A YEAR IN REVIEWNEWSLETTER

NOVEMBER 2017

2017 has been another eventful year for RMI Investment Managers and we proudly refl ect on some of the highlights as we continue to develop and nurture our business.

Our affi liate family has grown with the addition of Truffl e and Ethos this year, both very successful businesses with prolifi c futures. Having a blue chip alternative player like Ethos in our portfolio should give us a wonderful opportunity to discuss interesting new areas of investment management with our clients.

Our team has successfully established trusted relationships with our affi liates and with the market alike. Our distribution team is opening new doors to potential clients for our affi liates and enjoying the role of helping intermediaries solve client investment challenges through the capabilities of our affi liates. Our operations team is also guiding the affi liates with the adoption of best practice where additive and have identifi ed some cost saving synergies across our affi liates with opportunities to switch or consolidate service providers.

On the marketing front we have recently launched a new fresh and dynamic identity for RMI Investment Managers as part of the broader RMI rebranding that was revealed during our latest annual fi nancial results release. Our new logo, which symbolises RMI’s proactive investment mandate to identify, partner and grow next-generation

entrepreneurial fi nancial services businesses, looks to diff erentiate RMI from the “Lion and Key” logo synonymous with the FirstRand group. The brand story is highlighted in more detail later in this newsletter and you can also visit our new website to experience our brand in action - www.rmiim.co.za

Royal Investment Managers, our joint venture with Royal Bafokeng Holdings, launched with a fast start, securing Sesfi kile Capital as their fi rst affi liate and more recently co-invested with us into Ethos. The business, ably led by Kabelo Rikhotso was also joined this year by Snowy Masakale as Director and seeks to help their affi liates grow and transform the South African asset management sector.

We look forward to 2018, as we shift our focus from acquisitions to growing our portfolio of affi liates. You will, no doubt, continue to see more of us in the year ahead as the team continues to foster the relationships with our clients and service providers. Best wishes for the fi nal run-up to year end and we hope you have a restful festive season.

In this issue, we would like to thank Dr Jaco van der Walt, head of the Investment Management Offi ce at FirstRand, for his valuable insights on the retirement challenge we face in SA and how we can assist our clients in designing better post-retirement solutions.

Happy reading!The RMI Investment Managers team

As an investment industry, we tend to put a lot of emphasis on the investment piece, and almost expect it to solve all our problems. In goal-based investing - as the name indicates - the end goal (post-retirement) is the key to the design, and yet we have neglected this vital piece of the puzzle. The conventional approach revolves around living annuities backed by investments in (risk-graded) multi-asset portfolios. These are essentially investment drawdown accounts (dressed up as annuities for tax purposes). While they may be appropriate for affl uent clients, it leaves our less affl uent clients exposed to more risk than they are able to handle. The post-retirement piece needs a rethink to make it more secure and aff ordable.

This becomes visible when we prioritise client goals into essential spending needs and those that are desired and aspirational. The desired spending in retirement tends to make up around 75% of the client’s total pre-retirement earnings while essential spending as much as 60%3. When designing solutions, our fi rst task is to secure the most important (essential) spending needs and the second is to maximise the probability of reaching the desired goals (on a best-eff orts basis).

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Providing a secure and aff ordable retirement is one of the biggest challenges in personal fi nance today. In defi ned contribution (DC) markets, where the investment and longevity risk is transferred to the individual, our clients are looking to us for help in solving their retirement challenge.

As things stand, most DC members in South Africa will fall far short of their aspiration to have a secure and aff ordable retirement. The average member will be able to replace less than half of their income at retirement from the money they have saved and invested during their working life. Unless something changes, our clients face a future retirement crisis.

To help, the whole ecosystem would have to change course; and this goes for every part of the value chain – advisers, product providers and end users. The retirement challenge, like climate change, is a “wicked problem”2. These problems have multiple causes, involve multiple stakeholders and require behavioural change. Our linear approaches won’t work. Instead, we have to apply integrated solutions, work across boundaries, collaborate across all stakeholders and apply a long-term focus.

The retirement end goal is to ensure infl ation-protected income for life that maintains the client’s pre-retirement standard of living. Being fully funded, to achieve this retirement income goal, is the only benchmark that matters. The goal goes beyond good investment returns, which is too often the sole focus.

