STANLIB Financial Mail Investment insights

Today, in investments, everything is connected.
Like East Africa’s first Real Estate Investment
Trust, and the legal framework STANLIB and the
Kenyan government had to sit down and draft
to make it possible. So, if you want to invest in
new markets, you have to be on the ground,
making the connections. That’s why STANLIB
connects multiple specialists across asset classes
and markets. Because a connected world demands
multi-specialist investing.
#ConnectedInvesting
stanlib.com
you’re in
new legislation.
STANLIBisanauthorisedfinancialservicesprovider.
If you’re
in listed
property,

December 8 - December 14, 2016 . financialmail.co.za 3
African economies — our
investment specialists share
insights from their unique points of
view. This allows them to
interrogate others’ views, resulting
in powerful insights that allow us
to make better investments on
behalf of our customers.
On page 6, Stanlib’s investment
specialists draw on their insights to
show how this is affecting asset
classes, and what this means for
investors.
Stanlib also believes the rest of
Africa has a good story to tell. We
have the advantage of being active
in 10 African countries, giving
us local understanding of
the different markets. On
page 14 we take a
look at investment trends
in other African
countries to understand
some of the exciting
investment opportunities
across the continent.
Many of these
OVERVIEW
Seelan Gobalsamy
Stanlib chief executive officer
Be positive, the
future is bright
The asset management
sector can help SA sustain its
growth and positive global
rating
stanlibcorporate report
ý We live in a world that’s fast-
paced and increasingly connected.
From markets and currencies to
economies and politics, everything
affects investment decisions and
outcomes. In this complex world,
successful investing depends on
being able to see and understand
the bigger, interconnected picture.
This is why we have brought
you this publication offering
investment insights across a broad
range of connected areas, to help
you better understand this critically
important world. We believe the
investment industry has a vital role
to play in the SA economy and the
growth story in the rest of Africa.
poverty in a sustainable way.
Business and government need
to work together to make a
difference. This will require a
different approach. I believe the
asset management industry can
play an important role.
SA’s financial services sector
has matured into a robust, world-
class industry, perfectly positioning
it to take on a wider and more
meaningful role in terms of
supporting economic growth
across all sectors of the economy.
The strength of our asset
management industry has created
a stronger economy and liquid and
deep capital markets. However, as
an industry we can do much more.
We can use this sector to create
funding and growth opportunities
that affect the real economy.
Though we have one of the
most developed contractual
savings industries in the world, our
national household savings rate is
among the worst. We need to do
more for education and youth
development to spread knowledge
and insight into how finance works
and the value of saving.
In the analysis by Kevin Lings,
Stanlib chief economist, on page 4,
you can read more about how the
sophisticated and world-class
nature of our asset management
industry can help to drive much-
needed economic growth in SA.
At Stanlib, we recognise that
managing investments in a
complex, connected and volatile
What it means: More meaningful
role in economic growth,
promotion of a culture of saving
world — the real world — depends
on being able to see and
understand the bigger, connected
picture. This is why we have
expertise across a wide range of
investment disciplines. Our teams
of investment specialists have
developed offerings across all asset
classes: cash, bonds, equities,
property and alternatives.
In practice, this means
that when we have to
make complex decisions
about investing in an
uncertain world — for
example, facing the
uncertainty of what a
Donald Trump US
presidency means for
The strength of our asset
management industry has
created a stronger economy,
as well as liquid and deep
capital markets
Well-resourced
SA has the resources, the resilience
and fantastic people to build a great
country. There have been
numerous good news stories
coming out of SA. We have
recently seen how our judiciary
and chapter nine institutions
function independently to serve
and strengthen our democracy.
Balanced against this are
concerns about poverty and
unemployment. Yet as a country,
we have the resources to eliminate
Seelan
Gobalsamy:
Bright
prospects
for sector

financialmail.co.za . December 8 - December 14, 20164
ASSET MANAGEMENT
A bigger
role to play
corporate report stanlib
SA’s world-class asset
management industry can
play a key role in the
country’s economy, with the
main players being the
contractual savings industry
Kevin Lings Stanlib chief economist
opportunities will be accessed
through alternative investments,
such as private equity and
infrastructure. Stanlib has been
focusing on developing its
alternative investment offerings to
provide our customers with access
to these exciting opportunities. We
believe that alternative investments
have a positive impact on
economies while earning decent
returns for investors. This fits in
well with our desire to make a
difference to the financial and
social wellbeing of our customers
and our continent.
Unique view
We end with a unique look at the
passives versus actives debate,
demonstrating how we see things
differently by making connections
that others don’t necessarily see.
At Stanlib we are in a unique
position to uncover deeper insights
in this increasingly volatile world,
enabling our customers to benefit
from investments that count. We
hope you, too, can benefit from
these insights. x
Seelan Gobalsamy has been
CEO of Stanlib since 2014. He
previously held the role of CEO of
Liberty Corporate, part of Stanlib’s
parent company. He has over 17
years’ experience in the insurance
and investment industries.
ý SA has developed a world-class
asset management industry with
the potential to play an even bigger
role in benefiting the economy.
The asset management industry
is a pocket of excellence in SA,
with its sophistication, the depth of
its offering and the quality of its
regulation.
It ranks among the best globally,
even leading the way in some
areas, and is more aligned to an
industry in a developed market
than that of a typical emerging
economy.
Given the country’s low savings
rate, this may seem surprising. But
the industry has developed in
response to the particular
circumstances of SA’s history.
Domestic savings culture
For a number of decades,
especially the 1980s and 1990s, SA
investors (both households and
corporates) had to invest most of
their savings in the local financial
markets, as they were largely
prohibited from investing offshore.
This “trapping” of domestic
savings led to the formation of a
relatively large and vibrant
domestic contractual savings
industry (pension funds, retirement
annuities and unit trusts). Over
time, the securities industry
became increasingly sophisticated
and well-regulated, encouraged by
the existence of a captive market.
Though there has now been a
significant relaxation of exchange
controls, the legacy effect remains,
making the country’s equity and
bond markets attractive to global
investors and relatively large in
relation to the size of the SA
economy.
At the same time, SA’s
discretionary savings, reflected
mainly as cash deposits in the
bank netted off against overdrafts
and personal loans, is negative.
SA has a significant, perpetual
savings shortfall of about 3%-5% of
GDP — or between R120bn and
R220bn a year. The official
household savings rate is a
negative 0.8%; this means savings
activities are shrinking.
SA’s stubbornly high
unemployment means fewer
people are in formal employment,
resulting in reduced contributions
to pension funds. South Africans
like to shop more than they like to
save, while the younger generation
has not, in general, developed a
culture of saving. This all puts
strain on the contractual savings
market.
South Africans have both debt
and credit. A typical middle-class
household in SA will have, for
example, R10,000 invested in unit
trusts funds, as well as an
overdraft of R10,000. On a net
basis, the household’s savings rate
is effectively zero, but South
Africans rarely net off the two
amounts. Rather, they manage their
savings and debt separately,
content to believe in the myth that
they are saving. The savings level is
unlikely to change without a
meaningful increase in
employment.
Savings are important for
individuals. They need to save for
emergencies, near-term goals like
education or home renovations,
and longer-term objectives like a
comfortable retirement.
Savings are important to a
country for a different reason: it
funds future growth. A country
needs capital to fund the expansion
of its industrial base and to build
vital infrastructure, which in turn
leads to more job opportunities.
If a country does not have
enough savings, it cannot
undertake sufficient investment to
meet its social and economic
needs. It would either have to
borrow money offshore or not
invest. To attract offshore savings,
the country has to offer a decent
return and the reassurance that the
lender will get their money back.
This is why a good credit rating
matters.
Credit rating
The more a country has to rely on
foreign funding, the more
vulnerable it is to global events,
including currency fluctuations.
Foreigners now own roughly 46%
of the free-float of the shares listed
on the JSE. At the end of 2015,
global investors held about 32% of
government’s rand-denominated
bonds.
This leaves SA vulnerable to
changes in foreign investor
perceptions of the country, the
region and emerging markets. SA
is susceptible to domestic political
events that concern foreigners, to
changes in credit ratings and to
global financial events. This
vulnerability won’t change as long
as SA has a very low savings rate
and has to rely on foreign
investment.
Despite this, SA’s contractual
savings industry more than holds
SA’S financial services
industry is world-class and
in some areas leads the
way globally
Stanlib’s
on- the -
ground
presence
in Africa
K
S
c
s

