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QUARTERLY REVIEW Q1 2015

Compiled between April 4–7, 2015

2BLUE QUADRANT CAPITAL MANAGEMENT | QUARTERLY REVIEW Q1 2015

FINANCIAL MARKET AND GLOBAL ECONOMIC OVERVIEW 3

INVESTMENT OUTLOOK 10

MAJOR FUND HOLDINGS 13

FUND PERFORMANCE & DETAILS 15

CONTACT DETAILS 15

TABLE OF CONTENTS


Global Outlook

Global equity markets remained largely range-bound during the quarter, being subjected to dual conflicting pressures. Declining oil prices and still accommodative monetary conditions supported expectations of improved global demand. However, growth prospects are capped by growing concerns of a possible new US tightening cycle commencing this year. US indices consequently underperformed some of the other major global equity markets in Europe and Asia. Chinese equities in particular registered strong gains for the second consecutive quarter.

This growing bifurcation in future monetary policy trajectory has predictably continued to place upward pressure on the US currency. The Dollar continued to appreciate against a broad basket of global currencies and its relative appreciation during the quarter was most marked against the Euro. The ECB’s decision to commence a large-scale sovereign Quantitative Easing (QE) programme placed further downward pressure on the single currency. In fact, the Euro moved to its lowest levels against the greenback in more than ten years, nearing parity.

Industrial commodity prices, notably iron ore and oil, were subject to pressure during the quarter. This was caused by the Dollar’s marked six month appreciation, along with poor supply and demand fundamentals. The Dollar’s strength, and temporary factors such as weather and port disruptions, also appears to have placed a drag on US GDP growth in the first quarter. This prompted the Federal Reserve to revise lower its growth and inflation projections for 2015, despite continued robust job growth. These dynamics resulted in global bond yields being consequently kept near historically low levels.

The recent softening in US growth was perhaps most visibly evident in the durable goods orders for February which were reported on March 25. They showed another disappointing print, declining by -1.4% m/m to $ 231bn, which exhibits a substantial reversal from the 2% m/m increase reported in January. The February data was the third negative m/m print in the last four months, pointing to some renewed weakness in US capital expenditures, and possibly the broader economy. The data, coupled with a more dovish FOMC statement released at the recent March meeting, provided more support for the doves who are forecasting the first US rate hike to only take place towards the end of the year.

The data is not unexpected, however, and should also be looked at more closely before reaching any definitive conclusions. The weakness in durable orders really started in August last year to coincide with the start of the recent rally in the US Dollar, which only started to gain meaningful momentum from Q3 2014 onwards. Although the ‘tradable’ sector of the US economy is smaller than other major developed economies, there is no doubt the stronger US Dollar has impacted negatively on the US manufacturing sector at the margin.

Furthermore, the breakdown within the durable goods new orders segment shows a much weaker trend. Certain segments such as mining and oil & gas reflect a contraction y/y. This weakness is expected given the decline in oil prices and anticipated sharp decline in capital expenditures in this segment. The huge growth in US shale would have been a not insignificant positive tailwind for overall capex trends since 2010. Said growth now will have a noticeable, but not trend-changing, negative impact in 2015.

FINANCIAL MARKET AND GLOBAL ECONOMIC OVERVIEW

NOV 2011 JULY 2013

50%

40%

30%

20%

10%

0

-10%

-20%

-30%

-40%

-50%

New Durable Goods Orders – Mining/Oil

Source: Blue Quadrant Capital Management

NOV 2011 JULY 2013

15%

10%

5%

0%

-5%

-10%

New Durable Goods Orders – Household



Although there has been a slowdown in new durable household goods orders, the y/y comparison continues to show growth.

Colder than normal weather in the US Northeast, along with the temporary strike at US West coast ports, would also have acted as a temporary drag on economic performance, especially during early February. Data from the Association of American Railroads supports this view. The data, particularly intermodal, shows a sharp decline from the end of January and into early February, actually taking the 2015 series below the prior three years. Thereafter it registers a sharp recovery, which has taken intermodal weekly freight volumes to levels substantially above those of the prior three years.

Similarly, weekly ICSC data (International Council of Shopping Centers) showed some y/y weakness in February. Since the start of March, however, the y/y growth metric has trended higher. The recent March ISM PMI survey data also reflected the bifurcation in performance, with the manufacturing PMI remaining relatively weaker at 51.5 from 52.9 in February. This is in contrast to the stronger services sector PMI which printed at 56.5 from 56.9 in February. Similar survey data conducted by Markit, showed an even stronger picture with regard to growth in the US services sector in March.

From this analysis, one can conclude that US growth did indeed weaken a little in late January and February, but that this was mainly due to temporary factors as well as the ongoing strength in the US Dollar. The negative impact from a stronger greenback will persist for a while, as will weakness in sectors exposed to the oil & gas industry. As the tradable and manufacturing sectors are a small portion of the overall US economy, other indicators suggest that the consumption-side of the economy is regaining momentum.

The data in the table above also underscores the relative importance of exports to the European economy. Given the large relative depreciation in the EUR over the past 12 months, said data would provide further support for the view that the European economy will experience a relatively robust cyclical recovery over the next 12 months. A risk factor for European exports remains the performance of emerging markets, particularly China, which comprise a much greater share of European exports than the US.

Nevertheless, recent data does indeed suggest that a nascent recovery in Europe appears to be taking hold.

