enter title here - alexander forbes...aon hewitt $3.1 3 cambridge associates $2.6 russell...

1

March 2019

Group risk benefits and investment insights

HOT TOPICS

Our speakers

Niall O' Sullivan

Chief Investment Officer, Mercer

Delegated Solutions Europe

Leroy Munetsi Chief Operating Officer

Corporate & Employee Benefits

Gyongyi King

Chief Investment Officer

Investments

Isaah Mhlanga

Executive Chief Economist

Investments

2

Our speakers

Niall O' Sullivan



Leroy MunetsiChief Operating Officer


Gyongyi King


Investments

Isaah Mhlanga


Investments

H E A LT H W E A LT H C A R E E R

M E R C E R

B U I L D I N G G L O B A L P O R T F O L I O S

3

5

“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time

and still retain the ability to function”

F.Scott Fitzgerald

6

S T R A T E G I C R E L A T I O N S H I P | C O M B I N I N G L O C A L K N O W L E D G E W I T H

G L O B A L E X P E R T I S E T O I M P R O V E O U T C O M E S F O R C L I E N T S

Enhance return

Reduce risk

Adopt best practice

Reduce cost

Local leadership

Trusted advisor

Pan African company with a regional focus

Local market knowledge

Deep global research coverage

165+ manager researchers

Large breadth of experience

Global, aggregated buying power

4

7

G L O B A L R E A C H | M E R C E R ’ S B R O A D C A P A B I L I T I E S S P A N T H E

S P E C T R U M O F T O O L S & R E S E A R C H , A D V I C E A N D S O L U T I O N S

TOOLS AND RESEARCH

$6.3tnSubscriber Assets

ADVICE

DELEGAT ED SOLUT IONS

2,200Staff

1,000Discretionary Clients

2,800Advisory Clients

40+Years Experience

$10.6tnUnder Advisement

$240bnAssets under Delegation

• Global manager research• Performance analytics

• Operational due diligence

• Investment strategy• Asset allocation

• Portfolio construction• Manager selection

• Responsible investment

• Transitions, custody, FX

• Multi-client and custom fund implementations

• Alternative investments• Diversified portfolios

• Liability driven investments

8

G L O B A L L E A D E R | M E R C E R ’ S I N V E S T M E N T B U S I N E S S I S

I N D E P E N D E N T L Y R E C O G N I Z E D A S A G L O B A L L E A D E R

# PROVIDER

ASSETS UNDER

DELEGATED

MANAGEMENT ($bn)

1 $212

2 Russell Investments $164

3 Aon Hewitt $152

4 Willis Towers Watson $115

5 Blackrock $105

6 SEI Investments $103

7 State Street Global Advisors $92

8 Goldman Sachs Group (GS) $82

9 Wells Fargo $81

10 Northern Trust Asset Management $69

Source: Pensions & Investments survey. Based on outsourced assets with full or partial discretion as of 31 March 2018

# PROVIDER

GLOBAL ASSETS

UNDER

ADVICE

($tr)

1 $10.6

2 Aon Hewitt $3.1

3 Cambridge Associates $2.6

4 Russell Investments $2.5

5 Callan LLC $2.3

6 RVK Inc. $2.3

7 Willis Towers Watson $2.2

8 Pension Consulting Alliance Inc. $1.3

9 Meketa Investment Group Inc. $1.1

10 NEPC Investment Consulting $1.0

Source: Pensions & Investments Global AUA Rankings Survey as of 30 June 2018

5

9

G L O B A L M A N A G E R R E S E A R C H T E A M

*Average years of experience excludes analysts and support/admin staff.Data as of 1 January 2019

165Mercer research representatives

105Research specialists with

MBA, CFA, actuarial, masters, or industry designations

9*Average years

with Mercer

17*Average years of

financial experience

11Countries with

Mercer research representatives

26Cities with

Mercer research representatives

>50Research specialists

with fund management experience

9Years of institutional

ESG integration

10

Value added since inception to 30 September 2018 has been positive for 96% (66 out of 69) of the product categories covered by the analysis.

V A L U E A D D E D O F O U R A - R A T E D M A N A G E R S

V A L U E A D D E D B Y C A L E N D A R Y E A R

V A L U E A D D E D F O R P E R I O D S E N D I N G 3 0 S E P T E M B E R 2 0 1 8

Figures are annualised for periods longer than 1 year

6

11

D I S C I P L I N E D R A T I N G S P R O C E S S

IDEA GENERAT ION

PORT FOLIO CONST RUCT IO N

IMPLEMENT AT IO N

BUSINESS MANAGE ME NT

C A N D I D AT E S

GATHE R DATA (MercerInsight®)

P R IORIT IS E CANDIDATE S

WORLDWIDE DUE DILIGENCE

RATINGS A Above-average prospects of outperformance

B+Above-average prospects of outperformance, but with

some reservations

B Average prospects of outperformance

C Below-average prospects of outperformance

N Not rated

R Early-stage research / research no longer maintained

R AT I N G S

12

B U I L D I N G B E T T E R P O R T F O L I O S

F I N D I N G T H E B E S T

I D E A S

B U I L D I N G R O B U S T

P O R T F O L I O S

E N H A N C E D

G O V E R N A N C E

U N D E R S T A N D I N G Y O U R G O A L S

D E L I V E R I N G S U P E R I O R O U T C O M E S

7

13

M SCI WORL D VAL UE VS M SCI WORL D

R E M E M B E R I N G H O W T O T A K E R I S K

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

S&P 500 REALISED VOLATILITY

Source: Bloomberg

14

S&P 500 REAL ISE D VOL AT IL I T Y M SCI WORL D VAL UE VS M SCI WORL D

C O N V I C T I O N I N A C T I V E M A N A G E R S

Source: Aaron Reynolds “The Truth About Top Performing Mutual Fund Managers”, July 2011