almost R2 trillion in assets under
management and 1,403 funds.
There are more unit trusts in SA
than stocks listed on the JSE.
In the latest P&I/Towers
Watson survey on the 500 largest
asset managers globally, SA has
more firms listed than the
developed economies of Belgium,
Austria, Portugal, Norway and
Ireland. This points to the strength
and depth of our asset manage-
ment industry.
The industry has created the
vehicles — unit trusts and pension
funds — that pool SA’s savings to
provide meaningful funding for the
country, including government.
Given SA’s low level of savings, the
ability to pool what we have,
and channel it efficiently, has
allowed government and many
state-owned enterprises to
borrow mainly domestically,
whereas most other emerging
markets have to borrow
offshore.
This level of local
borrowing is one of the
reasons SA has not been
downgraded so far. It has also
allowed for a sophisticated
corporate bond sector, instead
of having to rely solely on the
banking system for credit. It
allows for capital raising through
equity markets. Without this size
and depth of capital markets, SA
would have to rely much more
heavily on bank and offshore credit
to fund economic expansion.
However, SA’s depth of financial
markets and instruments, its
breadth of expertise and world-
class products and reputation can
play a more meaningful role in
terms of driving economic growth.
One of the most effective ways
would be a partnership between
asset managers and government to
build infrastructure. Infrastructure
is critical in the development of
any economy. Business needs
electricity and water to produce
goods; rail, roads and ports to
transport those goods.
There simply is not enough
money for government to fund
SA’s infrastructure needs. Asset
managers could channel funds into
GROSS NATIONAL SAVINGS
Percentage of GDP in 2015
5 100 15 20 25 30 35 40 45
Source: IMF and SARB
China
Botswana
Thailand
India
Malaysia
Philippines
Russia
Mauritius
Poland
Mexico
Brazil
Argentina
Turkey
SA
Egypt
SA HOUSEHOLD SAVINGS
Percentage of GDP
1960 2016
Source: SARB
25
21
17
13
9
5
1
-3
FINANCIAL MARKET DEPTH: STOCK MARKET VALUE TRADED
Percentage of GDP
20 400 60 80 100 120 140 160 180 200
Source: World Bank
Belgium
Italy
Brazil
India
Israel
Norway
Germany
Russia
Netherlands
Japan
SA
Australia
UK
US
Thailand
France
Portugal
Mexico
its own on the global stage. SA’s
Government Employees Pension
Fund is among the 20 largest
pension funds globally, managing
around R1.6 trillion. Outside the
public sector’s contractual savings,
the overall size of SA’s private
sector pension fund industry is
about R4 trillion, which is similar in
size to SA’s annual GDP.
The unit trust industry has
infrastructure projects owned by
the public sector.
Public-private partnerships
have a long history in SA. One of
the most well-known and long-
running partnerships is the N3 toll
road concession between
Johannesburg and Durban. This
concession was awarded in 1999.
A more recent example is the
department of energy’s renewable
energy independent power
producer procurement
programme, where renewable
energy projects were identified.
The private sector invested capital
and expertise to develop these
projects. Many are now operating
and adding electricity to the
national grid.
Internationally there is a strong
correlation between fixed
investment spending and economic
growth. Higher investment
spending leads to higher GDP,
higher GDP means more jobs. We
need to spend on infrastructure
using public-private partnerships
Kevin Lings:
SA needs a
culture of
saving

ý In the near future, equity
earnings are going to come under
pressure while global bond yields
are at 30-year lows because of
where we are in the economic
cycle.
This limits the outlook for asset
class returns in 2017 — particularly
when the past six years have
delivered solid returns — for rand-
based investors in particular. How
should investors be thinking about
investing in an environment with
low economic growth locally and
globally, low interest rates, and
political volatility?
Investment goals
The most important goal of
investing is to beat inflation. In this
manner real wealth is created.
The second most important
consideration is time in the market.
The power of compounding is best
espoused by Albert Einstein
(though no-one is quite sure if he
said this, it is certainly good
advice): “Compound interest is the
eighth wonder of the world. He
who understands it, earns it, he
who doesn’t, pays it.”
So how should you decide on
what asset classes — bonds,
equities, property or cash — best
serve your investment needs?
“One way in which investors
protect their investments is to
diversify across asset classes and
geographies,” says head of Stanlib
multi-asset Robin Eagar.
“For effective diversification
aimed at long-term wealth
creation, an investor should have
exposure to a number of asset
ASSET ALLOCATION
Opportunities
abound
Retail, property and various
other segments still offer
great investment platforms
that create wealth
ABOUT STANLIB
Leader of the pack
in Africa’s asset
management
Stanlib is a leading pan-African
multi-specialist asset
management company that
connects multiple investment
specialists across a broad range
of asset classes to enable them
to make better-informed
decisions that benefit its
customers.
Succeeding in today’s
fast-changing world requires
multispecialist investment
professionals who share deep
insights to make the connections
that count.
As Africa’s largest asset
manager, Stanlib has a network
of investment experts across the
continent, with a presence in
10 countries. Stanlib is owned
by Liberty Holdings and a
subsidiary of the Standard Bank
Group, the largest banking group
in Africa. This gives Stanlib
access to more than 20 of
the most dynamic African
economies.
Under the guidance of
CEO Seelan Gobalsamy,
Stanlib is fulfilling its
ambition to be the
asset manager of
choice for flows
destined for Africa
through the
provision of a
broad range of
investment
solutions.
Stanlib’s
connections extend to
business partners in North
America, the UK, Europe, the
Middle East and Asia.
It manages and administers
over R584bn (as at June 30 2016)
in assets for over 500,000 retail
and institutional clients across
Africa. Stanlib was the first asset
manager to open in Uganda, and
runs the largest unit trust in
Kenya. Last year, the Stanlib
Fahari I-REIT (a real estate
investment trust) was listed on
the Nairobi Securities Exchange
— the first of its kind in East
Africa.
Stanlib head of franchise
operations Machela Sathekga
says the company’s multi-
specialist approach to investing
enables its experts to develop
deep insights across markets,
industries and asset classes.
“Our world is completely
interconnected. An election in
the US, the release of a public
protector report in SA or a UK
court decision on Brexit may
have a sudden, critical impact in
different ways across the globe,”
she says.
“Stanlib is structured in
a way that allows our
fund managers to make
better decisions on
behalf of our
customers.” x
to deliver better services to more
South Africans and give our
country the growth it deserves.
The financial services sector
can play a meaningful part in
funding this. It can also help small
and medium-sized businesses to
develop through access to capital
in various forms. Most financial
institutions have started investing
in the rest of Africa and see
opportunities in terms of skills
transfer, products and regulation as
well as private-public partnerships
to develop infrastructure.
It is time for SA to take on a
wider and more meaningful role in
driving economic growth across
sectors of the economy. x
classes, domestic and foreign that
are positively and negatively
correlated,” says Eagar. “This
provides investors with the
comfort that their exposure to risk
is contained without unduly
compromising on returns.”
Head of Stanlib absolute returns
Marius Oberholzer says investors
should feel comfortable that their
fund managers are able to
understand, measure and manage
risk in a portfolio.
“You have to understand the
granular risks within asset classes
and search for the small areas of
risk premia that are mispriced and
could become a source of returns,
diversification or downside risk
protection,” he says.
“By having a better
understanding of what risk factors
we are exposing our portfolios to
and highlighting where we may be
duplicating the same risk factors,
we aim to avoid fooling ourselves
into thinking our portfolios might
be highly diversified when in fact
the underlying assets may be
Robin Eagar: Diversifying across various
markets is key to protecting investments
Machela Sathekga:
Collective expertise
puts Stanlib at the
top

