRand Bank Ltd Investec Bank Ltd Transnet Soc Ltd Capitec Bank Ltd Growthpoint Properties Ltd Republic of South Africa Land and Agricultural Development Bank of SA

Berkshire Hathaway Inc Capital One Financial Corp Brookfield Asset Management Inc J Sainsbury plc Cisco Systems Inc JP Morgan Chase & Co Colfax Corp Qualcomm Inc Glencore plc Union Pacific Corp

Berkshire Hathaway Inc Capital One Financial Corp Brookfield Asset Management Inc J Sainsbury plc Cisco Systems Inc JP Morgan Chase & Co Colfax Corp Union Pacific Corp Glencore plc Qualcomm Inc

Asset allocation

Regional allocation

Regional allocation

• Linked NCDs/Floating rate notes 27%

• US 60%

• US 51%

• Step rate notes

10%

• Europe 4%

• Europe 3%

• NCDs 58%

• UK 14%

• UK 12%

• Corporate paper

4%

• Asia 12%

• Asia 11%

• Bill 1%

• Canada 7%

• Canada 6%

Total 100%

• Singapore 1%

• Singapore 1%

• Cash 2%

• Cash 16%

Total 100%

Total 100%

Performance

Performance

Performance

500

200

140

180

120

160

100

300

140

80

200

120

60

100

40

400

100 0

20

80 '00

'02

'04

'06


16 |

'08

'10

'12

'14

'16

(ASISA) South African IB Money Market Mean (Benchmark)

60

'10

'11

'12

PSG Global Equity Sub-Fund

'13

'14

'15

'16

MSCI Daily Total Return Net World USD Index

0

'13

'14

PSG Global Flexible Sub-Fund

'15

'16 US Inflation +6% USD

Percentage annualised performance to 30 September 2016 (net of fees) Local funds PSG Equity Fund A FTSE/JSE All Share Total Return Index

1 Year

2 Years

3 Years

5 Years

10 Years

Inception

Inception date

16.65

5.82

10.48

17.33

12.16

18.79

01/03/2002

6.57

5.68

8.84

15.29

11.98

14.75

15.00

10.81

12.25

15.92

14.56

17.15

Inflation +6%

11.94

11.29

11.68

11.69

12.34

12.12

PSG Balanced Fund A

12.92

9.41

10.58

14.03

11.00

14.73

Inflation +5%

10.93

10.27

10.65

10.67

11.20

PSG Stable Fund A

10.49

8.29

8.18

10.28

Inflation +3% over a rolling 3-year period

8.93

8.27

8.65

8.67

PSG Diversified Income Fund A

8.50

7.84

7.54

7.96

8.09

Inflation +1%

6.93

6.26

6.65

6.67

7.20

PSG Income Fund A

8.05

7.32

6.95

6.36

PSG Flexible Fund A

01/06/1999

10.65 10.27

13/09/2011

8.67 7.87

7.11

6.75

6.38

5.99

PSG Money Market Fund A

7.12

6.78

6.36

5.88

7.27 7.29

07/04/2006

7.33 6.30

STeFI Composite Index South African Interest Bearing Money Market Mean

01/11/2004

01/09/2011

5.99 8.59

19/10/1998

7.17

6.75

6.35

5.92

16.80

7.93

11.66

16.29

MSCI Daily Total Return Net World USD Index (in ZAR)

10.72

13.41

17.45

24.27

PSG Global Flexible Feeder Fund A

15.35

9.81

12.36

16.25

6.47

17.63

18.72

21.38

1 Year

2 Years

3 Years

5 Years

Inception

Inception date

15.11

-1.69

1.24

6.15

3.65

23/07/2010

11.62

9.53

PSG Global Equity Feeder Fund A

US Inflation +6% (in ZAR)

8.59 14.42

03/05/2011

21.86 10/04/2013

International funds PSG Global Equity Sub-Fund A

10 Years

MSCI Daily Total Return Net World USD Index

11.33

2.80

5.84

PSG Global Flexible Sub-Fund A

14.43

-0.25

1.58

3.61

7.05

6.63

6.99

7.23

US Inflation +6% (USD)

02/01/2013

Source: 2016 Morningstar Inc. All rights reserved as at end of September 2016. Annualised performances show longer term performance rescaled over a 12-month period. Annualised performance is the average return per year over the period. Past performance is not necessarily a guide to future performance.