PERCENTAGE OF HIGH -PERFORMING MUT UAL FUNDS UNDERPERFORMING T HEIR BENCHMARK OVER ANY 3 -YEAR PERIOD

85%

50%

25%

Underperforming by 1% p.a Underperforming by 3% p.a Underperforming by 5% p.a

0.0%

25.0%

50.0%

75.0%

100.0%

IF YOU PICK AN UNDERPERFORMER

IF YOU PICK AN OUTPERFORMER

IF YOU PICK AT RANDOM

PROBABIL ITY OF PICKING AN OUTPERFORMING MANAGER

(RELATIVE TO PEER GROUP)

3 YEAR HORIZON 5 YEAR HORIZON

0.0%

25.0%

50.0%

75.0%

100.0%

BEST PAST PERFORMERS

GOOD PAST PERFORMERS

POOR PAST PERFORMERS

WORST PAST PERFORMERS

PE

ER

GR

OU

P P

ER

CE

NT

ILE

AVERAGE 5 YEAR PAST & FUTURE PERFORMANCE ( RE LA T I V E T O P E E R G RO UP

AVERAGE PAST PERFORMANCE AVERAGE FUTURE PERFORMANCE

8

15

S&P 500 REAL ISE D VOL AT IL I T Y M SCI WORL D VAL UE VS M SCI WORL D

Source: Bloomberg

C O N V I C T I O N I N F A C T O R S

50%

100%

150%

200%

250%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

MSCI WORLD VALUE VS MSCI WORLD

16

F A C T O R H U N T I N G

0

0.1

0.2

0.3

0.4

0.5

-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3

Before incentives come into play

1 in 40 chance of False Positive

100

100 False PositivesImagine 4,000 people testing

€

9

17

F A C T O R H U N T I N G

74% 42%

Circulation Period

Post-Publication Period

“Does academic research destroy stock return predictability?”McLean & Pontiff (JF,2016)

18

L O W V O L A T I L I T Y E Q U I T Y – A R E W A R D E D P R E M I U M

There is a wide universe of defensively oriented strategies that could be considered “low beta”, or at least at the defensive end of “beta-one”.

- 1.00 - 0.75 - 0.50 - 0.25 0.00 +0.25 +0.50 +0.75 +1.00 +1.25 +1.50

Short biased

Market Neutral

Low Beta

Beta One

High Beta

Beta

Str

ate

gy

Variable Beta

MinimumVariance

Quality

Small Caps

Emerging Markets

Trend -following Growth

Thematic Growth

Relative Value

Contrarian Value

10

19

There are three main approaches to “low volatility” investing:

Variable Beta (partially invested equity)

• “Beta” is a measure of a stock or portfolio’s sensitivity to the broader market index

• Absolute return type investing which includes strategies which are structurally equity biased but contain tactical investing in fixed

income/cash/gold

Minimum Variance (“Systematic”)

• Portfolio of shares (usually “built” by quantitative screening) where the share prices themselves have low volatility characteristics, i.e. the

individual shares are usually less volatile than the market as a whole and the combined portfolio is materially less volatile

Quality

• Fully invested “long only” equity portfolios made up of shares in companies operating in businesses which have stable earnings, a high

return on equity and low borrowing

We believe that a balanced low volatility equity portfolio should look to allocate to all three approaches across a range of different investment managers

C O N S T R U C T I N G L O W V O L A T I L I T Y P O R T F O L I O S

20

9.6%8.6%

9.2%

11.5%

0%

2%

4%

6%

8%

10%

12%

14%

Return S.I. Volatility

Example Fund MSCI World

D O E S I T W O R K ?

Volatility reduction of

25% SI

Q4 2018• MSCI World: -13%• Example Fund: -10%

11

21

S U S T A I N A B I L I T Y F R A M E W O R K

P O L I C Y & P R O C E S S

22

F O U R S T R A T E G I E S F O R I M P L E M E N T A T I O N

Integration

Include ESG factors in

investment

analysis/decisions to assess

materiality

Investment Exclusions

Screen out sectors or

companies deemed

irresponsible or misaligned

with values

Stewardship

Actively engage with

companies failing to

address ESG risks through

voting and engagement

Allocate to sustain.

