ANGLES & PERSPECTIVES - FIRST QUARTER 2018 - PSG
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ANGLES & PERSPECTIVES FIRST QUARTER 2018
Contents
1. Introduction – Anet Ahern 1
2. The value investor's perspective: value is abundant in expensive markets – Shaun le Roux 2
3. ‘Perils of perception’ – and keeping a clear line of sight – Paul Bosman 5
4. ‘An overvalued rand’ – a closer look at the common perception – Lyle Sankar 6
5. The PSG Money Market Fund: preserving capital and providing a steady income – Lyle Sankar 8
6. Portfolio holdings as at 31 March 2018 10
7. Percentage annualised performance to 31 March 2018 (net of fees) 13
8. Risk/return profile 14
9. Unit trust summary 15
10. Contact information 16
11. Digital subscriptions 17
Personal perceptions are powerful. When investing, they serve as a double-edged
sword: acting on perception can be a costly mistake, but acting on the back of others’
misperceptions can get the odds in your favour. Focusing on the facts helps you maintain
the right perspective.
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. Anet joined PSG Asset Management as CEO in 2013.
Perspectives on the rand
"The fact that we live at the bottom of a deep gravity well, on Lyle Sankar, Manager of the PSG Money Market Fund, expands
the surface of a gas covered planet going around a nuclear fireball
on the risks attached to holding a one-way view on the rand,
90 million miles away and think this to be normal is obviously some
and explores a different perspective.
indication of how skewed our perspective tends to be."
Douglas Adams, The Salmon of Doubt: The PSG Money Market Fund: preserving capital and
Hitchhiking the Galaxy One Last Time providing a steady income
This quarter we feature the PSG Money Market Fund and its
Sometimes it takes a fresh perspective to see opportunity low-risk contribution to the portion of a portfolio that requires
amid concern and noise capital preservation, easy access to savings and a steady
A new political landscape is unfolding in South Africa and the income. At certain points in the interest rate cycle, there are also
year is progressing with the underpin of improved confidence opportunities to attain inflation-beating yields while preserving
and a better outlook. This gives us room to reflect on the capital – opportunities we have recently taken advantage of.
influence that perspectives and perceptions can have on our
decisions. We calmly continue to apply our process, consistently
and patiently
Finding value in expensive markets We make sure we do not get caught up in popular perceptions,
Shaun le Roux, Manager of the PSG Equity and PSG Flexible but rather maintain the right perspective. Thank you for your
funds, opens this edition with a discussion on perspective. He interest and support, and we trust that you will find this edition
distinguishes between a market that is generally overvalued valuable. Your feedback, as always, is welcome.
and the availability of investment opportunities. He also
discusses the impact of passive investing on overall valuations
and includes a sobering note on expectations for future returns.
The perils of perception
Paul Bosman, Manager of the PSG Balanced and PSG Stable
funds, focuses on perceptions, and examines the habit of South
Africans to expect the worst. He explains that the key is not to
base investment decisions on predictions, but to have a handle
on the extent to which prices have responded to the possible
scenarios.
FIRST QUARTER 2018 | 1
The value investor's perspective:
value is abundant in expensive markets Shaun le Roux
Shaun has managed the PSG Equity Fund since 2002 and the PSG Flexible Fund since 2016. He is a CA(SA) and a CFA
charterholder.
What you see depends on your perspective approaching its end. This follows recent bouts of extraordinary
and unconventional monetary stimulus, including zero interest
rate policies, negative real yields and quantitative easing (bond
buying by central banks). This environment has been very
favourable for the prices of long-duration assets, including
equities – especially equities perceived to yield more sustainable
or faster-growing cash profits.
We believe that portfolio returns (on a broad basis) from these
levels will be disappointing compared to the returns South
African (and other) investors have become accustomed to over
the past 15 years – especially after the surge in equities in 2017.
Due to much higher stock prices, we have been finding fewer
opportunities to buy high-quality businesses at wide margins
of safety over the past year and a half. This is reflected in the
relatively high cash levels in our funds, especially offshore.
We consider cash one of the most uncrowded and under-
appreciated global asset classes, especially when yields are low
and appetite for risk is high. The inherent value of cash is never
evident in times of exuberance. Its true value shows itself when
volatility rises, prices fall and liquidity is in short supply.
Despite high overall valuations, there are still pockets of
opportunity
It is dangerous to express a view on the market as a whole,
when ‘the market’ comprises thousands of different securities.
The dynamics within markets tell an altogether different story,
and certainly add another perspective. It is true that markets are
broadly expensive. However, if you are prepared to look beyond
the crowded stocks and sectors, the opportunity for good long-
Above is an image widely used to demonstrate an ambiguous term returns is quite promising.
optical illusion. In it, we see either a glamorous young lady or
an old woman, but if we change our frame of reference, we Indeed, we continue to highlight the dispersion in valuations
can see the reverse – the image we initially missed. This shows within equity markets – the anomaly of current market
the power of perspective; how it is personal and can change. conditions. The difference between prices paid for expensive
stocks that dominate indices versus cheap, out-of-favour stocks
Currently, views around equity valuations are highly varied remains at levels we last saw in the dotcom bubble.
