angles & perspectives - PSG

ANGLES & PERSPECTIVES THIRD QUARTER 2017

Contents

1. Introduction – Anet Ahern

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2. Market overview – Shaun le Roux

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3. How patient, bottom-up investing capitalises on big market cycles – Kevin Cousins

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4. The dollar cycle and the disappearing opportunity in South African fixed income – Lyle Sankar

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5. Accounting: not as black-and-white or as boring as you may think – Mikhail Motala and Kevin Cousins

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6. The PSG Stable Fund: risk-conscious real returns – Paul Bosman

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7. Portfolio holdings as at 30 September 2017 18 8. Percentage annualised performance to 30 September 2017 (net of fees)

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9. Risk/return profile

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10. Unit trust summary

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11. Contact information

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12. Digital subscriptions

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Economic and market cycles are a given, and are here to stay. Understanding that we cannot forecast future market moves or anticipate market tops and bottoms frees us up to focus on what has consistently delivered favourable returns for our clients: long-term investing based on our 3 M criteria (Moat, Management and Margin of Safety).

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.

Asset prices remain elevated, but we continue to find opportunities In our final edition for 2017, we reiterate our discomfort with market levels in general. However, we remain encouraged by the opportunities our investment approach and process have enabled us to uncover, despite prevailing overvaluation at index levels. Shaun le Roux gives further context in his commentary on current market conditions. Our investment approach allows us to capitalise on market cycles Kevin Cousins, Head of Research, highlights how we view big market cycles (often labelled ‘crises’) as long waves of opportunity. This is because we invest from the bottom up, instead of making decisions by trying to forecast economic cycles – a strategy we view as inadequate, at best. A disciplined approach to buying low and selling high, regardless of prevailing market sentiment, allows patient, bottom-up investors like ourselves to capitalise on market and economic cycles. When evaluating the management teams of companies we consider for investment, we also look for the rare ability to act contracyclically.

We think accounting is far more interesting than it appears – and maybe you'll agree In our final article, we hope that Mikhail Motala can win you over to our view of accounting – that it is far from boring, and rather a nuanced business language providing essential clues about the companies we invest in. We would love to hear whether you are convinced or not! Fund Focus: the PSG Stable Fund Our featured portfolio this quarter is the PSG Stable Fund, our low-equity (maximum 40%), Regulation 28-compliant, multiasset fund. The fund has delivered returns ahead of its realreturn benchmark, and has grown to over R4 billion. We are pleased to share our approach to this important fund category with you. As always, we hope that you will find our insights valuable and welcome any feedback. We thank you for your continued support and wish you well for the remainder of the year.

Opportunities in local fixed income are fading, but our investors will continue to benefit We have been communicating on (and taking advantage of) opportunities in the local fixed income market for several quarters now. In this edition, Lyle Sankar explains how the US dollar ties back to investment prospects in emerging market debt. He highlights that the opportunities we have been so excited about in this area of the market are playing themselves out. Fortunately, we have locked in attractive yields across our funds, which will at least allow investors to benefit for some time to come.

THIRD QUARTER 2017 | 1

Market overview

Shaun le Roux

Shaun has managed the PSG Equity Fund since 2002 and he is also the Fund Manager of the PSG Flexible Fund. He is a CA(SA) and a CFA charterholder.

Despite new market highs, domestic counters on the JSE remain weak Many global stock markets (including those in the US and South Africa) have been reaching fresh highs in recent weeks. Eightand-a-half years after the bull market in the S&P 500 began, it is now the second-longest and third-highest on record. Recent stock price gains have coincided with synchronised global economic growth, which has seen improving expectations of future profits from corporates. New highs on the JSE have largely been driven by a bout of rand weakness rather than earnings upgrades, with a handful of foreign earners dominating the market. Domestic counters have been weak this year, with most declining amid very poor domestic sentiment and aggressive selling of South African equities by foreign investors. An unstable political environment has caused the South African economy to stall despite the favourable backdrop of global growth, higher commodity prices, and falling domestic inflation and interest rates. South African bonds continue to attract investors but political risk is preventing lower yields Emerging market bonds continue to trade at attractive yields relative to those available in developed markets. This has seen South African bonds attract foreign buyers. If this was a normal economic cycle, we would anticipate lower expectations for domestic inflation – and resultant interest rate cuts – to be favourable for capital returns from domestic bonds. Unfortunately, the range of potential political outcomes and the possibility of further sovereign credit rating downgrades are keeping yields higher and bond prices lower than they would otherwise be. We are cautiously positioned but continue to find attractive opportunities Elevated valuations for global assets have seen us finding fewer high-conviction equity ideas across the broader global universe. This suggests that investors should expect more muted longterm returns from most securities, and warrants a more cautious positioning. Accordingly, cash levels in our multi-asset portfolios remain relatively high.

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There are, however, still very attractive isolated opportunities, particularly in the domestic stock market. Poor domestic sentiment is likely to have given rise to mispricings, which will provide good long-term returns at acceptable levels of risk. We have been increasing our exposure to higher-quality domestic businesses at very wide margins of safety. We believe that the valuations of these stocks (which are at levels last seen during the global financial crisis) more than compensate for the high levels of political risk in South Africa. They are attractive on all valuation metrics – especially free cash flow yields, where double-digit yields are the order of the day. We have identified excellent individual opportunities, many of which are from outside the FTSE/JSE Top 40 Index. In challenging times, we focus on capital preservation but keep an eye out for opportunities We have continued to invest in domestic fixed income securities that offer attractive real returns. But as we discuss in more detail in this publication, the opportunity has diminished substantially. It is our view that in such a challenging investment climate, investors are best served by focusing on capital preservation without missing out on opportunities that gloomy local sentiment presents.

