MasterMind is the official monthly newsletter of Sanlam Private Wealth, a division of Sanlam Ltd. Issue 92 August 2015

Asset allocation: stay focused on price, perspective and pattern

We live in extremely volatile times and an extended bull phase for equities. When news flow is negative on top of this, it’s tempting to consider changes in asset allocation.

by Alwyn van der Merwe, Director of Investments

Equities

When asset allocation is adjusted, different asset classes are blended in such a way as to provide a desired outcome over the longer term, in terms of both the returns generated and the amount of risk taken. In our view investors should remain focused on price, perspective and pattern when considering such a move.

Equity outlook We’ve been bullish on equities for a long time. In South Africa, we’ve been bold since the price of this asset class has been attractive following the 2008/9 correction.

However, negative sentiment in global equity markets – driven mainly by the situation in Greece and the strong correction in the Chinese equity market – has seen share prices tumbling around the world. The problems in these countries are by no means immaterial. Yet from an economic perspective we believe that economies in the developed world are recovering and policymakers will continue to provide stimulus to avoid a loss of momentum in activity levels and to prevent deflation from becoming an endemic problem. Therefore, low interest rates are still a crucial factor to think about despite expectations that the US is likely to hike before year end. So in a low-return environment there might still be ‘runway’ left – but the risks have certainly increased.

Although it appears to be in an advanced stage given the pattern of the bull market – lots of noise but a perspective of low

In the midst of the annual summer holiday season in the northern hemisphere, the month of July has been an eventful one in both the international and local arenas. Over time, these events should have a major impact on geopolitical relations, regional politics and the potential growth in earnings of companies who can capitalise on the resulting opportunities.

In Europe, the 19 eurozone countries, led by a principled Germany, against all expect-ations managed to avoid the long expected Grexit. Despite the negotiation strategy

followed by the Greek premier causing mistrust among his European colleagues, and the overwhelming ‘no’ vote in his referendum, the Europeans did not make any significant new concessions.

In fact, the same recipe of ‘austerity’ objected to so vehemently by the Greeks is being pursued further, and this latest lifeline will allow the Greeks only to redeem the interest on their existing debt. Commentators agree that it definitively cannot stimulate sustainable economic growth in Greece and that the prospect of a Grexit has merely been

postponed rather than wiped from the table.

The agreement, inter alia, requires the Greeks to privatise state assets and it is expected that this could yield up to €50 billion. For these opportunities German companies certainly will not receive priority.

On the other side of the ocean, President Barack Obama’s second term has started gaining significance, especially by normalising America’s relationship with Cuba, the constructive diplomatic approach to the Iran nuclear issue, and the outreach

On my mindby Daniël Kriel, CEO

interest rates – we still recommend staying the course with a marginal overweight position in equities.

Outlook for bondsAs a house, Sanlam Private Wealth called the sell-off in bonds too early but it did the right thing in maintaining the position and we’ve reaped the benefits. However, we should remember that from top to bottom the recent sell-off in equities was more severe than in bonds.

Traditionally international bonds have been a good diversifier of risk in a balanced portfolio. Despite this view we would be hesitant to buy

aggressively into the asset class as the risk of losing capital over the longer term is still highly probable.

At Sanlam Private Wealth, our investment philosophy

dictates that asset allocation is longer-term in nature. We need to withstand shorter-term underperformance if we believe in a longer-term road map.

... (On my mind) continued on page 2

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Since the end of the strikes in the platinum sector the platinum index has declined by about 50%, with the price of platinum falling about 22% in rand terms.

action of détente to Africa. After all, our continent has been neglected by the Americans over the past decade, creating space for the Chinese to expand their sphere of influence. It is laudable that President Obama did not shy away from taking African leaders to task for their abuse of power during his address to the African Union.

But President Obama’s real presidential legacy will be the normalisation of relations with Cuba, as symbolised by the opening of mutual embassies in the past month. Even more significant for the international political scene is that under America’s leadership, the six nuclear powers and the European Union, against all expectations, have concluded a nuclear treaty with Iran to limit further development of nuclear weapons. If this agreement is approved by the American Congress, and if it is implemented successfully, it will result in lifting of sanctions and opening up of a relatively sophisticated economy with a population of 80 million to foreign investment and trade relations.

Given South Africa’s historical sympathetic relationships with both Cuba and Iran, normalisation of US relationships with these two countries implies major opportunities for South African companies.

Locally, we have once again been confronted with further corruption, retrenchments and dysfunctional corporate management in our big state corporations. The question is how long this squandering of money can continue in a country with very limited resources and huge development requirements and expectations. In the words of former Finance Minister, Trevor Manual, this is a ‘real tragedy’ and we should avoid it developing into a Greek tragedy.