themes/impact investments,

e.g. renewable energy,

water, social housing

P O L I C Y & P R O C E S S

12

23

T H O U G H T L E A D E R S H I P I N V E S T M E N T

2004 - 2009

Responsible Investment

team formed and initial years on

PRI development and ESG

evidence and education

2010-11

ESG Ratings by strategy

implemented and climate

change and SAA report

published

2013Sustainable

Opportunitiesvehicle launched

2014

Sustainable Growth

framework launched

2014

Sustainability key

component of Mercer’s

global equity beliefs /

advice

2015

Mercer’s major Investing

in a Time of Climate

Change report is

published

2017

Mercer represented on

FSB Climate Disclosure

Task Force*

2017Mercer launches

Sustainable Global Equity

Fund

*See: www.fsb-tcfd.org

2015

Sustainable

Investment Policy

for Europe

Delegated Solutions

released

24

T Y R A N N Y O F T H E D I S C O U N T R A T E

$-

$100 000

$200 000

$300 000

0 10 20 30 40 50 60 70 80 90

No Deal NPV: c.$2m

Deal NPV: c.$5m

PROFITS PER YEAR UNDER DEAL AND NO DEAL

9.44% 9.54% 9.56% 9.66% 9.71% 9.74% 9.75% 9.77% 9.84% 9.90% 9.94%

x Health Care x IT S&P 500 x Discretionaries x Materials x Financials

ANNUALIZED RETURNS ON THE S&P 5001989 - 2017

http://www.fsb-tcfd.org/

13

25

U S E Y O U R A D V A N T A G E S

KNOW YOUR LIABILITIES

KNOW YOUR LIQUIDITY PROFILE KNOW YOUR LIABILITIES

R

26

G R O W I N G I N V E S T O R A P P E T I T E I N P R I V A T E M A R K E T S

37%42%

26%

39%

0%

10%

20%

30%

40%

50%

60%53% 54%

32%

55%

0%

10%

20%

30%

40%

50%

60%

Institutional Investor’s Plan for 2018Investors planning to invest more capital than prior

year

Institutional Investor’s Allocation in the Longer TermInvestors planning to invest more capital than prior

year

Source: 2018 Preqin Global PE&VC Report

14

27

SUPERIOR, RISK ADJUSTED RETURNS

GREATER DIVERSIFICATION

ACCESS TO OPPORTUNITIES

W H Y P R I V A T E M A R K E T S ?

28

O P P O R T U N I T Y S E T

Ex

ce

ss r

etu

rn p

ote

nti

al

Main investment objective Capital gainCurrent yield

Hig

hM

od

era

te

Venture Capital

Private EquityOpportunistic

Real Estate

Timber/Agriculture

Illustrative

Private Debt

SeniorPrivate Debt

Asset classes thathelp drive performance

Balanced performance/income focus

Asset classes that helpgenerate stable cash flows

and match long-term liabilities

Infrastructure

15

29

DISPERSION OF RETURNS

CLOSED-END FUNDS

AND ACCESS

BUILDING AND MAINTAINING AN

ALLOCATION

I N V E S T M E N T C H A L L E N G E S

30

P A R A D O X O F S K I L L

Pure luck

Pure skill

Source: Mercer and Michael Maboussin

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCPb2u43C7McCFcXWGgodFRIPIw&url=http://protista.org/amazing-nba-basketball-dunks/&psig=AFQjCNGNvxKEyv-gYA9pMyAGi70uQ2MeDQ&ust=1441976064212676

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCPb2u43C7McCFcXWGgodFRIPIw&url=http://protista.org/amazing-nba-basketball-dunks/&psig=AFQjCNGNvxKEyv-gYA9pMyAGi70uQ2MeDQ&ust=1441976064212676

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCMWev97S9scCFcwPGgodnKINLw&url=http://www.iconshut.com/cardboard-box-psd-image-download-this-brown--icons/dT1hSFIwY0RvdkwyTnZjbkoxY0hSbFpHUmxkbVZzYjNCdFpXNTBMbU52YlM5M2NDMWpiMjUwWlc1MEwzVndiRzloWkhNdk1qQXhNUzh3Tnk5emFHbHdjR2x1WnkxaWNtOTNiaTFpYjNndFkyRnlaR0p2WVhKa0xtcHdad3x1cj1odHRwOi8vY29ycnVwdGVkZGV2ZWxvcG1lbnQuY29tL3NoaXBwaW5nLWNhcmRib2FyZC1ib3gtcHNkLWljb24vfHc9NDUwfGg9MzU4fHQ9anBlZ3w/&bvm=bv.102537793,d.d2s&psig=AFQjCNFLyWzQfC7oIKjzLsT0_bMvTh4ecQ&ust=1442324239574756

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCMWev97S9scCFcwPGgodnKINLw&url=http://www.iconshut.com/cardboard-box-psd-image-download-this-brown--icons/dT1hSFIwY0RvdkwyTnZjbkoxY0hSbFpHUmxkbVZzYjNCdFpXNTBMbU52YlM5M2NDMWpiMjUwWlc1MEwzVndiRzloWkhNdk1qQXhNUzh3Tnk5emFHbHdjR2x1WnkxaWNtOTNiaTFpYjNndFkyRnlaR0p2WVhKa0xtcHdad3x1cj1odHRwOi8vY29ycnVwdGVkZGV2ZWxvcG1lbnQuY29tL3NoaXBwaW5nLWNhcmRib2FyZC1ib3gtcHNkLWljb24vfHc9NDUwfGg9MzU4fHQ9anBlZ3w/&bvm=bv.102537793,d.d2s&psig=AFQjCNFLyWzQfC7oIKjzLsT0_bMvTh4ecQ&ust=1442324239574756

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCK-nmZmo7McCFUHUGgodWyILhw&url=http://students.pdht.ca/f14_web1/section1/farokhian_julian/Personal Project 3 - Julian Farokhian/stadiumtable.html&bvm=bv.102022582,d.d2s&psig=AFQjCNHqwpdY1JbelCJ3kph1RrJc_USVUg&ust=1441969209451354

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCK-nmZmo7McCFUHUGgodWyILhw&url=http://students.pdht.ca/f14_web1/section1/farokhian_julian/Personal Project 3 - Julian Farokhian/stadiumtable.html&bvm=bv.102022582,d.d2s&psig=AFQjCNHqwpdY1JbelCJ3kph1RrJc_USVUg&ust=1441969209451354