Kevin Cousins

How patient, bottom-up investing capitalises on big market cycles

Kevin is Head of Research at PSG Asset Management and has 23 years’ experience in investment management. After working at BoE Asset Management from 1993 to 2002, he co-founded Lauriston Capital, a specialist hedge fund manager. Kevin then worked as part of the hedge fund management team at Brait (now called Matrix Fund Managers). Kevin joined PSG as an Investment Analyst in 2015.

Economic and market cycles are a given Despite regular academic assurances that economic and market cycles can be mitigated, managed or will even stop happening 'from here on out', the world is still beset by major financial panics. Most recently, we navigated the global financial crisis in 2007/2008 and the emerging markets collapse, which reached a low point in early 2016 (illustrated by the charcoal line in Graph 1). In the words of Howard Marks, co-founder of Oaktree Capital Management in the US: "In the world of investing, nothing is as dependable as cycles. Fundamentals, psychology, prices and returns will rise and fall, presenting opportunities to make mistakes or to profit from the mistakes of others. They are the givens."1 Cycles happen because progress in finance and economics is often not cumulative In fields like the natural sciences or medicine, progress is cumulative. In other words, it is built on the foundation of a historic body of work. This may occasionally result in prior beliefs being refuted or refined. However, the vast majority of work stands to guide and support future innovations. Unlike the hard sciences, progress in the fields of finance and economics appears to be cyclical, rather than cumulative. It seems that each generation of market participants, investors, business leaders and policymakers only learns from painful personal experience, rather than benefiting from the wisdom of those who have gone before. 'This time is different' is often the rallying cry, until events conspire to set them right. Economist JK Galbraith said it best: "There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the wonders of the present."2 Using a top-down view to predict economic and market cycles can be problematic Many investment managers do extensive macroeconomic research to develop a top-down view of the return prospects for each asset class – equities, bonds, credit, property, foreign assets and cash. They then determine the weightings of the respective asset classes in their multi-asset funds based on this view. In our experience, attempting to predict economic and market cycles using top-down research is a poor allocation of resources and hardly ever improves performance or lowers risk. In fact, it can be inherently dangerous if it raises confidence levels about forecast outcomes.

The truth is that cycles cannot be forecast. Market tops and bottoms can never be observed in real time – only with hindsight. An investment manager that devotes considerable time and resources to developing a top-down view generally feels obligated to use it. The manager may become increasingly confident of its forecast accuracy just as a market cycle matures and approaches an inflection point. Fortunately for their clients (and for us, but for a different reason, as we will see) their mandates or processes normally specify tight ranges for exposure to each asset class. The research therefore merely determines small relative positioning shifts within each range. How we benefit from big cycles as bottom-up investors The realisation that we cannot forecast future market moves and anticipate market tops and bottoms can be quite liberating. It frees us up to focus on what has consistently delivered favourable returns for our clients: buying stocks that meet our 3 M criteria (Moat, Management and Margin of Safety) at attractive prices, and selling them when we no longer consider them sound investments. (This is ideally because the price of the stock has increased to such an extent that it has eroded the margin of safety we require.) Not devoting time and resources to top-down forecasts doesn't mean that we ignore the big cycles. In fact, they are an important component of our ability to deliver long-term returns ahead of our mandate targets. Our default position of cash means we are ready to take up opportunities that arise Our default position in our multi-asset funds is cash. As stock prices rise through the cycle, it becomes more difficult to find investments that meet our criteria. Conviction levels for our remaining holdings also tend to decline, dictating smaller positions. We will then exit or trim our equity positions, and our cash balance will gradually grow to a substantial weighting, ready to be deployed when the market once again offers attractive opportunities. For example, the PSG Flexible Fund has held as much as over 40% in cash, as shown in Graph 2. The size of this cash balance is entirely determined by the results of our bottom-up process; it is not an asset allocation decision. That said, a high and growing cash balance, together with a narrowing gap between market prices and our intrinsic value estimates for our buy-list stocks, give us good insight into where we are in the market cycle. Importantly, this in no way forecasts the timing of a market top – a crucial distinction.


Graph 1: Big market cycles (January 1988 - August 2017) 1 400

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Trade-weighted US Dollar Index

MSCI Emerging Markets Index

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MSCI Emerging Markets Index

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Trade-weighted US Dollar Index (inverted)

Source: Bloomberg

Graph 2: PSG Flexible Fund cash holding since inception versus the FTSE/JSE All Share Index (November 2004 - June 2017) 8 000

100% 90%

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Sources: PSG Asset Management, Morningstar

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Cash holding

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80% 6 000

Cultivating the ability to buy low Accumulating cash performs a vital role for our funds: it expands our investment opportunity set from the asset prices currently available to those that will become available in the future (increasing our ‘intertemporal’ choices). A substantial cash position is not an indication of risk-averse conservatism. To the contrary, our goal is to aggressively buy stocks – but only when they are available at attractive prices. We are prepared to wait patiently for the cycle to work its magic. When fear or even panic prevails, we will once again find an abundance of opportunities at low prices. This may sound like a simple, common-sense strategy, but it is extremely difficult to implement. Firstly, it requires immense discipline to execute in real time. Accumulating cash in a strong bull market inevitably dilutes short-term returns. This means our funds are likely to lag fully invested competing products for a period – a difficult experience for any manager. Secondly, there are always credible reasons for the fear or panic that causes price declines, whether company-specific or related to the market in general. Conventional wisdom will strongly support selling in such an uncertain environment, and our purchases are likely to be seen as reckless. Therefore, a crucial part of our investment philosophy and process is cultivating this ability to buy low during uncertain times. Finally, our mandates deviate from industry norms in allowing us to accumulate such large cash holdings. As mentioned earlier, most multi-asset funds have tight pre-set allocation ranges for each asset class. Cash is typically minimised, given its lower long-term average return. Few other investment houses appreciate the substantial intertemporal value of cash and they do not have mandates designed to take advantage of it. We back management that understands market cycles There is another important way in which a bottom-up investor can benefit from big cycles. This is by backing management teams that have demonstrated a deep understanding of these cycles and have configured their businesses to take advantage of cyclical extremes in asset pricing.

