28/03/2018 1 Hot Topics | March 2018 Leading opinion: Getting more out of investing 4. A new concept to disrupt the retirement industry Agenda 9:00 10:30 Break 1. Setting the scene 2. 2018 global themes and opportunities 3. 2018 local themes and opportunities 4. A look at alternative investments 11:00
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28/03/2018
1
Hot Topics | March 2018
Leading opinion: Getting more out of investing
4. A new concept to disrupt
the retirement industry
Agenda
9:00
10:30
Break
1. Setting the scene
2. 2018 global themes and
opportunities
3. 2018 local themes and
opportunities
4. A look at alternative
investments
11:00
28/03/2018
2
Setting the scene
Presenters
Lesiba Mothata Chief Client Officer
Alexander Forbes Investments
The experts
Gyongyi KingChief Investment Officer
Alexander Forbes Investments
John AndersonGroup Executive:
Client Solutions,
Strategy
Alexander Forbes
Deb ClarkeGlobal Head of
Investment Research
Mercer
28/03/2018
3
template
www.slido.com
Join with event code
#AFHotTopics
Go to
Question
Whose interests are you representing here today?
Members of our retirement fund
My clients interests as a consultant, actuary or in another capacity
Media, Financial Services Board, National Treasury
None of the above
28/03/2018
4
Setting the scene – Lesiba Mothata, Chief Client Officer
The current reality
AFRF Member Watch Survey 2016
Credit Suisse Global Return Yearbook 2017
Stats
Ave. preservation:
Retire comfortably:
8.4%
6%
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5
Why haven’t strong returns translated into better outcomes? Industry has been fixated on returns instead of investor outcomes.
Source: Behavior Gap, Carl Richards
GREEDBUY FUNDS/HIRE
MANAGERS
FEARSELL FUNDS/FIRE
MANAGERS
Better outcomes
through
meticulous risk
management
Re
turn
Time
*
Competitive long-term growth with focus on client outcomes
28/03/2018
6
1 Your Goals
We work with you to
establish the right goals
2 Solutions design
We work with you to design
and implement solutions to
meet your goals
3Client experience
We help you track the
journey towards your
goals
Process uniquely links advice to investment management
Manages money in a way to grow off a higher base
We communicate to give customers clarity and confidence in meeting their goals
Living*Investing framework Strategic relationship
• Strategic alliance with Mercer combines our thinking and research with unrivalled global experience
• Unfettered access to global skills, research and experience that we can leverage to improve outcomes for clients
• Clients will benefit from this relationship in terms of access to professional expertise and investment propositions
Global leadership with a Pan-African presence
+
28/03/2018
7
Mercer Investments
$200bnGlobal
Delegated
Assets
Alexander Forbes and Mercer... Leveraging off strengths
Alexander Forbes Mercer
Local leadership
Accountability
Customisation
Trusted adviser
Regional
company with
regional focus
Integrated
approach
Developing strategies
to address threats
and opportunities
Capturing
innovation both
globally and
locally
140+ full-time manager
researchers
Involvement with
world’s largest
institutional investors
Strength in global
Alternatives
Aggregated
buying power
Breadth of
experience
28/03/2018
8
Global themes – Introducing Deb Clarke from Mercer Local themes – Lesiba Mothata, Chief Client Officer
28/03/2018
9
2018 themes & opportunities
FROM QE TO QT -- AN EMERGING MARKET RESPONSE
Uneventful response to higher
US interest rates
Emerging markets
assets in favour
Prepare for market volatility
OPPORTUNITIES ABOUND AS AFRICA INDUSTRIALISES
Fastest growth region in
the world
Untapped private
funding model
Underutilised alternative
asset class
ALTERNATIVES ATTRACTIVE IN A LOW RETURN ENVIRONMENT
No bull market started on dear
valuations
Future returns to be
lower
Alternative assets can
augment outcome
STEWARDSHIP IN THE 21ST CENTURY
Governance practices impacted
2017 equity market returns
SA investment
community focused on
ESG issues
We incorporate ESG in our
investment process
1. From QE to QT – an emerging market response
Source: Institute of International Finance, January 2018
They are investments that may be relatively illiquid, that are not publicly traded or that use
non-traditional strategies
Emerging market (EM) flows minus mature market (MM) flows (% of assets under
management)
Strong demand from EM assets
EM bonds/equities now represent 11.8%/13.4% of global funds’ bond/equity
portfolios
28/03/2018
10
1. From QE to QT – an emerging market response
Source: Bank of America/Merrill Lynch, September 2017
They are investments that may be relatively illiquid, that are not publicly traded or that use non-traditional strategies
Improved EM fundamentals suggest there are still legs in the
current bull market
Start date End date Duration (months) % Returns in US$ p.a.