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCJbp9JK07McCFQa9GgodCzIJbw&url=http://www.gettyimages.com/detail/video/businessman-playing-chess-stock-video-footage/482533394&bvm=bv.102022582,d.d2s&psig=AFQjCNGcgFsrpysBRMrjl-XDBUjpOh2rQQ&ust=1441972279551180

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCJbp9JK07McCFQa9GgodCzIJbw&url=http://www.gettyimages.com/detail/video/businessman-playing-chess-stock-video-footage/482533394&bvm=bv.102022582,d.d2s&psig=AFQjCNGcgFsrpysBRMrjl-XDBUjpOh2rQQ&ust=1441972279551180

16

31

L O N G H O R I Z O N E Q U I T Y I N V E S T I N G

B U F F E T ’ S A L P H A

VALUELEVERAGEREGULATORY

ALPHASTRUCTURAL

ALPHA

Our speakers

Niall O' Sullivan





Gyongyi King


Investments

Isaah Mhlanga


Investments

17

c

When economic cycles turn, market performance Isaah Mhlanga | Executive Chief Economist | [email protected]

Outline

A review of 2018 economic and market performance

Key global market drivers for 2019 and beyond

South Africa’s economic outlook

Unsettling discussions: separating facts from rhetoric on crucial policy issues

18

A review of 2018 economic and market performance

The year 2018 started with a synchronized economic growth story …

… then Trump trade policy put breaks on a long history of globalisation

….imposition of import tariffs on autos, solar panels, washing machines steel, aluminum

The US-Mexico-Canada (USMCA) trade agreement was born out of the renegotiation of the North American Free Trade Area (NAFTA)

Argentina and Turkey debt and currency crisis spilled over into emerging markets.

China’s growth slowed to the lowest level in three decades, Brexit negotiations and Italy fiscal problems increased risk for Europe…

… The US Fed hiked rates four times leading to a 4.6% gain in the US dollar against major currencies

It didn’t matter where you were invested, the majority of major asset class returns were negative

Breaking down the S&P 500, it is clear that nearly every sub-sector struggled. Even the technology sector eventually capitulated by the end of the year

Source: Bloomberg and Alexander Forbes Investments

19

In currency markets the US$ appreciated against almost all currencies

The U.S. dollar and the Japanese yen proved their safe heaven status.

0.1%

0.0%

-0.2%

-2.0%

-2.1%

-3.0%

-3.9%

-4.0%

-4.1%

-4.5%

-5.1%

-5.2%

-5.4%

-5.7%

-6.8%

-7.5%

-8.1%

-8.7%

-11.3%

-13.7%

-14.6%

-17.3%

-28.3%

-50.6%

Thai Baht

Mexican Peso

Hong Kong Dollar

Singapore Dollar

Malaysian Ringgit

Taiwanese Dollar

Peruvian Sol

Romanian Leu

South Korean Won

Bulgarian Lev

Philippine Peso

Czech Koruna

Chinese Renminbi

Indonesian Rupiah

Polish Zloty

Hungarian Forint

Colombian Peso

Indian Rupee

Chilean Peso

South African Rand

Brazilian Real

Russian Ruble

Turkish Lira

Argentine Peso

Emerging economiesAdvanced economies


South African asset class returns followed global trends, with bonds and cash returning positive in 2018

6.6 7.7

-8.5 -8.4 -9

-25.3

15.5

-8.8

-17.5-14.6

-9.7 -8.3 -9

0.3 0

-6.8 -5.5

-13.5-10.2 -8.7

-30

-20

-10

0

10

20

30

Ca

sh

Bon

ds

Equ

itie

s

All

Sha

re In

dex

TO

P40

In

de

x

Ca

ppe

d s

wix

Lo

cal pro

pe

rty

JS

E R

esou

rce

s

JS

E F

ina

ncia

ls

JS

E In

du

str

ials

Sm

all

Ca

ps

Mid

Ca

ps

La

rge C

aps

Sty

les

S&

P V

alu

e

S&

P L

ow

Vo

l

S&

P M

om

entu

m

S&

P Q

ualit

y

S&

P S

A M

ulti-

facto

r In

dex

FX

US

DZ

AR

EU

RZ

AR

GB

PZ

AR

2018 3yrs%


20

Typical of turning economic cycles, macro fundamentals remain strong despite financial markets underperformance


Outlook for 2019

Better than 2018, with downside risks from local political, policy

and global uncertainties

21

Key global market drivers for 2019: (1)Slow economic growth


40

45

50

55

60

65

2016/04 2016/07 2016/10 2017/01 2017/04 2017/07 2017/10 2018/01 2018/04 2018/07 2018/10 2019/01

Japan manufacturing PMI EZ manufacturing PMI US manufacturing PMI

China manufacturing PMI G4 PMI (GDP weighted) Emerging Markets PMI

PMI > 50 = expanding activity

PMI<50 = contracting activity

Index

The outlook for 2019 market performance is better than 2018 with significant downside risks

Source: IMF World Economic Outlook and Alexander Forbes Investments

1.0

1.5

2.0

2.5

2017 2018 2019 2020 2021 2022 2023

4.0

4.3

4.5

4.8

5.0

2017 2018 2019 2020 2021 2022 20233.0

3.3

3.5

3.8

4.0

2017 2018 2019 2020 2021 2022 2023

Global growth Advanced markets Emerging and developing markets

o Global economic growth at 3.7%, moderate to 3.5% in 2019.

