July 2017 - Issue 42

YOUR QUARTERLY UPDATE

There are many studies on human behavioural traits when it comes to money. It has been widely demonstrated that we are naturally conditioned to feel the pain of losses far more acutely than we are to enjoy the joys of gains.This trait, called loss aversion, is the

reason that a market decline garners more attention and weighs on emotions more than gains. Slow and steady gains on the stock market do not make for interesting headlines; chaos and panic are much more compelling viewing.

Keeping your (and our) emotions in check

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July 2017 - Issue 43

The end of the first quarter appears to have set the tone for the rest of the year as markets both locally and abroad were continuously bombarded with negative surprises. Initially most of the surprises were economic in nature as global growth numbers continued to disappoint which impacted future expectations on GDP growth and inflation.

Keep Reading

Market Overview

The various purposes and designs of knots require technique gained through experience and the imagination to know which one to use. For us, proactivity is an orchestra of imagination & technique.

Why the knot in our campaign?

In the midst of the political turmoil calls started coming in from clients about what will happen to the market. “Is it going up or down?” One of the recurring questions was how are we repositioned in our funds in the midst of the negative news and ongoing political drama? The answer to the question above is that it all depends on your investment objectives and the time horizon one is looking at.Keep Reading

A message to our clients in uncertain times

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In recent times we have witnessed high levels of uncertainty on global stock markets and three years of annualised negative real returns (after inflation) from the JSE All Share Index (including dividends), as illustrated in Graph 1 below. This is understandable.

Market valuations are elevated, earnings performance has generally been weak, emerging markets are struggling and participants are digesting the uncertainty that stems from geo-political problems and social- economic reform.

Keeping your (and our) emotions in check

FTSE/JSE Africa All Share J203T

Performance Report - 01/07/2014 To: 01/07/2017

9.484% 3.066%

Name Ann PerfPerf

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Graph 1

Uncertainty will test your emotional character

Uncertainty is an ugly thing. When the herd is panicking you will be reading headlines suggesting reasons for market declines. There will also be no shortage of commentary from bearish investors suggesting that the worst is still to some. Such times are a real test of your emotional character and are conditioned to cause you to make mistakes. In practice it is not easy to stay invested when the market is panicking and everyone else is heading for the exits – we inherently don’t like losses and commentators will provide many reasons as to why you should be following the herd.

Don’t follow the herd

It will be impossible to pass the emotional test that uncertainty brings if you are not clear on your investment objectives. If you have a rational, well thought out investment portfolio with a good manager it is important to try to remove the emotion when short term performance does not live up to expectation. The natural tendency for the market herd in times of uncertainty is to default to a risk aversion strategy and invest in cash or guaranteed funds.

This combination of short holding periods and aversion to losses is why the market pitches such fantastic opportunities in times of panic. Equipped with a clear investment objective, an ability to maintain emotional discipline and a willingness to take a longer-term view, uncertainty can definitely be your friend.

Trying to time investment decisions

The lag between when an event occurs and when it is reported is what typically causes investors to lose money. The media will

report a bull market only once it has already hit; unless the trend continues, the market will retract in upcoming periods.

Investors, influenced by the reports, often choose these times of premium valuations to build up their portfolios and buy expensive assets. It is worrisome when the daily stock market report leads off the mainstream news because it creates a buzz and investors make decisions based on “opinions” that are often outdated and flawed. Market uncertainty creates fear and brings about an atmosphere of emotional investing.

A 2009 study of investment behaviour by DALBAR showed that over the 20-year period from January 1989 to December 2008, the S&P 500 returned an average annual 8.4% but the average investor returned only 1.9% annually. The reason for this was bad investment timing and chasing past performance. Investors switched out of the market only after the market had already dropped and switched back into the market after the market had already recovered – thereby not avoiding the downside and missing out on the upside.

The second cause of return destruction was switching from an underperforming mutual fund (relative to peer performance) into the most recent top performing mutual fund. The evidence suggests that emotional investing gets the best of the typical investor during periods of uncertainty and irrational decisions are made and money is lost.

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Commitment is what transforms a promise into a reality.

- Abraham Lincoln

Strategies to take the emotion out of investing

The most effective and prudent way to allocate new money tends to be the Rand-cost averaging method. Rand cost averaging is a strategy where equal amounts of Rands are invested at a regular, predetermined interval. This strategy is good during all market conditions. During a downward trend, investors are purchasing assets at cheaper and cheaper prices.