Many argue that global equity markets are currently expensive,
trading at levels only reached in times of irrational exuberance, We have recently been identifying attractive long-term
like 1929 or 1999. They are of the view that a material market investment opportunities
correction is overdue. Others reference strong economic Most of the globally superior companies we would love to
conditions, fast growth in corporate profits, and low interest own are currently very expensive. Hence, they do not appear
rates as evidence that the bull market is sustainable. Who is in our clients' portfolios. However, we believe that if you look
right? Well, it depends on your perspective. a bit deeper into equity markets and are prepared to invest in
uncrowded areas, good prospects abound. In fact, the strength
Our perspective is that global assets are generally trading of our current pipeline has seen us starting to spend some of the
at elevated valuation levels cash that’s been building up in our funds. We would argue that
We expect low long-term returns from many asset classes contrasting valuations within markets present fertile ground for
given these levels, especially developed market bonds and the stock pickers to generate alpha and deliver on clients’ long-
well-owned equities with which they have been competing for term return objectives. We would further argue that investing
capital. Indeed, long-term asset class performance needs to be in cheap stocks on suppressed levels of earnings is a lower-risk
seen in the context of the 30-year bond bull market that is likely way of helping clients achieve these objectives.
2|
The increasing dominance of passive and growth Similarly, there are several countries in which negative
strategies is contributing to current market pricing narratives have adversely affected stock prices. For example,
We can hazard a few calculated guesses about the factors the Japanese authorities' unconventional zero interest rate
contributing to the divergence in equity valuations. In a low- policy has dramatically weighed on margins for many financial
yield and high-asset-price world, investment flows that are not businesses. As a result, we think we can acquire such businesses
price sensitive can drive prices to extreme levels. It is clear to us on unsustainably low levels of earnings at very cheap prices. We
that the ever-increasing switch from active to passive investment also acknowledge structural (and long overdue) improvements
strategies is having a profound impact on market pricing. This in Japanese corporate governance, with increasing focus on
has resulted in the allocation of capital to assets that have shareholder returns. In combination, these factors create the
recently enjoyed strong price performance, and away from potential for asymmetrical investment outcomes.
underperforming assets. We also see clear evidence of multi-
year style drift by global active managers, away from value to We have also actively been mining the opportunity set that has
growth (and from high to low active share) – a consequence arisen from the fallout in the US retail property sector. Not only
of the decade-long consistent outperformance of growth over have bond yields been rising (which is negative for capitalisation
value (as shown in Graph 1) and passive over active. A simple rates), but brick-and-mortar sales have been declining due to
review of global mutual funds indicates the low and ever- growing online market share in an overbuilt mall environment.
shrinking market share of traditional value managers relative to Department stores in particular have been haemorrhaging. US
passive and growth strategies. retail real estate investment trusts (REITs) have been heavily hit,
and we have used the opportunity to acquire excellent assets at
Strong evidence of the impact of these factors on global very attractive prices and yields.
equity markets can be seen in Table 1. It shows the staggering
outperformance by mega caps across global equity markets in We have an unwavering focus on buying with a sufficient
2017, to the extent that the largest handful of shares dominated margin of safety
last year's returns in just about every market. A cursory glance We avoid stocks that don't provide adequate returns to
at the constituents of these global stock indices indicates the compensate for the risk of investing in them. It is our view that
dominance of mega-cap growth and tech stocks in particular. very few of the popular mega-cap global equities are currently
In sharp contrast, the least liquid stocks (the far-right column) attractively priced. Not only will future returns likely disappoint
have underperformed materially (most are negative) in all the most investors, but prices certainly do not compensate for
indices. This is indicative of a rising liquidity risk premium, and unpredictable future macro developments or unforeseen
clearly demonstrates that the breadth of the bull market has geopolitical events. On the other hand, many stocks around
not been as widespread as is commonly perceived. the world are out of favour and being neglected. If our analysis
is correct, these should provide good long-term returns for our
A market dominated by price-insensitive flows that result in clients.
wide divergences in performance and neglect for smaller-cap
stocks is fertile ground for contrarian stock pickers.
Uncrowded areas of the market present the most
attractive opportunities
To invest in securities of sufficient quality at wide margins of
safety in an expensive market, we need to buy businesses:
• that are out of favour for reasons we consider to be
temporary, or
• for which we consider the likely outlook to be better than
what the market is pricing in.
So where can we currently find such opportunities? Firstly,
we think there are very attractive opportunities in our own
backyard. Liquid stocks that are exposed to the South African
economy, the ‘SA Inc stocks’, have re-priced dramatically
following the improved outlook for the political governance of
the country since December. Notably, less liquid stocks that fall
outside the reach of global investors, big domestic managers
and index-tracking strategies have been left behind. It is our
view that many higher-quality SA Inc mid and small caps can
be acquired at attractive valuations on low levels of earnings.
This bodes well for long-term returns from this opportunity set.