Only last week, the Reserve Bank raised the repo rate, driven mainly by concern about our weakened currency, growth prospects and the ‘fragile’ condition of the economy. The rand was trading at a 14-year low against the dollar at the end of July and a further downgrading by credit agencies must be back on the table.

1OF1 – A NEW WAY OF COMMUNICATINGFinally, please note that this is the last edition of MasterMind in its current printed format. We hope you’ll enjoy our new digital communication platform to be launched in August. Should you wish to subscribe to the email newsletter, please let us know at 1of1@privatewealth.sanlam.co.za.

Sanlam Private Wealth MasterMind Issue 92 August 2015

...(On my mind) continued from page 1World economy

Holding off on platinumby Shiraaz Abdullah, Investment Analyst

As the strikes ended, one thing was certain to us: costs would increase while the platinum price required to justify the price of the equities was above our near-term expectations. This is why we stayed away from direct exposure in our house-view portfolio.

With a platinum price below $1 000 and weakening prices from its main by-products (palladium, rhodium and gold), more operations will continue to haemorrhage cash. It follows that weaker players will exit the market, allowing stronger incumbents to benefit from the more favourable demand-supply situation.

However, because of the composition of the cost curve and possible government intervention, we’re not convinced normal market dynamics will apply in the industry. Impala Platinum and Lonmin are the second and third-largest producers in the world; they are both ill placed on the cost curve. Lonmin’s balance sheet looks exceedingly stretched and the capitulating platinum price makes the company’s sustainability less likely.

That said, we believe the company is unlikely to fail given the Department of Mineral Resources’ (DMR) past behaviour. The DMR has in the past vehemently opposed mass

restructuring in the platinum sector, and with about 38 000 jobs on the line at Lonmin, we’re not convinced the capitalist vision of ‘creative destruction’ will be allowed to take place.

Against the backdrop of a slowing economy and retrenchments in the private sector, intervention is in fact more likely. The Public Investment Corporation (PIC) recently increased its stake in the company, putting them in a

position to support a rights issue to ensure the survival of the struggling company and secure the jobs of the mineworkers.

If our supposition is correct and Lonmin is bailed out, it will negatively affect the rest of the industry as the unprofitable ounces will not be removed from the

market, potentially keeping the platinum price depressed.

We remain negative on the sector in the medium term but we’re cognisant that the malaise cannot continue indefinitely. We have a constructive view of the metal going forward once the demand-supply balance is more favourable. Our constructive view of the metal in the longer term is illustrated by an indirect holding in Amplats through our ownership of Anglo American. Amplats continues to be our favoured counter in the sector.

Auction season is upon us once again, with the three big shots sending out news and catalogues for their sales in the next few months. Bonhams in London of course caught everyone’s eye with the Irma Stern portrait Arab in Black, which was discovered hanging in a kitchen and used to some extent as a notice board. This painting goes on sale on 9 September. Dating from 1939, it is part of series of paintings produced by Stern, possibly in Zanzibar. A similar example sold in SA for about R17.3 million in 2012 and there is also one in the Sanlam Art Collection.

The next Stephan Welz & Co sale takes place in Johannesburg on 4 and 5 August. An interesting selection of contemporary works could provide an opportunity for young collectors. The feature lots are works by Stern and Pierneef.

The Pierneef exhibition at the Standard Bank Gallery in Johannesburg is well worth a visit.

From kitchen to auctionArt news

by Stefan Hundt, Head: SPW Art Advisory Service

Painting of the monthRobert Brooks, East London Harbour, 1963, oil on canvas, Sanlam Art Collection.

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The 2015 tax filing season started on 1 July and it’s important for taxpayers to know what SARS will be focusing on.

Sanlam Private Wealth MasterMind Issue 92 August 2015

With Nigeria accounting for nearly half of MTN’s valuation, investors are watching the

country’s currency situation. The oil price

collapse has hurt Nigeria’s export revenues and fiscal position. The central bank’s attempts to maintain the naira’s level to the dollar has depleted its foreign exchange reserves, dried up liquidity and forced it to block the availability of foreign currency for certain imports. It has fuelled black market growth at an exchange rate weaker than the official rate.

A weaker naira is expected to weaken MTN’s financial results in the next two years. The recent MTN trading update disappointed the market for this reason. In our view, the MTN share price discounts a further 25% naira devaluation, while three developments make us less gloomy in the long term: • The price competition brought

by smaller players trying to gain market share has reduced due to network capacity constraints and financial viability.

• Punitive regulations against market dominance have been relaxed in Nigeria.