600

550

500

450

400

350

United States Total Carloads and IntermodalOriginated Rail Traffic – Intermodal Units (in thousands)

Source: Association of American Railroads

0 5 10 15 20 25 30 35 40 45 50 55

2015201420132012

62

60

58

56

54

52

50

48

46

Markit US Services PMI Business Activity Index

Source: Markit

JAN 2010 JAN 2011 JAN 2012 JAN 2013 JAN 2014 JAN 2015

Export as a % of GDP

United States 13.5%

Euro Area 26.0%

United Kingdom 30.0%

China 26.4%

Japan 17.0%Source: World Bank 2013

1.8

0.9

0.0

-0.9

-1.8

-2.7

65

60

55

50

45

40

35

30

25

Markit Eurozone PMI and GDPMarkit Composite PMI Output Indexsa. 50 = no change

Source: Markit, Eurostat

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Eurostat Eurozone GDPquarterly % change

PMIGDP


However, this view should be tempered by the long-term structural headwinds still faced by the European economy. Poor demographic trends and high public debt represent risks that are likely to resurface at some point over the next 2 to 3 years.

Inflation data has also been suppressed at the headline level by both declining oil prices and the stronger dollar. However, core US CPI remains elevated and a high-frequency inflation survey by PriceStats has also recently shown some surprising acceleration.

Although nominal hourly wage growth remains subdued at around 2% y/y, benefit costs have seen total compensation grow at a faster rate, while large employment gains have led to slower productivity growth. Coupled with higher benefit payments to employees, total compensation is growing faster than actual hourly or weekly wage growth. Unit labour costs are consequently accelerating and now trending back towards a nominal 3% y/y.

Despite the higher unit labour cost, US wage growth will remain a key focus of FOMC policymakers this year. This will thus be a key variable in terms of judging the timing and pace of any US interest rate hikes. Cursory analysis suggests there remains some slack in the US labour market, as various unemployment indicators average about 1 to 2 percentage points above levels previously regarded as ‘full employment’.

Based on the current size of the US labour force, and assuming a similar pace of job creation as seen over the past year, research would suggest that the US will reach ‘full employment’ in about 12 months. Conventional economic wisdom would therefore suggest that at that point wage growth should begin to accelerate. It is our view, however, that there is a risk of wage growth beginning to accelerate well before this point.

A key developing feature of the US labour market is an apparent growing ‘skills mismatch’, which is clearly reflected in the high level of job openings relative to the current actual level of employment. This would support the view that job growth is likely to remain robust over the next 12 months, and should this ratio remain high, wages for more skilled workers would begin to accelerate materially.

US CPI – PriceStats (monthly)

JAN 2011 SEP 2012 MAY 2014

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

Source: PriceStats

Nonfarm Business Sector: Unit Labour Cost

2010 2012 2014

6

4

2

0

-2

-4

Source: St Louis FRED Database

(Per

cent

cha

nge

from

yea

r ago

)

Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons

1995 2000 2005 2010 2015

17.5

15.0

12.5

10.0

7.5

5.0


(Per

cent

)


The main driving force for worker remuneration at an absolute level is the core 25 to 64 demographic. The civilian labour force in this age category is currently estimated at roughly 127mn. Yet out of this pool of available workers, some 83mn, or nearly two-thirds, can be regarded as somewhat skilled in that they hold a college or associate degree. The observed unemployment rates for these groups are lower than the total unemployment rate, particularly so for those individuals with college degrees.

The data here confirms the view that college-educated workers in the US are within 1% of full employment and that workers with associate technical degrees or some college experience are within 2% of full employment. Based on the relative size of the labour force in these two segments, it would only require another 2.4mn jobs to be created, or 200,000 per month, before the US reaches full employment. These assumptions are based on an optimistic 1% growth in the labour force. The chart below shows that the labour force has actually remained fairly static over the past seven years, partly due to factors resulting from the large amount of retiring baby boomers.

There is slack based on the pool of unskilled workers or discouraged job-seekers, and the low participation rate on a historical basis is partly a reflection of this. The South African experience has shown, however, that if the job market becomes tight for more skilled workers, and they account for a majority of the labour force and earnings, a pool of available unskilled workers will not prevent an acceleration in overall wage inflation. In fact, if the labour force in the above age group does not grow over the next few years, the US will actually start to experience severe labour shortages.

These factors suggest that deflation and stagnation are not major risks in the US at present, while the greater risks are upside surprises to inflation and growth expectations over the next 12 months. This will increasingly support the US Dollar and, as the European recovery gains traction, also pose a significant risk to US bond yields. European and global bond yeilds will ultimately be affected as well.

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

-60%

Job Openings Outpace HiringPercentage change in monthly level of job openings, hirings and quits since the recession began in December 2007

Source: Department of Labor, wsj.com

Job openingsHiresQuits

Recession

10

9

8

7

6

5

4

3

2

Unemployment Rate (percent)Some College or Associate Degree – 25 to 64 years


2000 2002 2004 2006 2008 2010 2012 2014

10

9

8

7

6

5

4

3

2

Unemployment Rate (percent)College Graduates, Bachelor’s Degree and Higher – 25 to 64 years


2000 2002 2004 2006 2008 2010 2012 2014

128,000

126,000

124,000

122,000

120,000

118,000

116,000

114,000

Civilian Labour Force (thousands of persons)– 25 to 64 years


2000 2002 2004 2006 2008 2010 2012 2014


A ‘tapering’ in the ECB QE programme at some point this year, along with an earlier-than-anticipate US rate hike, stand out as key risk factors that are likely to provide some market volatility. As the pace of any tapering or tightening is likely to be slow, at least initially, equity markets are likely to remain well supported, notwithstanding increasingly ‘rich’ valuations at the index level. With global growth regaining momentum, good performance is still possible.