FIRST QUARTER 2018 | 3
Graph 1: Growth has been outperforming value since 2006
2.0
MSCI World Value versus MSCI World Growth indices
1.8 Gr
ow
th
ou
tp
1.6 er
fo
rm
in
g
va
lu
1.4 e
1.2
1.0
0.8
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Sources: PSG Asset Management, Bloomberg
Table 1: The largest members and quintiles dominated 2017 index returns
Index Index total Largest 5 Largest 10 Largest 25 Largest 2nd Middle 4th Smallest
return quintile quintile quintile quintile quintile
MSCI Emerging 37.3 68.0 62.5 55.9 45.0 39.1 25.1 25.0 2.5
Market
Russell 1000 30.2 45.2 44.5 38.9 38.5 25.6 23.8 12.9 -2.0
Growth
MSCI EAFE 25.0 20.2 22.3 21.7 22.5 20.6 23.6 20.6 6.7
MSCI ACWI 24.0 49.2 46.7 34.5 26.9 25.2 22.7 21.0 10.5
Russell 2000 22.2 93.3 85.1 55.4 32.6 14.4 9.2 -7.2 -23.2
Growth
S&P 500 21.8 45.3 34.3 29.9 24.5 22.0 17.0 14.2 -1.1
Russell 1000 21.7 45.3 34.3 29.9 32.3 20.2 25.6 12.9 -18.1
Russell Midcap 18.5 42.0 35.3 29.9 24.0 20.4 14.8 8.6 -11.3
Russell 2000 14.7 76.3 73.0 54.5 36.2 19.3 4.4 -3.1 -18.6
Russell 1000 13.7 26.5 19.2 14.4 16.4 14.5 19.2 7.6 -10.9
Value
Russell 2000 7.8 45.6 33.9 15.1 16.6 9.2 1.6 -0.4 -18.5
Value
Source: Semper Augustus Investments
4|
‘Perils of perception’ - and keeping a clear
Paul Bosman
line of sight
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.
South Africans are most likely to think things are worse bond delivered a total return of 15% to end March 2018,
than they really are and the local banking index 25%. While we are very careful
This is according to global market research firm Ipsos Mori, of referencing short-term returns, this might prove to be a
which ranked the country top – or ‘most wrong’ – in its latest fundamental re-pricing. A ‘wait-and-see’ approach that limited
Misperceptions Index. The index is constructed based on the exposure to South African-facing securities may therefore have
outcome of the company’s annual ‘Perils of Perception’ survey. come at a cost.
In 2017, it revealed that out of the 38 countries surveyed
throughout Europe, the Americas, Asia and further abroad, Current (mis)perceptions?
South Africans most consistently overestimate the size of their “South African industrials have rallied and run their course.
problems. While survey topics ranged from murder statistics to There’s no further upside.”
general health to smartphone ownership, we would venture While the prices of South African-centric stocks have recovered
that the trend might also hold true for negative assessments of from the lows seen in 2017, many remain on very reasonable
the local investment environment. multiples of low profits. These profits were generated at a time
when activity levels and confidence in the South African economy
When investing, perception is a double-edged sword were very low. In fact, gross fixed-capital formation was lower
Acting on perception can be a costly mistake, but acting on than in 2014, when adjusted for inflation. There is therefore
the back of others’ misperceptions can get the odds in your a reasonable chance that the market is underestimating the
favour. To place our clients on the right side of this dynamic, future potential profits of these companies (and multiples tend
our process focuses us on the facts. We believe that this is the to rise when profits rise).
only way to discern between perception and reality, and to
effectively gauge the odds of various outcomes. Blindly relying “The rand is strong and likely to weaken.”
on perception (yours or others’) is likely to cloud your vision. Predicting the movement of any currency is difficult, especially
in the short and medium term. Furthermore, perceptions of a
A recent (mis)perception: South Africa is headed for collapse currency’s strength or weakness are often the result of its recent
In the afterglow of the ‘Ramaphosa effect’, it is difficult to direction of travel. This is a dangerous over-simplification.
imagine that a year ago, sentiment towards South Africa was
clouded by fear and negativity. Political instability, worsening There are several scenarios under which the rand could
fiscal metrics and credit rating downgrades had spooked local strengthen further – and perhaps dramatically – from current
and foreign investors alike. But was the situation as bad as the levels. (Lyle Sankar writes more about this in his article on
market was pricing in? page 6.) Positioning a portfolio with a strong bias towards rand-
hedge assets based purely on exchange rate predictions may
At the time, our funds were invested in South African therefore be problematic. As long-term, bottom-up investors,
government bonds, and holdings included several domestic- we believe in evaluating each security we consider on its
facing companies (both positions we largely maintain). This individual merits – and not on macroeconomic or currency
was not because we were predicting the opposite of what the views. Our portfolios therefore include South African bonds
market was predicting – or in fact, any specific outcome at all. and industrial stocks (which will benefit from a stronger rand),
Rather, we believed that market prices reflected the certainty of as well as international stocks, which could detract from
a negative outcome, when several facts indicated that this was fund performance if the rand strengthens. We don’t predict
not a foregone conclusion. currencies.