o Driven by advanced markets at 2.3% - US outperformed, Eurozone and Japan moderated

o Emerging markets peaked at 4.6% - India outperformed; China and Emerging Europe were weak

22

Key global market drivers for 2019: (2) A turn in US dollar cycle


EM growth minus DM growth

o 2018 was an anomaly induced by US tax stimulus

o The US dollar has peaked and is expected to weaken going forward

o Weak US dollar supports emerging market economic growth and therefore bullish emerging market equities

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010 2012 2014 2016 2018 2020 2022

% EM minus DM growth

US dollar index

-10

-5

0

5

10

15

2011 2014 2017 2Q19 1Q20 4Q20

%

Unsustainable US tax stimulus

US dollar appreciation

US dollar depreciation

Key global market drivers for 2019: (3) stable inflation rates


EM growth minus DM growth

o Stable inflation rates across many countries, supported by stable currencies and still low oil prices

o Pass through effects from weak currencies have halved over time

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010 2012 2014 2016 2018 2020 2022

% EM minus DM growth

-10

-5

0

5

10

15

2011 2014 2017 2Q19 1Q20 4Q20

%

US dollar index

0

2

4

6

8

2010 2012 2014 2016 2018 2020

World

Advanced economies

Emerging market and developing economies

%

Inflation rates

23

Key global market drivers for 2019: (4) Gradual (or flat) interest rate increases


Central bank monetary policy

o The US Fed reduced expected rate hikes from three to one.

o Fed funds pricing 77% probability of no change in rates and 23% probability of a cut by 1Q2020.

o Bloomberg analyst forecast a 40bp increase by the end of 2019 followed by a cut of 10bp to 2.80%

o A 40bp and 75bp hike by ECB and BoE by the end of 2020. This will likely be postponed.

US yield curve close to inversion but not there yet

-5

-3

-1

1

3

5

1980 1985 1990 1995 2000 2005 2010 2015

3m10y 3Y10Y

Shaded areas represent periods of recessions

US yield curve inversion

0

1

2

3

4

5

6

7

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Fed target ECB rate UK bank rate

%

Where will the next crisis come from?

Source: Alan Greenspan, Bloomberg TV, January 31, 2018

“There are two bubbles: We have a stock

market bubble, and we have a bond market

bubble…what’s behind the bubble? Well the

fact, that, essentially, we’re beginning to run an

ever-larger government deficit. As a share of

GDP debt has been rising very significantly and

we’re just not paying enough attention to that.”

—January 31, 2018

Bubbles better than

anyone else

24

US corporate balance sheets are not in good shape!

Shaded regions represent periods of U.S. recession


% of GDP

Third most overvalued stock market

Shaded regions represent periods of U.S. recession


25

We are more than 90% of the way through the U.S. Economic cycle


Key drivers of uncertainty in global economic markets outlook

Shifts in energy price dynamics – uncertainty on whether we can rely on oil as a

positive supply shock

Global monetary policy normalization and the US dollar cycle

Tightening global financial conditions and implications for high deficit countries

Trade wars and supply chain disruptions

Implications of global economic growth slowdown and China’s changing

economic growth drivers

26

South Africa’s economic outlook dependent on structural reforms

o Fiscal consolidation unavoidable

o The reform of state owned enterprises

o Fee-free education inadequate solution

for skills

o Minimum wages are now law

o Intentions to look into prescribed assets

o The nationalisation of the SARB

o Land expropriation without compensation

The winning party must get at least 60% to be

able to push structural reforms

Fiscal consolidation unavoidable and requires compromises and trade-offs

3.8%

2.0%

7.2%

1.7%

4.2%

1.0%

-0.3%-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

LocalEquity(ALSI)

LocalBonds

LocalProperty

LocalCash

GlobalEquity

GlobalBonds

Rand -Dollar

Source: Stats SA, Bloomberg and Alexander Forbes Investments

Est. 0.70

1.51.9

2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2012 2014 2016 2018 2020

%

1 ye

ar

Pause in monetary

policy tighteningReduced

liquidityWeaker economic

growthImprovement in asset class returns*

*Performance returns shown above are the base case real return assumptions for a five-year period as produced by Alexander Forbes Investments. Any projections contained in the

information are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be

realised in the future. Historical returns are no guarantee of future performance.

Moderating global growth and modest recovery in local growth imply low return expectations

27

Monetary policy supportive to business environment but business confidence remains weak

Source: Stats SA and Alexander Forbes Investments

No pressure for the SARB to increase interest rates SA Inflation to remain contained within the 3%-6% target band

0

5

10

15

20

25

30

2005 2007 2009 2011 2013 2015 2017 2019

Prime rate (%) Real prime rate%

0

5

10

15

20

25

2005 2007 2009 2011 2013 2015 2017 2019

Headline inflation%

Weak business confidenceCorporate credit extension remain weak

-10

0

10

20

30

40

2005 2007 2009 2011 2013 2015 2017

Corporate credit%y/y

90

100

110

120

130

140

150

2005 2007 2009 2011 2013 2015 2017 2019

SACCI BCI

Fiscal consolidation unavoidable and requires compromises and trade-offs

Budget deficit Government spending and revenue

-200

-150

-100

-50

0

50

1991 1994 1997 2000 2003 2006 2009 2012 2015

Rbn

0

200

400

600

800

1000

1200

1400

1600

1991 1994 1997 2000 2003 2006 2009 2012 2015

Government spending Government revenueRbn

+126%

+95%

o Fiscal deficit ballooned after the financial crisis

o Spending consistently rose throughout the years

o Revenues declined during the financial crisis and never caught up with spending