• Planned lifting of sanctions against Iran (7% of MTN’s profits) will free up to $1 billion of MTN’s frozen cash assets and boost the Iranian economy.MTN has an enviable market

position as leader in 14 of the 21 countries it operates in. It has created strong barriers to new entrants, while mobile penetration still has room to grow in these markets. Lower capital spending in future should ensure strong free cash flows, underpinning a healthy, growing dividend stream.

InsideTrackby Renier de Bruyn,Investment Analyst

Fiduciary and tax

SARS sets its sights on high net worth individuals and their trustsby Stanley Broun, Fiduciary and Tax Specialist

The taxation of wealthy South Africans and their associated trusts is one of SARS’ main focus areas in terms of its Compliance Programme for 2012–2017.

SARS has been tightening loose ends by performing more detailed audits and investigations to curb tax avoidance, especially by high net worth individuals (HNWI) and their trusts.

To aid SARS, the release of the new tax return for trusts requires a more in-depth look at trusts and their transactions. Prominent features of the new return include:• expanded financial and legal reporting

requirements • full details are required of all parties contributing

funds and assets into the trust, as well as details of transactions undertaken

• full details are required of any party benefiting from the trust as well as details of the benefits received in respect of each beneficiary. SARS also increased its collaboration with the

Master’s office, which has improved access to and sharing of information on trusts and the parties involved. SARS is leaving no stone unturned and will scrutinise HNWIs and their trusts more closely.

This places a greater burden on trustees as increased and detailed record keeping is essential.

Internationally, there’s been a big shift towards sharing tax information. SARS was one of the front runners, working closely with other countries on cross-border exchange of information programmes, which has led to projects such as:• ForeignAccountTaxComplianceAct(FATCA)–

SARS will report to the US on US persons who hold financial interests in SA from June 2015.

• CommonReportingStandard(CRS)–thisglobalmodel for automatic exchange of information will enable more than 90 countries to exchange information from 2017.

• Third-partydatasubmissions–financialinstitutions in SA must submit financial data to SARS.

SARS recently announced that SA residents with HSBC bank accounts would have until 12 August 2015 to regularise their tax affairs via SARS’ Voluntary Disclosure Programme. The announcement followed SARS’ initial investigation into a list of HSBC bank account holders on which several SA taxpayers appeared. According to SARS, initial investigations showed that several of these taxpayers did not declare the income earned on the funds in those bank accounts. They will now have an opportunity to come clean.

To help trustees when completing their trust tax returns, Sanlam Private Wealth has created a checklist of required information. Please contact Stanley Broun on 021 950 4622 or via email at stanleyb@privatewealth.sanlam.co.za.

Beyers Truter is known as Mr Pinotage. This wine variety can be controversial in wine circles. Beyers was the man who, over the years, defended the cultivar and today the quality of wines from this cultivar certainly proves his point.

Pinotage Diesel is the pinnacle in Beyerskloof’s offering. The wine got its name from Beyers’ Grate Dane cross-breed, which allegedly had the ability only to sample phenolically ripe grapes in the vineyard.

This is a big structured Pinotage with intense dark fruit flavours, presenting itself with rich blackcurrant, dark cherries, prunes and ceder oak aromas. A complex middle leads to a smooth finish. This wine will mature beautifully over time.

Wine of the monthBeyerskloof Pinotage Diesel

Ranked #1 wealth manager for the second year running.

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Hospice manages the pain suffered by HIV/Aids and cancer patients.

Surveys in 2012 revealed that 50% to 72% of the 25 million people living with HIV in sub-Saharan Africa experienced pain. In 2008 a survey in two African countries showed that 87.5% of cancer patients experienced pain.

According to the International Narcotics Control Board’s 2014 annual report about 5.5 billion people, or 75% of the world’s population, have limited or no access to proper pain relief treatment.

A hospice aims to promote quality of life, dignity in death and support in bereavement for those living with a life-threatening illness, which is why SPW’s Knysna branch has chosen the Knysna Sedgefield Hospice as their charity for 2015.

When you leave a legacy to hospice care, you provide vital funds to help ease the final days and weeks of those who do not have much longer to live, the organisation says. Your gift could have an enormous impact, providing new hospice facilities or bursaries to train more nursing sisters in palliative care.

This newsletter is intended to be utilised for information purposes only. Should you choose to use this newsletter for any purposes other than information, you should do so with the assistance of professional advice. If you rely on this information for any purpose whatsoever, you do so at your own risk. Sanlam Private Wealth does not accept any liability of whatever nature and howsoever arising in respect of any claim, damage, loss or expense, whether caused directly or indirectly, including consequential loss or loss of profit, arising out of or in connection with you, the user, on the contents of the newsletter, or the user of the information, products and services described in this newsletter. The user agrees to submit exclusively to the law of the Republic of South Africa and the jurisdiction of the courts of the Republic of South Africa in respect of any disputes arising out of the use of this newsletter. Licensed Financial Services Provider and Registered Credit Provider (NCRCP1867).