PSG Stable

PSG Money Market

PSG Income

PSG Diversified Income

Risk/return profile

Anticipated long-term real returns

18 |

Average risk

PSG Balanced

PSG Global Flexible PSG Flexible

PSG Global Equity

PSG Equity


PSG Stable Fund


PSG Income Fund


Provide long-term capital growth and deliver a higher rate of return than that of the South African equity market within an acceptable risk profile

FTSE/JSE All Share Total Return Index

High

5 years +

• seek an equityfocused portfolio that has outstanding growth potential • aim to maximise potential returns within an acceptable risk profile

Investment objective

Benchmark

Risk rating

Time horizon

The Fund is suitable for investors who

Bi-annually

R2 000 lump sum, or R250 monthly debit order

Annual management fee: Class A: 1.71% Class B: 1.14% + 22.8% of outperformance of benchmark

No

Income distribution

Minimum investment

Fees (incl. VAT)

Compliance with Prudential Investment Guidelines (Regulation 28)

Yes

Yes

Annual management fee: Class A: 1.71%

Annual management fee: Class A: 1.71% Class B: 1.14% + 7.98% of outperformance of high watermark

Annual management fee: Class A: 1.14% + 7.98% of outperformance of high watermark

No



Bi-annually

Bi-annually

0% - 40%


0% - 75%

Bi-annually

0% - 100%

• want long-term retirement savings

• want a balanced portfolio that diversifies the risk over the various asset classes

• have a time horizon of at least 3 years and can withstand short-term market fluctuations

• f ocus on a shortto medium-term investment horizon

• aim to build wealth within a moderate risk investment

• aim to build wealth

• focus on a mediumto long-term investment horizon

•h ave a low risk appetite but require capital growth in real terms

2 years +

Moderate

Inflation +3% over rolling 3-year period

Seek to generate a performance return of CPI+3% over a rolling 3-year period, while aiming to achieve capital appreciation with low volatility and low correlation to equity markets through all market cycles

South African - Multi Asset - Low Equity

• would prefer the fund manager to make the asset allocation decisions

3 years +

Moderate - High

Inflation +5%

Provide long-term capital growth and a reasonable level of income

South African - Multi Asset - High Equity

• seek exposure to the equity market but with managed risk levels

3 years +

Moderate - High

Inflation +6%

Achieve superior medium- to long-term capital growth through exposure to selected sectors of the equity, bond and money markets

South African - Multi Asset - Flexible

Yes



Quarterly

0% - 10%

No



Quarterly

0%

• focus on a shortto medium-term investment horizon

• want to earn an income, but need to try and beat inflation • focus on a shortto medium-term investment horizon

• have a low risk appetite with an income requirement

1 year +

Low - Moderate

STeFI Composite Index

Maximise income and preserve capital while achieving long-term capital appreciation as interest rate cycles allow

South African - Interest Bearing - Short-term

• have a low risk appetite and an income requirement

2 years +

Low - Moderate

Inflation +1%

Preserve capital and maximise income returns for investors. The fund conforms to legislation governing retirement funds

South African - Multi AssetIncome

For full disclosure on all costs and fees refer to the Minimum Disclosure Documents on our website: www.psg.co.za/asset-management

80% - 100%

Net equity exposure

• focus on a long-term investment horizon

South African - Equity - General

Fund category (ASISA classification)

Yes

Annual management fee: Class A: 0.57% Class B: 0.17%

R25 000 lump sum

Monthly

0%

• focus on a shortto medium-term investment horizon

• need an interim investment vehicle or ‘parking bay’ for surplus funds

• seek capital stability, interest income and high liquidity through a low- risk investment

1 month +

Low

South African - Interest Bearing - Money Market Mean

Provide capital security, a steady income yield and high liquidity

South African - Interest Bearing - Money Market

No

Annual management fee: Class A: 0.86% Class B: 0.29% Annual management fee: Class A: 0.86%

No

R2 000 lump sum

Annually

40% - 75%

• focus on a mediumto long-term investment horizon

• want to diversify their holdings across the world

• want a managed solution in offshore markets

4 years +

Moderate - High

US Inflation +6% (in ZAR)

Achieve superior medium- to long-term capital growth through exposure to selected sectors of the global equity, bond and money markets

Global - Multi Asset Flexible

R2 000 lump sum

Annually

80% - 100%

• focus on a long-term investment horizon

• aim to maximise potential returns within an acceptable risk investment

• seek an equityfocused portfolio that has outstanding growth potential

4 years +

High

MSCI Daily Total Return Net World USD Index (in ZAR)

Outperform the average of the world’s equity markets, as represented by the MSCI Daily Total Return Net World USD Index (in ZAR)

Global - Equity General

PSG Global Flexible Feeder Fund

PSG Global Equity Feeder Fund

PSG Balanced Fund

PSG Equity Fund

PSG Flexible Fund

Rand-denominated offshore

South African portfolios

Unit trust summary

Contact information PSG Asset Management unit trusts

Cape Town office

Local unit trusts 0800 600 168 [email protected]

Physical address First Floor, PSG House Alphen Park Constantia Main Road Constantia, Western Cape, 7806

Offshore unit trusts 0800 600 168 [email protected] General enquiries +27 (21) 799 8000 [email protected] Websites www.psg.co.za/asset-management www.psgkglobal.com