The facts reminded us that South Africa remained a functioning Diversified portfolios of quality, undervalued instruments
democracy, with an independent judiciary and independent should continue to serve investors well
central bank. In addition, our public debt remained well We believe that perception is a powerful force that favours the
structured, both in terms of currency and maturity. Furthermore, most informed – so we make it a priority to be well informed.
although the size of this debt was unhealthy in relation to GDP, We aim to achieve this by, firstly, always doing our own
it was not as dire as credit markets suggested. homework: we rely on original sources rather than second-
hand, ‘packaged’ research. Secondly, our team-based approach
However, news flow, sentiment – and therefore security encourages debate and critical thinking. Finally, the investment
prices – were all fixated on the worst possible outcome. This checklists we’ve developed from our prior experience and
was especially visible in the prices of local government bonds learnings act as a final risk overlay, ensuring that facts – and
and banks. Since mid-December, the 20-year government not perceptions – remain at the forefront of our process.
FIRST QUARTER 2018 | 5
‘An overvalued rand’ – a closer look at
the common perception Lyle Sankar
Lyle joined PSG Asset Management in 2014 and was appointed Fund Manager of the PSG Money Market Fund in 2018. In
addition to his fund management responsibilities, Lyle performs fixed income research for the broader team.
The rand is generally deemed strong, and offshore We do not make currency forecasts and do not build
investments more attractive than domestic options portfolios on a directional rand view
A broad review of market commentary and portfolio positioning We are, however, cognisant of longer-term economic cycles
clearly shows a consensual view among local asset managers – and in particular, how the dollar cycle impacts emerging
that the rand has overshot as a result of ‘Ramaphoria’ and markets. (We wrote about this in the third quarter of 2017.)
finds itself overvalued. Furthermore, many argue that after a We take this into account when managing our portfolios and
sharp re-pricing of South African assets since November, bonds aim to ensure that our client outcomes will be satisfactory
are unattractive and domestic equities are pricing in excessive regardless of unpredictable short-term movements.
optimism. In contrast, rand hedges are deemed attractive. Many
investors are being advised to take advantage of the increase Based on purchasing power parity (PPP), the rand is
in regulatory limits for offshore assets in prescribed funds (from undervalued
25% to 30%, excluding Africa) by using rand strength to A review of PPP (which gives an indication of the fundamental
immediately increase their allocations. value of an exchange rate between two countries) may offer
an alternative perspective to the view that the rand is currently
Investing globally offers many advantages but should overvalued. In Graph 1, it is noticeable that the rand is still
not be based on currency views undervalued on this basis. In fact, based on PPP, its fair value is
We consider global investments an essential building block for closer to R10.70/$.
most domestic portfolios. The JSE is small and the benefits of
a wider universe, diversification and hard currency protection While PPP has its flaws as a predictive tool, it does give
cannot be underestimated. Furthermore, market timing is us pause for thought
always difficult (if not impossible) and it is better to be buying The shortcomings of using PPP as a predictive tool for currencies
dollars at R12/$ as opposed to R16/$ – where the exchange rate have been well documented. Firstly, it is very sensitive to which
was two years ago. However, we do not consider it a foregone starting point you use and can be heavily influenced by short
conclusion that the rand must weaken from here. In fact, we swings in inflation. Secondly, the rand is the key driver of local
think it is very possible that the rand could be stronger than inflation and a move in exchange rates can have a causal impact
anticipated for a sustained period. We also think it is advisable on inflation differentials (the difference between two countries’
to pause and question whether building a portfolio based on a inflation rates).
singular view that the rand is overvalued is appropriate. Lastly,
we believe that both South African government bonds and That said, Graph 1 is instructive in several ways. Market
cheap domestic equities continue to provide an opportunity for participants have a tendency to extrapolate recent experiences.
attractive long-term returns at relatively low levels of risk. We think many are likely guilty of extrapolating the experience
Graph 1: Rand/dollar exchange rate relative to PPP (inflation differential)
5
4
3
Standard deviations
2
1
0
-1
-2
-3
-4
-5
-6
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Rand/dollar less PPP Average
Sources: PSG Asset Management, Nedbank
6|of the later years of the Zuma era, when the rand traded at CPI is currently at 4% and, given the SARB’s credible inflation
more than two standard deviations below PPP fair value on targeting track record, we expect benign medium-term domestic
a sustained basis. In total, it has traded weaker than the PPP inflationary pressure. This is an outcome that we do not think is
value for four years, the longest period of successive weakness priced into longer-dated South African government bonds, even
over the last 25 years. It can therefore be argued that the sharp after the rally of recent months. We continue to view real yields
appreciation since November is in fact a partial reversal of as attractive for this asset class and our clients retain exposure.
fundamental undervaluation.
Strong global growth and low local inflation stand to
We also observe that the rand has been strong relative to a PPP benefit the local economy
value for 60% of the time since democracy, contrary to popular The combination of a favourable global economic backdrop and
perception. Interestingly, this has generally been during periods benign domestic inflation could likely give impetus to further
of synchronised global economic growth (such as 2005 to 2007 interest rate cuts, which should provide a meaningful boost
and 2010 to 2012, circled in the graph). It is therefore important to the domestic economy. When we consider the low base of
to note that we are currently witnessing such conditions – and consumer and business confidence levels and the improved
that the rand has previously displayed sustained multi-year outlook for governance at state-owned enterprises, we could
strength when the global growth stars were aligned. be looking at further upward revisions to South African GDP
over the years ahead. This would be an environment in which
Rand weakness is not a necessary precursor to local the rand is likely to be stronger for longer.