Source: National Treasury and Alexander Forbes Investments

28

Fiscal consolidation: debt service costs crowding productive spending

Public debt Interest costs

0

500

1000

1500

2000

2500

3000

1991 1994 1997 2000 2003 2006 2009 2012 2015

Total net government debt

Total gross government debt

Rbn

+293%

0

20

40

60

80

100

120

140

160

180

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Debt service costsRbn

+177%


o Rising debt service costs constraining public investment and economic growth

Fiscal consolidation: unsustainable and limited options

40

45

50

55

60

65

70

75

80

85

2013/14 2015/16 2017/18 2019/20 2021/22 2023/24

% of GDPBudget 2018 Scenario A Scenario B

Scenario C MTBPS 2018

Economic growth scenarios

o Budget 2018 ~ 2.2%

o 2018 MTBPS ~ 2.4%

o Scenario A ~ 1.8%

o Scenario B ~ 0.6%

o Scenario C ~ 3.1%


o Increase taxes to raise more revenues ~ cant do PIT, CIT and VAT

o Let inflation rise ~ the SARB’s mandate is to keep inflation between 3%-6%, not an option

o Boost economic growth through structural reforms

29

The rand valuations suggest it should appreciate over the short-term

Source: Bloomberg, INET and Alexander Forbes Investments

o Rand undervalued against the US dollar

o Over valued against the pound

o The US dollar cycle turning would support ZAR strength

-1.5

3.2

0.0

-16.7

10.0

-8.8

-25 -20 -15 -10 -5 0 5 10 15 20 25

EUR

JPY

CHF

GBP

USD

ZAR

Over valued

Currency valuations as at 31 Dec 2018

Rand valuation against the US dollar over time

-30

-20

-10

0

10

20

30

1990 1995 2000 2005 2010 2015

%

Undervalued

Overvalued

Bond-positive global backdrop to counter domestic factors

2.41 2.26 2.25 2.4 2.77 2.89 2.9 2.69 2.79

2.34 2.53 2.49 2.48 2.1 2.55 2.77 3.07 2.78

4.11 3.98 3.99 4.313.53

3.27 3.39 3.46 3.68

8.86 8.77 8.73 9.198.4 8.71 9.06 9.22 9.25

0

1

2

3

4

5

6

7

8

9

10

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Current10y UST SA sovereign premium SA FX premium 10y SA yield

%

o A pose by the US fed should result in improved risk appetite

o But fiscal risks remain

o Valuations are weighed by issuance, moderate growth and Eskom risks to the fiscus

o Fair value is at 8.6% ~ post budget and election, positive policy surprises will lower yields


30

SA equities poised for a recovery from both valuation and macro

o Economic growth improving, though marginally

o Valuations look attractive following 2018 declines

o At 16, the Price Earning ratio not far from long-term average of 14

-5%

0%

5%

10%

15%

20%

25%

30%

1995 2000 2005 2010 2015 2020

Blended SA equity forecast real ALSI 5yr returns ann.


Unsettling discussions: separating fact from rhetoric

o Land expropriation without compensation

• Policy document excluded commercial farm land, it was not by error

• Banks have exposure of more than R160bn to commercial agriculture

o The nationalisation of the South African Reserve Bank

• The mandate and independence of the SARB is a creature of the constitution

• Nationalising the SARB changes ownership but not its mandate (many central banks owned by their

governments)

o Prescribed assets

• The first type are imposed to provide funding for social or developmental investments whose return and

risk profile make them unattractive to pension funds.

• The second type of prescribed assets are legislated to protect pension fund member’s retirement funds

by limiting the amount of exposure to risk in one asset class. Regulation 28 fits in this good prescription

• Not new in South Africa but was abolished in 1989

31

Thank you

[email protected] | @IsaahMhlanga

Our speakers

Niall O' Sullivan





Gyongyi King


Investments

Isaah Mhlanga


Investments

32

c

Group Report Back – Portfolio performance

Prepared by: Gyongyi King, Chief Investment Officer

Global shares were confronted with a challenging 2018: 1 Year to 31 December 2018

-100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 200.0%

One year return (USD)

Only 7.5% of MSCI AC World constituents managed to deliver a positive absolute return

Positive returning sharesNegative returning shares

33

SA shares followed global trends: single stock performance 1 Year to 31 December 2018

Aspen

NEPI Rockcastle

Tiger Brands

MTNBritish American Tobacco

Anglogold Ashanti

Anglo American

BHP Billiton

Nedbank

Clicks

ALSI 40

Return

A handful of JSE-listed equities managed inflation-beating returns

Just how bad were the markets in 2018?

-6.2%

-14.5%-16.9%

-1.5%

2.6%

-26.4%-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

US Equity (S&P 500) Europe, Australia, Far EastEquity

Emerging Market Equity US Corporate Bonds US Cash Local Equity (SWIX)

of global assets

posted negative

returns

90%Best

performing

asset class

219

Major currencies appreciated

against the USD

60%of SA stocks

posted negative

returns

*Returns shown above are in US dollar terms

34

Markets across the world offered no place to hide

-16.0% -14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0%

Japanese Stocks

Commodities

MSCI EM Index

Australian Stocks

Chinese Stocks

UK Stocks

Global Stocks

Developed Market Stocks

French Stocks

US Stocks

Xetra Dax

Global Hedge Funds

US Dow Jones Industrials

Gold

Global Bonds

Global Market returns (in local currency)

78 out of 82 major global equity markets returned negative returns in local currency