During an upward trend, the assets previously held in the portfolio are producing capital gains and fewer shares (or units in a unit trust fund) are being added at the higher price. The key to this strategy is to stay the course- set the strategy and don’t tamper with it unless a major change warrants revisiting and rebalancing the established course. If a lump sum is to be allocated look to phase the money into the desired long term target return strategy over a meaningful period (depending on economic variables and personal circumstances).

Another strategy to diminish the emotional response to market investing is to diversify a portfolio. There have been only a handful of times in history when all markets have moved in unison and diversification provided little protection. In most normal market cycles, the use of a diversification strategy provides downward protection and offers upside opportunity. Diversifying a portfolio can take many forms - investing in different industries, different geographies, different asset classes

and investment managers with different styles. There are distinctive market conditions that favour each of these subsectors of the market, so a portfolio made up of all these various types of investments should provide protection in a range of market conditions and smooth out performance overtime.

Conclusion

Investing without emotion is easier said than done, especially because high levels of uncertainty as it is at the moment rules the market and our everyday lives. Evidence suggests that most investors are emotional and maximize money flows (and decision making) at the wrong times - a sure fire way to reduce potential returns. Strategies that eliminate the emotional response to investing should produce returns that are significantly greater than those indicated by the typical investor responding to the market rather than proactively investing in the market for the long term. Rand-cost averaging and diversification are two proven strategies that will help clients reduce their emotional reaction to the market.

At VPFP we spend a lot of time actively ensuring that our investment processes are rational and stripped of emotion to allow us to avoid the pitfalls of the irrational behaviour that results from loss aversion. In fact, the best buying opportunities arise because investors panic at the wrong times. As we all know, you should be buying when others are fearful and selling when others are greedy.

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The best way to measure your financial success is not by whether you are beating the market but by whether you have put together a financial plan and behavioural discipline that are likely to get you where you want to go.

- Benjamin Graham

A message to our clients in uncertain times

We suppose a fair amount of people perceive financial advisors or asset managers to have certain kinds of predictive superpowers, but the fact of the matter is that we know just about as well as anyone else of where the market may sit in a week or two’s time.

What we do know, however, is that by carefully selecting assets based on solid fundamentals, which are attractively priced for their reward and risk characteristics over the long-term, one need not worry about where the market will be in a week or two.

People need to remind themselves that investing (as opposed to speculation) is a long-term game and therefore investors should not get bogged down by daily, weekly and even quarterly market volatility. Rather, they should focus on the big picture, assess their financial plan and ask themselves why they are invested and what portion of their portfolio is exposed to equities (wholly or - more likely - as part of their portfolio).

History has repeatedly demonstrated that markets do not move up, or down for that matter, in straight lines. Our view is that people who seek the best real returns over time must also be prepared to accept some pull-backs over the shorter-term and periodically even negative performance.

We believe that by reviewing a few key areas you will focus your attention away from the short term news bombardment (and associated anxiety) towards a partnership with us that is continuously working at ensuring that you have control of your future financial wellbeing.

Have a financial plan and invest for the long-term

Successful investing begins with a financial plan, a road map that should set-out your goals. Financial plans should state your financial objectives and the time frames for achieving them. To prevent unreasonable panic brought on by market uncertainty its important to clearly understand the long-term benefits of staying a course of action, the importance of sticking to the road and the dangers of random detours.

During times when fear and confusion are so pervasive, the first piece of sound advice is to return to basics - the original financial plan and focus on the long-term goals and what strategies were put in place to achieve these. A key step when planning your investment is choosing the right investment portfolio based on your risk profile and priorities and then staying invested to reap the benefits of the investment manager’s expertise. In order to do this, however, you need to:

1. Be clear on your investment objectives – don’t chop and change depending on the market conditions i.e. don’t decide to be a conservative investor when the market declines and then an aggressive investor when the market rally’s.

2. Understand the objectives of the fund you choose and make sure they match your own.

3. Understand how the investment manager aims to achieve the fund’s objectives and how the fund is likely to behave over time in different market conditions.

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A well-planned investment strategy will help you remain focused on your long-term objectives, which means you are less likely to react to short-term market movements, giving your investment time to grow.