1 Oct-76 Oct-80 49 169 (28)
2 Apr-85 Jul-90 64 299 (30)
3 Jan-91 Feb-94 37 221 (46)
4 Sep-98 Feb-00 17 125 (77)
5 Mar-03 Oct-07 56 396 (41)
6 Mar-09 May-11 26 154 (54)
7 Jan-16 Sep-17 20 60 (33)
Average (equal weighted) 42 (3.5 years) 228 (46)
Mean 43 (3.6 years) 195 (44)
Anatomy of EM bull markets
1. From QE to QT – an emerging market response
Source: Bank for International Settlements (February 2018) and Alexander Forbes Investments
Overvalued
Undervalued
Overvalued
Undervalued
Adjustment after downgrade has been different. Risks for rand strength remain
Currency valuation: Brazilian real vs. SA rand
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11
2. Opportunities abound as Africa industrialises
Source: PwC Annual Global CEO Survey, International Monetary Fund and Alexander Forbes Investments
Where half of the population growth will come from
The fastest growing middle class and highest broadband
growth
Has 21 countries of the 43 in the world that will grow at
>5%
Will have 2 million new workforce entrants
every year
Currently represents 15% of world’s
population and 3% of its GDPPart of China’s Belt and Road Initiative
Fastest growth and youthful region in the world
Every year between 2015 and 2030, 29-million new entrants will
join Africa’s labour force
2. Opportunities abound as Africa industrialises
Source : Deloitte Africa Construction Trends 2017 Report
Infrastructure needs are ≈ US$170 billion annually, with a funding gap of ≈ US$108 billion
27.1
15.5
14.5
13.2
9.2
8.3
6.33
1.7 1.3
Who funds?
Governments
China
Private Domestic
International Development Finance Institutions
African Development Finance Institutions
European countries
Other countries
US
South Africa
Brazil
Sources of funds for infrastructure
28/03/2018
12
3. Alternatives attractive in a low return environment
7
9
11
13
15
17
19
21
23
25
1995 1999 2003 2007 2011 2015
Alsi P/E ratio ave. = 15.4
Source: I-Net Bridge, Bloomberg and Alexander Forbes Investments
Investment implications
No bull market was
started on dear
valuations.
Even when the current
investment outcome has
been stellar, valuations
underpin future returns.
Need to diversify into
alternative asset classes.
JSE/FTSE All Share Index valuation (price:earnings ratio)
Investment implications
Greater levels of diversification.
Robust portfolios on a risk management
front.
Strong alignment with long-term
investment horizon of retirement funds.
Making a positive contribution to general
economic growth.
3. Alternatives attractive in a low return environment
Source: Alexander Forbes Investments
Enhanced
return
Long
term
Diversification
Inflation
protectionAccess
Societal
benefits
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13
4. Stewardship in the 21st century
Source: JP Morgan and Bank of America/Merrill Lynch
2017
JSE/SWIX 17.7%
JSE/SWIX ex properties and SNH 21.2%
Outperformance (bps) +347
9.3%
16.0%
24.2%
20.1%
20.9%
13.0%
Investment implications
Governance considerations
negatively impacted investment
outcomes.
Poor ESG processes at
companies can destroy value.
Even for passive investors,
there is a responsibility to take
ESG considerations into
account as risks amount.
Active managers need to apply
their minds fully when engaging
with the company management
on ESG issues.
