Foord Presentation
- 1. SENATE GROUP CONFERENCE Nick Curtin, Heather McCulloch LONG-TERM THINKING
- 2. From Defined Benefit to Defined Contribution • First wave (1980s) driven by members; second wave (1990s) by employers • Shifted all of the “risk” from sponsoring employer to the member • Governance impacts? Reg 28 PIGs promulgated(1989) 50/50 (member/employer) board representation (1998). Trustee skill sets? • Led to the “professionalization” of the investment management industry Co-incided with academic advancements re investment management theory Previously assets were typically managed by sponsor’s internal corporate treasury or an external life co. Investment strategies were inefficient, expensive and opaque SOME HISTORY | 2
- 3. A shifting industry • Beginning of the “independent asset manager” industry Independent firms and products proliferate Excon relaxation led to foreign expansion over time Was near impossible for foreign managers to compete in SA – this is changing SOME HISTORY | 3
- 4. A shifting industry • What of post-retirement? No more % of final salary paid by the Fund until death DC Funds typically fund for cash lump-sum at retirement or withdrawal Retiring member is then responsible for purchasing a retirement income stream • The life companies did very well Life company dominated (traditional life annuities) Explosion of the CIS industry later led to birth of Living Annuities SOME HISTORY | 4
- 5. Rise of the gatekeepers • Also led to growing reliance on “agents” Asset consultants to advise Trustee Boards on investment strategy matters. “Brokers” to advise members on post-retirement products etc. (dominated by tied life co agencies) • Agents/aggregators (consultants, multi-managers, brokers, DIMs etc.) become powerful intermediaries Trustee boards increasingly dependent on professional advice Concentration of AUM (60%+ invested with top 5 !) Asset managers increasingly detached from the client Retiring members often with little financial acumen left at the mercy of product salesmen SOME HISTORY | 5
- 6. Significant regulatory reform • Social Security Reform is the government’s bigger picture • Closing the “gaps” in the social security landscape Guiding principle – “Social Solidarity” • Enhance all citizens’ access to: Retirement income Risk benefits (Death, Disability, Unemployment, RAF etc.) Linked to NHI • Grow National Savings pot • But has been stagnant for years (political logjams?) WHERE ARE WE GOING? | 6
- 7. 1. Architecture (the “hardware”) New structures to capture the uncovered Slower than anticipated (inter-departmental, DSD & NT drivers, ideological differences?) Will have significant impact on the industry 2. Rules of the game (the “software”) Taking aim at “inefficiencies” Cost Governance (PF130 etc.) Leakage (compulsory preservation, annuitisation, regulated defaults etc.) Simplicity and transparency TWO KEY TRACKS | 7
- 8. POAG – basic welfare net NSSF (GSRF) – proposed new govt. “default” tier ACCREDITED Pvt. RFs – Occ. Funds, UFs, Industry Funds, RAs etc. VOLUNTARY SAVINGS – CIS, Life prods etc. MULTI-TIER STRUCTURE SOCIAL SECURITY SYSTEM | 8
- 9. • Will have to meet strict criteria to be “accredited”: • Cost will be big focus (expect more prescription) • Scale an explicit objective (expect major consolidation) • Governance (see PF130 guidelines, more impetus for consolidation) • Limited investment choice where offered • Must offer a default preservation vehicle (compulsory preservation) • Must offer default annuitisation route at retirement (compulsory annuitisation) • Must allow for (limited) portability • Other policy levers? ESG? BEE? SRI? • Level playing field with GSRF i.e. they will compete ACCREDITED RFs – This is where you sit! TIER 3 “ACCREDITED” RETIREMENT FUNDS | 9
- 10. 1. Consolidation & Professionalisation Corporate sector will continue to shrink (umbrella funds will grow) GSRF + tier 3 Accredited RFs will be small in number but large in AUM Improved fund governance and an internal executive (PF130) “Gatekeeper” power should diminish Focus on cost will force more efficient use of fee and risk budgets resulting in “bifurcation” of AM providers: Will be more pure passive, smart passive etc. High conviction, high alpha offerings will populate the “active risk budget” component Only the “real” active managers will survive – product pushers will fade IMPLICATIONS | 10
