FutureGrowth Asset Management

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March 2016
Senate Group

Corporate overview

Click to edit Master subtitle styleA large,
dedicated
investment
team
3

Investment team structure
Updated: 30 November 2015
Andrew Canter (CIO)
Portfolio Managers
Daphne Botha
James Howard
Jason Lightfoot
Mei-Chi Liou
Michael Van Rensburg
Nazley Bardien
Wikus Furstenberg
Paul Semple
Credit & Equity Team
Olga Constantatos
James Howard
Jason Lightfoot
Mei-Chi Liou
Paul Semple
Conway Williams
Ringetani Ndlovu
Thina Tiyo
Gershwin Long
Iqeraam Petersen
Angelique Kalam
Smital Rambhai
Dolf van Wijngaarde
Yasmine Ganief
Amrish Narrandes
Sarah De Villiers
Wafeeqah Mallick
Irfaan Abbas
Didintle Mosupyoe
Sue Hopkins
Chantal Wood
Tarryn Mentoor
Interest Rate Team
Wikus Furstenberg
Daphne Botha
Rhandzo Mukansi
Yunus January
Dealing Team
Michael Van Rensburg
Nazley Bardien
Rasheda Jacobs
Nadia Ismail
Desigan Reddy
Mandy Scholtz
4
Specialist Investment
Administrators
Michelle Green
Sheree Davids
Narayan Vyas
Thato Khaole
Melissa Moore

Interest rate view and strategy

Key investment themes (most turned out worse)
l Chinese rebalancing
l Great monetary easing
l Global economic growth
l Local economic growth
l Local headline inflation (trend)
l SA current account
l Monetary policy
l Fiscal policy (rolling 3yr)
Slow rebalancing Hard landingReturn to 10+
Trend Below trend Recession
Trend Below trend Recession
4.5% 5.5% 7.0%
Neutral EasingTightening
Consolidation Stabilization Slippage
6
FG
Improving Muddle through Disaster
FG
Low for long QE‘Normalization’
FG
FG
FG
FG
FG
FG
6

Commodity markets
Falling oil price buffered some of the blow…but not by enough
7

8
Current account & Fiscal budget balances
…leaving us with a current account deficit that is still too wide for
comfort

Real policy rate versus current account balance
9
Theoretically, the SARB has to tighten policy by at least 200bps

SA real repo rate
10
10
SARB still “injecting” too much liquidity into system…due to low growth

USDZAR: Purchasing power parity
11
Leaving the bulk of the required adjustment to the currency

Local inflation forecast
12
12
Persistent rand weakness contributes to risk of inflation

Fiscal Revenue and Expenditure trends
13
Major concern always had been current expenditure…

Sovereign debt & contingent liabilities
14
The SOE problem…

Sovereign bond rating metrics
15
(Fiscal Policy)
?

Local currency spreads versus ratings
16
16
Spreads have widened to levels last seen in 2000-2002…

5-year CDS spreads/S&P foreign currency ratings
17
Cost of insurance against SA sovereign default has surged…

18
Fair value estimate (10-year RSA Treasury yield)
18
Assuming a foreign currency sovereign downgrade…

Global 10-year nominal treasury rates
SA looks attractive…
19
19

Global 10-year real treasury rates
…until you adjust for inflation.
20
20

-
Old Mutual Income Fund
21
21
Fund structure: Latest

SA fixed rate non-government bond market
22
22
ABIL debacle served as catalyst for more general spread widening

NCD spot and monthly rates
23
23
Priced by both forward and spot money markets
Increasing exposure for money
market and income funds

1.32% 1.42% 1.52% 1.62% 1.72% 1.82% 1.92% 2.02% 2.12% 2.22% 2.32% REAL YLD
7.0% 6.5% 6.0% 5.6% 5.1% 4.6% 4.2% 3.7% 3.2% 2.8% 2.3% 2.7%
7.4% 6.9% 6.5% 6.0% 5.5% 5.1% 4.6% 4.1% 3.7% 3.2% 2.7% 3.2%
7.9% 7.4% 6.9% 6.4% 5.9% 5.5% 5.0% 4.5% 4.1% 3.6% 3.1% 3.6%
8.3% 7.8% 7.3% 6.8% 6.4% 5.9% 5.4% 4.9% 4.5% 4.0% 3.5% 4.0%
8.7% 8.2% 7.7% 7.3% 6.8% 6.3% 5.8% 5.4% 4.9% 4.4% 4.0% 4.4%
9.1% 8.6% 8.2% 7.7% 7.2% 6.7% 6.2% 5.8% 5.3% 4.8% 4.4% 4.8%
9.6% 9.1% 8.6% 8.1% 7.6% 7.1% 6.7% 6.2% 5.7% 5.2% 4.8% 5.2%
10.0% 9.5% 9.0% 8.5% 8.0% 7.6% 7.1% 6.6% 6.1% 5.6% 5.2% 5.6%
10.4% 9.9% 9.4% 8.9% 8.5% 8.0% 7.5% 7.0% 6.5% 6.1% 5.6% 6.0%
10.8% 10.3% 9.8% 9.4% 8.9% 8.4% 7.9% 7.4% 6.9% 6.5% 6.0% 6.4%
11.3% 10.8% 10.3% 9.8% 9.3% 8.8% 8.3% 7.8% 7.3% 6.9% 6.4% 6.9%
11.7% 11.2% 10.7% 10.2% 9.7% 9.2% 8.7% 8.2% 7.8% 7.3% 6.8% 7.3%
12.1% 11.6% 11.1% 10.6% 10.1% 9.6% 9.1% 8.7% 8.2% 7.7% 7.2% 7.7%
12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.6% 9.1% 8.6% 8.1% 7.6% 8.1%
13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 8.5%
13.4% 12.9% 12.4% 11.9% 11.4% 10.9% 10.4% 9.9% 9.4% 8.9% 8.4% 8.9%
13.8% 13.3% 12.8% 12.3% 11.8% 11.3% 10.8% 10.3% 9.8% 9.3% 8.8% 9.3%
14.2% 13.7% 13.2% 12.7% 12.2% 11.7% 11.2% 10.7% 10.2% 9.7% 9.2% 9.7%
14.7% 14.1% 13.6% 13.1% 12.6% 12.1% 11.6% 11.1% 10.6% 10.1% 9.6% 10.1%
15.1% 14.6% 14.0% 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 10.5%
15.5% 15.0% 14.5% 14.0% 13.4% 12.9% 12.4% 11.9% 11.4% 10.9% 10.4% 11.0%
24
RSA CPI-linked return matrix (R212, 2022)
Expected returns over 12-month period
End of period
inflation rate
changes
R212
yield
changes
24

