2016 q1 morningstar fund observer

2Q

Fund ObserverSouth Africa

Morningstar Fund Observer | 1st Quarter 2016

7Commentary: Quarterly Market Summary

8Commentary: Fund Fees Predict Future Success or Failure

5Data: Fund Houses

6Data: Market Performance

3Data: Individual Funds

4Data: Fund Categories

Contents

©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.


Morningstar

Rating

Return (Past

Quarter)

Mstar Category

Quartile RankReturn (1 Year)

Fund Level AUM

(R Mil)

Quart Est Net

Flow (R Mil)

Short Term Bond

Coronation Strategic Income 4 2.6 19 7.4 22 440 -696

STANLIB Income 4 2.0 71 7.3 19 945 344

Cautious Allocation

Allan Gray Stable 5 2.8 10 14.9 38 095 736

Prudential Inflation Plus 5 2.2 23 6.5 38 317 21

Coronation Capital Plus 3 1.8 43 3.5 20 795 -1 188

Coronation Balanced Defensive 4 1.4 56 6.4 39 316 -1 257

ABSA Absolute 3 1.0 73 4.9 17 765 -578

Nedgroup Inv Stable 4 0.1 88 7.3 34 292 498

Moderate Allocation

Allan Gray Balanced 5 4.7 5 14.0 115 388 -476

Investec Opportunity 5 3.7 8 13.1 40 260 244

Prudential Balanced 4 2.3 32 5.4 13 654 238

Discovery Balanced 4 1.6 48 5.4 16 007 1 266

Coronation Balanced Plus 4 1.4 55 4.7 84 172 -1 487

Foord Balanced 5 1.0 62 5.8 49 385 86

South African Equity

Coronation Top 20 3 14.0 6 - 1.8 18 150 -893

Allan Gray Equity 5 7.0 19 9.4 39 672 -847

Foord Equity 5 4.8 35 0.7 12 731 -322

Old Mutual Investors 4 3.5 53 2.6 13 631 -64

Nedgroup Inv Rainmaker 3 3.4 55 3.9 15 702 -344

Global Equity

Allan Gray - Orbis Global Equity FF 5 - 2.9 12 19.2 15 613 -209

Performance and Estimated Net Flows for Largest 20 Funds by AUM

©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute

investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be

responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

AG BalancedAUM: R115bn

AG EquityAUM: R40bn

AG StableAUM: R38bn

Coro Bal DefensiveAUM: R39bn

Coro Bal PlusAUM: R81bn

Coro Capital PlusAUM: R21bn

Foord BalancedAUM: R48bn

Investec OpportunityAUM: R40bn

Prudential Inf PlusAUM: R38bn

0

50

100

150

200

250

300

350

400

450

0 50 100 150 200 250 300 350

Avg Mkt

Cap

(R bn)

# of holdings

10 Largest Funds: Market Cap vs # of holdings

Nedgroup StableAUM: R34bn


ASISA Categories Return (1 Month)Return (Past

Quarter)1 Year Return

Category AUM

(R m)

Quart Est Net

Flow (R m)

South African RE General 7.8 6.0 4.2 64 927 -880

South African IB Variable Term 2.1 5.2 0.8 44 415 -1 586

South African EQ General 6.7 4.5 0.4 284 860 -692

South African EQ Mid/Small Cap 7.3 3.5 1.8 6 687 -57

South African IB Short Term 0.7 2.0 6.8 85 054 53

South African MA High Equity 3.4 1.6 4.6 428 673 4 786

South African MA Low Equity 1.9 1.5 5.6 236 675 2 773

South African MA Medium Equity 2.7 1.4 4.7 46 327 -402

South African MA Flexible 3.8 1.3 2.0 55 345 1 671

Worldwide MA Flexible 0.9 - 2.6 9.1 23 111 236

Global RE General 0.7 - 2.7 19.2 8 802 -42

Global MA Low Equity - 4.0 - 3.8 19.7 3 728 390

Global MA Flexible - 2.3 - 5.0 15.0 18 285 862

Global MA High Equity - 2.2 - 5.0 16.4 11 342 744

Global EQ General - 1.5 - 5.9 14.0 71 081 941

Morningstar Categories Return (1 Month)Return (Past

Quarter)1 Year Return

Category AUM

(R m)

Quart Est Net

Flow (R m)