4. Stewardship in the 21st century
Source: Alexander Forbes Investments
Independence
of Directors
Ownership and
Control StructureRemuneration Policy,
King IV
External Audit and Audit
Committee Independence
Proxy Voting
G
28/03/2018
14
2018 themes & opportunities
FROM QE TO QT -- AN EMERGING MARKET RESPONSE
Uneventful response to higher
US interest rates
Emerging markets
assets in favour
Prepare for market volatility
OPPORTUNITIES ABOUND AS AFRICA INDUSTRIALISES
Fastest growth region in
the world
Untapped private
funding model
Underutilised alternative
asset class
ALTERNATIVES ATTRACTIVE IN A LOW RETURN ENVIRONMENT
No bull market started on dear
valuations
Future returns to be
lower
Alternative assets can
augment outcome
STEWARDSHIP IN THE 21ST CENTURY
Governance practices impacted
2017 equity market returns
SA investment
community focused on
ESG issues
We incorporate ESG in our
investment process
Global trends impacting investors – An EM response
R E G U L AT I O N S
C L I M AT E C H AN G E
T E C H N O L O G YF E E S
D I V E R S I T Y
N E W S O L U T I O N S
28/03/2018
15
Questions for Deb and Lesiba via Slido
Question
How satisfied are you about your board’s efforts in incorporating ESG
considerations into the fund’s investment strategy?
Not satisfied
Satisfied
Very satisfied
28/03/2018
16
Alternative investments – Gyongyi King, Chief Investment Officer
Regulation allows for increased portfolio diversification into private markets
Cash
Up to 100%
Property
Up to 25%
Equities
Up to 75%
Alternatives
Up to 15%
Commodities
Up to 10%
30% Global
assets
15% hedge and
private equity
28/03/2018
17
Alternatives: different risks for different sources of return
Source: Alexander Forbes Investments
Type Underlying investmentPerformance return
characteristics
Liquidity
profile
Private
equity
Buyouts, venture capital,
distressed debt
Higher performance return,
relative to listed equitiesLow
Private debtCorporate, real estate,
infrastructure
Income, with some downside
risk protectionLow
Real assetsInfrastructure, direct real estate,
natural resources, commodities
Income, some inflation
protectionLow
Hedge
funds
Long/short, relative value,
multi-strategy
Performance returns higher
than cash, diversificationModerate
Characteristics of private markets
Alternative investment strategies that
cannot be accessed through a listed
exchange
Typically long-
term investment
horizon
Limited
liquidity
Can give exposure to parts of the
economy that cannot be
accessed through listed
instruments
28/03/2018
18
Private markets follow these strategies
Private equity AgricultureDirect
property
Infrastructure Private debt
A story that resonates – for it is all around us
Wake up in
the morning Flat tyre on your
way to work
Long day at work,
not feeling well
Grab a sandwich
on way to work
28/03/2018
19
Why private markets?
Returns linked
to inflation
Inflation protection
2 – 20-year time
horizons
Long term
Environmental,
Social and
Governance attributes
Societal benefits
Alternative source of
income generation
Enhanced return
Uncorrelated, less
cyclical, lower volatility
Diversification
!
Societal benefits for investing in South African private markets
Energy efficiency
Carbon emissions
Water scarcity
Waste management
Environmental Impact
Assessments
Environmental
Affordable housing
Education
Healthcare
Gender and diversity
Employee
engagement
Job creation
Health and safety
Social
Stakeholder
engagement
Board of directors and
committees
Policies and
procedures
Transparency and
accountability
Governance
28/03/2018
20
Private markets in portfolios
Practicalities around implementation will need to be discussed
We are of the view that Funds should give consideration to private
markets
Low returns
expected from
listed asset
classes
Alternative
source
of returns
Societal
benefitsPortfolio
diversificatio
n
!
General hedge fund objectives
Employ
non-traditional
investment
strategies
Have a low
correlation to
traditional portfolios
of equities and
bonds
Have a clear focus
on downside risk
management
Target returns in
excess of cash
!