As a global player, Brookfield also seeks out distressed or liquidity-constrained markets when looking to invest. For example, in 2016 it agreed to buy Nova Transportadora Sudeste (NTS), a gas pipeline business in Brazil that was a carve-out from the heavily indebted and scandal-ridden oil producer Petrobas. NTS is a long-life asset, connecting both the Bolivian and Brazilian deep-water gas fields with Brazil’s three most populated regions. It has long-term, inflation-indexed, take-or-pay contracts with its customers that are not volume dependent. This sort of asset only becomes available at a reasonable price in an environment of extreme fear, which was the case in 2016. By early 2016, the Brazilian real had halved in value in little over a year, and the local debt market had effectively stopped functioning. In its 2015 Annual Report, Brookfield made the following statement: "The pricing of opportunities in Brazil today has discounted almost every negative scenario. We are buying at fractions of replacement cost and therefore believe we have enough margin of safety that we will be fine in almost any reasonable economic scenario. Our upside cases are based on modest recovery of the country over the next five years. Should we be fortunate enough to see more than that, returns could be exceptional." Putting cycles to work requires a disciplined approach A disciplined approach to buying low and selling high – regardless of prevailing market sentiment – allows patient, bottom-up investors to capitalise on market and economic cycles. In addition, when evaluating the management teams of potential investments, we also look for the rare ability to act contra-cyclically. References: 1 ‘It is what it is’, Memo to Oaktree Clients, (H Marks), 2006 2 ‘A Short History of Financial Euphoria’, (JK Galbraith), Penguin Books, 1990

Brookfield Asset Management, a portfolio holding across our funds, is an excellent example of a management team that adds substantial value by taking advantage of the cycle. It is the world’s second-largest alternative manager, with some $250 billion of assets under management, and specialises in real assets such as infrastructure, real estate, renewable energy and agricultural land. Over the past few years, Brookfield has raised substantial funds in developed markets. This has included placing longdated debt and perpetual preference shares at low yields (for example, it has just placed $550 million in 30-year debt at a yield of 4.75%) as well as selling property investments in highpriced markets like London, Sydney and Manhattan.


The dollar cycle and the disappearing opportunity in South African fixed income

Lyle Sankar

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.

Market and economic cycles present attractive but uncomfortable investment opportunities We believe that by understanding the inevitability of market and economic cycles, the patient investor is rewarded with the best opportunities. Over long periods, these cycles invariably run their usual course, but low points in the investment cycle are only obvious with hindsight and never observable at the time. Lows are marked by poor market sentiment, which can distract investors from the opportunity to buy quality securities at low prices. In addition, risk is perceived to be higher and buying is uncomfortable. This is particularly true for emerging markets, where cycles are more extreme, and downturns tend to be labelled a ‘crisis’. Cash as a default position allows us to capitalise on cyclical price movements The reality of market cycles (covered in detail by Kevin Cousins in his article on page 3) touches on some of the key tenets of our investment philosophy, which we apply across the various asset classes and all the funds we manage: • We take time to understand where we are in longer-term investment cycles, but we do not aim to forecast or time market tops and bottoms. • We follow a bottom-up approach, where our starting point is always to assess the individual merits of an investment opportunity. We search for security-specific, above-inflation yields and ensure a sufficient margin of safety between the price at which we invest and our estimates of intrinsic value. • We are happy to sit in cash when we cannot find investments that meet our criteria. This serves as ‘dry powder’ to deploy when attractive opportunities arise. The recent cycle in emerging markets gave rise to opportunity Emerging markets in general endured a torrid economic cycle between 2010 and 2016. They were hit hard by the collapse in commodity prices and found themselves out of favour − they experienced significant capital outflows, interest rates and inflation rose, and their currencies depreciated. This created attractive opportunities within those markets. South Africa was no exception, and our clients benefited from the opportunity that arose within both equity and fixed income markets. The dollar bull cycle tends to coincide with a bear cycle in emerging markets Over longer timeframes, the US dollar cycle tends to be negatively correlated with the performance of emerging market economies and financial assets: • When US growth is low, the US Federal Reserve adopts accommodative monetary policy to boost the economy.

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• As growth picks up, expectations of higher interest rates

• •

• •

typically result in a stronger dollar, as investors reallocate assets to a faster-growing and higher-yielding developed market economy. Capital flows out of emerging markets, resulting in weaker currencies and, as a result, higher inflationary pressures. Emerging market central banks are forced to raise interest rates to restrain inflation and stem capital outflows, lowering domestic demand. Asset prices take strain as bond yields and equity discount rates rise. Deteriorating emerging market sentiment and asset price declines tend to see capital seeking the relative stability of developed markets, causing currencies like the dollar to appreciate further.