Despite the somewhat high valuations, it should still be noted that the US equity market is currently fairly divergent in sector valuations. Most of the overvaluation is concentrated in more defensive or ‘dividend-paying’ companies such as consumer non-cyclicals supplying branded food and household goods. This overvaluation has been primarily driven by the low interest rate environment and the resultant ‘search for yield’. Cyclical industrial sectors, particularly those focused more on the domestic US economy, continue to show considerable value. Financial counters, including insurance companies, also generally continue to reflect conservative valuations.

We believe that large-scale price declines in a range of mining and resource companies have also created opportunities in these sectors. In particular, the negative sentiment with regard to the oil market is now probably overdone. We have noted that the decline in oil prices is more a reflection of the strong growth in US supply over the past three years, as opposed to weakening Chinese demand as some market analysts have opined. This is in contrast to the metals and industrial metals segment of the commodity markets, where weak Chinese demand has clearly been a factor coupled with excess supply.

As noted in prior publications, a major medium-term risk factor remains the outlook for the Chinese economy. The enormous credit bubble that has built up in that economy

over the past decade now appears set to unwind. This has already been reflected in slower fixed investment spending, which has directly impacted on global commodity prices.

Nevertheless, Chinese policymakers still have considerable ‘capacity’ in terms of both monetary and fiscal stimulus. This suggests that as long as global growth, specifically demand for Chinese exports, remains sufficiently buoyant, a more serious ‘crisis’ situation can probably be averted for now - and more than likely until 2016 at a minimum.

Eventually, we believe that the Chinese currency will be forced to devalue, at least against the US Dollar. This dynamic could result in a turbulent ‘unwind’ of the Yuan-USD carry trade, which we have also written about at length over the past year. In this scenario, once global growth potentially starts to weaken again, possibly in 2016, Chinese policymakers may be left with no option but to allow the currency to devalue. In terms of specific ‘event-risk’, this may become an important macro focus for us over the next two years.

10%

0%

-10%

-20%

-30%

-40%

-50%

-60%

China: Imports by Commodities (January and February 2015)

Iron Ore and Concentrate

Crude Oil Coal and Lignite

Soy Bean Steel Product Unwrought Copper and

Product

Source: CEIC and RBS

-0.9%

-45.4% -44.9%

4.5%

-43.8%-46.2% -45.3%

-55.1%

-17.9%

3.9%

-13.3%-16.6%

-13.3% -14.9%

-1.8%

-23.8%

-33.3%

-12.5%

Volume (%YoY)Value (%YoY)Average Import Price (%YoY)

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

China’s investment share of GDP is already considerably higherthan it was in Japan and Korea

1954 1973 1992 2011

Source: Thomson Reuters, Credit Suisse Research

China: latest 48%Japan: peak in 1973 at 36%Korea: peak in 1991 at 38%

100%

80%

60%

40%

20%

0%

The credit boom (relative to GDP) in China has been greater thanmost other credit booms seen

USA51-60

USA93-09

Korea88-98

UK97-09

Japan85-90

China08-13

Thailand86-97

Spain96-10

Max 5-year change private sector debt to GDP (% point)Peak in private sector debt (% of GDP), rhs

Source: Thomson Reuters, Credit Suisse Research

250%

200%

150%

100%

50%

0%


South Africa Outlook

In South Africa, the respite provided by the decline in oil prices is expected to be short-lived. Although continued capital inflows have kept the currency fairly resilient on a trade-weighted basis, the Rand still lost some ground during the quarter. Coupled with a modest recovery in Brent oil prices, and higher fuel levies announced in the February budget, the domestic fuel price increased sharply in March and April. Higher fuel and electricity tariffs, coupled with higher maize prices following the drought, are expected to see CPI reaccelerate. This could quite possibly increase sharply over the next two quarters and back towards 6%. Local bonds have consequently come under some renewed pressure, despite global bond yields remaining near record lows. Interest rate expectations have accordingly shifted towards speculation of an interest rate hike at some point in the next few months.

A more serious development, however, has been the recent further operational and financial deterioration at utility parastatal Eskom. The developments at Eskom, coupled with sustained load-shedding and an anticipated further large rise in electricity tariffs, have serious medium-term implications for the domestic economy.

Eskom has already applied for a thus far unapproved 25% tariff hike this year and is pushing for an additional increment next year. The further anticipated tariff increases add to the already substantial tariff increases awarded to Eskom since 2007, when the current electricity crisis began to surface. Based on 25% expected tariff increases this and next year, the US-denominated local electricity price is likely to approach USD 10 cents per kWh. This represents an almost 5-fold rise since 2003, which is greater when measured in rand terms.

The country’s manufacturing and construction sectors are also likely to face continued headwinds, mainly manufacturing as a result of the aforementioned increase in wages and electricity costs. In addition, the likely sharp retrenchment in mining sector capital expenditures will also negatively impact the country’s engineering and construction sectors, as they have strong linkages to the mining sector. Again, although currency weakness may provide some support to manufacturing exports, the rand is actually stronger or unchanged in y/y terms on a trade-weighted basis, particularly relative to major trading partner regions such as Europe and Asia. As such, we expect the

Rand to still depreciate, perhaps substantially from current levels, over the course of the next 12 to 18 months.

Eskom is facing several challenges which are currently undermining its financial position: sustained load-shedding results in reduced electricity sales; increased expenditure on expensive diesel for back-up power plants places a severe squeeze on the parastatal’s margins and operational profits. Between 20 and 30% of the existing installed capacity is routinely offline due to unplanned outages, mostly a function of the age of these plants and their stressed capacity situation. Due to the age of the existing equipment, the huge investment needed for its upgrade and replacement will not be covered by the current build programme. This allows little time for repair and maintenance, so power shortages may consequently plague the country well into the next decade.