However, many investors with very well thought out investment strategies, forget to consider the universal human blind spot – emotion. Reward-seeking and loss-avoiding behaviour often influences investment decisions. Some investors tend to wait for herd consensus before investing (waiting for enough of a positive movement in the market to reassure themselves that a trend is confirmed) Others flee the market as soon as the market declines or when negative news hits the media.

Of course, waiting for herd consensus could mean missing out on much of the positive price moves while exiting at the wrong time

and locking in loss. Allow the fund manager to make these decisions for you by remaining invested.

Remain invested and fully committed to your investment strategy

While over the last year the VPFP Fund’s offshore position has detracted from overall performance, due to a unprecedented strong Rand, we remain committed to this position based on a fundamental standpoint and not short term sentiment. Based on analysis of purchasing power parity and the long term inflation differentials of SA versus a basket of trading partners we feel the Rand will depreciate over time in-line with this disparity. Although it’s not impossible to experience bouts of Rand strength along the way, the data strongly supports the economic theory as shown in Graph 2 below.

Graph 2

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Source: Ampersand Asset Management (Pty) Ltd; data from OECD & I-Net BFA April 2017

In addition, we feel holding a portion of the portfolio in offshore assets supports one of our core investment fundamentals - diversification. Offshore introduces global asset classes and world renowned companies to our clients balance sheets. These assets also cannot be accessed through the JSE. We feel it would be irresponsible for us as your wealth advisors not to protect a portion of your assets in US Dollars as the bulk of your asset wealth and income is derived in Rands.

Offshore exposure is about delivering US Dollar performance and while there is no guarantee for outperformance, disciplined investors should benefit from the fund achieving its objectives over the longer term. Such discipline can seem easy when your investment is performing well but can be difficult to maintain when the going gets tough. When investor behaviour is driven by biases

such as favouring recent performance over long-term performance, or reacting fearfully after a decline, investors end up selling at the wrong time and thus fail to achieve all the returns of the funds they are invested in. Hold the asset for fundamental reasons and unless the fundamentals change, and on review requires adjustments, continue to hold the asset.

Reviewing portfolios

Switching a portfolio can be beneficial in certain circumstances, for example, if your lifestyle has changed or your initial risk profile was a mismatch, however, a word of warning, don’t chop and change to suit your current outlook based on future unknowns, changing for this reason alone is often misguided by emotional responses. Consult with your financial advisor and review your long term plan.

Embracing equities as part of your asset spread for extended periods

Turning specifically to the equity portion of your portfolio, it is important to remember to view equities with at least a 5 year plus investment horizon. Equities have produced far superior returns than all other asset classes over the long run. As Graph 3 below shows, local (red Line) and offshore (purple line) equities have far outperformed bonds (blue line) and cash (green line) over extended

periods. But note, they did so at much higher levels of volatility. In other words, even though the long term returns were significantly better, over the short run the range of outcomes for returns from equities was much wider than for bonds or cash.

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Source: Ampersand Asset Management (Pty) Ltd - 30 April 2017

Graph 3

The excess return by equities over other asset classes is referred to as the ‘equity risk premium’ and the only reason that such a premium exists is because the range of outcomes for profits and dividends are inherently less predictable than coupons from a bond. At the same time, within stock markets, some securities are more risky than others and investors are usually compensated for this additional risk via a higher equity risk premium.

1. High returns and higher levels of volatility

Something that many investors lose sight of in times of economic and political turmoil is the fact that these events bring market volatility – which typically rises in times of uncertainty – is precisely why equities produce superior long-term returns. In other words, we need the volatility to get the higher returns.

2. We exploit the market’s excessive focus on specific scenarios

Humans grapple with complexity by weaving facts into stories. Most of the time, this way of thinking serves humankind well. The challenge is that markets today offer us more data than investors can weave into a story. If we are not mindful, we grab on to the points that are most vivid and oft repeated to suit our own narrative – justification for our own behaviour. A very negative scenario for a stumbling company can come to dominate market discourse.

The extent to which this can be reflected in the share price is often disproportionate to the likelihood of the scenario happening. At VPFP, we are conscious of unpredictability and take advantage of these opportunities. Being mindful of unpredictability when outcomes seem certain creates long term opportunities.

3. Maintaining perspective

Embracing uncertainty is at the core of producing long-term superior returns and a fundamental part of successful investing. The way we position your investment portfolio is based on working with our real, unpredictable world from the most rational standpoint available to us today. We operate in the same world as everybody else, we simply cannot create returns that are not there to exploit.