highly correlated.”
When it comes to
diversification, investors often ask
to what degree they should have
offshore exposure. Ignoring
exchange control regulations, the
optimal level of offshore
investment is 30% of your
investments. In an ideal world, this
would maximise your return for
the level of risk you are taking.
That 30% offshore allocation should
be divided among the major asset
classes in a similar way to your SA
asset mix. This prevents you
diversifying away all of your
returns.
This would be no different to
putting a chip on every number in
a game of roulette – you might
win, but your losses would be
greater. So, for example, if you
have all of your offshore
investments in cash, you would
lose the benefit of the upside in
global equities, for when the values
of global equities go up, local
equities do the same.
This is what Stanlib’s investment
specialists are saying about the
connections they are seeing in
the real world that have an
impact on how they think about
asset classes, and what this
means for investors:
Equity: buy stocks, not sectors
A flat equity market, slow
economy, and a consumer with
less to spend make a worrying
investment picture, until you look
deeper.
Casting aside the generalisations
reveals some good performers,
shares offering decent dividend
yields and retailers that benefit
from savvy spenders willing to buy
the right product at the right price.
The local equity market holds more
than a few opportunities.
Finding these opportunities is
harder than it was five years ago,
says head of Stanlib equity Herman
van Velze. He has over 20 years’
experience in equity markets, and
thinks that though the investment
environment has become more
complex, picking the right shares
may still offer reasonable returns.
Just how complex the
environment has become is
illustrated by the retail sector.
South Africans love to shop, as
Stanlib chief economist Kevin Lings
often says, and retailers have done
well. But rising inflation, a
depreciating rand, and a higher
cost of living have left consumers
with less to spend. Even the
wealthy are buying down, Van
Velze says.
That might make an investment
case for retailers focusing on the
value-for-money end of the
market. But this area is starting to
look crowded and competitive as
international retailers such as H&M
and Cotton On enter the market
and higher-end chains like Edgars
and Stuttafords discount their
goods.
In this environment, investment
returns won’t come from sector
exposure, they will come from
stock selection.
The importance of stock-
picking is borne out by market
returns. In 2015 and 2016, so far,
the market has been flat. At the end
of 2014, the FTSE/JSE all share
index was 49,770. A year later it
was 50,693, and at the end of
October the index value was
50,590.
Van Velze says this flat return is
made up of some really well-
performing stocks, and some poor
performers. It was a similar story
in 2015, when holding SABMiller
was a performance enhancer,
while holding MTN detracted from
returns. He expects to see more of
this in the future.
Picking the right stocks extends
across sector and size, and Stanlib
Equity has increased the number
of holdings in its portfolios to
reflect that. “A few more horses in
the race” is how Van Velze
describes it.
Van Velze says they have
uncovered a few winners in the
small-cap sector, where
companies are not well
researched. If you’re wary of small
caps, keep in mind that some of
today’s best-known companies
were once small caps — Aspen and
AVI come to mind.
A stock like Curro Holdings has
also piqued the team’s interest.
“Private education is a big story
and a sector we believe will grow,”
Van Velze says.
He’s got two more positives: no
more load-shedding as demand for
electricity has reduced, which will
allow all sectors of the economy to
increase productivity compared to
recent years.
This, in an economy that has
been starved of electricity, could
boost business confidence and
encourage fixed investment by
corporates. The other positive: the
JSE is attracting a number of new
listings that will provide more
choice for local asset managers.
Bonds: conservative strategies
deliver in bond market
The only way to outperform an
investment benchmark is to skew
the portfolio away from the
benchmark assets — in other
words, invest differently. In bond
funds this is easy — and hard. Easy
because the all bond index
benchmark is over 90%
government bonds.
Diversifying out of one
dominant type of asset — for
example, government bonds — into
other assets, such as corporate
bonds, makes inherent investing
sense. Hard because the choices of
assets to diversify into are limited,
and only astute active management
can successfully deliver a better-
than-benchmark return.
Fortunately, this type of
outperformance can be achieved
using a conservative strategy.
Stanlib co-head of fixed interest
Henk Viljoen says a gross expected
return of 9% from the bond market
is reasonable, and with active fund
management a further 1%-2% can
be added, to give a return of 10%-
11%. This is enticing compared with
an expected inflation rate of
roughly 5.5% in 2017.
“There are four ways in which
we can add value in a fixed interest
fund,” says Viljoen. “We can take
duration bets, invest in credit,
structure a portfolio along the yield
curve investing in instruments
with different maturity dates, and
use inflation-linked bonds.”
Viljoen says bond portfolios
typically hold around 30%-40% of
their assets in corporate credit and
inflation-linked bonds. Adding
these types of assets to the
portfolio has consistently boosted
investment returns, without
excessively increasing the overall
level of risk in the fund.
“Typically the bond fund can
earn an extra 1%-2% more out of
investing in corporate credit
instruments than a government
bond,” he says.
“This means if a government
10-year bond has a yield of 8%, a
bond from a company like Bidvest
would offer a 1%-2% higher return.
Buying these assets can
substantially enhance the overall
return of the fund.”
Herman van Velze: Picking the right shares
will ensure good returns
Victor Mphaphuli: Diversification benefits are
achieved over the medium term

There is another potential
benefit a bond fund manager can
use to enhance returns —
diversification.
Stanlib co-head of fixed interest
Victor Mphaphuli agrees that the
local bond market is not well
diversified — government debt
dominates. Mphaphuli says
investors can look to boost returns
by diversifying a portion of the
bond portfolio into listed property
assets.
Obviously, this does increase
the overall risk of the portfolio,
requiring that investors have, at
least, a medium-term investment
horizon.
This unique mix of bonds and
property is available in Stanlib’s
Aggressive Income Portfolio, which
managed to achieve an impressive
return of around 15% over the past
year. Mphaphuli says: “You need to
be invested for the medium term of
three to five years to see the
benefits of this diversification.”
Overall, while Mphaphuli
argues there is “fundamentally a
good case for having bonds in your
portfolio” there are a few caveats.
In particular, the political
situation, locally and globally,
remains unpredictable while a
more aggressive rise in global
interest rates, especially by the US
Federal Reserve, could increase
bond market volatility.
Cash: floating rate notes
preferred in volatile markets
There is more to investing in cash
than simply having money in your
bank account. Cash instruments
include money market funds and
higher-yielding income funds.
Typically, cash investments include
instruments such as deposits and
negotiable certificates of deposits.
However, in some funds credit
may be included such as corporate,
state and parastatal debt. Whatever
the instrument, the goal of the fund
manager is to give investors the
best possible interest rate on a
daily basis.
Managing cash investments
means paying close attention to
current events that can move
interest rates and interest rate
expectations.
Political and economic risks
have dominated SA’s investment
environment in the past year,
contributing to an increase in
market volatility and investment
uncertainty. Under these
circumstances, it is natural for
conservative investors to increase
their level of cash holdings.
This uncertainty has meant that
money market fund managers
have tended to over-weight
floating rate instruments at the
short end of the yield curve.
Stanlib head of money market
Ansie van Rensburg says: “With all
the uncertainty and the threat of a
sovereign credit rating downgrade,
we are keeping duration below 90
days in our money market funds.”
Investing in shorter dated notes
with floating rates gives Van
Rensburg and her team more
flexibility to adapt quickly to
changes in the cash markets.
Floating rate notes are linked to the
Jibar or prime rate, which are reset
either monthly or every three
months.
The good news for the
conservative investor is that
despite the heightened risks and
market volatility, it is still possible
to achieve a 2% above inflation
return from a cash investment.
In fact, Van Rensburg argues
that “a risk-averse investor can
reasonably expect a return from
money market assets of around 8%
over the next year, which should
be at least 2% above inflation”.
A recent development in the
money market space that Van
Rensburg is keeping an eye on is
the move away from constant
pricing of money market funds to
floating rate pricing for US money
market funds that are not solely
invested in US government
securities. This may well spill over
to local markets.
This came into effect in October
2016 in the US, and stems from the
2008 financial crisis when some
US money market funds faced
potential losses, and risked paying
investors less than the amount they
had invested.
The thinking behind the floating
rate net asset value (NAV) is that
investors will now be able to see
the risk in the price of the fund on
a daily basis.
SA money market funds are still
priced at a constant NAV price of
R1/unit. Local regulators are
monitoring the changes in the US
market and may review the local
pricing of money market funds in
the future.
Van Rensburg believes a fixed
NAV rate is more beneficial to
investors, and a lot easier to
account for. “Europe still follows
fixed rate NAVs, as do we.
However, there is some
uncertainty as to which way the
pricing of money market funds will
go in the future.”
Listed property
Retail and industrial property
markets adapt to changing needs.
SA listed property has been a
star performer with double-digit
returns in seven of the past 10
years.
Its highest total return over the
past decade was 35.9% in 2012. In
comparison, the JSE all share index
returned 26.7%, while the all bond
index returned 16%.
Can this growth continue?
“Property fundamentals have
been slowing in SA,” says head of
Stanlib listed property Keillen
Ndlovu. But there are opportunities
for investors to make good returns
in the medium term in the retail
and industrial sectors.
SA has nearly 2,000 shopping
centres, and the seventh-highest
number of malls in the world,
according to a recent report by
market research group Urban
Studies. It might be too many, but
Ndlovu identifies two consumer
trends that may benefit malls.
“The growing number of
international retailers — such as
H&M, Cotton On and Starbucks —
has helped to drive growth in
rental income and demand for
space,” he says.
New names attract and retain
shoppers, as do holistic
experiences. Customers are
looking for a shopping-plus
experience — 3D or IMAX movie
theatres, dining opportunities and
activities for the family. Shopping
centres offering a food, beverage
and entertainment combination
have a better chance of success.
Industrial property growth is
coming from the distribution and
logistics segments. A move to
online shopping has increased the
demand for warehousing and
distribution space. “In developed
markets, increased online shopping
is driving demand for industrial
property,” Ndlovu says. This trend
will grow in SA over time.
Additional opportunities have
come from the high number of
imports. “With manufacturing
essentially moving outside SA,
industrial property is being
developed to basically distribute
these goods throughout the
country.”
The news is not as positive in
the office property market, with
predictions of low to negative
Henk Viljoen: Conservative strategies yield
outperformance