Property - Indirect South Africa & Namibia 8.0 6.8 4.9 66 457 -926

Diversified Bond 2.2 5.5 0.8 44 229 -1 424

South Africa & Namibia Equity 6.9 4.8 0.9 279 452 187

Flexible Bond 1.2 2.5 6.9 53 761 3 389

Bond - Short Term 1.0 2.3 6.7 85 235 -924

Bond - Ultra Short Term 0.7 1.9 6.8 51 092 518

South Africa & Namibia Small-Cap Equity 6.8 1.8 3.1 8 795 -220

Aggressive Allocation 3.5 1.6 5.3 57 681 573

Cautious Allocation 1.5 1.4 6.5 246 652 6 866

Moderate Allocation 2.5 1.1 5.7 421 025 1 820

Flexible Allocation 2.0 - 0.4 5.6 97 505 4 728

Global Bond - ZAR/NAD - 4.7 - 1.3 20.9 1 353 107

Property - Indirect Global 1.4 - 1.9 20.0 8 703 -23

Global Large-Cap Blend Equity - 0.5 - 5.8 15.5 59 119 743

Africa Equity - 0.5 - 6.3 - 7.1 2 316 -149

Performance and Estimated Net Flows by Fund Category

©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment

advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading

decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.


AUM (R Mil)

(30/09/2015)

Quarterly Net-

Flow (R Mil)Net-Flow Rank

# of 4 & 5

Star** Rated

Funds

Total # of Star

Rated Funds

% of Funds

rated 4 & 5

Stars

ABSA Fund Managers 36 930 -138 32 8 56 14%

Allan Gray Unit Trust Mgmt 210 959 -748 35 9 9 100%

Ashburton Management Company 9 885 221 14 9 20 45%

Boutique Collective Investments 54 761 3 903 3 35 138 25%

Cadiz Collective Investments 1 296 -62 29 1 12 8%

Ci Collective Investments 6 085 829 9 6 40 15%

Community Growth Mgmt Co 748 0 22 0 2 0%

Coronation Management Co 230 542 -7 138 37 35 62 56%

Discovery Life Collective Inv 28 538 1 701 5 2 10 20%

Element Unit Trusts 930 15 21 3 15 20%

FNB Unit Trusts 284 -3 23 0 1 0%

Foord Unit Trusts 74 379 -112 31 21 21 100%

Grindrod Collective Investments 2 972 46 19 1 5 20%

H4 Collective Investments 9 341 -26 25 0 5 0%

Investec Fund Mgrs SA 127 630 871 8 69 139 50%

Investment Solutions UTs Ltd 17 288 93 17 6 16 38%

IP Management Company 5 489 267 12 9 56 16%

Kagiso Collective Investments 2 083 -61 28 0 6 0%

Marriott Unit Trust Mgmt Co 9 117 -50 26 5 17 29%

MET Collective Investments Limited 32 803 2 688 4 39 116 34%

Momentum Collective Investments 43 266 -252 33 80 230 35%

Nedgroup Collective Investments 112 079 261 13 60 109 55%

Oasis Crescent Management Co 13 723 -50 27 15 32 47%

Old Mutual Unit Trust Mgrs 70 603 109 16 18 83 22%

Personal Trust Intl Mgmt Co 5 079 -6 24 2 5 40%

PPS Management Company (Pty) Ltd 11 208 739 11 4 21 19%

Prescient Management Co 46 792 4 894 1 71 146 49%

Prime CIS Mgmt Co 3 024 28 20 6 9 67%

Prudential Portfolio Managers 86 697 1 577 7 25 37 68%

PSG Collective Investments 25 518 -501 34 16 42 38%

RECM Collective Investments 1 336 -63 30 0 5 0%

Rezco Collective Investments 8 371 1 657 6 4 8 50%

Sanlam Collective Investments 100 304 3 932 2 87 266 33%

Satrix Managers (Pty) Limited 7 531 827 10 0 16 0%

STANLIB Collective Investments 100 264 -1 436 36 49 175 28%

STANLIB Multi-Manager 34 221 58 18 9 37 24%

Sygnia Collective Investments 5 722 134 15 3 3 100%

*Figures are estimates which exclude Money Market and Fund of Funds

**Morningstar rates investments from 1 to 5 stars based on risk-adjusted performance relative to similar investments over a minimum of 3 years

1st Quarter Net Flows* and Morningstar Ratings by Fund Company

©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice

offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions,

damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.