But there is another side to this picture for emerging markets: • Economic growth in emerging markets tends to lag developed economies. • At a more advanced stage of the dollar bull cycle, weaker emerging market currencies and growing demand for goods and services from developed economies like the US will stimulate emerging market exports. • Asset prices are usually cheap enough and yields high enough to attract foreign capital. • The cycle therefore reverses, with stronger growth from emerging market economies coinciding with an end to dollar strength. Dollar strength since 2011 has accompanied poor performance by emerging market assets We have recently seen this cycle play out (as shown in Graph 1), with the US dollar (measured using the Trade-weighted Dollar Index) strengthening by 41% between 2011 and earlier this year. During this period of dollar strength, performance by emerging market bonds and equities was relatively poor, as their economies struggled and they fell out of favour relative to their developed market peers. Commodity producers (like Brazil, Russia and South Africa) have been particularly vulnerable, since sharp drops in commodity prices resulted in significant currency weakness and high levels of inflation over this period. Dollar strength presented an opportunity in the local short-term fixed income market Dollar strength (and emerging market weakness) accelerated between the middle of 2014 and the end of 2015, necessitating aggressive interest rate hikes by several emerging market central banks amid domestic spikes in inflation. As bottom-up investors, we do not try to time the top or bottom of any cycle. But we have found that the combination of adverse cyclical factors and poor

sentiment results in good opportunity for long-term returns. Notably, the South African Reserve Bank (SARB) raised interest rates by 2% between 2013 and 2016 and foreign investors fled from South African assets. The domestic political situation heightened fears, as demonstrated by a 1.5% rise in the cost of insuring five-year South African dollar-denominated debt in a few short months (as shown in Graph 2). In local fixed income markets, this resulted in an attractive opportunity, as shorterterm rates increased significantly. We were able to use the cycle and pounced to lock in attractive real yields for our clients. We used the cycle to lock in high real yields on fixed-rate instruments A year ago, 12-month negotiable certificates of deposit (NCDs) issued by the large local banks were available at a yield of 8.5%, and five-year instruments yielded 9.5%. These are instruments that offer good liquidity and are therefore viewed as an alternative to cash (for shorter-dated instruments) and bonds (for longer-dated instruments) in our funds. The combination of higher interest rates and forced issuance by banks gave rise to the opportunity to lock in NCD rates that were at a wide margin above our expectations for long-term inflation. We also bought South African government debt following the significant stepup in yields towards the end of 2015. Fixed income exposures in our funds rose, and we migrated from floating- to fixed-rate instruments.

This is illustrated in Graph 3, which shows the migration from floating- to fixed-rate exposure in the PSG Stable Fund from August 2013 to August of this year, as well as the significant increase of almost 3% in the running yield on the fund’s fixed income component. While this resulted in rising duration levels in our multi-asset funds, these levels remain moderate. We also retain relatively high levels of cash, ready to capitalise on further opportunities as they arise. Unfortunately, the high real yield opportunity has recently been fading The rand and other emerging market currencies have strengthened significantly since early 2016. The stabilisation and reversal of the dollar cycle has coincided with moderating inflationary pressures. In South Africa, we have seen headline CPI fall from a high of 7.0% in February last year to 4.6% for July 2017. As a result, in July this year, the SARB cut interest rates for the first time since July 2012, and further rate cuts are expected. While uncertainty continues, investors have become accustomed to the fluid political situation and the cycle of fear may be stabilising or even abating. (In fact, it could be argued that political constraints are what is preventing South Africa from participating in the traditional late-cycle growth spurt in emerging economies.) Healthy demand for yield and declining interest rates have put short-term rates under pressure: NCD rates alone have fallen by close to 1.00% over the past year (as shown in Graph 4), despite a repo rate cut of only 0.25%.

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MSCI Emerging Markets ETF versus the S&P 500

Graph 1: The Dollar Index versus emerging market equity performance relative to developed markets (March 2011 - March 2017)

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Relative emerging markets performance

Source: Bloomberg


Graph 2: Spike in South African fixed income spreads (five-year dollar credit default swap spreads) (November 2010 - November 2016) 400 350

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Sources: PSG Asset Management, Bloomberg

Graph 3: PSG Stable Fund – fixed- versus floating-rate exposure and running yield (August 2013 versus August 2017) 9.2%

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PSG Stable Fund 2013 Fixed-rate exposure (%)

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Graph 4: Falling negotiable certificates of deposit rates (August 2016 - August 2017) 10.0% 9.43%

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Sources: Standard Bank, Nedbank, FirstRand, Barclays Africa Group, PSG Asset Management

Although the opportunity has diminished, rates could fall further if this is a normal cycle We do not like to predict economic cycles. We prefer to use the cycle to buy in times of fear and sell in times of euphoria. South African assets have been overwhelmed by a wave of pessimism in recent years. Interest rates have started coming down and short-term yields have reduced sharply. Investors need to be

aware that if the political backdrop plays ball, this cycle could prove to be a normal cycle and may match previous cycles where yields fell even further. We take comfort from the fact that we have been able to lock in attractive, inflation-beating yields in our multi-asset funds. Our funds also continue to sit on high levels of cash, which we will employ if we see similar opportunities in future.


Accounting: not as black-and-white or as boring as you may think

Mikhail Motala

Kevin Cousins

Mikhail joined PSG Asset Management in 2015 as an Equity Analyst. He conducts research on both local and global companies across various sectors. Before joining PSG, he worked in the assurance division at Ernst & Young. Mikhail is a qualified Chartered Accountant. Kevin is Head of Research at PSG Asset Management and has 23 years’ experience in investment management. After working at BoE Asset Management from 1993 to 2002, he co-founded Lauriston Capital, a specialist hedge fund manager. Kevin then worked as part of the hedge fund management team at Brait (now called Matrix Fund Managers). Kevin joined PSG as an Investment Analyst in 2015. Accounting is a nuanced business language that can reveal important clues The foundation of our investment process is research. Not just any research, but our own proprietary work, using companies’ audited financial statements as our main source of data.