The completion of the current build programme, encompassing two large coal-fired power plants of 9000MW, is thus seen as critical in terms of at least alleviating the electricity supply crisis. The current substantial build programme has large capital funding requirements, however, and these will require further debt issuance, particularly as the treasury remains reluctant to divert current budget expenditure to Eskom. Apart from sales of non-core assets, the only other avenue that can be taken is to further substantially lift electricity tariffs.

The twin impact of sustained supply shortages and sharply higher electricity prices could have a permanent structural impact on the economy. Although an electricity price of 10 US cents per kWh is still lower than the average electricity price in many OECD countries, it should be noted that South Africa has a high energy intensity. Following decades of very cheap electricity prices, the country exhibits unusual kWh usage per unit of GDP. This suggests that the structure of

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

10,00

9,00

8,00

7,00

6,00

5,00

4,00

3,00

2,00

1,00

SA Electricity Tariffs ($cents/kWh, average) – 1990 to 2016



the economy at present is simply not built to weather electricity prices similar to those seen in most OECD countries, where usage intensity is much lower.

Energy-intensive business models, particularly those in the mining and manufacturing sectors, may be faced with making permanent cutbacks in output capacity or shutting down completely. Industries that are likely to face the prospect of shutting down or downsizing would include underground mining operations, particularly in the gold and platinum sector, along with steel and aluminium metal processing industries. These industries have already been forced to reduce power consumption by 10% since the 2008 crisis, but this reduction has not been sufficient. A reduction in platinum and gold output, and their consequent exports, could require a wholesale shift in the structure of the economy as imports increase for steel and other component products that can no longer be manufactured domestically.

Open-cast mining operations, particularly those in the iron-ore and coal sectors, could ramp up production given that they are typically not that energy intensive, relying more on diesel. The recent sharp decline in USD-denominated commodity prices, however, make potential expansion in these sectors unlikely, at least over the medium term. Light manufacturing industries such as food production could also perhaps increase output and exports. A service industry such as tourism could assume a key role over the long term in replacing lost mining sector export revenues. The tourism industry is obviously far less energy intensive than other forex-earning sectors and has substantial long-term growth potential in the correct policy environment.

Country COST* INTENSITY** $cents/kWh Cons/GDP

Germany 28

UK 18

France 15

USA 10

Australia 10

South Africa** 9.7 0.76

Asia n/a 0.57

OECD n/a 0.25*Average for industry & households, 2013 **2013 Electricity Consumption (Tw/H) / GDP, $2005 ***Based on 2016 estimate, R/$ of 12

Source: International Energy Association


US Dollar to outperform as global yield trade unwinds

SUMMARY

• US current account deficit will narrow and possibly move to surplus as US energy production and net imports decrease.

• Accelerating US economic growth will lead to gradual rate normalization. Coupled with less global dollar liquidity and a smaller US current account deficit, the fundamental underpin for the global ‘carry’ yield trade will become progressively less favourable.

• These dynamics will attract capital flows back to the US, supporting sustained US Dollar bull market.

IMPACT ON OUR INVESTMENT STRATEGY AND FUND POSITIONING

• Avoid asset classes such as fixed-income and higher risk yield-bearing counters and securities that have benefited from this trade.

• Remain overweight in the US Dollar in respect of our overall currency exposure.

Return of inflation, policy uncertainty to underpin new gold bull market

SUMMARY

• Current consensus expects continued disinflation in the global economy. US and global labour market dynamics do however point to a threat of the return of sustained wage inflation over the next 5 to 10 years.

• A heightened risk to medium-term inflation outlook could also be caused by: • Fundamental dynamics such as lack of infrastructure investment in major developed economies. • The end of ‘Moore’s’ law and geopolitical-induced disruption to global energy supplies.

• Memories of the 2008 financial crisis create the risk that policymakers will be slow to react and respond to a return to elevated global inflation.


• Avoid asset classes such as fixed-income and higher risk yield-bearing asset classes, where rising interest rates and yields erode capital principal.

• Remain overweight the US Dollar in terms of overall currency exposure, which will benefit from rising long-term US bond yields.

• Build and maintain an exposure to physical gold and specific gold producers as a form of portfolio insurance.

INVESTMENT OUTLOOK – SUMMARY

Blue Quadrant Capital Management clients invested in one or more funds listed below can refer to the client portal at www.blueqcm.com for more detail regarding each major investment theme listed in this publication.


Negative on outlook for South African economy and financial assets

SUMMARY

• Supply-side structural constraints, such as a persistent power deficit and a fractious labour environment, will constrain the country’s ability to expand export capacity.

• These dynamics will ensure that the country’s two key economic imbalances, namely the fiscal- and current account deficits, will remain large and entrenched as a feature of the country’s economic fundamentals.

• A depressed commodity price environment, with the exception of gold, and higher energy prices will lead to a deterioration in terms of trade, and create additional external headwinds for the economy.

• Rising global interest rates and a reduction in US Dollar liquidity will make it difficult for South Africa to fund its current account deficit, resulting in a sustained depreciation in the currency.


• Avoid domestic asset classes such as fixed-income and higher risk yield-bearing asset classes, particularly commercial property.

• Retain a large offshore exposure and minimize Rand currency risk in portfolios.

• Retain a minimal exposure towards interest-rate sensitive domestic sectors.

• Seek to invest in companies that are able to generate export revenues or will benefit from import substitution.

Negative on outlook for Chinese economy, fixed investment and global linkages

SUMMARY

• The large growth in credit over the past five years has led to a massive capital misallocation. There exists widespread evidence of a significant capital stock surplus in certain sectors, such as residential and commercial property.

• Chinese fixed investment has averaged 50% of GDP over the past five years, an unprecedented level relative to other economies both past and present.

