BETTING ON BALANCE SHEET Cy Jacobs | Evan Walker | Mary Curtis 13 - PowerPoint PPT Presentation

BETTING ON BALANCE SHEET Cy Jacobs | Evan Walker | Mary Curtis 13 May 2020

BACKGROUND ASSETS UNDER MANAGEMENT Long Only Hedge Funds Total Assets R9.3bn ($500m) R9.5bn ($510m) R18.8bn ($1bn) Unit Trusts (R4.9bn) Hedge Funds (R9.5bn) Funds: Local (R4.8bn) Segregated (R4.4bn) Long Only (R9.3bn) Funds: Offshore (R1.5bn) Segregated: Local (R1.4bn) Segregated: Offshore (R1.8bn) As at 30 April 2020 PAGE 2

MARY CURTIS HEAD OF GLOBAL STRATEGY PAGE 3

M O R G A N S T A N L E Y R E S E A R C H SA Strategy December, 2019 Strong balance sheets have stood the test of time Looking at the long- run history of the MSCI ‘Quality’ Index shows that focussing on strong balance sheets and high ROEs has delivered significant outperformance 10000 250 Total return indices in USD terms 9000 230 8000 210 7000 190 6000 170 5000 150 4000 130 3000 110 2000 90 1000 70 0 50 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Jan-20 MSCI World Quality Index MSCI World Index Relative performance (RHS) Source: MSCI, Thomson Reuters, RMB Morgan Stanley research 4

M O R G A N S T A N L E Y R E S E A R C H SA Strategy December, 2019 South Africa’s balance sheet isn’t strong SA debt to GDP: government debt levels have been The rise in debt has not translated into better climbing for 10 years rates of GDP growth Loads of debt but 70 8.0 nothing to show for it Real GDP gr % y/y 6.0 60 4.0 50 2.0 40 0.0 30 -2.0 20 -4.0 10 -6.0 0 -8.0 1995 1998 2001 2004 2007 2010 2013 2016 2019 1980 1985 1990 1995 2000 2005 2010 2015 2020E SA World Government Households Non-fin corporates Financial Corporates Source: IMF, IIF, Thomson Reuters, RMB Morgan Stanley research 5

M O R G A N S T A N L E Y R E S E A R C H SA Strategy December, 2019 Compared to other markets SA has deteriorated at one of the worst rates in the last 10 yrs Large cumulative fiscal deficits show the SA government is “living beyond it’s means”. Large cumulative current account deficits are a sign that the country in aggregate is “living beyond it’s means” 20 10 Korea Sum of fiscal balances as % GDP (last 10 yrs) Germany 0 Thailand Philippines NZ Russia -10 Czech Peru Netherlands Chile Colombia -20 Canada Indonesia Taiwan Hungary Turkey Poland -30 Malaysia Mexico Italy China Australia -40 France Argentina UK -50 South Africa Brazil -60 Spain US -70 India -80 -60 -40 -20 0 20 40 60 80 100 120 Sum of current account balances as % GDP (last 10 yrs) Source: IMF, Thomson Reuters, RMB Morgan Stanley research 6

M O R G A N S T A N L E Y R E S E A R C H SA Strategy December, 2019 A weak ZAR is one solution (or a partial solution) in this predicament Hungary: interest rates, the exchange rate and Govt external debt as % total government debt current account balance 45 170 15 40 35 150 10 30 25 130 5 20 15 110 0 10 5 90 -5 0 Malaysia South Korea South Africa Czech Republic Brazil Hungary Mexico Chile Russia Hungary Poland Colombia Philippines Indonesia Turkey 70 -10 50 -15 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Real effective exchange rate Yield on Hn long-dated debt CA as % GDP, rhs Source: BIS, Thomson Reuters, RMB Morgan Stanley research 7

MACRO UPDATE Presenter: Evan Walker PAGE 8

US CENTRAL BANK – RAPID RESPONSE FED TRYING TO STOP A FINANCIAL CRISIS Fed asset holdings have grown more sharply than during past quantitative easing periods, in which the Fed bought nearly $4 trillion in securities to stimulate the economy Source: Federal Reserve Bank of St.Louis PAGE 9

GLOBAL MARKETS OUTPACING GDP Source: RMB Morgan Stanley PAGE 10

TRENDS – GLOBAL AND DOMESTIC • Trump/China, trade war impact and supply chain disruption • Globalisation – major shifts, some big winners and losers in home markets • Technology – accelerated use to continue – fast forward 5 years • Major business disruptions to accelerate – retail, property • Longer term impacts on certain industries still very unclear – travel PAGE 11

CONCERNS FOR 2020 – SURVEY CHINA Source: RMB Morgan Stanley PAGE 12

POTENTIAL DEBT SPIRAL POST LOCKDOWN REVENUE DECLINE OF 10% IN 2021 , INCREASE OF 5% IN 2022 EXPENDITURE UP 12% in 2021 AND 3% IN 2022 0,0% 90% 85% -2,0% 80% -4,0% 75% -6,0% 70% -8,0% 65% 60% -10,0% 55% -12,0% 50% -14,0% 45% -16,0% 40% 2019 2020 2021 2022 Deficit as % GDP Debt to GDP Source: 36ONE Research PAGE 13