These choices allow them to present a company in a specific way – usually a very flattering one. (Occasionally, however, before a ‘take-private’ transaction for example, incentives are reversed and the choices made will most likely be aimed at lowering reported profits.)

Investors seldom consider the accounting policies and disclosures behind a set of financial statements very intently. For most people, Generally Accepted Accounting Practice (GAAP) and its application is not an enthralling topic. However, this is the language of company reporting – and like any language, it is full of easily overlooked subtleties and innuendos. Investors who think accounting is boring may miss important clues that can help to avoid the very non-boring outcome of losing money.

While potentially masking true business performance (and making analysis more difficult), the choices themselves provide investors with valuable information. For example, a consistent pattern of aggression or conservatism in accounting policy and disclosure is vitally important evidence, providing a window into the true corporate culture of a business. In fact, we believe it provides better insight than the typically lengthy and buzzwordladen narrative at the start of most annual reports. It is equally important to scrutinise changes to policies and disclosures: what motivated the change and what is the impact on reporting?

Financial statements are finalised through negotiation Most investors are under the impression that the process of producing a set of accounts is precise, with independent auditors supervising management closely. This is not the case. Auditors do not verify that accounts are accurate, only that they do not contain ‘material misstatements’. In reality, the process of finalising accounts is one of negotiation (as detailed in Table 1) and important clients (who pay substantial fees) can have strong negotiating positions. Accounting choices can obscure true performance but still (ironically) provide valuable insight Management teams have far more discretion in their choice and application of accounting policies than generally imagined.

Case study 1: Comparing African Bank’s and Capitec’s bad debt provisioning policies When the accounting policies of companies in the same industry are vastly different, it often raises red flags. We took African Bank’s accounts from 2009 to 2013 (the last set of accounts it published before its failure in 2014) and recalculated its provision for bad debts in every year using Capitec Bank Holdings’ (Capitec's) provisioning policy. Of course, while African Bank and Capitec both focus on unsecured lending, no two banks are alike. Differences in their provisioning policies may therefore partially be due to the different compositions and durations of their lending books. But even given these limitations in this relatively simplistic exercise, the results make for interesting reading.

Table 1: Accounting perception versus reality Investors’ perceptions

How it works in reality

Management must follow strict accounting rules and conventions when presenting a company’s financial statements.

Management has plenty of discretion in how it presents its accounts.

The accuracy of financial statements is verified by an independent audit.

The final set of accounts is often the result of an intense negotiation between auditors and management over ‘audit differences’.

Large blue chip companies produce better accounts, with less risk of misleading policies or inadequate disclosure.

Larger firms often pay significant fees to auditors, and therefore have much more negotiating power. The professional management teams typical of large firms often have incentives that result in the unintended consequence of promoting misleading accounting or disclosure.

Source: PSG Asset Management

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Graphs 1 and 2: African Bank – net book value and earnings per share (2009 - 2013) Net book value (NBV) per share (rands)

Earnings per share (EPS) (rands)

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Sources: African Bank annual financial statements, PSG Asset Management research

In Graph 1, the gold bars show African Bank’s reported net book value (NBV) per share, while the charcoal bars are our estimates of NBV if African Bank had consistently adopted the same bad debt provisioning policy as Capitec. While our estimated NBVs are much lower, the trend itself also provides interesting information – our figures decline over time while African Bank’s reported numbers initially increased. In the year to September 2013, African Bank took a substantial write-down on its lending book (hence the decline in its NBV). However, by this date our adjustments resulted in a negative value, indicating that African Bank would have been insolvent. As we know, despite raising some R5.4 billion of additional capital in a rights offer in December 2013, African Bank did go under less than a year later. The earnings per share (EPS) shown in Graph 2 reveal a similar picture. Our re-calculated numbers (in charcoal) are a fraction of African Bank’s reported EPS and do not show the growth trend illustrated between 2009 and 2012. (The validity of this trend as a fair representation of earnings is called into question anyway by African Bank’s own write-offs in 2013 and its subsequent collapse in 2014.) Importantly, at the end of 2012, African Bank traded at an attractive seven times earnings on its reported EPS. By using our restated EPS, the price-earnings ratio increases to a heady 56 times.

Of course, the analysis is easy in hindsight. However, this exercise reveals that important clues about African Bank’s true health were available from at least 2011, and reinforced when its 2012 results were published in November 2012. As Graph 3 shows, despite the share price being substantially lower than previous highs, a sale in late 2012 would have preserved the majority of an investor’s capital. Management can be very good at getting investors to ignore statutory earnings Many management teams disclose their own adjusted earnings alongside statutory numbers, using disclaimers such as ‘adjusted’, ‘normalised’, ‘underlying’, ‘operating’ or ‘nonGAAP’. The idea is to eliminate once-off or non-cash items that distort reported earnings, thereby providing ‘clearer’ disclosure. While improved disclosure is laudable, there are several potential problems with adjusted earnings. Firstly, the adjustments are subjectively made by management, and are not subject to accounting standards or audit opinion. As time goes by, the temptation to classify more expenses as ‘non-operating’ grows, especially in tough business environments when it is likely that a company will miss management’s earnings guidance. This temptation is further compounded if management incentivisation is based on adjusted earnings rather than statutory earnings.