Yield curve slope – nominal bonds
25
25
Yield spread: RSA 30-year fixed rate bond and 3-month JIBAR

Fixed rate bond returns
26
Repo rate: +100bps
Long end: +100bps
Repo rate: +100bps
Long end: +50bps

-
27
Fixed rate bond returns
Repo rate: +150bps
Long end: -50ps
Repo rate: +100bps
Long end: 0bps
27

-
OM retail funds
28
28
Fund structures: Latest

Sovereign credit rating dynamics

SA local currency government bond ownership
Foreign ownership of domestic debt at 3-year low
30
30
32% of R1.4tn = R0.5tn

31
Sovereign credit rating scale
Moody's S&P Fitch
Long-Term Ratings
Aaa AAA AAA Prime
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-
Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
B2 B B
B3 B- B-
Caa1 CCC+ Substantial risk
Caa2 CCC Extremely speculative
Caa3 CCC-
CC
C
C DDD
/ DD
/ D
Ca
D
CCC
High grade
Upper medium grade
Lower medium grade
Non-investment grade (Speculative)
Higher speculative
In default (low posibility of recovery)
In default
SA FC
SA FC SA FC
SA LC
SA LC SA LC
BZ FC
BZ FC
BZ FC
S:BondsFixed Income ResearchEconomic AnalysisSA – Rating Metrics

/ High hurdle to South Africa exiting emerging market bond indices
/ Citi Bank’s World Government Bond Index (WGBI) & Barclays’ Global Aggregate (Global
Agg) Index
- Investment grade, local currency bonds considered [thus local as opposed to foreign currency rating]
- WGBI inclusion criteria requires at least investment grade rating from either S&P or Moody’s
- Global Agg. inclusion criteria requires at least investment grade rating from either S&P, Moody’s or Fitch
/ JP Morgan’s Global Diversifies Index (EMBI) & Barclays’ Emerging Market Local
Currency Government Bond Index (EMLGBI)
- Index inclusion criteria ambivalent to credit ratings
- Inclusion criteria:
- Classified as lower/middle income country (World Bank) and non-advanced country (IMF)
- Respective bond market must have significant market depth and liquidity
- Include all of investment grade, high yield & unrated debt securities
EM bond index inclusion criteria
32

Disclaimer
33
Futuregrowth Asset Management (Pty) Ltd (“Futuregrowth”) is a licensed discretionary financial services provider, FSP
520, approved by the Registrar of the Financial Services Board to provide intermediary services and advice in terms of
the Financial Advisory and Intermediary Services Act 37 of 2002. The fund values may be market linked or policy
based. Market fluctuations and changes in exchange rates may have an impact on fund values, prices and income and
these are therefore not guaranteed. Past performance is not necessarily a guide to future performance. Futuregrowth
has comprehensive crime and professional indemnity in place. Performance figures are sourced from Futuregrowth and
I-Net Bridge (Pty) Ltd.
This document is for information purposes only and is not intended as an offer or recommendation to buy or sell or a
solicitation of an offer to buy or sell a financial product or security. The recipient is advised to assess the information
with the assistance of an advisor if necessary, with regard to its compatibility with his/her own circumstances in view of
any legal, regulatory, tax and other implications.
Personal trading by staff is restricted to ensure that there is no conflict of interest. All employees of Futuregrowth are
remunerated with salaries and standard short and long-term incentives. No commission or incentives are paid by
Futuregrowth to any persons. All inter-group transactions are done on an arm’s length basis. Futuregrowth has
comprehensive crime and professional indemnity insurance.
Futuregrowth prepared this document in good faith. Although the information in this document is based on sources
considered to be reliable, Futuregrowth makes no representation or warranty, express or implied, as to the accuracy or
completeness of this document, nor does it accept any liability which might arise from making use of this information.

FutureGrowth Asset Management

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