Excess returns of South African equities vs. cash

21.1%

11.8%

-2.9%

20.0%

15.3%

1.7%

-1.2%

-4.8%

13.4%

-15.8%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Excess returns of SA equities relative to SA cash

Excess Return Average Excess Return (since 1900) Average Excess Return (last 10 years) Average Excess Return (last 5 years)

35

Cash has outperformed equities occasionally over the last 30 years

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

01-N

ov-1

999

01-M

ar-

2000

01-J

ul-2000

01-N

ov-2

000

01-M

ar-

2001

01-J

ul-2001

01-N

ov-2

001

01-M

ar-

2002

01-J

ul-2002

01-N

ov-2

002

01-M

ar-

2003

01-J

ul-2003

01-N

ov-2

003

01-M

ar-

2004

01-J

ul-2004

01-N

ov-2

004

01-M

ar-

2005

01-J

ul-2005

01-N

ov-2

005

01-M

ar-

2006

01-J

ul-2006

01-N

ov-2

006

01-M

ar-

2007

01-J

ul-2007

01-N

ov-2

007

01-M

ar-

2008

01-J

ul-2008

01-N

ov-2

008

01-M

ar-

2009

01-J

ul-2009

01-N

ov-2

009

01-M

ar-

2010

01-J

ul-2010

01-N

ov-2

010

01-M

ar-

2011

01-J

ul-2011

01-N

ov-2

011

01-M

ar-

2012

01-J

ul-2012

01-N

ov-2

012

01-M

ar-

2013

01-J

ul-2013

01-N

ov-2

013

01-M

ar-

2014

01-J

ul-2014

01-N

ov-2

014

01-M

ar-

2015

01-J

ul-2015

01-N

ov-2

015

01-M

ar-

2016

01-J

ul-2016

01-N

ov-2

016

01-M

ar-

2017

01-J

ul-2017

01-N

ov-2

017

01-M

ar-

2018

01-J

ul-2018

01-N

ov-2

018

Rolling five-year returns

Local Equities Local Bonds Local Cash

SteFi vs ALSI rolling 5 year returns to the end of December 2018

Cash beats Equities 20% of the time over rolling 5 year periods since January 1960

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Nov-1

983

May-1

984

Nov-1

984

May-1

985

Nov-1

985

May-1

986

Nov-1

986

May-1

987

Nov-1

987

May-1

988

Nov-1

988

May-1

989

Nov-1

989

May-1

990

Nov-1

990

May-1

991

Nov-1

991

May-1

992

Nov-1

992

May-1

993

Nov-1

993

May-1

994

Nov-1

994

May-1

995

Nov-1

995

May-1

996

Nov-1

996

May-1

997

Nov-1

997

May-1

998

Nov-1

998

May-1

999

Nov-1

999

May-2

000

Nov-2

000

May-2

001

Nov-2

001

May-2

002

Nov-2

002

May-2

003

Nov-2

003

May-2

004

Nov-2

004

May-2

005

Nov-2

005

May-2

006

Nov-2

006

May-2

007

Nov-2

007

May-2

008

Nov-2

008

May-2

009

Nov-2

009

May-2

010

Nov-2

010

May-2

011

Nov-2

011

May-2

012

Nov-2

012

May-2

013

Nov-2

013

May-2

014

Nov-2

014

May-2

015

Nov-2

015

May-2

016

Nov-2

016

May-2

017

Nov-2

017

May-2

018

Nov-2

018

Source: Alexander Forbes Investments ALSI SteFI

36

Is it wise to move to cash investments when a market anomaly occurs?

Cash beats equities on a 5 year period only 8% of the time from a starting point of five year real returns in excess of equities after

an anomaly has occurred which means 92% of the time equities outperform.

92%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ALSI Stefi

Outp

erf

orm

ance o

f equitie

s v

s c

ash o

n f

ive-y

ear ro

llin

g b

asis

pro

vid

ed fiv

e y

ear

rollin

g c

ash r

etu

rns a

re a

head o

f equitie

s

Source: Alexander Forbers Investments

Select AF Investments portfolio performance – 1 Year to 31 Dec 18

Product/portfolio Portfolio Benchmark Relative performance

Main portfolios

Performer -0.7% -1.9% 1.2%

AF High Growth -4.5% -4.2% -0.3%

Pure Equity Local -12.3% -10.9% -1.3%

(Multi-asset (Balanced portfolios)

Performer Local -4.5% -4.4% 0.0%

Accelerator -3.6% -5.4% 1.8%

Conserver 4.5% 2.2% 2.2%

Moderate Balance -0.8% -1.1% 0.3%

Multi-asset (Absolute returns)Real Return Focus 3.3% 9.2% -5.9%*

Stable Focus 4.1% 8.2% -4.1%*

Fixed Income

Inflation Linked Bond 1.1% -0.4% 1.5%

Pure Fixed Interest Local 8.7% 7.7% 1.0%

Income 9.5% 9.2% 0.3%

Banker 8.8% 6.6% 2.2%

Property Property portfolio -22.1% -25.3% 3.2%

Global portfoliosGlobal Equity 5.2% 4.9% 0.3%

Global fixed Income 15.9% 15.8% 0.1%

Alternatives + Africa

Caveo Africa 7.0% -0.2% 7.2%

Private Markets SA 7.7% 7.7% 0.0%

Sakhisizwe 13.8% 9.3% 4.5%

AF Investment Focus QI HFoF** -0.6% -4.6% 4.0%

AF Investment Performance QI HFoF** 1.7% 0.0% 1.7%

*Stable Focus and Real Return Focus are benchmarked against a CPI + target

**Hedge Fund return numbers are shown as hard NAVs

37

5 year asset class return expectations – looking better, but still challenging to achieve CPI + 5%

3.8%

2.0%

7.2%

1.7%

4.2%

1.0%

-0.3%-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Local Equity(ALSI)

Local Bonds Local Property Local Cash Global Equity Global Bonds Rand - Dollar

1 ye

ar

5 ye

ar

Tightening

monetary policy

Reduced

liquidity

Weaker economic

growth

*Performance returns shown above are the base case real return assumptions for a five-year period as produced by Alexander Forbes Investments

Note: Any projections contained in the information are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes

Investments, so may not be realised in the future. Historical returns are no guarantee of future performance.