Have rational expectations in different market conditions

Investors tend to inevitably extrapolate their immediate past experience into the future. For example, when excessive returns are being made during bull markets (15%+ annualised), we have a natural inclination to believe that the good times will actually get better – we anchor our return expectations regardless of the economic cycle or prevailing asset valuations. For many, this often translates into happily employing extra cash into riskier asset classes at the most inappropriate times.

Equally, during depressed times, the assumption is made that matters will only get worse and selling low and moving to cash is a common phenomenon. Gripped by irrational fear, it is extremely difficult to convince clients that a market that is down 30% and sitting on PE valuation of 10 is in fact a safer investment destination than a market up 30% and sitting on a PE valuation of 25.

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No matter how rational a financial advisor may be, during times like this many investors are blind to the facts and are simply overwhelmed by emotion. This leads to unrealistic return expectations followed by disappointment and the feeling that a decision needs to be made. The decision is often emotionally driven and the problem is compounded and the wealth destructive cycle continues. Blame apportionment and experience extrapolation often accompany each other.

Even the least informed market participants begin to exhibit characteristics of ‘all knowingness’ or ‘absolute knowledge’ when news flow is heavy and one directional. This assumed knowledge is based on little evidence, but is driven by herd mentality or group think. Over short periods of time there is no doubt that markets are certainly propelled by group behaviour and sentiment undoubtedly influences the market’s direction but its not a reliable source to harness consistent positive investment outcomes.

For wealth advisors, remaining steadfast to a process and not being influenced by the noise factor is often the difference between success and failure. It reveals a tried and tested process versus random luck but client defection and

accusations of incompetence are par for the course during such times. It should be noted that truly skilled wealth managers often evade trends for short periods of time and experience market underperformance. Once irrational exuberance or unfounded fear dissipates, skilled managers prove their worth, for investors this often demands patience.

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SUMMARY

Times are undoubtedly tough at present but we have no doubt that the market and the economy will readjust to a changing world and given enough time, investors will over the following years experience returns in line with their long term target return objectives. Creating wealth requires time, patience and a plan. Therefore, over the long-term, the value of your investment portfolio from one week to the next is of very little relevance to the successful investor. Remember that investing is not about being number one. The actual goal is achieving your investment objectives with as little risk as possible. We remain committed to making sure we fulfil this obligation.

MARKET OVERVIEWThe end of the first quarter appears to have set the tone for the rest of the year as markets both locally and abroad were continuously bombarded with negative surprises. Initially most of the surprises were economic in nature as global growth numbers continued to disappoint which impacted future expectations on GDP growth and inflation.

Furthermore, political and policy surprises out of the US continued, playing havoc with markets during April while the French elections exacerbated negative sentiment as many pundits expected Marie Le Pen to have a strong showing – echoing the populist stance Trump holds in the US. Many of these fears subsided when the market-friendly and moderate Emmanuel Macron won the French elections in a very strong showing. This has provided massive support for the longer term EU-friendly environment in Europe’s second largest economy, while it has also provided more sanity with regards to political impact on markets. Macron’s victory also provided some much needed support for Ms Merkel in Germany as her pro-EU views have attracted continued negative responses from right wing opposition.

This has greatly subsided since Macron’s strong showing and positive sentiment from most of Europe. A unified Europe with a clear and executable strategy should be positive for global risk, yet the uncertainty around the longer term impact of Brexit, along with policy uncertainty out of the United States with President Trump running the show, continues to drive market discomfort. Investors have remained extremely resilient and market volatility continues to surprise on the down.

This is clearly highlighted by the Volatility Index being at or close to all-time lows during the latter parts of the quarter, which provided continued support for global equity assets. One of the biggest surprises this year relates to the weakness of the US Dollar which remained under massive pressure during the quarter.

The main reason for this appears to relate to the sluggish increases in US interest rates as the Federal Reserve remains cautious not to put further strain on a fragile US Economy. This has disappointed many pundits that expected a more aggressive interest rate policy. Many have blamed the weak US currency on slow economic growth and political infighting and others have spoken of the indirect benefits of a weaker currency which suits the current administration’s narrative and longer term objectives.

What remains clear however is that opinions are varied and uncertainty rife, regardless of which bias holds or which narrative is preferred. This environment will continue to be difficult to forecast and will undoubtedly have surprises, both positive and negative.