growth
Another widely held perception is that the South African economy We do not believe portfolios should be positioned for a
needs a weak currency to grow, given that currency strength weaker rand
acts as a headwind for many of our primary industries. Here, it is Given the consensual positioning of domestic portfolios for a
worth noting that the period in which South Africa experienced weaker rand and the fondness for expensive rand hedges, this
the strongest sustained GDP growth (3% and over) over the scenario could see lower investment returns than many investors
past two decades was between 2004 and 2007 – a period that have become used to. A strong rand will also act as a headwind
coincided with a strong rand. This was a time of synchronised for the offshore equities that our clients own, but we take
global growth and low levels of South African inflation. comfort from the high dollar returns we expect from current
valuation levels. Furthermore, our portfolios contain a number
We believe the medium-term inflation outlook is of higher-quality domestic stocks that remain very cheap and
favourable on low levels of earnings. These stocks have missed out on the
We think that there is a broad under-appreciation of how re-pricing of ‘SA Inc’, which has largely been restricted to the
successful the South African Reserve Bank (SARB) has been at widely held JSE large caps. They should therefore do especially
anchoring inflation expectations within its targets over the past well in an environment of improving South African confidence
15 years: it has managed to repeatedly drop inflation below the and a strengthening rand.
6% upper limit despite adverse conditions and extended rand
weakness, as Graph 2 shows. In our minds, a key question clients should be asking their portfolio
managers is: have you built a portfolio that only does well if the
rand weakens?
Graph 2: South African CPI
16%
14%
12%
10%
8%
6%
4%
2%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
South African CPI SARB upper limit
Sources: PSG Asset Management, Bloomberg
FIRST QUARTER 2018 | 7The PSG Money Market Fund: preserving capital
and providing a steady income Lyle Sankar
Lyle joined PSG Asset Management in 2014 and was appointed Fund Manager of the PSG Money Market Fund in 2018. In
addition to his fund management responsibilities, Lyle performs fixed income research for the broader team.
However, while a money market fund offers a secure investment,
Basic fund information
it is not completely risk free. As with any investment, severe
Fund name: PSG Money Market Fund
capital losses may reduce the capital value of the portfolio.
Fund size: R3.4 billion
ASISA sector: South African – Interest Bearing –
Declining inflation bodes well for real returns on money
Money Market
market instruments
Benchmark: South African – Interest Bearing –
Headline inflation (CPI) in February was 4.0% – down from 4.4%
Money Market Mean
in January, 5.3% in December 2017 and 6.3% a year ago. The
Manager: Lyle Sankar
South African Reserve Bank (SARB) has further indicated that it
intends to target an inflation rate that is closer to the midpoint
The fund aims to provide capital security, easy access to of its 3% to 6% target range, at 4.5%. Given this downward
your money and a steady income trend (shown in Graph 1) – and the SARB’s commitment to
The key objectives of the PSG Money Market Fund are supporting it – many money market instruments are currently
preserving capital, maintaining sufficient liquidity to meet all offering an opportunity for inflation-beating returns, in an area
investor requirements, and delivering attractive returns within of the market focused purely on capital preservation.
the confines of its mandate. To achieve these objectives, it
invests in selected local money market instruments that are Short-term interest rates are currently attractive
issued by government, parastatals, corporates and banks and Despite a favourable backdrop for lower interest rates
have a maturity term of less than 13 months. (a stronger rand, falling inflation and signs of economic
recovery), short-term money market rates remain attractive.
Who is the fund appropriate for? Graph 2 shows that although money market rates have fallen
The fund sits at the bottom of the risk/return spectrum and is from the levels we locked in for clients in 2017 amid poor South
suitable for investors who: African sentiment, attractive opportunities remain. In particular,
• seek capital stability, interest income and easy access to the longer end of the negotiable certificate of deposit (NCD)
their money through a low-risk investment curve continues to offer high real yields, with the current
• need an interim investment vehicle or 'parking bay' for 12-month rate close to 7.65%. With inflation at 4.0%, this
surplus money means that NCDs potentially carry a real yield of 3.65% at low
• have a short-term investment horizon levels of credit risk.
Graph 1: South African CPI is trending lower
7.0
6.5
Inflation – year-on-year (%)
6.0
5.5
5.0
4.5
4.0
3.5
MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
'16 '16 '16 '16 '17 '17 '17 '17 '18 '18 '18 '18 '19 '19 '19 '19
Current SARB forecast Inflation path (current variables)
Sources: RMB, PSG Asset Management
8|Graph 2: Current money market rates
8.5
Money market rate (%)
8.0
7.5
7.0
6.5
0 1 2 3 4 5 6 7 8 9 10 11 12
Months
NCD curve: 31 March 2017 NCD curve: 31 March 2018
Source: Bloomberg
We have locked in high real yields for our clients lowest-risk South African government credit instruments) at
At certain points in an interest rate cycle, there are opportunities yields above those offered by NCDs with comparable maturities.
to attain real yields while still preserving capital. When these As such, we have locked in the inflation-beating yields currently
opportunities present themselves, we take advantage. on offer, while maintaining an internal average fund credit
rating of AA and a comfortable aggregate level of fund liquidity.