- 11. 2. Private sector could lose significant AUM & flows to GSRF ~50% of formal workforce earn below GSRF threshold of R150k Will likely allow for transfer of accumulated savings to GSRF Impact on large asset gatherers, Life Cos etc.? How will government manage these assets? PIC? Already dominant on the JSE 3. Separation of duties The end for one stop shop business model ? (accreditation criteria should see to that) Greater separation between “aggregators” and service providers? Impact on asset gatherers, Life Cos etc.? IMPLICATIONS | 11
- 12. • Some things never change Beware the salesman promising to “revolutionise” the industry Rise of “cheap” passive; smart beta; beware of “cost vs. value” Look out for principal/agent problems… • In a low return environment, providers will scrap for crumbs! Governance structures will have to be more robust than ever • Simplicity is your friend Its worked well for our retirement fund investors for 37 years… PARTING COMMENTS | 12
- 13. MARKET REVIEW AND OUTLOOK
- 14. RETURN FREE RISK Real 10-year treasury yields & inflation expectations | 14 Source: Factset
- 15. • Geopolitical risk is high – dominated by Trump’s inauguration • US share markets discounting substantial increase in earnings • “Risk-on” Trump rally should fade in 2017 • Increased protectionism and trade wars uncertainties • Interest rate differentials between US and other developed market economies will continue to widen • Commodity prices will be volatile after a recovery in 2016 • Political risks remain elevated (Brexit, elections in France, Netherlands etc.) • Inflation picking up globally MACRO OUTLOOK – GLOBAL Economic growth remains on track | 15
- 16. SA ECONOMY Facing headwinds | 16 • Economic growth is unlikely to recover significantly • Domestic focused companies may struggle to grow earnings • Significant tax increases • Stubbornly high inflation and interest rates will impact consumer • Lack of job creation and weak real wage increases • Political risk remains elevated • Business and consumer confidence low • Potential downgrade by rating agencies • Longer term currency outlook is poor
- 17. RAND PLAYING CATCHUP After 10 years of relative strength | 17 Source: INET BFA
- 18. • Capital preservation is key • Conservative approach • Non-resource rand hedge preferred • Liquidity accumulation • Well diversified portfolio • Quality prevails • Maximum offshore allocation • Remain cautious on bonds STRATEGY | 18
- 19. | 19 ASSET ALLOCATION COMPARISON 28 February 2017 (%) FOORD CONSERVATIVE FOORD BALANCED FOORD FLEXIBLE FOORD INTERNATIONAL SOUTH AFRICA 71 74 36 - Equities Property Corporate debt Government debt Commodities Money market 19 3 2 6 6 35 38 4 3 9 6 14 16 2 - 1 2 15 - - - - - - FOREIGN 29 26 64 100 Equities Property Commodities Money market 22 - 1 6 21 - - 5 51 1 1 11 61 3 4 32 TOTAL 100 100 100 100 Total equity exposure 41 59 67 61
- 20. Asset allocation FOORD FLEXIBLE FUND OF FUNDS | 20 JSE equities, 15.7% JSE property, 2.2% JSE commodities, 2.2% SA money market, 14.5% Government debt, 0.9% Foreign assets, 64.6% 28 February 2017 29 February 2016 JSE equities, 19.3%JSE property, 0.5% JSE commodities, 2.7% SA money market, 10.2% Foreign assets, 67.4% Total equity holding = 67%
- 21. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Apr 14 Apr 15 Apr 16 Foreign equities Commodities SA equities Listed property Corporate debt Money market Government debt Historic asset allocation FOORD FLEXIBLE FUND OF FUNDS | 21 Equity average (74%)
- 22. Top 10 equity holdings at 28 February 2017 | 22 FOORD FLEXIBLE FUND OF FUNDS % of portfolio Roche Holding 2.7 CF Richemont 2.6 CVS Health Corp 2.5 BHP Billiton 2.5 FMC Corp 2.4 Gilead Sciences 2.3 PICC Property & Casualty 2.2 Alphabet Inc 2.2 China Construction Bank 1.9 Royal Caribbean Cruises 1.6 22.9
- 23. R 299 R 238 Mar 08 Sep 09 Mar 11 Sep 12 Mar 14 Sep 15 Foord Regulation 28 Best house view FOORD FLEXIBLE FUND OF FUNDS | 23 10.2% 13.1% The chart compares the investment returns of the unconstrained Foord Flexible Fund of Funds (Class R) to Regulation 28 mandates managed by Foord (the Foord Balanced Fund (Class R) returns are net of fees and therefore have been used for direct comparative purposes). The chart shows that the Foord Flexible Fund has outperformed the Foord Balanced Fund by more than 3% per annum since its inception, illustrating the long-term opportunity cost of investing discretionary savings in a Regulation 28 portfolio. CashValue(R’000s) R100
- 24. THANK YOU