An integrated solution requires that we need to pull all the levers at our disposal:

1. off er fl exible contribution options, encourage our clients to save more as their circumstances allow and off er lifestyle education,

2. fi nd ways to lower costs and ensure that fees provide value for money, 3. off er investment choices that leverage more sources of return, but which

are, of course, cost-effi cient and suitable to our client base, 4. make it easier for our clients to preserve when they change jobs and, importantly, 5. off er post-retirement solutions that are more aff ordable and secure.

POST-RETIREMENT, THE NEXT FRONTIERDR JACO VAN DER WALT

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Clients with living annuities have to “self-insure” their longevity risk. To avoid running out of cash (as in the case of Panel 1.B), clients are advised to take on more investment risk. This closes the funding gap, but provides no guarantees and still leaves the client vulnerable to the risk of outliving their capital. This is more risk than the client is able to bear4.

To secure the essential goal you need to use the fi rst two tools of goal-based risk management, namely hedging and insurance. Living annuities off er neither of these5. The conventional approach could work in economies, like Australia, where there is signifi cant state support in the form of age pension to secure essential needs as long as the individual is alive. In these cases, the “investment drawdown account” can act as a top-up to supplement income towards desired goals.

With 90% of sales going into living annuities, it seems that the industry is off ering the same solution to almost all its clients. The conventional approach, however, leads to unbalanced risk management, especially for less affl uent clients. It advocates no hedging, contains no longevity protection6, over-insures early death and places most of its emphasis on diversifi cation.

We need to customise our solutions, at least considering our client’s age, gender, income and asset size. While the most affl uent individuals may be well served by a single post-retirement product in the form of an “investment drawdown account” (living annuity), clients with lower asset sizes need a combination of products. This is illustrated in Figure 2, which shows that clients with diff erent asset sizes require diff erent elements of risk management.

FIGURE 1 – THE CONVENTIONAL APPROACH IS NOT SUITABLE FOR ALL OUR CLIENTS

1.A – AFFLUENT CLIENTS 1.B - LESS AFFLUENT CLIENTS

FIGURE 2 – CUSTOMISING POST-RETIREMENT SOLUTIONSFIGURE 2 – CUSTOMISING POST-RETIREMENT SOLUTIONS

Our clients are facing a future retirement crisis. We have a signifi cant opportunity to rise up and reshape the future by throwing our weight behind the current eff orts to design better post-retirement solutions. The road forward, to secure an aff ordable retirement, lies in a fi nding better ways to combine thinking across insurance, investments and wealth management.

Jaco heads up the Investment Management Offi ce at FirstRand, working across the retirement, insurance and wealth management industries. He fulfi ls the CIO role for FirstRand’s non-bank portfolios including insurance and wealth management. He is Chair of both the FNB Pension Fund and the RMB Pension and Provident Fund and chairs their investment committees. He also chairs the Balance Sheet Management Advisory Committee for a major SA insurer and is a member of the Thinking Ahead Institute, a global think tank. He holds a master’s degree in economics from the University of Toronto and a doctorate from the University of Pretoria. Jaco is passionate about better client outcomes and champions transformational change in the investment industry.

DR JACO VAN DER WALTHEAD OF INVESTMENT MANAGEMENT OFFICE

The retirement challenge, like climate change, is a “wicked problem”. These problems have multiple causes, involve multiple stakeholders and require behavioural change.

The conventional approach, however, leads to unbalanced risk management, especially for less affluent clients. It advocates no hedging, contains no longevity protection , over-insures early death and places most of its emphasis on diversification.

The road forward, to secure an aff ordable retirement, lies in a fi nding better ways to combine thinking across insurance, investments and wealth management.

There are three risk management tools available in goal-based investing to help us achieve this – hedging, diversifi cation and insurance. To secure the essential goal (achieving the outcome with 100% probability) requires hedging of the risk drivers (in this case, infl ation and interest rate risk) and insurance of the longevity risk (the risk of living longer than expected). Remember, we are aiming to secure enough infl ation-protected income to meet our essential needs for life. To maximise the probability of reaching the desired goals requires the diversifi cation of rewarded investment risk and insurance of early death (which allows the transfer of our remaining capital to loved ones).