• Chinese fixed investment spending has been a major driver of global demand for industrial commodities, particularly steel and iron-ore. A substantial slowing in Chinese fixed investment spending creates substantial downside risks for industrial metals.

• Low global interest rates and access to cheap US Dollar funding has led to large-scale use of cheap US Dollar funding to finance risky investment projects in China. Unwind of this trade could lead to systemic risks in certain key banking centres, such as Hong Kong and Singapore and Australia by association. All three banking centres remain heavily reliant on wholesale funding.


• Avoid those economies which have benefited from both elevated commodity prices and ample global liquidity, such as Australia. Substantial risks exist over the next several years to commodity-sensitive currencies that have also benefited from the global ‘yield’ trade.

• Build and maintain a short exposure in commodity or ‘yield’ currencies, as well as the financial assets of these economies.

• Avoid exposure to industrial metals and also mining companies focused on the production of industrial metals, particularly steel and iron ore.


The US energy revolution – implications and the scope for energy price volatility

SUMMARY

• US oil and gas production is expected to increase significantly over the next five years due to the use of new technologies able to unlock vast and previously inaccessible oil and gas (shale) reserve formations.

• Increasing US energy production and decreasing net energy imports have important implications for global US dollar liquidity going forward.

• Increasing US oil and gas production may depress global energy prices, creating substantial risks for major ‘petrostates’. Inherent political vulnerabilities may be exposed, leading to heightened geopolitical risks and threats of major energy supply disruptions.

• The current disparity in pricing between US natural gas prices and global gas and oil prices will gradually be narrowed.


• Avoid major energy companies, particularly those with operations in geopolitical regions with heightened risks.

• Focus on maintaining an exposure to US-centric energy companies, and in particular companies focused on natural gas production, with substantial gas and liquids reserves. The inevitable narrowing in US gas prices relative to global oil and gas prices will favour these companies.

• Focus and maintain an exposure to companies that will benefit from rising US oil and gas production as a second derivative of this dynamic. Energy infrastructure companies able to remove the logistical bottleneck, and take advantage of existing energy price differentials, will benefit.

Negative on outlook on commodity-sensitive economies: Canada and Australia

SUMMARY

• Low global interest rates, and the large appreciation in commodity-sensitive currencies relative to the US Dollar since 2001, have led to substantial credit and residential property bubbles in these economies. The reverse of this dynamic may lead to a sustained depreciation in these currencies over the next five years.

• Residential property prices are substantially overvalued based on median incomes or rent to price metrics in Canada and Australia. This creates a substantial downside price risk over the next several years.

• A decline in residential and commercial property prices creates substantial downside risks to economic growth prospects for Canada and Australia. Downside risks may be amplified in the event of a global commodities price decline, which leads to large-scale reduction in mining and energy investment spending. Energy, mining and property construction expenditures account for almost all private fixed investment in these countries.

• The risk of a severe decline in housing prices creates substantial risks to the banking sectors in these economies.


• Avoid those economies which have benefited from both elevated commodity prices and ample global liquidity, such as Australia. Substantial risks exist over the next several years to commodity-sensitive currencies that have also benefited from the global ‘yield’ trade.

• Build and maintain a short exposure to the Canadian and Australian equity markets.


*Certain holdings in the Blue Quadrant Capital Growth Fund are held indirectly via the fund’s direct holding in the Blue Quadrant Worldwide Flexible Fund.

Blue Quadrant Capital Management clients invested in one or more funds listed below can refer to the client portal at www.blueqcm.com for more detail regarding each major investment holding as listed below.

FORD (NYSE: F)

FUND EXPOSURE BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND - % OF NAV - 5% BLUE QUADRANT CAPITAL GROWTH FUND - % OF NAV - 2.5% (indirect)

ING US (NYSE: VOYA)

FUND EXPOSURE BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND - % OF NAV - 4.3% BLUE QUADRANT CAPITAL GROWTH FUND - % OF NAV - 2.2% (indirect)

GOODYEAR (NYSE: GT)

FUND EXPOSURE BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND - % OF NAV - 2.2% BLUE QUADRANT CAPITAL GROWTH FUND - % OF NAV - 5.3% (direct & indirect)

AIG (NYSE: AIG)

FUND EXPOSURE BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND - % OF NAV - 8% BLUE QUADRANT CAPITAL GROWTH FUND - % OF NAV - 4% (indirect)

BERKSHIRE HATHAWAY (NYSE: BRKA)

FUND EXPOSURE BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND - % OF NAV - 9.9% BLUE QUADRANT CAPITAL GROWTH FUND - % OF NAV - 4.8% (indirect)

LEUCADIA (NYSE: LUK)


MAJOR FUND HOLDINGS


US NATURAL GAS COMPANIES (NYSE: CHK, ECA, UPL)


GOLD MINING EQUITIES (NYSE: KGC, GDX) (JSE: ANG)

FUND EXPOSURE BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND - % OF NAV - 3.4% BLUE QUADRANT CAPITAL GROWTH FUND - % OF NAV - 11% (indirect)

MAJOR FUND HOLDINGS


BLUE QUADRANT CAPITAL GROWTH FUND (ALTERNATIVE)BLUE QUADRANT MET WORLDWIDE FLEXIBLE FUND

FUND PERFORMANCE & DETAILS

Disclaimer

This report and its contents are confidential, privileged and only for the information of the intended recipient. Please destroy this document if you have received it in error. Blue Quadrant Capital Management make no representation or warranties in respect of this report or its content and will not be liable for any loss or damage of any nature arising from the unauthorised use of this report, the contents thereof, or any electronic viruses associated therewith. This report is proprietary to Blue Quadrant Capital Management and may not be copied or distributed without the prior written consent of Blue Quadrant Capital Management.