%
28/03/2018
21
Hedge funds – tools in the toolbox
Leverage
Shorting
Change in market exposure
Non-benchmark cognisant
Size
South African hedge fund universe and available strategies
Source: Novare Hedge Fund Survey 2016
Equity market neutral12.6% Multi-
strategy7.2%Volatility arbitrage
1.1%
Equity long/short
61.6%
Other strategies
0.7%
Fixed income …
Commodities
3.8%
28/03/2018
22
Share A @ R12 p/share
Share B @ R8 p/share
Buy back Share B at
the present price of R8,
make R100 profit
To buy stocks that will
go up in the future
Sell stocks now that will
go down in the future
May position the
portfolio for the market
to go up or down in the
future
Summary of Equity Long/Short
Buy 100 shares Share
A at price of R10 per
share
Borrow 50 shares of
Share B and sell for
R10 per share
Example One month laterAim
!
Summary of Equity Market Neutral
Buy 100 shares Share A
at price of R10 per
share
Borrow 100 shares of
Share B and sell for R10
per share
Market goes down 2%
Share A @ R9 p/share
Share B @ R8 p/share
Combination equals
profit of R100
To generate returns
regardless of direction
of market
Normally match long
and short stocks to
same value in same
sector
Buy stock in a sector
that will go up in the
future
Sell stock in a sector
now that will go down in
the future
Example One month laterAim
!
28/03/2018
23
Regulatory update
Latest regulation
Hedge funds managers’ regulation
Hedge funds (Collective Investment Schemes Control
Act) (CISCA)
Advantages of the new regulation
Practical issues when considering alternative investments
Risk management
Asset allocation
decisionManager
selection
MonitoringFund
selection
28/03/2018
24
Questions for Gyongyi via Slido Retirement fund survey – John Anderson, Client Solutions
28/03/2018
25
This edition includes 15 surveys with 58 managers and 369 funds, covering four
balanced surveys, ten specialist surveys, and a multi-manager survey
Alexander Forbes performance surveys continue to evolve
Despite a reduction in AUM of 7%, OMIG still the largest manager
28/03/2018
26
Shift towards smaller manager continues
76.9% 76.2%74.0%
71.5%69.2%
17.2% 16.8%19.3% 19.7% 20.8%
5.9% 6.9% 6.6%8.8% 10.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Top 10 Managers Next 10 Managers Remaining Managers
SA Equity Manager Watch™
25.8%
13.4%
16.9% 16.3% 15.1%16.0%
8.3%
11.8% 12.8%10.9%
-4.0%
0.5%4.0% 4.5% 4.8%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1 Year 3 Years (p.a.) 5 Years (p.a.) 7 Years (p.a.) 10 Years (p.a.)
Highest Median Lowest
1 year3 years
(p.a.)
5 years
(p.a.)
7 years
(p.a.)
10 years
(p.a.)
Range 29.8% 12.8% 12.9% 11.8% 10.3%
Tough environment for
active managers based on
large single stock
exposure in many
benchmarks
12 out of 51 Equity
portfolios changed to
Capped SWIX to mitigate
this risk
28/03/2018
27
Global Balanced Manager Watch™ – best investment view
15.3%
11.4%
15.0%13.9%
12.7%11.9%
7.8%
11.3%12.1%
10.5%
6.6% 5.6%
8.7%9.8%
8.9%
0%
5%
10%
15%
20%
1 Year 3 Years (p.a.) 5 Years (p.a.) 7 Years (p.a.) 10 Years (p.a.)
Highest Median Lowest
1 year3 years
(p.a.)
5 years
(p.a.)
7 years
(p.a.)
10 years
(p.a.)
Range 8.7% 5.8% 6.3% 4.1% 3.8%
Tough environment to
achieve meaningful
inflation-beating returns
over the past three years
On average, asset
allocation remained
relatively stable over the
year despite meaningful
changes in individual
manager asset allocations
Expect increased
divergence in asset
allocation views amongst
managers given new
foreign limits
28/03/2018
28
Time for a break
Presenters
Lesiba MothataChief Client Officer
Alexander Forbes
Investments
The experts
Prof. Robert C MertonAmerican economist, Nobel
Memorial Prize in Economic
Sciences laureate and
professor
John AndersonGroup Executive: Client
Solutions, Strategy
Alexander Forbes
28/03/2018
29
A new concept to disrupt the retirement industry
John Anderson
Defined
Outcome
Defined
Benefit
Defined
Contribution
28/03/2018
30
Give members peace of mind
Alexander Forbes ClarityTM
In partnership with Colourfield Liability Solutions
How does Alexander Forbes ClarityTM
stack up to international best practice?