The conventional approach focuses only on diversifi cation and the insurance of early death. Panel A and B of Figure 1 compares two examples. While an affl uent client (Panel 1.A) may have enough wealth relative to their needs to draw down from their living annuity and never run out of money to satisfy essential needs, this is not the case for less affl uent clients, which is where the real need for solutions lies (Panel 1.B).

1 Disclaimer: The views expressed in this presentation are those of the author and do not necessarily refl ect the views of FirstRand Limited, or any of its entities.2 “Wicked problems” are diffi cult, even impossible, to solve. They are wicked in the sense of being resistant to resolution, rather than evil.3 It seems that the latter number is not very different for low, medium and high income earners.

4 We often focus on the willingness to take risk, but it is more often the ability to take risk that is the binding constraint.5 Living annuities provide no longevity protection. The only insurance they provide is death cover. In fact, the death cover embedded into a living annuity amounts to 25% of its value.6 Living annuities also forfeit mortality credits that are available in life annuities, which can typically add real return around 3% p.a.

For more information on our unique affiliate model or any of our affiliate asset managers, please contact a member of our distribution team.

Alida de Swardt 082 857 4479Kevin Hinton 082 568 1795Zamazulu Molai 072 599 3675Ant Moore 078 002 9777

Email us at info@rmiim.co.za

DISCLAIMER

Investors should take cognisance of the fact that there are risks involved in buying or selling any financial product. Past performance of a financial product is not necessarily indicative of future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. Illustrations, forecasts or hypothetical data are not guaranteed and are provided for illustrative purposes only. This document does not constitute a solicitation, invitation or investment recommendation. Prior to selecting a financial product or fund it is recommended that investors seek specialised financial, legal and tax advice. The laws of the Republic of South Africa shall govern any claim relating to or arising from the contents of this document. The fund managers referred to above are authorised financial services providers: CoreShares Asset Management (Pty) Ltd (FSP 46695); Ethos Private Equity (Pty) Ltd (FSP 9254); Granate Asset Management Ltd (FSP 46189); NorthStar Asset Management (FSP 601); Perpetua Investment Managers (Pty) Ltd (FSP 29977); Polar Star Management (Pty) Ltd (FSP 35056); Sentio Capital Management (Pty) Ltd (FSP 33843); Sesfikile Capital (Pty) Ltd (FSP 39946); Tantalum Capital (Pty) Ltd (FSP 21595); Truffle Asset Management (Pty) Ltd (FSP 36584)

RMI Investment Managers Group (Pty) Ltd. Reg. no 2015/089899/07

We hope you like our new identity as much as we do and invite you to please visit our website to further enjoy and experience our new look and feel - www.rmiim.co.za

We are very proud to launch a new identity for RMI Investment Managers.Our new logo is based on the newly crafted RMI identity that was revealed during our latest annual financial results release in September.

The new and dynamic brand is a visual representation of RMI’s philosophical approach as a strategic shareholder. Visually, inspiration was drawn from the contained yet multifaceted images of a kaleidoscope with its limitless choice for creative interpretation. The significance of the new Kaleido symbol is described below:

the meticulously crafted open-ended yet closed circular icon signifies completeness, describing RMI’s ethos of enabling its portfolio companies to operate in empowered, independent, owner-managed entities within a partnership construct, in which RMI acts as a shareholder of influence;

the outer circumference represents RMI’s holistic portfolio management approach encompassing financial performance, operational excellence and longevity of business model;the open spaces denote the freedom and opportunity of the management partners to run their businesses without interference;the overlaps speak to active endeavors to identify areas of selective co-operation and collective engagement; and lastlythe core embodies the proud history, values, culture and common attributes that bind the RMI portfolio.

The RMI Investment Managers affiliate business model echoes the above approach and we therefore resonate deeply with the new Kaleido symbol.

We liken our version of the logo to a “sport edition” of the RMI identity and hence our colour palette draws inspiration from the RMI corporate colours with the addition of a vibrant accent green. Along with the Deep Blue that represents stability and consistency, the vibrant Future Green depicts creativity, growth and potential.

Deep Blue Pure WhiteCool GreyFuture Green

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