Graph 3: African Bank’s share price (rands) (2009 - 2014) 30 25 20 15 10 5 0 AUG '09

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AUG '14

Source: Bloomberg

Case study 2: IBM – statutory versus operating earnings International Business Machines Corporation (IBM) had a long track record of beating guided earnings, both quarterly and compared to its long-term roadmaps, which targeted growth over specific five-year periods. The first roadmap ended in 2010, with IBM consistently beating forecast EPS. When the company announced its 2010 results, IBM’s management also announced a new target for the next five years – achieving $20 of EPS in 2015. However, there was one change to the previous roadmap: the $20 would be ‘operating’ EPS, rather than statutory reported EPS.

There were several other factors that could have indicated the growing risks: • Free cash flow dropped substantially below reported earnings from 2013 onwards, compared to a history of producing earnings largely in cash. • The CEO and CFO both retired, with new internal appointments in these roles in October 2012 and January 2014 respectively. • The new CEO’s incentive remuneration for hitting targeted earnings dwarfed what she could have made from dividends and price appreciation on her IBM stock holdings.

By mid-2014 IBM had beaten its guided earnings estimates for 31 quarters in a row. This was an astonishing performance considering how the vagaries of different economies, currencies and the timing of customer orders – which are all outside management’s control − can impact any single trading quarter. In October 2014, IBM shocked the market by missing earnings. In addition, it announced it would not make its roadmap target of $20 of operating EPS in 2015. The share price dropped by 35% over the next 18 months.

Management’s accounting policy choices can provide valuable insights and should not be overlooked Investors should understand that management teams often have considerable leeway in their choice of accounting policies and disclosures. These choices also give good insight into a company’s corporate culture. It is important to carefully evaluate non-statutory earnings numbers and incentives that drive management behaviour, as they are critical in determining accounting risk.

Were there any accounting clues that could have warned investors that IBM’s run of exceeding management’s forecasts was coming to an end? Graph 4 shows that, within three years of changing its roadmap target from statutory EPS to operating EPS, the adjusting items had grown from a negligible amount to just under $1.5 billion.

An in-depth knowledge of accounting and the process of producing financial statements is a huge asset in identifying the often subtle signals that trouble may be brewing in a company. We therefore believe it is essential to have analysts in our team who, in addition to having excellent technical ability, do not regard accounting as boring.

12 |

Graph 4: IBM operating earnings adjustments after tax ($m) (2009 - 2015) 1 600 1 400 Incentive system changes to exclude items

1 200 1 000 800 600 400 200 0 2009

2010

2011

2012

2013

2014

2015

Sources: IBM 10-K annual reports, PSG Asset Management research


The PSG Stable Fund: risk-conscious real returns

Paul Bosman

Paul Bosman joined PSG Asset Management in 2004. His responsibilities include portfolio management and equity analysis. Paul is the Fund Manager of the PSG Balanced Fund and PSG Stable Fund. He is also Co-Fund Manager of the PSG Flexible Fund and PSG Diversified Income Fund.

Basic fund information Fund name: PSG Stable Fund Fund size: R3.9 billion ASISA sector: South African – Multi Asset – Low Equity Benchmark: CPI+3% over rolling three-year periods Managers: Paul Bosman and Ian Scott The fund aims to deliver real capital growth at low levels of risk The PSG Stable Fund seeks to outperform inflation by 3% over rolling three-year periods. As a multi-asset fund, it pursues these returns by investing across asset classes – equities, bonds, property and cash. Equity exposure is limited to 40%, listed property exposure to 25% and offshore exposure to 25%. As such, the fund is suited to investors with a low risk appetite who need real capital growth over a short- to medium-term investment horizon. They should also be comfortable with a small degree of exposure to market fluctuations. The benefit of a proven process applied consistently Across multiple asset classes, we look for instruments with inherent quality trading at prices that offer a margin of safety. This process of picking individual investments based on merit rather than betting on future events is known as bottom-up investing. It has served our clients well in the past, by ensuring that we act contra-cyclically: buying when others are selling at any price, and selling when others are buying at any price. Risk management is embedded in our process For any investment we look at, we don’t define risk as volatility (or fluctuations in returns) but rather as the potential for permanent capital loss. In terms of the overall portfolio, we place ourselves in our clients’ shoes and see risk as the probability of underperforming the fund’s benchmark over an appropriate timeframe. It ultimately comes down to enabling our clients to meet their goals. We manage risk through: • Rigorous research For each and every investment we consider: -- the people in charge (poor capital allocation introduces risk), -- the competitive advantage of the business (vulnerability to competitors introduces risk), and -- the price of the security (paying more than something is worth introduces risk).

14 |

• Emotional restraint

We exercise the discipline to avoid investments that don’t match our criteria and patiently remain invested for as long as it takes for a security’s price to reflect its true value.

• Diversification

As a final risk overlay, we ensure that the portfolio is sufficiently diversified – overconfidence in the return potential of a specific investment or asset class introduces risk.

Jointly, we believe that our process allows us to maximise the number of scenarios under which investors achieve their required real return. A track record of delivering inflation-beating returns The fund has returned 9.9% per year since inception, outperforming its benchmark of CPI+3% (8.5%). As responsible stewards of our clients’ capital, we don't compromise our process to win the race. These returns were therefore obtained without exposing our clients to concentrated, directional bets. The fund currently presents a good opportunity In times of concern, fixed income investments sell off and offer good buying opportunities. This was recently the case for government bonds, corporate bonds and negotiable certificates of deposit. We locked in attractive rates during this time, which are no longer available in the market. (Lyle Sankar discusses this in more detail in his article on page 6.) Our carefully selected equities also present attractive longer-term return potential, as shown in Graph 1. The top five holdings are Discovery, Brookfield Asset Management, Nedbank, Old Mutual and Super Group. Investors in the PSG Stable Fund can therefore rest assured that they are in a well-diversified portfolio of instruments, carefully selected to maximise the probability of achieving CPI+3% over the recommended investment horizon of three years or longer.