KNYSNA

Tel: 044 382 7727 TYGER VALLEY

Tel: 021 950 2300 CLAREMONT

Tel: 021 672 1888 STELLENBOSCH

Tel: 021 861 3700 DERIVATIVES TEAM

Tel: 021 950 2153

For more information about these articles or solutions, contact Sanlam Private Wealth at:

CORPORATE OFFICE

Tel: 021 950 2770JOHANNESBURG

Tel: 011 778 6600 PRETORIA

Tel: 012 470 0622DURBAN

Tel: 031 560 3600GEORGE

Tel: 044 805 5900

Or visit our website: www.privatewealth.sanlam.co.za

Social responsibility

Modern medicine aims to cure illness – but when this is no longer realistic, patients run the risk of being abandoned even though managing their symptoms effectively could improve their quality of life. Hospice aims to address this shortcoming.

Hospice care

Bequests to Knysna Sedgefield HospiceTo make a bequest to the Knysna Sedgefield Hospice, you need to add a bequest to your Will, either by amending and signing your current Will or by signing a codicil to your current Will containing the bequest.

The wording of such a bequest could be, for example: ‘I bequeath a cash amount of RXXX/xx% of my estate/the residue of my estate to the Knysna Sedgefield Hospice.’

You should contact a professional adviser to implement any of the above. Please contact cariens@privatewealth.sanlam.co.za for assistance in this regard.

Sanlam has performed spectacularly under Johan van Zyl’s leadership over the past 12 years. Johan recently passed the reins to Ian Kirk, who successfully headed Santam since 2007. We had a few questions for Ian about the way forward for Sanlam.

Q&A

Sanlam – into the futureby Renier de Bruyn, Investment Analyst

Sanlam has outperformed its peers on most key metrics over the past decade. What are the key drivers of this success? I believe we have a solid strategy in place, well communicated and understood within our business and by our important stakeholders. A critical pillar of our strategy is our focus on capital efficiency and consistently achieving our stretch hurdle rates across all our business units.

We also have an unwavering focus on the execution of our strategy. We have always recognised that people make the difference in this business and we’ve had a strong team of people across all business units in our four clusters. The business has demonstrated an ability to adapt to the challenges within our various markets and market segments, and this has set us apart.

What will be your most important strategic objectives in the first two years as head of Sanlam?The core strategic focus of the Group will remain unchanged – and that is to achieve a sustainable, superior rating for the group in order to deliver the best possible value to shareholders over the long term. This can only be achieved if we focus on two critical areas: firstly, maximising the return on investment in our existing businesses; and, secondly, sourcing new growth opportunities through identifying new markets for growth and expansion. Success is dependent on effectively managing the group’s capital and our key performance measurement is return on Group Equity Value. Our vision is to become a leading pan-African financial services group with a significant presence in India and South East Asia, and an established footprint in the UK. To achieve this we need to retain a leadership position in South Africa and accelerate our organic growth strategy in selected emerging market territories.

Sanlam is redeploying capital in emerging markets outside SA with higher expected economic growth rates and low insurance penetration. Do you believe there are areas in SA that can still offer acceptable growth for Sanlam?In SA we certainly plan for continued growth. We have a number of businesses that lead in their market segments. In tough times,

together with regulatory pressure, these businesses can put further distance between us and our competitors. We can also improve the performance of other businesses where we are not yet in a leadership position. Only by adapting and taking advantage of opportunities in tough times will we continue to put distance between Sanlam and our competitors.

In 10 years, how do you expect Sanlam to be materially different from today?If we can achieve our strategic objectives Sanlam will be significantly different from the business we see today. We aim to become a true financial services industry leader across Africa and we will have developed a significant market presence in India and South East Asia. Our established footprint in the UK will also have developed off business flows from Africa and Europe.

We will have demonstrated the ability to face and adapt to numerous challenges we have experienced over 10 years, be they market conditions, technology, regulatory change or customers’ changing expectations. We will be able to achieve this only if we continue to attract, retain and develop the best talent in the industry. This is the most critical element.

If all our Sanlam people can embrace the vision and continue to focus on implementing our strategic objectives, relentlessly pushing ahead in good times and bad, it is definitely achievable.

Read the full interview online at www.1of1privatecollection.co.za.

Ian Kirk