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Source: MoneyMate 30 June 2017

Performance – what added and what detracted?

Growth assets experienced significant volatility over the quarter with the global components holding up best. The return in hard currency terms was strong and weakness in the local currency unit in the last weeks of June provided much needed support. The SA equity and listed property components were under pressure as concerns around local economic growth and uncertainty remained rife. The JSE All Share Index lost -0.4% this quarter as market sentiment remained negative and valuations elevated. Local bonds and local listed property again experienced significant volatility, especially in the last weeks of June, but ended the quarter stronger on the back of a stronger local currency and lower bond yields.

The All Bond Index generated 1.5% and the property index ended up 0.9% over this period. Local short dated fixed income assets

continued to perform well as credit markets remained constructive and yields remained reasonable with the STeFi Composite generating a return of 1.9%. Our overweight position in local fixed income and cash equivalents added material value while the offshore growth assets performed strongly relative to local equity assets. For the first time in approximately 3 years the local property component was one of the major laggards but we remain positive on the longer term position and growth prospects of the asset class. When we look back at the quarter, diversification and the inclusion of low risk cash-orientated assets added significant value. We continue to be diversified across asset class, currency, geography and strategy. We remain cautious and hold significant positions in local cash and equivalents and we believe that offshore diversification remains critical for long term success.

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Annualised Fund Performance for the Period Ending 30 June 2017

Source: Morningstar, MoneyMate, Ampersand Asset Management 30 June 2017 (A Class, ZAR) (CPI Benchmark as at 31 May 2017)• The investment performance is for illustrative purposes only• 1High/Low – highest/lowest 1 year return of the portfolio/class of portfolio during the period detailed.• Annualised return is the weighted average compound growth rate over the period measured.• The portfolios were previously managed by Momentum Collective Investments, prior to 1 July 2017.

POSITION GOING FORWARDOur key positions across the portfolios have remained consistent for the majority of the past 12 months.

We remain concerned with market valuations and risk, however structurally we need to retain growth assets in the portfolio to ensure we achieve our longer term objectives.

Asset allocation and diversification therefore remain key to ensuring downside risk management while continuing to achieve our inflation-based returns. We continue to focus our attention on consistently applying our philosophy and process to ensure we meet our investment objectives over the long term (a time horizon of at least 3 years, and longer for the more risk-orientated portfolios).

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Fund Administration transfer to Sanlam Collective Investments

The fund administration transfer process would hopefully have been completed without any events or disruptions by the time this communiqué goes out to our investors.

We are extremely excited by the new opportunities the relationship with Sanlam Collective Investments will bring into the portfolios and we are confident our investors and clients will experience this through enhanced performance, improved communication and in time even reduced costs.

Our commitment and belief in our investment philosophy remains as resolute as ever and we trust the enhancement will ensure that we can position and implement our philosophy more effectively.

We urge investors to remain patient and committed to their chosen investment strategy as negative surprises are possible yet the destruction that strategy capitulation creates tends to last much longer and cause much greater pain.

Uncertainty remains high and leads us to focus on structural long term drivers with asset class valuations being dominant.

We are continuously looking for ways to increase the certainty of cash flow while remaining cognisant of our longer term capital preservation objectives.

We focus on keeping our emotions, be it positive or negative, in check to ensure the best possible long term outcomes within the portfolios.

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The portfolios were previously managed by Momentum Collective Investments, prior to 1 July 2017.

This newsletter is not intended for marketing purposes, but it is intended for clients invested in the Ampersand Sanlam Collective Investment portfolios and should not be distributed. Sanlam Collective Investments (RF) (Pty) Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Performance is calculated for the portfolio and the individual investor performance may differ as a result of initial fees, actual investment date, date of reinvestment and dividend withholding tax. Lump sum investment performances are being quoted. The manager has the right to close the portfolio to new investors in order to manager it more efficiently in accordance with its mandate. Sanlam Collective Investments retains full legal responsibility for the co-branded portfolios. The portfolio management of the fund is outsourced to Ampersand Asset Management (Pty) Ltd (FSP no. 33676), an authorised financial services provider in terms of the FAIS Act.

Ampersand Asset Management | Ampersand Momentum CPI FoF | Class A | Market Review as at 30 June 2017 | Published: July 2017

vpfp.co.za | +27 11 803 7399 | clientservicing@vpfp.co.za

Disclosures

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