rental growth for the next two to
three years.
“One of the biggest challenges
for this segment is consolidation,”
Ndlovu says. “Large corporates
such as Discovery and Sasol are
consolidating office space, moving
into newer, bigger buildings rather
than having separate campuses,” he
says.
“In the case of Sasol, moving
into central Sandton from
Rosebank leaves a prime — though
older — property in search of
tenants in another key office rental
area.”
Vacating older buildings creates
more supply, but a lot of work is
required to get the buildings to a
higher standard for a new tenant.
The segment is also seeing a lot of
incentives for tenants, such as
rent-free periods, which indicates
its weakening position in terms of
oversupply in a low-growth
economic environment.
Ndlovu says two other areas of
the market might offer
opportunities — student housing,
and residential and centrally
located storage space. There is a
shortage of student
accommodation, and as people
move into smaller residential units
in more densely populated areas,
the need for storage grows.
Offshore diversification also
potentially offers returns. “Most
local property companies have
gone in search of growth
opportunities outside SA, mainly in
Australia, the UK and Europe,
particularly Eastern Europe, to
diversify their returns,” Ndlovu
says. “Earnings from outside SA
now make up about 40% of total
earnings compared to 1% in 2009.”
We are forecasting income to
grow by 8% over the next year and
by an average of 7% over the next
four years with total returns of 8%-
10%. The primary aim for investing
in listed property is for income.
Capital growth comes over time.
Investors should take a three- to
five-year view.
Passives: smart beta the ultimate
complement
SA passive investments may not
have as high a proportion of assets
under management as their US and
UK counterparts, but our products
are internationally comparable.
This is according to Len
Jordaan, Stanlib head of exchange
traded funds.
Smart beta strategies have been
used in local institutional portfolios
for over a decade, but like other
passive investments they have yet
to attract the large inflows.
Jordaan says SA investors are
still looking to extract alpha from
the market. This is not the case in
regions like Europe, where
investors are happy with market
returns and are looking for ways to
reduce the risk.
Smart beta strategies offer this.
“Smart beta funds create an
index using something other than
market capitalisation,” says Jordaan.
Described by some as the
intersection between active and
passive investing, smart beta funds
use the screening tools of active
managers to construct a set of
rules for the fund to follow.
For example, a value fund
manager would look at a
company’s earnings per share as
part of their assessment of the
company.
When a smart beta fund index
is constructed, the same metric
would be used as one of the
parameters to construct the index
for a value factor.
One thing a smart beta fund is
not is an index plus fund.
“Smart beta funds offer rewards
over the long term, but they can
underperform in the short term as
they react to macro events,” says
Jordaan.
Smart beta funds are
constructed on the basis of
relationships and correlations.
“When there is a big spike in
volatility, historical correlations
break down and shares behave
unpredictably.”
Jordaan says this is why smart
beta funds are not a short-term
play. The way in which Stanlib has
constructed its smart beta funds is
ahead of the market in that it has
neutralised sector concentration in
its indices.
What can happen with smart
beta is that you find high sector
concentration in one factor
because shares in the same sector
could react the same way to risk
premiums.
If you are looking at the value
factor, for example, you would find
that there is a concentration in
commodity stocks.
“We neutralise our factor funds
so investors get the best value
stock from each sector rather than
the best value overall, which
ensures we don’t get sector
concentration,” says Jordaan.
Smart beta can be used as a
complementary investment to
equity investments. “The most
successful way to use them
appears to be as complementary to
existing active strategies,” he says.
Stanlib is launching smart beta
funds for retail investors later this
year or early next year.
Jordaan cautions:
“We don’t think it is wise to
chase performance via smart beta
investing. Private investors should
consult investment professionals
for advice on how to construct
smart beta portfolios depending on
their risk profile.”
So what should you invest in?
In light of the different insights
offered by a range of investment
specialists, investors should be
considering diversification, risk and
that there are a number of different
ways to achieve their desired
investment outcome.
In a world where diversification
is so important, investors should be
considering the breadth of
investment options available.
Is your asset manager thinking
about these different connections
between asset classes and how to
achieve the best investment
outcome to meet your needs? x
Keillen Ndlovu: Listed property offers new
attraction for investment
Sandton City: Houses mostly
high-end retail and corporate offices

ALTERNATIVES
Infrastructure takes lead
Top: A view of the Kouga Wind Farm
Above: Stanlib is invested in the Dreunberg
solar plant in the Eastern Cape
Patrick Mamathuba: Consider the risk vs
return on investments in alternatives
ý Investors seeking growth and
sustainable long-term investment
returns are increasingly
considering alternative assets such
as private equity, infrastructure and
real estate. These assets are often
able to offer strong investment
returns while developing real
businesses and uplifting
communities.
PwC forecasts alternative
investment assets under
management globally will grow to
US$13.6 trillion-$15.3 trillion by
2020. This would be out of a total
of $56.6 trillion in global pension
fund assets.
This growing global demand
offers a significant growth
opportunity for the SA alternatives
sector. As these investments
become better known, funds will
flow into the asset class and more
investors will benefit from the
returns on offer, which have only
been accessed on a relatively
exclusive basis so far.
As some alternatives,
particularly private equity, have a
track record of improving
environmental, social and
governance initiatives, this is good
news for the economy at large.
The lower returns of
international markets and volatility
have spurred investors to look for
returns from alternative
investments. Many of these
investments have delivered, with
private equity returns globally
having “meaningfully”
outperformed the S&P 500 index
over the long term, according to
McKinsey, a global economic
research institute.
By 2015, alternative assets
globally had reached a record high
of $7,4 trillion as institutional
investors like pension funds looked
to diversify their portfolios,
according to Preqin, a leading
source of intelligence on the global
private equity market.
The alternatives sector is
Investments in alternative assets are often able to offer strong
investment returns while also uplifting communities