Alternatives bolster outlook

Public

Equity

Private

Equity Difference

Mercer 2017 - 20 year assumptions 8.7% 11.8% 3.1%

Blackrock 2014 7.5% 10.5% 3.0%

Blackrock 2017 3.9% 5.4% 1.5%

Morgan Stanley 2013 8+%

Morgan Stanley 2017 6.3% 7.6% 1.3%

State Street 2017 6.0% 7.3% 1.3%

JP Morgan 2018 6.4% 9.2% 2.8%

AON 2017 6.5% 8.6% 2.1%

BARRA risk model

Expected Return

Global Experience

South African Experience

Mercer Experience

Source: Mercer, SAVCA, Various and Alexander Forbes Investments

38

Greater offshore allocation offers a wider opportunity set

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Maximum allowed offshore exposure for SA retirment funds

Offshore Africa

Allocation to alternatives has been supportive of greater portfolio diversification

Cash

Up to 100%

Equities

Up to 75%

Commodities

Up to 10%

Property

Up to 25%

Alternatives

Up to 15%

30% Global assets

15% hedge funds and private equity

39

We seek to utilise all available sources of excess return:

• Active, passive and smart beta investment building blocks are combined in an optimal way

• Utilising passive and smart beta enables access to returns at lower costs

• Where client mandates allow for it, we make use of alternative asset classes to enhance the overall

risk/return profiles of portfolios

Our investment approach is risk centred, optimising the return outcomes within a given risk budget

We believe in using the complete information set (market derived information, macro analysis, other

sources of information) in making our investment decisions

How we construct our client solutions

Tailwinds:

• Market valuations look softer

• Good opportunity for diversification within alternatives

• Wider breadth of investment universe after relaxation of regulation to 30% maximum offshore allowable

limit

• SA inflation remains well-contained

Headwinds:

• Earnings outlook remains subdued

• We expect volatility to remain elevated

• EMs are open to shocks in a liquidity tightening environment

Near-term outlook

40

Retirement Funds

GROUPAlexander Forbes

Alexander Forbes Annual Retirement Fund Survey 2019 – Key Insights

Annual Retirement Fund Survey

1994Manager Watch

Performance-Only

Survey – a market first!

1998 Manager Watch™ Survey

revamped

Participation criteria set

Large Manager Watch™

− Launched June 1998

− Top 10 active balanced

managers

RDP Survey (later renamed

Targeted Development

Investments Survey

Enhancements post-1998

Risk profiling

SA-only and Global-only portfolios

Benchmark returns

Risk-adjusted measures

2001Absolute

Return Survey

2003Specialist

Bond Survey

2002Money Market

Survey

2004Hedge

FoF Survey

2006International

Survey

2007Medical

Aid Survey

2010BEE Survey

Property

SurveySurveys

Revamped

2012LDI Survey

2013Formalised

Survey

Governance

2014Equity Funds

Analysis

2015Survey

Rules

Survey Rules

Updated, New

LMW Definition

2017New Survey

Technology

2018Shari’ah

Survey

2019Africa Survey

Development

14 Surveys

60 Managers

412 Funds

41

Key insights

Largest asset

managers in

South Africa

50% of AUM belongs to

Top 5

Offshore

allocation

Of asset managers close

to max 30% offshore

allowance

1827

Best return in 2018: -1.06%SA Active

Equity

managers

BEE

Level

1

Level

2

No

t ra

ted

60

Top

20

AUM

asset

managers

15.5% was the lowest

allocation

Shari’ah equity returns

Fund of Hedge Funds

-1.34%

6.36% 5.78%

-8.73%

3.82%5.06%

1 year 3 years 5 years

Average SA Shari'ah Equity Funds in the AF Shari’ah survey Average SA Equity Funds in the AF SA Equity survey

Hedge Funds

Bonds

Equities

Property

0%

2%

4%

6%

8%

10%

12%

14%

0% 2% 4% 6% 8% 10% 12% 14%

Investment returns at 31 December 2018

Outperformed equites and

property with lower risk when

markets were under pressure

42

Maximum, minimum and average fees charged

Highest

Discuss with your

consultant:

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

DomesticBIV - Seg

Global BIV- Seg

GlobalAbsoluteBIV - Seg

Global BIV- Pooled

DomesticBIV -

Pooled

SpecialistDomestic

Equity

DomesticAbsolute

SpecialistDomestic

FixedInterest

SpecialistDomestic

MoneyMarket

Max Min Average

Lowest

Are your fees reasonably

priced?

Are your fees competitive?

Are your fees appropriate

given your objectives?

March 2019

Thank you

enter title here - alexander forbes...aon hewitt $3.1 3 cambridge associates $2.6 russell...

Documents