Postal address Private Bag X3 Constantia, 7848 Switchboard +27 (21) 799 8000 Guernsey office Address 11 New Street St Peter Port Guernsey, GY1 2PF Switchboard +44 1481 726034 Client services SA Toll Free 0800 600 168 Malta office Address Unit G02 Ground floor SmartCity Malta SCM 01 Ricasoli Kalkara SCM 1001 Telephone +356 (2180) 7586

20 |

The information and content of this publication is provided by PSG as general information about its products. The information does not constitute any advice and we recommend that you consult with a qualified financial adviser before making investment decisions. For further information on the funds and full disclosure of costs and fees refer to the Minimum Disclosure Documents on our website. Disclaimer: Collective Investment Schemes in Securities (CIS) are generally medium- to long-term investments. The value of participatory interests (units) or the investment may go down as well as up and past performance is not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and script lending. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to go up or down. Where foreign securities are included in a portfolio, the portfolio is exposed to risks such as potential constraints on liquidity and the repatriation of funds, macroeconomic, political, foreign exchange, tax, settlement and potential limitations on the availability of market information. The portfolios may be capped at any time in order for them to be managed in accordance with their mandate. Excessive withdrawals from the fund may place the fund under liquidity pressure and, in certain circumstances a process of ring-fencing withdrawal instructions may be followed. The fund may borrow up to 10% of the market value to bridge insufficient liquidity. Unit trust prices are calculated on a net asset value (NAV) basis, which is the market value of all assets in the fund, including income accruals less permissable deductions divided by the number of units in issue. Fees and performance: Prices are published daily and available on the website www.psg.co.za and in the daily newspapers. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments (RF) Limited. Commissions and incentives may be paid and, if so, are included in the overall costs. Forward pricing is used. Different classes of Participatory Interest can apply to these portfolios and are subject to different fees, charges and possibly dividend withholding tax and will thus have differing performances. Performance is calculated for the portfolio and individual investor performance may differ as a result thereof. All performance data for a lump sum, net of fees, include income and assumes reinvestment of income on a NAV-NAV basis. Income distributions are net of any applicable taxes. Annualised performance show longer term performance rescaled over a 12-month period. Source of performance: Figures quoted are from Morningstar Inc. Cut-off times: The cut-off time for processing investment transactions is 14h30 daily, with the exception of the PSG Money Market Fund, which is 11h00. The portfolio is valued at 15h00 daily. Additional information: Additional information is available free of charge on the website and may include publications, brochures, application forms and annual reports. Company details: PSG Collective Investments (RF) Limited is registered as a CIS Manager with the Financial Services Board, and a member of the Association of Savings and Investments South Africa (ASISA) through its holdings company PSG Konsult Limited. The management of the portfolios is delegated to PSG Asset Management (Pty) Ltd, an authorized Financial Services Provider under the Financial Advisory and Intermediary Services Act 2002, FSP no 29524. PSG Asset Management (Pty) Ltd and PSG Collective Investments (RF) Limited are subsidiaries of PSG Group Limited. Money Market: The PSG Money Market Fund maintains a constant price and targeted at a constant value. The quoted yield is calculated by annualising the average 7-day yield. A money market portfolio is not a bank deposit account. Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures and in such circumstances a process of ring-fencing of withdrawal instructions and managed payouts over time may be followed. The total return to the investor is made up 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 the case of abnormal losses it can have the effect of reducing the capital value of the portfolio. Fund of Funds: A Fund of Funds portfolio only invests in portfolios of other collective investment schemes, which levy their own charges, which could result in a higher fee structure for Fund of Funds portfolios. Feeder Funds: A Feeder Fund is a portfolio which, apart from assets in liquid form, invests in a single portfolio of a collective investment scheme, which levies its own charges and which could result in a higher fee structure for the feeder fund. Trustee: The Standard Bank of South Africa Limited, Main Tower, Standard Bank Centre, 2 Hertzog Boulevard, Cape Town, 8001. Tel: +27 (21) 401 2443. Email: [email protected]. Conflict of Interest Disclosure: The Fund may from time to time invest in a portfolio managed by a related party. PSG Collective Investments (RF) Limited or the Fund Manager may negotiate a discount in fees charged by the underlying portfolio. All discounts negotiated are re-invested in the Fund for the benefit of the investor. Neither PSG Collective Investments (RF) Limited nor PSG Asset Management (Pty) Ltd retains any portion of such discount for their own accounts. The Fund Manager may use the brokerage services of a related party, PSG Securities Ltd. PSG Collective Investments (RF) Limited does not provide any guarantee either with respect to the capital or the return of the portfolio and can be contacted on 0800 600 168 or on e-mail at [email protected]. © 2016 PSG Asset Management Holdings (Pty) Limited Date issued: 28 October 2016