- 25. INVESTMENT OUTLOOK In a low growth, low yield environment | 25 • Target attractively valued sectors and businesses with structural tailwinds, above market growth potential and exceptional management. - Healthcare: Increasingly complex healthcare needs of an ageing global population - Financials: Rising middle class in Asia to drive higher financial services penetration - Technology: Shift of media and advertising spend to online - Consumer: Consumption moving towards experiences from goods
- 26. HEALTHCARE: AGEING POPULATION | 26 Source: United Nations Number of people aged 60 or over, 1950-2050 ...health care spend increases as the population ages The world is getting older... US health care spending per person (2014 US$) Source: Health Affairs Portfolio Holdings: Roche, Gilead, CVS, JNJ
- 27. HEALTHCARE STOCKS Underperformed the market in “Trump rally” | 27 Source: INET BFA
- 28. FINANCIALS: RISING MIDDLE CLASS IN ASIA | 28 Asia’s share in the global middle class is growing rapidly… …a rising middle class will lead to higher financial services penetration in Asia Source: Sanford Bernstein Source: Brookings Institute, OECD, Deloitte Services LP Portfolio Holdings: PICC, AIA, CCB Asia’s share of in the global middle class population 2009-2030
- 29. TECHNOLOGY: MOBILE ADVERTISING | 29 …mobile’s scale is unprecedented and will lead to a vastly bigger advertising opportunity Advertisers remain over-indexed to legacy media… Source: Kleiner Perkins Caufield & BeyersSource: Kleiner Perkins Caufield & Beyers Portfolio Holdings: Alphabet
- 30. | 30 THANK YOU COPYRIGHT 2016 FOORD. ALL RIGHTS RESERVED Foord Unit Trusts (RF) (Pty) Ltd (Foord Unit Trusts) is an approved CISCA Management Company (#10). Assets are managed by Foord Asset Management (Pty) Ltd (Foord), an authorised Financial Services Provider (FSP: 578). Collective Investment Schemes in Securities (unit trusts) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not necessarily a guide to the future. Performance is calculated for the portfolios. Individual investor performance may differ as a result of the actual investment date, the date of reinvestment and withholding taxes Performance may be affected by changes in the market or economic conditions and legal, regulatory and tax requirements. Foord Unit Trusts does not provide any guarantee either with respect to the capital or the performance return of the investment. Unit trusts are traded at ruling prices and can engage in borrowing. Foord Unit Trusts does not engage in scrip lending. Commission and incentives may be paid and if so, this cost is not borne by the investor. A schedule of fees and charges, including performance fees, and maximum commissions is available on www.foord.co.za or directly from Foord Unit Trusts. Distributions may be subject to mandatory withholding taxes. Portfolios may include underlying foreign investments. Fluctuations or movements in exchange rates may cause the value of underlying foreign investments to go up or down. Underlying foreign investments may be adversely affected by political instability as well as exchange controls, changes in taxation, foreign investment policies, restrictions on repatriation of investments and other restrictions and controls which may be imposed by the relevant authorities in the relevant countries. A fund of funds invests only in other Collective Investment Scheme portfolios, which may levy their own charges, which could result in a higher fee structure. A feeder fund is a portfolio that, apart from assets in liquid form, consists solely of units in a single portfolio of a Collective Investment Scheme which could result in a higher fee structure. Foord Unit Trusts is authorised to close any of their portfolios to new investors in order to manage them more efficiently in accordance with their mandates. This document is not an advertisement, but is provided exclusively for information purposes and should not be regarded advice, an offer or solicitation to purchase, sell or otherwise deal with any particular investment. Economic forecasts and predictions are based on Foord’s interpretation of current factual information, and exploration of economic activity based on expectation for future growth under normal economic conditions, not dissimilar to previous cycles. Forecasts and commentaries are provided for information purposes only and are not guaranteed to occur. While we have taken and will continue to take care that the information contained herein is true and correct, we request that you report any errors to Foord at unittrusts@foord.co.za. The document is protected by copyright and may not be altered without prior written consent.