Herman Marais: The amount of
capital competing for deals has
increased significantly
increasing in importance and
relevance. At the moment, it makes
up a small but growing proportion
of global assets under management
— $7,4 trillion of the $71,4 trillion
global asset management industry.
The uptake of alternative
investments in SA is still to gain
traction, even though there are
many opportunities available,
according to Stanlib head of
alternatives Patrick Mamathuba.
“As the historical strong
performance of listed equities
moderates, we should see growing
interest in alternatives.”
SA has the second-lowest
allocation — 2.3% — to alternative
assets out of 10 African markets,
according to RisCura’s Bright Africa
2015 report. Botswana’s allocation
was lower at 0.7%. However,
Namibia was 8.5%, Swaziland was
10.9% and Zambia 38%. Globally,
the allocation is estimated at 24.8%.
In absolute terms, however, SA’s
alternatives sector stands out on
the continent.
Investors unfamiliar with
alternative investments may
consider them high risk. But
alternative investments cover such
a broad range of investments that it
is impossible to classify as one
particular risk. Some are high risk,
a venture capital start-up, for
example. Some, like infrastructure,
are countercyclical, less volatile
and lower risk.
Mamathuba says you need to
look at the risk return mix. A
private equity investment might
have a lower risk than listed
equities, but offer a better return,
and the risks, as in the case of
infrastructure, are completely
different.
This makes alternative
investments a good diversifier,
often with uncorrelated investment
risk returns to more traditional
assets.
As it is more difficult to
disinvest from alternative
assets, investors are generally
compensated with higher returns,
known as the liquidity premium.
Private equity investors generally
invest for the long term – 10 years
or so.
Private equity is the “most
positive form of equity flow for
developing countries in the region”,
according to the Overseas
Development Institute (ODI), a
UK-based think-tank. Private
equity directs capital to industries
and projects that typically have a
positive impact on development,
often where attracting financing is
difficult.
Private equity managers get
involved in the businesses they
invest in, and have a strong
influence on the delivery of
investor returns.
Herman Marais, managing
partner and co-founder of Exeo
Capital, a private equity business
Stanlib took a 49% stake in earlier
this year, says: “Executing rapid
growth plans can be quite a
challenge, and we will offer
technical support, introduce new
skills, and have a formal say in
Alternative Fund of Funds
Focus on areas of need
Stanlib Multi-Manager has launched a first of its kind in SA: a
way for investors to access a variety of alternative
investments through a single access point.
The Alternative Assets Fund-of-Funds invests in a
diversified portfolio of attractive non-traditional assets such
as infrastructure, private equity, private real estate and
hedge funds.
It gives customers access to diversified and return-
enhancing assets without the usual complexity and minimum
investment sizes associated with such investments – barriers
which have historically restricted participation to only the
largest and most sophisticated investors. The R8bn global
Fund-of-Funds is currently managed exclusively for a single
client, with the intention of taking this to the rest of the
market in 2017.
“Our ambition is to grow this capability by making it
available to third-party clients as a self-standing solution,”
says Chris Roelofse, one of the pioneers of this idea and
Stanlib Alternative Fund-of-Funds portfolio manager. x

governance with a seat on the
board of directors.”
In one type of private equity
investment, regulation has been
good for investors.
“Everything in the infrastructure
space is regulated,” says Stanlib
head of infrastructure investments
Greg Babaya. “For power it’s Nersa,
for telecoms it’s Icasa.”
Regulation brings certainty — if
you build a power plant, you
receive a concession for 20 or 30
years and have a guaranteed buyer
for your product.
Global inflows into private
equity are at record highs, but not
all of this money is finding its way
into actual investments. Dry
powder — funds yet to be allocated
to projects — sits at record levels,
as finding the right deals is a
challenge ($818bn at June 2016
globally, R40,6bn at the end of
2015 in SA).
Members of the US-based
Emerging Markets Private Equity
Association raised $3,6bn for sub-
Saharan Africa in 2015. This is the
second-highest annual fundraising
total for the region since the
association began tracking
fundraising in 2006. In 2014 the
highest level of funds was raised —
$4,3bn.
Big-ticket projects
Marais says the amount of capital
competing for deals has increased
significantly. This is particularly
evident in what he calls the big-
ticket projects like infrastructure,
but in other areas such as mid-cap
and lower-mid-cap businesses,
competition for deals is not nearly
as vigorous.
Exeo’s Agri-Vie Funds I and II
focus on medium-sized companies
in the food and agribusiness sector.
Marais says that in sub-Saharan
countries with no oil, this sector
accounts for 40%-60% of these
economies. “There is no lack of
investment opportunities, the
challenge is to be selective
enough,” he says.
Babaya says accessing good
deals is the hardest part of
managing infrastructure funds.
While there is some formal
bidding, most deals come through
Greg Babaya: Regulation
means certainty in alternatives
development role of midsize
businesses,” says Marais. “We have
a keen eye on returns, and invest
responsibly.”
What kind of a return can
investors expect? Marais says
investors in private equity should
expect two-and-a-half to three
times their initial investment in US
dollar terms. But don’t expect a
quick payout. Private equity is a
long-term commitment, from five
to 10 years.
Private equity funds have
historically delivered higher
returns than the conventional
equity market. The average net
internal rate of return for private
equity in SA was 19.1% for the 10
years to December 2014. In
comparison, the FTSE/JSE all
share index was 18% and the Swix
was 18.6%, according to the latest
RisCura SA Venture Capital &
Private Equity Association
performance survey.
This picture is largely mirrored
by the performance data on the
private equity asset class in
broader Africa. Africa private
equity has outperformed the global
MSCI index by two percentage
points over the 10-year period to
2015. Babaya says an infrastructure
fund offers two types of returns. If
the investment is built from scratch
the return can be up to 20%. For
investments in existing
infrastructure without construction
risk, returns are in the early teens
— 12%-14%.
In property developments, the
targeted returns for African
markets range between 20% and
25% in US dollars, says Roberto
Ferreira, who manages the Stanlib
Africa direct property development
fund. The horizon for exiting
developments is usually no longer
than five years from the start of
construction.
“The investment opportunities
in direct property are directly
correlated with the huge
undersupply of formal trading
options for consumers in these
target markets,” says Ferreira.
The increasing urbanisation
across the continent has created
demand for quality real estate
networks and relationships that
have been built over time. “Often
it’s just being in the right place at
the right time,” he says.
Infrastructure is driving a lot of
investor interest. These funds offer
investors good returns, and a
chance to build economies and
uplift communities.
Take power, one of the big
needs in Africa. According to the
World Bank, sub-Saharan Africa
with a population of 800m
generates roughly the same
amount of power as Spain with a
population of 45m.
Building power plants requires
public and private expenditure, and
Private equity funds have
historically delivered higher
returns than the conventional
equity market
it is here that infrastructure funds
play a role, notably in the
renewable energy space. The
Stanlib Infrastructure Private
Equity Fund 1 has invested in a
number of solar-powered projects
and wind farms.
The World Bank estimates that
sub-Saharan Africa requires $93bn
a year for the next decade in
infrastructure funding. At least half
of this will have to come from
nongovernment sources. At the
moment, only 4% of African GDP is
invested in infrastructure; in
comparison, China invests 14%.
The infrastructure theme
cannot be overemphasised.
World Bank research
shows clear links between
infrastructure expenditure
and economic growth. A
1% increase in a country’s
infrastructure can lead to
a 1% increase in its GDP
level.
Fund managers
globally are reporting an
increase in investor
appetite for
infrastructure deals,
particularly from
pension funds, insurance
companies and sovereign wealth
funds, according to Preqin.
There’s plenty of scope for more
investment in the sector. Willis
Towers Watson, a global advisory,
broking and solutions firm, notes
that almost all institutions have not
yet invested in the sector, or are
below their target allocation, in its
Global Alternatives Survey 2016.
Infrastructure funds held $309bn
in assets at the end of 2015.
Across Africa in total, the
energy sector has attracted the
most funds. It attracted 53% of
funds — $7.9bn – between 2008
and June 2015, driven by a few
large transactions, according to the
ODI. Power has a large-scale
impact, while smaller investments
can also have a notable impact.
Exeo Capital has an investment
in Kenyan-based Kariki Group, an
exporter of specialist flowers to
countries like the Netherlands,
Australia and Japan. The Kenyan
flower industry is reported to
support more than 500,000
people in the country. “We are
strong believers in the