Tel: +27 (21) 672 4744 | Fax: + 27 (21) 672 4701 Unit C, Clareview Business Park, 236 Imam Haron Road, Claremont, 7700 Email: [email protected] | www.blueqcm.com

CONTACT DETAILS

The objective of the fund is to deliver returns in excess of consumer price

inflation over a rolling five-year period, but with an emphasis on ensuring a level

of capital preservation over the shorter term. The fund’s benchmark is the South

African Consumer Price Index (CPI) plus 8%. The strategy’s core asset allocation

will remain flexible and its exposure to equity investments may vary depending

on prevailing market and economic conditions and available investment

opportunities. The Fund’s direct and indirect gross equity exposure will vary

between a minimum of 0% to a maximum 150% (including unlisted equity

investments) of the Fund’s total net asset value (NAV).

The fund may employ leverage in order to enhance returns where deemed

appropriate and when specific opportunities arise. However, the allowable

gross leverage of the fund will be limited to 2x Net Asset Value (NAV).Total

annual fees and expenses are based on a percentage of the NAV of the fund.

The Manager shall receive a management fee of 1.3% of the NAV of the portfolio.

A performance fee of 15% will be levied. The performance fee will be calculated

and payable annually and will be based on the excess returns generated by

the strategy above its benchmark, CPI + 8% (compounded annually). A high-

water mark will be maintained and adjusted following any payment of related

performance fees. The total performance fees payable in any one year will be

limited to 5% of the fund’s NAV at year-end.

During the first quarter (Q1) of 2015, the Blue Quadrant Capital Growth Fund

(the Fund) generated a positive return of 2.6%, while the JSE-All Share Index

generated a positive total return of 5.8%. Global equity markets remained

largely range-bound during the quarter, being subjected to dual conflicting

pressures. Declining oil prices and still accommodative monetary conditions

supported expectations of improved global demand. However, growth

prospects are capped by growing concerns of a possible new US tightening

cycle commencing this year. US indices consequently underperformed some

of the other major global equity markets in Europe and Asia. Chinese equities in

particular registered strong gains for the second consecutive quarter.

This growing bifurcation in future monetary policy trajectory has predictably

continued to place upward pressure on the US currency. The Dollar continued

to appreciate against a broad basket of global currencies and its relative

appreciation during the quarter was most marked against the Euro. The

ECB’s decision to commence a large-scale sovereign Quantative Easing (QE)

programme placed further downward pressure on the single currency. In fact,

the Euro moved to its lowest levels against the greenback in more than ten

years, nearing parity.

BLUE QUADRANT CAPITAL GROWTH FUND

FUND DETAILS

Launch date 1 May 2011

Dealing MONTHLY

NAV (1 May 2011) ZAR 100.00

NAV, 31 March 2015 (All-in-Price) ZAR 125.76 (USD 10.39)

NAV, 31 March 2015 (Clean Price) ZAR 126.45 (USD 10.45)

Income, 31 March 2015 ZAR -0.699 (USD 0.0578)

USD/ZAR at 31 March 2015 12.10

MANAGER DETAILS

Investment Manager Blue Quadrant Capital Management

Portfolio Manager Leandro Gastaldi

Administrator Automated Outsourcing Services

Risk Statistics 1-year 3-year

BQCGF - S.DEV 11.0% 13.0%

JSE - S.DEV 6.7% 9.7%

BETA -0.02 0.12

CORRELATION -0.01 0.08

SHARPE RATIO* -0.08 0.83

MAXIMUM DRAWDOWN -7.1% -7.9%

Updated: 31 Mar 2015, Monthly Returns, Annualised

* Risk free rate =s 6-Month T-Bill

COMMENTARY

Performance Table

Performance Since Inception:

1 May 2011

1Month

3Month YTD 1-Year 2014

Annual average

(3 Yrs)

BQCGF 79.1% -1.2% 2.6% 2.6% 5.2% 2.3% 18.2%

CPI + 8%* 53.6% 1.3% 2.3% 2.3% 12.0% 13.8% 11.0%

JSE-ALLSHARE** 79.1% -1.3% 5.8% 5.8% 12.5% 10.9% 19.4%

Updated: 31 Mar, 2015

*Based on CPI figure for Feb, ** Total Return Index

First Quarter, 2015

Exposure Statistics Current Limit

Gross Leverage* 1.80x 2x

Gross Equity Leverage* 1.41x 1.5x

Net Long Equity Exposure* 75% 0% -150%

Short/Option (Non-Hedge)* 12.5% 20%

* As % of NAV

Industrial commodity prices, notably iron ore and oil, were subject to pressure

during the quarter. This was caused by the Dollar’s marked six month appreciation,

along with poor supply and demand fundamentals. The Dollar’s strength, and

temporary factors such as weather and port disruptions, also appears to have

placed a drag on US GDP growth in the first quarter. This prompted the Federal

Reserve to revise lower its growth and inflation projections for 2015, despite

continued robust job growth. These dynamics resulted in global bond yields

being consequently kept near historically low levels.

In South Africa, the respite provided by the decline in oil prices is expected

to be short-lived. Although continued capital inflows have kept the currency

fairly resilient on a trade-weighted basis, the Rand still lost some ground during

the quarter. Coupled with a modest recovery in Brent oil prices, and higher

fuel levies announced in the February budget, the domestic fuel price increased

sharply in March and April. Higher fuel and electricity tariffs, coupled with

higher maize prices following the drought, are expected to see CPI reaccelerate.