As at end March, fixed-rate instruments comprised 59% of the
portfolio, reflecting our views of a lower interest rate trajectory. Graph 3 shows the gross real returns (before fees, adjusted for
The fund’s largest asset allocation is to NCDs (66%), two thirds inflation) of the PSG Money Market Fund over the past four
of which comprise fixed-rate NCDs. Corporate credit, acquired years (since the start of the recent interest rate hiking cycle in
at spreads above our internal fair value spreads, comprises 2014). With the fund’s current yield above market expectations
5.2% of the fund. Over the past few months, we have further of inflation, it should continue to serve investors well going
managed to gain exposure to South African treasury bills (the forward.
Graph 3: The PSG Money Market Fund is yielding above-inflation returns
5%
4%
3%
2%
1%
0%
-1%
-2%
MAR SEP MAR SEP MAR SEP MAR SEP MAR
'14 '14 '15 '15 '16 '16 '17 '17 '18
PSGMMF yield less CPI
Source: PSG Asset Management
FIRST QUARTER 2018 | 9Portfolio holdings as at 31 March 2018
PSG Equity Fund PSG Flexible Fund PSG Balanced Fund
Top 10 equities Top 10 equities Top 10 equities
Old Mutual plc Old Mutual plc Brookfield Asset Management Inc
Discovery Holdings Ltd Brookfield Asset Management Inc Nedbank Group Ltd
Glencore plc Discovery Holdings Ltd Old Mutual plc
AECI Ltd AECI Ltd Discovery Holdings Ltd
Brookfield Asset Management Inc Glencore plc AIA Group Ltd
Tongaat-Hulett Ltd Babock International Group plc AECI Ltd
Super Group Ltd Super Group Ltd Super Group Ltd
Babock International Group plc Tongaat-Hulett Ltd L Brands Inc
Grindrod Ltd Grindrod Ltd Tongaat-Hulett Ltd
Barclays Africa Group Ltd Nedbank Group Ltd Grindrod Ltd
Asset allocation Asset allocation Asset allocation
• Domestic equity 76% • Domestic equity 51% • Domestic equity 40%
• Domestic property 1% • Domestic cash and gold 20% • Domestic cash and NCDs 13%
• Foreign equity 22% • Domestic bonds 5% • Domestic bonds 24%
• Foreign property 1% • Domestic property 1% • Foreign equity 22%
Total 100% • Foreign equity 18% • Foreign property 1%
• Foreign cash and gold 3% Total 100%
• Foreign property 2%
Total 100%
Performance Performance Performance
1 600 800 1 400
1 400 700 1 200
Rand (thousands)
Rand (thousands)
Rand (thousands)
1 200
600 1 000
1 000
500 800
800
400 600
600
400 300 400
200 200 200
0 100 0
'02 '04 '06 '08 '10 '12 '14 '16 '18 '04 '06 '08 '10 '12 '14 '16 '18 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
PSG Equity Fund FTSE/JSE All Share TR Index PSG Flexible Fund Inflation +6% PSG Balanced Fund Inflation +5%
10 |PSG Stable Fund PSG Diversified Income PSG Income Fund
Fund
Top 5 equities Top 5 equities Top 10 issuer exposures
Brookfield Asset Management Inc Brookfield Asset Management Inc Standard Bank of SA Ltd
Nedbank Group Ltd Discovery Holdings Ltd FirstRand Bank Ltd
Old Mutual plc PSG Group Ltd Absa Bank Ltd
Hudaco Industries Ltd Hudaco Industries Ltd Nedbank Ltd
AIA Group Ltd AIA Group Ltd Republic of South Africa
Capitec Bank Ltd
Top 5 issuer exposures Top 5 issuer exposures PSG Money Market Fund
FirstRand Bank Ltd FirstRand Bank Ltd Land and Agricultural Development
Republic of South Africa Absa Bank Ltd Bank of SA
Standard Bank of SA Ltd Republic of South Africa Bidvest Group Ltd
Absa Bank Ltd Standard Bank of SA Ltd MMI Group Ltd
Nedbank Ltd Nedbank Ltd
Asset allocation Asset allocation Asset allocation
• Domestic equity 23% • Domestic equity 5% • Fixed-rate notes 57%
• Domestic cash and NCDs 26% • Domestic cash and NCDs 38% • Floating-rate notes 39%
• Domestic bonds 37% • Domestic bonds 53% • Domestic cash and NCDs 4%
• Foreign equity 12% • Foreign equity 3% Total 100%