Recognising the growing role of
private sector funding in
infrastructure, Stanlib has
introduced a number of funds to
capitalise on the opportunities
on offer. This also fits in with
Stanlib’s commitment to finding
investment opportunities that
are part of the solution to
Africa’s greatest challenges.
Stanlib’s Infrastructure
Private Equity Fund invests in
new-build infrastructure
projects, the majority of them in
SA. Its investments include
R813m in renewable energy
independent power producer
procurement programme wind
and solar projects that have a
collective generation capacity
of 345 MW and are expected to
contribute approximately
847,395 megawatt-hours per
year into the national grid for
the next 20 years.
This is equivalent to
powering 192,590 average SA
households (using the World
Energy Council’s data).
Stanlib’s infrastructure yield
fund is focused on more mature
infrastructure assets. The fund
invests in post-construction,
operational infrastructure
projects.
Once projects are built and
have an operational track
record, they have a different
risk profile: they have highly
predictable revenue profiles and
provide a good measure of
diversification in a general
portfolio.
Infrastructure investments
offer excellent risk-adjusted
returns on investment. Given
the large infrastructure deficit,
private equity opportunities in
the sector are going to grow.
Property development is a
key pillar of Stanlib’s
alternatives offering.
The Stanlib Africa Property
Development Fund aims to
capitalise primarily on the retail
sector and to a lesser degree
on the office sector in these
markets. x
Changing the game in investment: Stanlib has invested in agribusiness
REAL ESTATE
Building a
property heritage
The Liberty Group and Stanlib
have listed a real estate
investment trust on the JSE to
build on their premium
property heritage and to
provide investors with the
opportunity to own a portion of
some of SA’s most iconic
properties.
Liberty Two Degrees listed
with a R6bn portion of the
successful R27.2bn Liberty
property portfolio. The
portfolio is made up of iconic
retail property assets including
Sandton City — “the richest
square mile in Africa”, Nelson
Mandela Square, Eastgate
Shopping Centre and an
interest in Melrose Arch. It also
includes other premium assets
such as the Liberty Midlands
Mall, Liberty Promenade and
the new Botshabelo Mall in
Bloemfontein.
The listing will enable
Liberty Two Degrees to gear
up for continued investment to
grow the portfolio mainly in SA
and selectively in sub-Saharan
Africa. The same award-
winning Stanlib direct property
investments team that has
been managing the Liberty
property portfolio for many
years will continue to manage
Liberty Two Degrees under
CEO Amelia Beattie.
This management team has
a proven track record and the
necessary expertise to
successfully deliver
sustainable long-term
returns to unit holders of
Liberty Two Degrees. x
Melrose Arch: One of the iconic retail assets in the property portfolio
INFRASTRUCTURE
New funding structures
to aid development
developments. The Stanlib Africa
direct property development fund
focuses primarily on investing in
retail-type developments in
carefully chosen economically
growing nodes in sub-Saharan
Africa with a focus primarily on
Nigeria and Ghana in West Africa
and Kenya and Uganda in East
Africa.
Increasing liquidity in private
equity — through secondary
markets, for example — could
attract new investors. The growth
of a secondary market in private
equity funds is controversial; just
buying a stake when the hard
work has already been done
seems like an easy way out.
These markets are growing
globally, and contributing to
liquidity. In SA the second most
common way to exit investments
for private equity funds is via the
secondary market.
Though growing, allocations to
private equity by institutional
investors are still small. Locally,
growth should come from
institutions as they become more
familiar with the alternative asset
class, and use the increased
allocations allowed in regulation
28 of the Pensions Fund Act. x

FOCUS ON AFRICA
The continent
is calling
Diversified growth has made Africa an
attractive place for new investments
ý The global hunt for yield is likely
to benefit Africa with its higher
economic growth rates and
numerous opportunities. The
African growth story has been
tempered, not halted, by the
slowdown in global growth.
Asset managers have started
setting up shop in key African
markets in anticipation of growing
markets and returns. This trend
should help to develop the
continent’s financial markets and
play a part in boosting economic
growth.
Declining commodity prices,
particularly oil prices, and reduced
levels of demand from China have
raised concerns about prospects in
Africa. However, savvy, long-term
investors will recognise that Africa
is made up of multiple different
countries with varying
opportunities. The economic
growth potential in many African
countries is particularly
compelling.
A recent report from McKinsey
Global Institute confirms this. The
Lions on the Move II report found
“stark divergence” in African
economies, with growth having
slowed among oil exporters and
North African countries, while the
rest of Africa posted accelerating
growth at a healthy average of 4.4%
from 2010 to 2015.
Investing in Africa is not just a
resource story: only 30% of
revenues are earned by companies
operating in this sector. Pointing to
“robust long-term economic
fundamentals” in Africa, McKinsey
estimates US$5.6 trillion in
business opportunities in Africa by
2025. The emerging market share
of GDP is growing and it now
makes up about 40% of world
GDP. It has risen significantly from
20% in 2003, making a compelling
case for investing in emerging
markets including Africa.
As it stands, Africa’s financial
sector is small in global terms. The
market capitalisation of African
exchanges excluding SA was about
R23bn at the end of 2015,
according to PwC. Besides the JSE,
only Egypt and Nigeria have
over 100 counters.
“Though statistics cannot
be interpreted in isolation,
certain metrics commonly
used to analyse global
market performance, such
as the market capitalisation-
to-GDP ratio, suggest that
untapped value remains in
Africa, with the potential for
further sustained growth in
African market
capitalisation,” according to
PwC. For long-term
investors, opportunity
abounds.
“Africa is now a place of
steady, remarkable
progress. It is truly the last
frontier market for
investments with
tremendous potential,” says
UK-based Michael Housden,
global head of institutional
product at Columbia
Threadneedle Investments,
one of Stanlib’s global
partners.
Africa’s young population
brims with potential. In Germany
and Japan the average age in cities
is over 40, in Nigeria it is between
20 and 33. Only 40% of Africa is
urbanised, which is expected to
increase to 60% by 2050.
A rising middle class
More people in cities and
economic growth should give rise
to a middle class that needs goods,
services and financial products.
Private consumption is an
important driver of growth, and
one Africa’s population is starting
to provide.
Standard Bank estimates there
are 15m middle-class households
in 11 of the biggest economies in
the region: Angola, Ethiopia, Ghana,
Kenya, Mozambique, Nigeria, South
Sudan, Sudan, Tanzania, Uganda
and Zambia. This should rise to
40m households by 2030.
When it comes to
resources, sub-Saharan
Africa is blessed with
commodities and natural
resources, including about
60% of the world’s
uncultivated arable land.
Commodities have been a
big part of the African growth
story, but not the only driver
of growth. According to the
African Development Bank,
21.4% of the past decade’s
growth can be explained by
the commodity supercycle.
The recent election of
Donald Trump as US
president ushers in a
“different element of
uncertainty in Africa”, says
Stanlib chief economist Kevin
Lings.
“Trump definitely
represents a change, but his
policies are still uncertain.
We expect his presidency to
result in different risks and
opportunities.”
Trump wants to stimulate
economic growth through
What it means: More
opportunities for
economic growth in multiple
countries in a variety of
investment sectors
Marius Oberholzer: More diversified African economies set to
fare better in the midterm than those reliant on commodities