This could quite possibly increase sharply over the next two quarters and back

towards 6%. Local bonds have consequently come under some renewed

pressure, despite global bond yields remaining near record lows. Interest rate

expectations have accordingly shifted towards speculation of an interest rate

hike at some point in the next few months.

The fund performed well in January and February, with returns driven by

renewed weakness in the currency, and a further recovery in the fund’s offshore

long equity book. The performance in these months was also supported by

profit-taking in some of the fund’s gold-related equity positions, which were

initiated in the prior quarter. Despite a likely softer Q1 GDP print in the US, we

still expect general US Dollar strength and a reacceleration in global growth as

the year unfolds. This scenario will support our long offshore equity book and

provide strong rand-denominated returns for the fund in 2015.

Tel: +27 (21) 672 4744 | Fax: + 27 (21) 672 4701 | Mobile: 076 733 8983Unit C, Clareview Business Park, Lansdowne Road, Claremont, 7700Email: [email protected] | www.blueqcm.com

ASSET ALLOCATION % NAV

UNLISTED 4.7%

SMALL/MID-CAP 20.2%

LARGE-CAP 28.4%

FUNDS/ETFS 57.0%

SHORT EQUITY/OPTIONS (non-hedge) 12.5%

OFFSHORE EQUITY* 12.0%

CASH (Total) 18.5%

CASH (net) 4.2%

LEVERAGE (Gross Equity) 1.41x

LEVERAGE (Gross) 1.80x

NET LONG EQUITY EXPOSURE 75%

* Excluding Offshore exposure via Blue Quadrant WW Flex Fund

MAJOR POSITIONS* % NAV

Blue Quadrant WW Flex 54.1%

Short S&P 500 19.6%

Long NEWPLAT ETF 15.0%

Long EUR/ZAR (Sep) 11.9%

Long USD/ZAR (Sep) 10.9%

Long Anglogold 9.5%

*Excludes ZAR Cash

80

100

120

140

BQCGF Comparative Performance

180

1 May 11 8 Nov 11 19 Jun 12 29 Jan13 1 Oct 14

BQCGF CPI+ 8% JSE TOTRET

160

1 Aug 13 1 Mar 14

200

Blue Quadrant MET Worldwide Flexible Fund

31 March 2015

Portfolio Performance

Portfolio Objective

The Blue Quadrant MET Worldwide Flexible Fund’s primary objective is to generate high long term total returns.

Portfolio Information

Launch Date: 2 August 2013

Portfolio Size (31/03/2015): R 374.99 million

NAV Price (Fund Inception): 100.00 (cpu)

NAV Price (31/03/2015): 127.61 (cpu)

JSE Code: BQWCA

ISIN Number: ZAE000181236

Classification: Worldwide - Multi Asset - Flexible

Benchmark: MSCI World index over rolling 2 year period

Minimum Lump Sum: R 5,000

Minimum Monthly: R 500

Valuation: Daily

Valuation Time: 15h00

Dealing Cut-Off Time: 14h00

Income Declaration: 30 Jun/31 Dec

Income Payment: 2nd working day of Jul/Jan

Distribution (cpu) Dividend Interest Total

Dec`13 0.000 0.000 0.000

Jun`14 0.000 0.000 0.000

Dec`14 0.390 0.000 0.390

2014 Total: 0.390 0.000 0.390

Portfolio Costs

Initial Fee – MetCI (incl. VAT): 0%

Initial Fee – Adviser (incl. VAT): 0%

Annual Management Fee (incl. VAT): 1.48%

Performance Fee: Yes 15% of excess above benchmark over rolling 2 years, capped at max 2% p.a.

Total Expense Ratio (TER) (incl. VAT): 1.64%

Regulation 28

Compliant: No

Intended Maximum Limits: Equity 100.00% Property 25.00% Equity & Property 100.00% Foreign 100.00% Africa 5.00% Cash 0.00% Debt 0.00%

Portfolio Risk & Term

Inception cumulative performance graph based to 100

Monthly (%)

Mar'15 Feb'15 Jan'15 Dec'14 Nov'14 Oct'14 Sep'14 Aug'14 Jul'14 Jun'14 May'14 Apr'14

Fund 2.60 6.79 -3.12 2.33 4.99 -5.20 2.44 -0.72 -0.54 2.46 0.62 0.16

Benchmark 2.42 6.11 -1.26 3.08 2.05 -1.57 3.39 1.47 -0.85 2.36 2.57 1.21

Cumulative (%) Annualised (%)

Fund Benchmark Cash Inflation Fund Benchmark Cash Inflation

1 month 2.60 2.42 0.53 0.63 - - - -

3 months 6.15 7.30 1.53 0.27 - - - -

6 months 8.11 11.10 3.10 0.45 - - - -

9 months 9.36 15.57 4.64 1.92 - - - -

1 year 12.91 22.80 6.13 3.91 12.91 22.80 6.13 3.91

Inception 28.02 44.51 9.82 8.36 16.03 24.80 5.80 4.95

Portfolio Holdings

Asset Allocation (%) Top Holdings (%)

Berkshire Hathaway INC 9.99 American International Group 7.99 Wisdomtree Japan Hedged Equity Fund 7.20 Leucadia National Corporation 5.91 Scorpio Tankers Inc 5.25 Ford Motor Co 5.04 Sony Corporation 4.40 Voya Financial Inc 4.30 Morgan Stanley 3.54 Ally Financial Inc 3.16

Currency Allocation (%)

MET Collective Investments

Portfolio Mandate

Fund Managers

Leandro Gastaldi BCom (Hons) UCT, PGDA (Acc) UCT, CFA

Portfolio Manager

Blue Quadrant Capital Management

Start Date with Fund: 01 Aug 2013

Leandro is a Director and Founder of Blue Quadrant Capital Management. He has extensive experience in the industry having worked previously as a research analyst and portfolio manager. He joined Anglorand Securities in 2006 as a portfolio manager and managed the Anglorand Growth Fund between 2007 and 2009. Leandro graduated from the University of Cape Town with a Bcomm (Honours) in accounting and economics. In 2005 he qualified as a Chartered Financial Analyst (CFA).