• Foreign cash 1% • Foreign cash 1%
• Foreign property 1% Total 100%
Total 100%
Performance Performance Performance
200 300 160
180
250 140
Rand (thousands)
Rand (thousands)
Rand (thousands)
160
140 200 120
120 150 100
100
100 80
80
60 50 60
'11 '12 '13 '14 '15 '16 '17 '18 '06 '08 '10 '12 '14 '16 '18 '11 '12 '13 '14 '15 '16 '17 '18
PSG Stable Fund Inflation +3% over a PSG Diversified Income Fund Inflation +1% PSG Income Fund STeFI Composite Index
rolling 3-year period
FIRST QUARTER 2018 | 11PSG Money Market Fund PSG Global Equity Sub-Fund PSG Global Flexible
Sub-Fund
Top issuer exposures Top 10 equities Top 10 equities
Nedbank Ltd Brookfield Asset Management Inc Brookfield Asset Management Inc
Standard Bank of SA Ltd Babcock International Group plc Babcock International Group plc
FirstRand Bank Ltd AIA Group Ltd AIA Group Ltd
Absa Bank Ltd Simon Property Group Inc Simon Property Group Inc
Republic of South Africa The Mozaic Co The Mozaic Co
Land and Agricultural Development L Brands Inc Glencore plc
Bank of SA Glencore plc L Brands Inc
Investec Bank Ltd Pandora A/S Pandora A/S
Capitec Bank Ltd Colfax Corp Colfax Corp
Discovery Holdings Ltd Discovery Holdings Ltd
Asset allocation Regional allocation Regional allocation
• Linked NCDs/Floating-rate notes 24% • US 34% • US 26%
• Step rate notes 15% • Europe 6% • Europe 5%
• NCDs 44% • UK 21% • UK 17%
• Bill 15% • Asia ex Japan 8% • Asia ex Japan 7%
• Call deposits 2% • Japan 6% • Japan 5%
Total 100% • Canada 9% • Canada 7%
• Africa 5% • Africa 4%
• Other 1% • Other 1%
• Cash 10% • Cash 28%
Total 100% Total 100%
Performance Performance Performance
500 250 180
160
US dollar (thousands)
US dollar (thousands)
400
Rand (thousands)
200 140
300 120
150
200 100
80
100
100
60
0 50 40
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '10 '11 '12 '13 '14 '15 '16 '17 '18 '13 '14 '15 '16 '17 '18
PSG Money Market Fund (ASISA) South African IB PSG Global Equity MSCI Daily TR Net PSG Global Flexible Sub-Fund US inflation +6%
Money Market Mean Sub-Fund World USD Index
12 |Percentage annualised performance to 31 March 2018
(net of fees)
Local funds
1 Year 3 Years 5 Years 10 Years Inception Inception date
PSG Equity Fund A 2.87 5.59 12.56 12.15 17.87 01/03/2002
FTSE/JSE All Share Total Return Index 9.60 5.05 10.02 9.67 14.05
PSG Flexible Fund A 4.72 7.43 12.87 13.39 16.10 01/11/2004
Inflation +6% 10.04 11.77 11.43 11.71 11.86
PSG Balanced Fund A 5.34 6.68 10.89 10.46 14.16 01/06/1999
Inflation +5% 9.04 10.77 10.43 10.71 10.58
PSG Stable Fund A 7.63 7.52 8.60 9.79 13/09/2011
Inflation +3% over a rolling 3-year period 7.04 8.77 8.43 8.47
PSG Diversified Income Fund A 8.69 8.25 7.86 7.95 7.97 07/04/2006
Inflation +1% 5.04 6.77 6.43 6.70 7.13
PSG Income Fund A 8.73 8.13 7.18 6.83 01/09/2011
STeFI Composite Index 7.46 7.21 6.60 6.34
PSG Money Market Fund A 7.51 7.23 6.58 6.98 8.51 19/10/1998
South African Interest Bearing Money Market Mean 7.64 7.32 6.64 7.03 8.52
PSG Global Equity Feeder Fund A -4.42 4.19 11.19 11.97 03/05/2011
MSCI Daily Total Return Net World USD Index (in ZAR) 0.37 7.17 15.46 17.74
PSG Global Flexible Feeder Fund A -5.31 4.02 11.57 10/04/2013
US inflation +6% (in ZAR) -4.38 7.19 13.81
International funds
1 Year 3 Years 5 Years 10 Years Inception Inception date
PSG Global Equity Sub-Fund A 8.52 5.61 6.52 5.82 23/07/2010
MSCI Daily Total Return Net World USD Index (in USD) 13.60 7.97 9.71 10.55
PSG Global Flexible Sub-Fund A 7.51 5.57 6.09 6.07 02/01/2013
US inflation +6% (in USD) 8.22 7.99 7.42 7.52
Source: 2018 Morningstar Inc. All rights reserved as at end of March 2018.
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.