expansionary fiscal policy,
including building infrastructure. If
the US economy grows, world
growth could benefit. This in turn
could have a positive effect on
Africa as commodity prices
increase.
On the other hand, Trump is
against trade agreements that he
says are unfavourable to the US. If
he raises trade barriers, this could
slow global trade and lead to lower
global economic growth.
Trump has targeted China in
particular for, as he claims,
breaking the rules of trade
agreements.
Should the US crack down on
trade with China, the Eastern
superpower could focus on
increasing trade with other
countries and regions, including
African countries.
“There is a risk that China
would be more aggressive in
finding new markets,” says Lings.
“Countries in Africa would be
vulnerable because their trading
ports and customs systems are not
all strong enough to control
dumping and pick up bad trade
practices.”
The slowdown in Chinese demand
for commodities has hurt
commodity-exporting economies
in Africa.
“China joined the World Trade
Organisation in December 2001
and was a big buyer of
commodities,” says Stanlib head of
absolute returns Marius
Oberholzer.
Ten years later, there was a
“deliberate slowdown”, as China
began to move its economy away
from infrastructure spend towards
consumer spending. China still
buys commodities, but not always
from Africa, and in lower
quantities.
This trend, along with low
commodity prices, will lead to
more diversified African
economies, particularly those in
East Africa, faring better in the
medium term than those more
reliant on commodities, such as
Angola and Zambia.
Economies like Angola and
Nigeria that benefited from high oil
prices and strong demand in the
past decade are now struggling.
Though Nigeria has diversified
away from oil, it is still dependent
on it. Oil accounts for just 8% of
GDP, but 91% of exports. The
Nigerian government generates
three-quarters of its revenues from
oil.
Nigeria’s currency has also
depreciated dramatically, after
being unpegged from the US dollar.
On the official market the naira fell
60% in three months; on the
parallel “black market” the fall was
125%. Nigeria is now in its first
recession in two decades.
Many investors have been
wary of the African story amid
global uncertainty, but the
opportunities and higher economic
growth than developing markets
will increasingly attract interest.
“In the asset management
industry, the impact can be seen in
the form of money flows,” says
Stanlib chief investment officer for
the East Africa region Humphrey
Gathungu.
“In times of uncertainty
investors move into more secure
asset classes like gold or the US
dollar. They have less appetite for
risk, where frontier markets rank
on the upper end of the scale.”
The outlook for US interest
rates will strongly influence the
extent of money flows into high-
yielding emerging market assets.
Equity markets in Africa are
likely to continue delivering mixed
performances, while there are
compelling reasons to consider
pan-African fixed income
investment opportunities.
Only 16.9% of people in
sub-Saharan Africa have a pension
fund investment, and insurance
penetration is a low 3.5%.
Institutional investors, the major
drivers of capital markets, have
been slow to develop in Africa, but
that’s changing.
Savings assets growing
According to RisCura’s Bright
Africa report, regulatory reform in
pensions in many countries has
driven the creation of more reliable
forms of savings for individuals.
Though the assets in African
pension funds are still relatively
small, most are fast growing,
creating local pools of capital for
investment. A similar trend is
expected in the accumulation of
capital in insurance investment
portfolios.
In sub-Saharan Africa, where
pension systems are more
established, growth rates ranged
between 8% and 18% over the
previous five years. Assets in East
Africa have grown in excess of
20% while Nigeria had growth of
between 25% and 30%.
These trends are likely to
continue as countries adopt more
Humphrey Gathungu: Growth in developing
markets attracts interest
Standard Bank estimates
there are 15m middle class
households in 11 of the
biggest economies in the
region
Stanlib offices in Melrose Arch: Key African
markets are attracting asset managers in
anticipation of growing markets
inclusive financial systems.
In tandem with this has come
the rapid development of stock
exchanges across Africa, though
there are disparities between them
in terms of size and liquidity.
RisCura attributes the
development of markets to
enhanced governance, increased
listings of strong local companies,
improving technology and data
availability, reducing fees, and
innovations that increase ease of
investing.
This offers compelling reasons
for asset managers to set up shop
in some African countries.
Stanlib head of pan-African
investments John Mackie says a
number of countries have well
established in-country asset
management industries, including
Nigeria and Kenya.
“From a size perspective, the
most important fund management
opportunities are Kenya, Nigeria,
Egypt and Morocco.”
A large number of fund
managers have entered the African
market in recent years, making for
a very competitive environment.
Most SA asset managers have pan-
African funds, and there remain in
excess of 40 dedicated African

John Mackie: Compelling reasons to
set up shop in African countries
long-only managers.
Housden says competition for
good investments is healthy, but as
investor interest ebbs and flows, so
does the number of competitors.
“There are a number of market
participants who have been
present on the continent for a very
long time while new entrants come
and go. The number of competitors
also varies across asset classes;
there has been a steady increase of
competitors for good infrastructure
projects while the number of listed
equity managers has declined.”
Managers are competing in a
small market. Most of the stock
markets have fewer than 50
counters and trading hours are
short — only the JSE and Morocco
are open after 3.30 pm. Large-cap
companies dominate. In Nigeria,
the Dangote Group accounts for a
third of the NSE market cap.
Some exchanges, like Ghana,
have set up alternative exchanges
for small and medium-sized
companies to gain access to capital,
and exchange traded funds are
starting to appear across the
continent.
Investors looking to enhance
their returns by accessing Africa’s
growth prospects quickly learn
that characteristics attributed to the
continent as a whole are less
important than regional and
national differences.
This can favour better-informed
managers. The tendency for some
global investors to treat African
countries as a homogenous group
creates price inefficiencies and
opportunities that they can access.
Returns are varied. Mackie says
the Kenyan equity market has been
the star performer, with the all
share index delivering 11% per
annum returns in US dollars over
the past five years. “Performance
has not been bad in rand terms, but
hard currency returns have been
poor, with Nigeria particularly
disappointing,” he says.
High yields not attracting as
much attention
African debt markets are small, but
growing. Given the low to no
growth globally, African debt
should be an appealing investment,
particularly for international
investors.
In 2014, $11bn in African bonds
were raised. In February 2015, the
AFMI Bloomberg African bond
index was launched, initially
comprising the four most liquid
bonds on the continent. Six months
later Botswana and Namibia joined
the index.
“In a yield-starved world where
populations are ageing, African
bonds offer the opportunity for real
yields that are also positive in
absolute terms.
“In contrast, 10-year bond yields
in Japan are a negative 0.27%,
compared with a negative 0.04% in
Germany and -0.6% in
Switzerland,” says UK-based Kent
Grobbelaar, head of portfolio
management at Stanlib multi-
manager global funds.
Nevertheless, investors perceive
African debt as high risk.
Perception on risk
Stanlib fixed income analyst
Lievin Mbuyamba says the
perception of the risk in African
debt versus the rest of the world is
disproportionate. This can make it
difficult to get offshore flows into
African credit, as investors expect a
higher return than is offered by the
perceived risk.
“It is a matter of educating
investors on the risk/return profile
of a pan-African fixed income
strategy,” says Mbuyamba.
“African fixed income markets
are still small relative to global
bond markets and investors are
generally not as informed about
them. What we’ve seen is that
global investors will incorrectly, at
times, treat African countries as a
single homogenous group.
“This creates price inefficiencies
and opportunities which favour
better-informed Africa fixed
AFRICA VS GLOBAL AND EMERGING BOND INDICES
$
160
140
120
100
80
60
40
Feb
2012
AugAug
2011
Feb
2013
Aug Feb
2014
Aug Feb
2015
Aug Feb
2016
Aug
Source: Bloomberg and Statpro
Standard Bank Africa (ex ZA) bond index JPMorgan EMBI global index
JPMorgan global aggregate bond index Besa all bond index
AFRICA EQUITY MARKETS PERFORMANCE
5 Years ($)
300.00
250.00
200.00
150.00
100.00
50.00
0
Feb
2012
AugAug
2011
Feb
2013
Aug Feb
2014
Aug Feb
2015
Aug Feb
2016
Aug
Source: Bloomberg
Nigeria all share index Nairobi all share index Morocco all share index
EXG 100 index JSE all share index
Kent Grobbelaar: African bonds are worth
focusing on for real yields