TRADE DISRUPTION ON THE LOCAL ECONOMY PAGE 14

PORTFOLIO POSITIONING Presenter: Cy Jacobs PAGE 15

PORTFOLIO POSITIONING CURRENT POSITIONING • Majority rand hedges & dollar earnings - better insulated against Coronavirus challenges • Technology - largest exposure • Gold miners - portfolio hedge • Limited exposure to South African economy - industrials, retailers, banks and property • NB: Sustainable cash flow and balance sheet • Business models - take market share in downturn PAGE 16

PORTFOLIO POSITIONING 36ONE BCI EQUITY FUND TOP 10 EQUITY HOLDINGS % British American Tobacco 9.8 Naspers 8.3 AngloGold Ashanti 5.1 Prosus 5.0 Zambezi Platinum (Pref Share) 4.1 Mondi 4.1 Gold Fields 3.6 Impala Platinum 3.4 NewGold Issuer 3.2 Sibanye Stillwater 3.1 Total 49.7 As at 30 April 2020 PAGE 17

PORTFOLIO POSITIONING 36ONE GLOBAL FUND PC TOP 10 EQUITY HOLDINGS % SECTOR EXPOSURE Microsoft 9.2 1,4% 1,3% 0,8% Alphabet 7.5 1,7% 1,9% Activision Blizzard 6.9 Amazon 6.2 Netflix 4.4 35,0% 8,9% Facebook 4.0 Sony 3.8 Philip Morris International 1.9 Berkshire Hathaway 1.7 Technology General Consumer Twitter 1.7 Tobacco Investment Holding Company Total 47.3 Beverages Financial Services Luxury As at 30 April 2020 PAGE 18

PORTFOLIO POSITIONING RAND HEDGE EXPOSURE 36ONE BCI FLEXIBLE OPPORTUNITY FUND 36ONE BCI EQUITY FUND 12% 44% 56% 88% Rand Hedge Domestic (SA Inc.) Rand Hedge Domestic (SA Inc.) As at 30 April 2020 PAGE 19

PORTFOLIO POSITIONING 36ONE BCI FLEXIBLE OPPORTUNITY FUND ASSET ALLOCATION 35% Cash & Equivalents: 28.6% Offshore Exposure: 29.3% 29,4% 30% 25% 21,7% 20% 15,3% 14,0% 15% 10,4% 10% 5,1% 5% 2,9% 1,2% 0% Local Equity Bonds Money Market Pref Shares Local Cash Local Property Offshore Cash Offshore Equity As at 30 April 2020 PAGE 20

PORTFOLIO POSITIONING 36ONE BCI FLEXIBLE OPPORTUNITY FUND TOP 5 FIXED INCOME HOLDINGS % FIXED INCOME EXPOSURE Government Bond (2030) 3.6 21% Absa Additional Tier 1 (2024) 3.4 Absa Additional Tier 1 (2022) 2.4 Standard Bank Additional Tier 1 (2022) 1.6 53% Nedbank Additional Tier 1 1.5 26% Additional Tier-1 Corporate Bonds Government Bonds As at 30 April 2020 PAGE 21

PROPERTY Presenter: Cy Jacobs PAGE 22

PROPERTY SECTOR How did we get here? • Historically everything was about distribution growth. Incentivised distribution of non-property related income and gearing up of balance sheets to show growth. • Many companies went offshore, not just because of tough SA economy, but to play the cheap funding relative to property yields in offshore market. • Offshore ventures often highly leveraged through CCIRS (cross currency interest rate swaps) Where are we now? • Offshore values have dropped in Rand terms, while debt has increased with Rand weakness • Already weak fundamentals hit by COVID-19 • Balance sheets need repair, either through earnings retention (no distributions), capital raises or both PAGE 23

PROPERTY SECTOR TRUE LOAN TO VALUE (LTV) HIGHER THAN DISCLOSED MTM LTV with direct property Mark to Market (MTM) Disclosed LTV marked down 20% LTV* Resilient 27.5% 34.1% 40.1% Vukile 40.6% 44.1% 54.6% Redefine 43.8% 51.4% 62.9% Hyprop 34.0% 39.5% 49.4% Hyprop (fully consolidated) 43.9% 49.0% 61.3% Growthpoint 39.3% 41.6% 51.2% *Associates at market value and foreign loans at current exchange rate Source: 36ONE Research PAGE 24

PERFORMANCE Presenter: Cy Jacobs PAGE 25

PERFORMANCE 36ONE BCI FLEXIBLE OPPORTUNITY FUND 36ONE BCI Out/(under) 800% Flexible Repo + 2 performance Opportunity Fund Annualised returns 700% YTD 1.7% 2.6% (0.9%) 600% 500% 12 months 5.6% 8.4% (2.8%) 400% 300% 3 years p.a. 4.5% 8.7% (4.2%) 200% 10 years p.a. 12.5% 8.1% 4.4% 100% 0% Since inception p.a. Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 14.8% 9.1% 5.7% (5 Sept 2005) 36ONE BCI Flexible Opportunity Fund SA Repo + 2% Source: Bloomberg as at 30 April 2020. Inception Date: September 2005. Highest and lowest calendar year performance since inception (as at 30 April 2020): High 52.09 Low -31.30 PAGE 26