Best practice principal ClarityTM
solution
1. Set replacement income as the goal ?
2. Set risks relative to the income goal ?
3. Asset allocation strategy to meet income risk ?
4. Efficient use of all dedicated assets ?
5. Offer personalization based on individual account ?
6. Take account of changes in market and personal
circumstances
?
7. Be effective even for those who are completely unengaged ?
8. Supply only meaningful information and offer actionable
choices
?
9. Offer robust, scalable and low cost investment strategies ?
10. Offer seamless transition and payout flexibility at
retirement
?
28/03/2018
31
Setting the income target
A retirement fund needs to provide a monthly income
Increase each year with inflation
Supported by the new proposed regulations
A good retirement is being able to maintain the standard of living
Members target individualised income goals based on time spent in a fund
84%
64%
34%
0%
50%
100%
44.5 45 45.5
Inc
om
e T
arg
et
at
Re
tire
me
nt
Age
Live example: Income Target (as % of Salary)
Source: Colourfield
28/03/2018
32
193%
118%
51%
0%
50%
100%
150%
200%
44.5 45 45.5
Fu
nd
ing
Le
ve
l
Age
Individual funding positions
Source: Colourfield
Individual Funding Positions (Assets/Liabilities)
Assets = (current retirement fund
savings + preservation fund +
retirement annuity) +
(value of the future contributions)
Liabilities = cost of securing income
Invest differently
New technology can take the following into account: Human capital
Future contributions
Contribution rate
Preserved assets
Fund credit
Cost to purchase a pension
Age
Salary
Length of service
Default regulations require that the investment strategy is appropriate for members and they are assisted in both the accumulation and post-retirement phase.
This unique information is used to create a custom, personalised investment strategy for each member
Majority allocation Bespoke de-risking portfolio (protects against
rising inflation, falling interest rates and
falling equity markets)
Growth portfolio that gives the best
chance of delivering higher investment
returns to fund shortfall
Members on track to meet income goals
Member Z
Member x
Member Y
Members that are
underfunded/not on track
to reach goals
Personalised investment strategy
Member x Y Z
Ratio of Savings to Salary 10.95 4.48 1.12
Contribution Rate 20.97% 20.97% 15.97%
Funding Ratio 202% 85% 53%
Growth assets 17% 37% 57%
De-risking assets 83% 66% 43%
Individual asset mix
28/03/2018
34
Invest differently
Individual asset allocations are optimisedGrowth De-risking
Growth Building Block
Growth portfolio options
2 31
Best View: ClarityTM Growth Peer focussed ClarityTM Smart Tracker
Newly developed portfolio specifically
designed for ClarityTM
Greater use of index tracking and smart
beta building blocks to reduce overall
costs
Represents AF Investments’ best house
view of balanced funds
28/03/2018
35
Growth Building Block
Implementation – Best of Breed
R700 billion via our advisory and implemented solutions;
Investment process has been forged over the past 20 years;
Combination of best of breed underlying asset managers;
As part of the Mercer Group, Mercer Investments significantly
bolsters our offshore research capability
Living*Investing approach integrates advice with the investment journey, focusing on the client experience every step of the way. We do this in pursuit of
certainty. We pursue certainty of investor excellence by boldly integrating the different aspects of investing to help investors achieve their investment outcomes.
Developed by Dimensional Fund Advisors (almost $530bn)
Colourfield has customized and tailored the technology with
Dimensional Fund Advisors for use in South Africa.
Implementation – Best of Breed
Technology Provider
Live for more than a decade Successfully deployed in the
USA, UK, Canada and Netherlands.
Developed by Robert Merton - winner of the 1997 Nobel