FIRST QUARTER 2018 | 1314 |
Risk/return profile
PSG Equity Fund
PSG Global Equity Sub-Fund
PSG Flexible Fund
PSG Global Flexible Sub-Fund
PSG Balanced Fund
Return
PSG Stable Fund
PSG Diversified Income Fund
PSG Income Fund
PSG Money Market Fund
Average riskUnit trust summary
South African portfolios Rand-denominated offshore
PSG Equity Fund PSG Flexible Fund PSG Balanced Fund PSG Stable Fund PSG Diversified Income PSG Income Fund PSG Money Market PSG Global Equity PSG Global Flexible
Fund Fund Feeder Fund Feeder Fund
Fund category South African - Equity South African - Multi South African - Multi South African - Multi South African - Multi South African - Interest South African - Interest Global - Equity - Global - Multi Asset -
(ASISA classification) - General Asset - Flexible Asset - High Equity Asset - Low Equity Asset - Income Bearing - Short-term Bearing - Money Market General Flexible
Investment objective Aims to provide long- Aims to achieve Aims to provide long- Aims to generate a Aims to preserve capital Aims to maximise Aims to provide capital Aims to outperform Aims to achieve
term capital growth superior medium- to term capital growth performance return of and maximise income income and preserve security, a steady the average of the superior medium- to
and deliver a higher long-term capital and a reasonable level CPI+3% over a rolling returns for investors. capital while achieving income yield and high world’s equity markets, long-term capital
rate of return than that growth through of income 3-year period, while The fund conforms to long-term capital liquidity as represented by the growth through
of the South African exposure to selected aiming to achieve legislation governing appreciation as interest MSCI Daily Total Return exposure to selected
equity market within an sectors of the equity, capital appreciation retirement funds rate cycles allow Net World USD Index sectors of the global
acceptable risk profile gilt and money markets with low volatility and (in ZAR) equity, bond and
low correlation to money markets
equity markets through
all market cycles
Benchmark FTSE/JSE All Share Total Inflation +6% Inflation +5% Inflation +3% over a Inflation +1% STeFI Composite Index South African - Interest MSCI Daily Total Return US inflation +6% (in
Return Index rolling 3-year period Bearing - Money Net World USD Index ZAR)
Market Mean (in ZAR)
Risk rating High Moderate - High Moderate - High Moderate Low - Moderate Low - Moderate Low High Moderate - High
Time horizon 7 years and longer 5 years and longer 5 years and longer 3 years and longer 2 years and longer 1 year and longer Minimum of 1 day 7 years and longer 5 years and longer
The Fund is suitable for • seek an equity- • seek exposure to the • would prefer the fund • have a low risk • have a low risk • have a low risk • seek capital stability, • seek an equity- • want a managed
investors who focused portfolio equity market but manager to make appetite but require appetite with an appetite with an interest income and focused portfolio solution in offshore
that has outstanding with managed risk the asset allocation capital growth in real income requirement income requirement high liquidity through that has outstanding markets
growth potential levels decisions terms • want to earn an • focus on a short- a low-risk investment growth potential • want to diversify their
• aim to maximise • aim to build wealth • aim to build wealth • focus on a medium- income, but need to to medium-term • need an interim • aim to maximise holdings across the
potential returns within a moderate to term investment try and beat inflation investment horizon investment vehicle potential returns world
within an acceptable • focus on a medium-
to long-term high risk investment horizon • focus on a medium- or ‘parking bay’ for within an acceptable • focus on a medium-
risk profile surplus funds risk investment
investment horizon • have a time horizon term investment to long-term
• focus on a long-term of at least 5 years horizon • focus on a short-term • focus on a long-term investment horizon
investment horizon and can withstand investment horizon investment horizon
short-term market
fluctuations
• want a balanced
portfolio that
diversifies the risk
over the various asset
classes
• want long-term
retirement savings
Net equity exposure 80% - 100% 0% - 100% 0% - 75% 0% - 40% 0% - 10% 0% 0% 80% - 100% 0% - 100%
Income distribution Bi-annually Bi-annually Bi-annually Bi-annually Quarterly Quarterly Monthly Annually Annually
Minimum investment As per the platform As per the platform As per the platform As per the platform As per the platform As per the platform R25 000 lump sum As per the platform As per the platform
minimum minimum minimum minimum minimum minimum minimum minimum
Fees (excl. VAT) Annual management Annual management Annual management Annual management Annual management Annual management Annual management Annual management Annual management
fee: fee: fee: fee: fee: fee: fee: fee: fee:
Class A: 1.50% Class A: 1.00% + Class A: 1.50% Class A: 1.50% Class A: 1.00% Class A: 0.65% Class A: 0.50% Class A: 0.75% Class A: 0.75%
7.00%
of outperformance of
high watermark
Compliance with No No Yes Yes Yes No Yes No No
Prudential Investment
Guidelines (Regulation 28)
FIRST QUARTER 2018 | 15
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-managementContact information
Local unit trusts Cape Town office Guernsey office Malta office
0800 600 168
utadmin@psg.co.za Physical address Address Address
First Floor, PSG House 11 New Street Unit G02
Offshore unit trusts Alphen Park St Peter Port Ground floor
0800 600 168 Constantia Main Road Guernsey SmartCity Malta
utoffshoreadmin@psg.co.za Constantia GY1 2PF SCM 01
Western Cape Ricasoli
General enquiries 7806 Switchboard Kalkara
+27 (21) 799 8000 +44 (1481) 726034 SCM 1001
assetmanagement@psg.co.za Postal address
Private Bag X3 Client services Telephone
Websites Constantia SA Toll Free +356 (2180) 7586
www.psg.co.za/asset-management 7848 0800 600 168
www.psgkglobal.com
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 permissible 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/asset-management 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 CIS, 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 that, apart from assets in liquid form, invests in a single portfolio of
a CIS, which levies its own charges and which could result in a higher fee structure for that 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: compliance-
PSG@standardbank.co.za. 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 email at assetmanagement@psg.co.za.
© 2018 PSG Asset Management Holdings (Pty) Limited
Date issued: 2 May 2018
16 |Digital subscriptions
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