Graph 1: The PSG Stable Fund is offering attractive yields (as at 30 September 2017) 10%

9.1% 7.8%*

8% Inflation

6% 4%

65% of fund

35% of fund

Fixed income

Equity

2% 0%

* Earnings yield (profits divided by price). We expect these profits to grow and therefore to result in a total return that is significantly higher than 7.8%. Average long-term inflation is assumed at 6.0%. Source: PSG Asset Management


Notes

16 |

Notes


Portfolio holdings as at 30 September 2017

PSG Equity Fund

PSG Flexible Fund

PSG Balanced Fund

Top 10 equities

Top 10 equities

Top 10 equities

Discovery Holdings Ltd Old Mutual plc Super Group Ltd Glencore plc Brookfield Asset Management Inc Tongaat-Hulett Ltd Yahoo Japan Corp Grindrod Ltd FirstRand Ltd L Brands Inc

Discovery Holdings Ltd Old Mutual plc Brookfield Asset Management Inc Super Group Ltd FirstRand Ltd Glencore plc Yahoo Japan Corp L Brands Inc Grindrod Ltd Tongaat-Hulett Ltd

Brookfield Asset Management Inc Discovery Holdings Ltd Old Mutual plc FirstRand Ltd Nedbank Group Ltd Super Group Ltd AIA Group Ltd Yahoo Japan Corp L Brands Inc Grindrod Ltd

Asset allocation

Asset allocation

Asset allocation

• Domestic resources 10%

• Domestic resources 6%

• Domestic resources

• Domestic financials

28%


20%


16%

• Domestic industrials

37%


26%


18%

• Domestic cash and gold

25%

• Domestic cash and NCDs

• Foreign equity

21%

• Domestic bonds

29%

• Foreign equity

22%

• Domestic cash

1%

• Foreign equity

24%

Total 100%

• Foreign cash and gold

2%

Total 100%

4%

9%

• Foreign cash

2%

Total 100%

Performance

Performance

Performance

1 400

800

1 200

1 200

700

1 000

1 000

600

800

500

600

400

400

300

200

200

0

'03

'05

'07

PSG Equity Fund

18 |

'09

'11

'13

'15

'17

FTSE/JSE All Share TR Index ZAR

100

800 600 400 200 '05

'07

'09

PSG Flexible Fund

'11

'13

'15

Inflation +6%

'17

0

'01

'03

'05

'07

'09

PSG Balanced Fund

'11

'13

'15

Inflation +5%

'17

PSG Stable Fund

PSG Diversified Income Fund

PSG Income Fund

Top 5 equities

Top 5 equities

Top 10 exposures

Discovery Holdings Ltd Brookfield Asset Management Inc Nedbank Group Ltd Old Mutual plc Super Group Ltd

Brookfield Asset Management Inc Discovery Holdings Ltd Yahoo Japan Corp AIA Group Ltd Nedbank Group Ltd

Top 5 issuer exposures


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

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

FirstRand Bank Ltd Standard Bank of SA Ltd Absa Bank Ltd Nedbank Ltd Republic of South Africa Capitec Bank Ltd Land and Agricultural Development Bank of SA Imperial Group (Pty) Ltd MMI Group Ltd Barloworld Ltd

Asset allocation

Asset allocation

• Domestic resources

Asset allocation

2%

• Fixed-rate notes

53%

2%

• Floating-rate notes

46%

1%



10%



10%


31%

• Domestic cash and NCDs 1%


21%

• Domestic bonds

60%

Total 100%

• Domestic bonds

42%

• Foreign equity

4%

• Foreign equity

13%

• Foreign cash

1%

• Foreign cash

3%

Total 100%

Total 100%

Performance

Performance

Performance

200

250

160

180

140

200

160

120

140

150

120

100

100

100

80

80 60

'11

'12

'13

PSG Stable Fund

'14

'15

'16

Inflation +3% over a rolling 3-year period

'17

50

'06

'07

'08 '09

'10 '11 '12 '13 '14


'15 '16 '17

Inflation +1%

60

'11

'12

'13

PSG Income Fund

'14

'15

'16

'17

STeFI Composite Index (ZAR)


PSG Money Market Fund

PSG Global Equity Sub-Fund

PSG Global Flexible Sub-Fund


Top 10 equities

Top 10 equities

FirstRand Bank Ltd Nedbank Ltd Standard Bank of SA Ltd Republic of South Africa Absa Bank Ltd Investec Bank Ltd Land and Agricultural Development Bank of SA Capitec Bank Ltd Bidvestco Ltd Netcare Ltd

Brookfield Asset Management Inc Yahoo Japan Corp AIA Group Ltd L Brands Inc Glencore plc Cisco Systems Inc Discovery Holdings Ltd Babcock International Group plc Colfax Corp Berkshire Hathaway Inc

Brookfield Asset Management Inc Yahoo Japan Corp AIA Group Ltd L Brands Inc Cisco Systems Inc Glencore plc Babcock International Group plc Discovery Holdings Ltd Colfax Corp Berkshire Hathaway Inc