Lievin Mbuyamba: Investors need education
on dynamics in African asset management
STANLIB IN AFRICA
income managers. That said, we
have seen growing interest in
recent years as global and
emerging market investors seek
out better yields.”
Liquidity and good governance
are two must-haves. Oberholzer
says investors need tradable
currencies, credible central banks
and credible governments.
Foreign investor appetite
for the continent may not be
overwhelming, but it is evident.
In 2015, the New York State
Common Retirement Fund
announced plans to invest more
than $5bn in Africa over the next
five years. In percentage terms, this
will be no more than 3% of the
fund’s total assets.
The amounts allocated can be
substantial in currency terms, but
as a percentage of global assets,
allocations to the continent are low.
Grobbelaar says one reason for
this is the low presence of African
investments in major global
indices. Most African companies
are represented in frontier indices,
along with other frontier market
corporates. In practice this
translates to allocations to African
investments in global funds of
around 1%.
Mackie says that for markets to
become deeper and transactions
more liquid, catalysts are needed to
bring investors back. “For
allocators of capital to drill down to
Africa, they need a good reason. It’s
been a tough sell, but we may be
getting to the point where markets
are starting to look attractive.”
Catalysts might take the form of
a recovery in the oil price, or
policy and security issues being
addressed in Nigeria, he says.
Recent developments in Egypt
are an example of just such a
catalyst. Egypt recently adopted a
flexible exchange rate system as
part of a broader package of
reforms agreed with the
International Monetary Fund in
August, in exchange for financial
assistance.
“Egypt is starting to enjoy the
benefit of foreign investor interest,
which is expected to accelerate in
the next three to six months,” says
Mackie.
“The positive signals coming out
of Egypt may even give Nigeria a
wake-up call,” he says. “The fact
that Egypt’s reforms have led to
growing foreign investment might
well trigger a catalyst in Nigeria.”
Opportunities
Mackie sees long-term investment
opportunities in Africa. “Often
there’s a dislocation between
perception and reality, which can
work both ways. But mostly this
works against Africa. Foreign
investors have to decide that they
like the African story, and have an
appetite for risk.”
For this to happen, frontier
markets in Africa — down the
pecking order after developed,
developing and emerging markets
— have to reduce their reliance on
commodities and address the
deficit in infrastructure
development, where there
are also significant investment
opportunities.
Two-thirds of sub-Saharan
African economies are expected to
grow at rates above the global
average in 2016.
As EY puts it: “Most African
economies are in a fundamentally
better place today than they were
15-20 years ago, and overall
growth is likely to remain robust
relative to most other regions over
the next decade.” x
Built on stringent
measures
SA pension funds are allowed a
25% offshore allocation and an
additional 5% allocation to the
rest of Africa.
Potentially they could
then invest up to 30% in the
rest of Africa, offering retail
investors exposure to pan-
African funds.
Stanlib’s investment
solutions in Africa include
listed equity, property, and
fixed income investments.
It also includes private
equity, often the preferred
route for accessing African
opportunities due to the lack
of depth and liquidity in stock
markets.
In Stanlib’s case, there are
various funds to choose from,
including the pan-Africa equity,
the pan-Africa fixed interest
and the listed property
propositions.
In terms of the criteria
considered to capitalise on
that potential in equity
markets, Stanlib Africa fund
equity analyst Jaynesh Bhana
says: “We conduct bottom-up
analysis looking for well-
managed companies with
cash-generative business
models operating in industries
with a positive outlook.
“We tend to favour mid- to
large-cap companies trading at
attractive valuations.
“We put each stock through
a scoring process, which takes
into account, among others,
valuation, cash generation,
liquidity, management quality,
industry, macroeconomic
climate, politics and currency
outlook.”
As a company with multiple
investment specialists, Stanlib
also has direct property and
infrastructure capabilities
with exposure to the rest of
Africa. x
Hard currency returns have
been poor, with Nigeria
particularly disappointing
BREAKDOWN OF WORLD GDP: DEVELOPED VS EMERGING
Percentage of world GDP, at market exchange rates
85
70
55
40
25
10
1995 20001991 2005 2010 2015
Source: Bloomberg, Statpro
Developed economies Emerging markets

financialmail.co.za . Thursday 8 December 201618
ý In this article, I’ll take the
middle ground in the battle raging
between active and passive
managers and commentators
around which strategy is “best”.
Let’s be clear. Passive investing
does not exist. Investing is an
active process — always. Passive
investing merely points to certain
decisions in the investment
process that are “outsourced” and
somewhat “passive”.
Active investing is also not a
zero sum game. An important
person once titled a paper “Active
management is a zero sum game”,
and it has become the mantra of
passive investors ever since,
without an appreciation for the
absurdity of the statement.
The argument is typically made
in the context that the average
active manager cannot outperform
the index, because the index is the
average of all active managers. This
seems innocent enough, but is
completely fallacious. There is no
index without trading by active
managers and other investors, so it
is the index that represents the
sum of what all investors are
doing, not the other way around.
Investors hard at work
Investors are working to beat
something that does not exist
until some action is taken. If
everyone stopped acting at once,
what would the index do?
Nothing. The index does not
actually average anything.
Active managers are by no
means the only investors in
the markets. You have day
traders, banks, corporates and
other institutional investors
and one of the biggest groups
of investors, index trackers.
Let us zoom out a little further
and consider the broader benefits
that all active participants bring to
markets, adding further evidence
against the “zero sum game”
statement.
Markets represent one of man’s
greatest innovations, going back to
the barter system. As these
markets have become increasingly
competitive, so, too, have they
become increasingly efficient, but
this hardly applies to all markets all
of the time. Active investors
represent the “creators” of markets.
Insurance (or risk transfer)
represents one of the most
important features of capital
markets (transferring
risk from one body to
another and from
one point in time to
another).
Passive
investors mainly
take from markets,
and provide very
little in return. In economics, this is
known as the “free-rider” problem.
They “benefit” from the efficiency
that sometimes exists in markets,
while criticising that efficiency and
not recognising the irony.
Though passive investing can
provide some liquidity, this is
generally limited because the
underlying shares should not be
traded, except at the points of
index rebalancing, when the
liquidity provided is actually
concentrated.
The liquidity at other periods
merely represents money either
flowing into, or out of, passive
investing. It does not represent
active trading opportunities.
This brings us to the most
important point around
what passive investing does
not provide: price discovery.
Passive investments are
required to remain fully
invested, without concern for
price. They need to perform in
line with the index they are
tracking. They do not provide price
discovery in the markets, they are
price takers and those prices are
set by active investors. Active
managers love passive investors,
because they can trade against
them. Passive investors make
markets less efficient, providing
savvy active investors with great
trading opportunities.
This is why you will eventually
find an equilibrium between active
and passive investing, and why you
will find a higher proportion of
active investing in less efficient
markets. For example, it should not
be a surprise to find the highest
level of passive investing in the US
large-cap space, and the lowest in
MIDDLE GROUND
The unconsidered
A neutral view of the active and passive managers and commentators
All copy supplied by Stanlib
Advertising executive: Debbie Montanari
This is why you will
eventually find an equilibrium
between active and passive
investing, and why you will
find a higher proportion of
active investing in less-
efficient markets.
Joao Frasco:
Focus on
investors
Joao Frasco Stanlib multi-manager
chief investment officer
emerging markets.
So why would anyone invest
passively? There are some very
good reasons:
ý To reduce the total cost of
investing.
ý Lack of knowledge of the “best”
active managers in the market.
ý To create portfolios that better
reflect the manager’s views.
As the second largest multi-
manager (with R180bn in assets
under stewardship) in SA, we have
chosen not to offer funds that are
either fully active or fully passive,
but rather focus on our investors’
needs and combine active and
passive as required to deliver on
their investment objectives. x

If you’re
in beverage
stocks,
you’re in
sugar taxes.Today, in investments, everything is connected.
Like the beverage industry and the proposed
sugar taxes. Understanding these connections is
the difference between profit and loss. That’s why
STANLIBconnectsmultiplespecialistsacrossasset
classes and markets to make better investment
decisions for you. Because a connected world
demands multi-specialist investing.
#ConnectedInvesting
stanlib.com

stanlib.com
you’re in
Chinese gamers.Today, in investments, everything is connected.
Like one of Africa’s most valuable media companies,
and the stake it owns in one of China’s biggest
tech firms. Understanding these connections is
the difference between profit and loss. That’s why
STANLIB connects multiple specialists across asset
classes and markets to make better investment
decisions for you. Because a connected world
demands multi-specialist investing.
#ConnectedInvesting
If you’re in
South African
media,

STANLIB Financial Mail Investment insights

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to STANLIB Financial Mail Investment insights

Similar to STANLIB Financial Mail Investment insights (20)

Recently uploaded

Recently uploaded (20)

STANLIB Financial Mail Investment insights