Contact & Other Information

Scheme

MET Collective Investments Scheme

Custodian/Trustee

Standard Bank of South Africa Limited

Telephone: +27 (0)21 441 4100

Management Company MET Collective Investments (RF) (Pty) Ltd 268 West Avenue, Centurion, 0157 PO Box 7400, Centurion, 0046

Facsimile: +27 (0)12 675 3889

Call Centre: 0860 111 899

Email: [email protected]

Web: www.metci.co.za

Registration No.: 1991/003741/07

Policy

The Blue Quadrant MET Worldwide Flexible Fund’s primary objective is to generate high long term total returns. The investable universe of the portfolio includes interest bearing securities (including, but not limited to bonds, inflation linked notes and bonds, convertible bonds, debentures, corporate debt, cash deposits and money market instruments) as well preference shares, equity securities, property securities, convertible equities, derivatives and non-equity securities and assets in liquid form. The portfolio may from time to time invest in listed and unlisted financial instruments, in accordance with the provisions of the Act, and the Regulations thereto, as amended from time to time, in order to achieve the portfolio’s investment objective. The manager may also include forward currency, interest rate and exchange rate swap transactions for efficient portfolio management purposes. The manager may also invest in participatory interests or any other form of participation in portfolios of collective investment schemes or other similar collective investment schemes as the Act may allow from time to time, and which are consistent with the portfolio’s investment policy. Where the aforementioned schemes are operated in territories other than South Africa, participatory interests or any other form of participation in portfolios of these schemes will be included in the portfolio only where the regulatory environment is, to the satisfaction of the manager and the trustee, of sufficient standard to provide investor protection at least equivalent to that in South Africa. The manager will be permitted to invest on behalf of the portfolio in offshore investments as permitted by legislation. The portfolio will be actively managed with exposure to various asset classes being varied to reflect changing economic and market circumstances, in order to maximize returns investors. The trustee shall ensure that the investment policy, as set out above, is adhered to, provided that nothing contained in the investment policy shall preclude the manager from varying the proportions of the aforementioned securities and assets in liquid form, or the assets themselves, should changing economic factors or market conditions so demand.

Limits & Constraints

• None

Disclosures

FAIS Conflict of Interest Disclosure

Please note that in most cases where the FSP is a related party to Blue Quadrant Capital Management (Pty) Ltd and/or MET Collective Investments (RF) (Pty) Ltd, Blue Quadrant Capital Management (Pty) Ltd and/or the distributor earns additional fees apart from the FSP’s client advisory fees. It is the FSP’s responsibility to disclose additional fees to you as the client. Such fees

are paid out of the portfolio’s service charge and range anything between (excl VAT):

Service Fees Performance Fees

MetCI Blue Quadrant Distributor/LISP Total (Maximum)

Up to 0.15% Up to 1.15% Up to 0.00% Up to 1.30% 100% to Investment Manager

The Total Expense Ratio (TER) has been calculated using data from 01 January 2014 until 31 December 2014. The TER is disclosed as the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio and underlying portfolios. The TER is calculated quarterly but may additionally be re-calculated with effect from any significant portfolio restructurings and/or fee changes occurring. A higher TER ratio does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TER’s.

Performance figures quoted are from Morningstar, at the date of this fact sheet, for a lump sum investment, using NAV-NAV prices with income distributions reinvested. CPI/Inflation figures are lagged by one month. Performance data may not be displayed for recently launched funds as regulations governing the content of this factsheet preclude the publication of performance data for any fund/class that is less than 6 months old.

Collective Investment Schemes (CIS) in securities are generally medium- to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. All CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from MET Collective Investments (RF) (Pty) Ltd. Commission may be paid and if so, would be included in the overall costs. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. MET Collective Investments (RF) (Pty) Ltd reserves the right to close and reopen certain portfolios from time to time in order to manage them more efficiently. The fund may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. Different classes of participatory interests apply to certain portfolios, which are subject to different fees and charges. The exposure limit to a single security, in certain specialist equity portfolios, can be greater than is permitted for other portfolios in terms of the Collective Investments Schemes Control Act. MET Collective Investments (RF) (Pty) Ltd’s portfolios are valued daily at 15h00. Instructions must reach MET Collective Investments (RF) (Pty) Ltd before 14h00 to ensure same-day value. MET Collective Investments (RF) (Pty) Ltd is the Manager of the MET Collective Investments Scheme, and a full member of the Association for Savings and Investment SA. The Standard Bank of South Africa Limited (PO Box 54, Cape Town, 8000) is the trustee of MET Collective Investments Scheme. Although reasonable steps have been taken to ensure the validity and accuracy of the information in this document, MET Collective Investments (RF) (Pty) Ltd does not accept any responsibility for any claim, damages, loss or expense, howsoever arising, out of or in connection with the information in this document, whether by a client, investor or intermediary. This document should not be seen as an offer to purchase any specific product and is not to be construed as advice. Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of MET Collective Investments (RF) (Pty) Ltd’s products.

Blue Quadrant Capital Management (Pty) Ltd

Unit C, Clareview Business Park, 236, Landsdowne Road, Claremont, 7700

FSP No: 42165 Fax: +27 (0)21 672 4701

SmartAccess: Email: [email protected]

Tel: +27 (0)21 672 4744 Web: www.blueqcm.com

MET Collective Investments

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