Asset allocation

Regional allocation

Regional allocation

• Linked NCDs/Floating-rate notes 27%

• US 37%

• US 29%

• Step rate notes

14%

• Europe 3%

• Europe 3%

• NCDs 45%

• UK 17%

• UK 13%

• Bill 13%

• Asia 15%

• Asia 13%

• Call deposits

1%

• Canada 9%

• Canada 7%

Total 100%

• Singapore 1%

• Singapore 1%

• Africa 4%

• Africa 3%

• Cash 14%

• Cash 31%

Total 100%

Total 100%

Performance

Performance

Performance

500

250

180 160

400

200

140

300

120

150

100

200

0

60 '01

'03

'05

'07


20 |

80

100

100 '09

'11

'13

'15

'17

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

50

'10

'11

'12

'13

PSG Global Equity Sub-Fund

'14

'15

'16

'17

MSCI Daily Total Return Net World USD Index

40

'13

'14

'15

PSG Global Flexible Sub-Fund

'16

'17

US Inflation +6% USD

Percentage annualised performance to 30 September 2017 (net of fees) Local funds 1 Year

2 Years

3 Years

5 Years

10 Years

Inception

Inception date

PSG Equity Fund A

11.42

14.01

7.65

15.68

10.61

18.30

01/03/2002

FTSE/JSE All Share Total Return Index

10.23

8.38

7.17

12.53

9.54

14.45

9.56

12.25

10.39

15.08

13.66

16.55

10.75

11.35

11.11

11.64

12.18

12.01

8.98

10.93

9.26

12.83

9.76

14.41

Inflation +5%

9.74

10.33

10.09

10.62

11.01

10.60

PSG Stable Fund A

7.88

9.18

8.15

9.43

PSG Flexible Fund A Inflation +6% PSG Balanced Fund A

9.87


7.73

8.33

8.09

8.62

PSG Diversified Income Fund A

8.77

8.64

8.15

8.08

7.69 7.00

01/11/2004 01/06/1999 13/09/2011

8.52

Inflation +1%

5.73

6.33

6.09

6.62

PSG Income Fund A

8.69

8.37

7.77

6.82

STeFI Composite Index

7.62

7.37

7.04

6.39

PSG Money Market Fund A

7.65

7.38

7.07

6.34

7.15 7.19

7.95

07/04/2006

7.19 6.69

01/09/2011

6.26 8.54

19/10/1998

7.81

7.51

7.12

6.40

PSG Global Equity Feeder Fund A

15.47

16.13

10.38

17.60

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

16.04

13.35

14.28

22.49

PSG Global Flexible Feeder Fund A

12.90

14.12

10.83

15.49

5.99

6.23

13.62

17.76

1 Year

2 Years

3 Years

5 Years

Inception

Inception date

19.23

17.15

4.84

7.89

5.68

23/07/2010

10.99

10.69

South African Interest Bearing Money Market Mean

US Inflation +6% (in ZAR)

8.55 14.58

03/05/2011

20.93 10/04/2013

International funds PSG Global Equity Sub-Fund A

10 Years

MSCI Daily Total Return Net World USD Index

18.18

14.70

7.69

PSG Global Flexible Sub-Fund A

16.69

15.55

5.10

6.24

7.95

7.50

7.07

7.38

US Inflation +6% (USD)

02/01/2013

Source: 2017 Morningstar Inc. All rights reserved as at end of September 2017. 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

22 |

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

7 years and longer

• 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

As per the platform minimum

Annual management fee: Class A: 1.71%

No

Income distribution

Minimum investment

Fees (incl. VAT)

Compliance with Prudential Investment Guidelines (Regulation 28)

No

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


Bi-annually

0% - 100%

Yes



Bi-annually

0% - 75%

• 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 5 years and can withstand short-term market fluctuations

• aim to build wealth within a moderate risk investment

• aim to build wealth

• focus on a mediumto long-term investment horizon

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

5 years and longer

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

5 years and longer

Moderate - High

Inflation +6%

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

South African - Multi Asset - Flexible

Yes



Bi-annually

0% - 40%

• focus on a shortto medium-term investment horizon

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

3 years and longer

Moderate


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

Yes



Quarterly

0% - 10%

No



Quarterly

0%


• 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 and longer

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 and longer

Low - Moderate

Inflation +1%

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

South African - Multi Asset Income

For full disclosure on all costs and fees, as well as performance fees FAQ, refer to the fund fact sheets 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


R25 000 lump sum

Monthly

0%


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

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

Minimum of 1 day

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



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

7 years and longer

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

No



Annually

0% - 100%

• focus on a mediumto long-term investment horizon

• want to diversify their holdings across the world

• want a managed solution in offshore markets

5 years and longer

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

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 Local unit trusts 0800 600 168 [email protected] 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

Cape Town office

Guernsey office

Malta office

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

Address 11 New Street St Peter Port Guernsey GY1 2PF

Address Unit G02 Ground floor SmartCity Malta SCM 01 Ricasoli Kalkara SCM 1001

Postal address Private Bag X3 Constantia 7848

Switchboard +44 (1481) 726034 Client services SA Toll Free 0800 600 168

Telephone +356 (2180) 7586

Switchboard +27 (21) 799 8000

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 fund fact sheets 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 scrip 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, 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 holding company PSG Konsult Limited. The management of the portfolios is delegated to PSG Asset Management (Pty) Limited, an authorised Financial Services Provider under the Financial Advisory and Intermediary Services Act 2002, FSP no 29524. PSG Asset Management (Pty) Limited and PSG Collective Investments (RF) Limited are subsidiaries of PSG Konsult Limited. Money Market: The PSG Money Market Fund maintains a constant price and is 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 funds 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) Limited retains any portion of such discount for their own accounts. The Fund Manager may use the brokerage services of a related party, PSG Securities Limited. 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]. © 2017 PSG Asset Management Holdings (Pty) Limited Date issued: 27 October 2017

24 |

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ANGLES & PERSPECTIVES FIRST QUARTER 2016

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