Market Performance *Local Market Indices 1 Month Quarter/YTD 1 Year 3 Years 5 Years

JSE All Share

JSE All Share SWIX

JSE Top 40

JSE SA Listed Property

JSE Small Cap

JSE Mid Cap

STeFI Composite

Beassa ALBI

6.44

8.32

6.07

9.48

8.29

8.51

0.58

2.63

3.17

2.65

3.29

4.57

3.75

2.13

6.61

-0.61

3.87

5.88

1.50

10.10

11.39

18.83

1.68

6.55

12.78

14.58

12.68

14.35

14.65

13.07

6.01

3.98

13.57

15.43

13.04

19.81

17.53

16.08

5.81

7.79

Global Market Indices 1 Month Quarter/YTD 1 Year 3 Years 5 Years

MSCI World

S&P 500

FTSE 100 TR GBP

Nikkei 225 Average

Shanghai SE Composite

7.48

6.78

1.78

5.35

11.75

0.38

1.35

0.07

-11.23

-15.12

-3.81

1.78

-5.26

-11.05

-19.85

6.10

11.82

2.43

12.48

10.33

5.80

11.58

4.66

13.51

0.51

Top 10 Stocks by Market Cap QuantitativeMoat

QuantitativeFair-ValueEstimate

QuantitativeValuation

QuantitativeValuation

Uncertainty

QuantitativeFinancial

Health

Naspers

SABMiller

Richemont

BHP Billiton

British American Tobacco

Steinhoff

Sasol

MTN

Old Mutual

Standard Bank

Wide 1 770.65 Overvalued Medium Moderate

Wide 869.28 Overvalued Low Strong

Wide 115.13 Undervalued High Strong

None 166.18 Fairly Valued High Moderate

Wide 890.26 Fairly Valued Low Moderate

Narrow 92.14 Fairly Valued High Strong

None 141.50 Undervalued Medium Moderate

None 381.46 Overvalued Medium Moderate

None 42.05 Undervalued Medium Strong

Narrow 167.04 Undervalued High Moderate

*All Returns are in base currency

JSE Sector Indices5.1

18.1-8.5

0.8-2.8

25.2

10.0-1.0

6.8

11.56.2

-0.7

8.82.5

-11.0

7.87.6

-4.0

4.41.3

-12.4

7.36.7

-21.5

-25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0

Basic Materials

Consumer Goods

Consumer Services

Financials

Health Care

Industrials

Technology

Telecommunication

Total Ret 1 Mo (Qtr-End) Total Ret 3 Mo (Qtr-End) Total Ret 1 Yr (Qtr-End)

Kyle CoxInvestment Analyst

Morningstar Investment Management

The first quarter of 2016 brought with it massive amounts market volatility resulting in a challenging period for fund managers. Rand strength and a strong recovery in commodity prices broke the trend that has seen offshore categories oupterform their local counterparts in recent times. Indeed, all 14 local ASISA categories produced positive performance for the quarter while all 11 offshore categories ended the quarter in negative territory. This performance is a stark contrast to that seen in 2015, with the strong returns from resource stocks on the back of rising commodity prices a prevalent theme throughout a bumpy quarter.

Local asset prices recovered nicely in the first quarter, and were bouyed by a strengthening Rand, rising commodity prices and a generally well-received national budget. It must be noted however that the quarterly gains in local asset prices largely represent a recovery from relatively low price levels as opposed to a rally based on improving economic fundamentals. This said, the trend of lower returns from the largest unit trust categories continued with only mildly positive returns evident in the first quarter. Returns from the multi-asset categories have come under increasing pressure with a growing disparity evident between their returns and the local equity market. For instance, compared to the FTSE/JSE All Share Index 's return of 3.9%, the South African Multi-Asset categories all experienced similar, low returns: High Equity (1.6%), Medium Equity (1.4%), Low Equity (1.5%) and Flexible (1.3%). The General Equity category, however, outperformed the index, with a return of 4.5% for the quarter.

Global markets provided a mixed bag of performance over the quarter resulting in flat to negative gains at an aggregate level. In US dollar terms, emerging markets outperformed their developed peers as investors' risk appetite grew through the second half of the quarter. Rand strength over the quarter was a ubiquitous theme, and pushed returns from offshore categories into negative territory for the period.

In a turnaround of fortunes, local categories dominated the list of best performing categories in the first quarter of 2016. South African Resources was top of the list with a stellar return of 20.4% in the first quarter, as rallying commodity prices stimulated a recovery in asset prices within the sector. The next best performing categories were South African Listed Property and South African Interest Bearing Variable Term with returns of 6.0% and 5.2% respectively. Interestingly, the multi-asset local categories underperformed the more asset class specific categories. This is indicative of the higher aggregate cash drag and larger offshore allocations evident in the local multi-asset portfolios.

The worst performing category for the quarter was Regional Equiity General with a return of -9.0%. Indeed, weak global market performance coupled with a strengthening Rand negatively impacted all offshore categories in the first quarter. The next worse performing category was Global Equity General with a quarterly return of -5.9%.

The best performing funds in first quarter of 2016 were the Old Mutual Gold fund (63.3%), the Investec SA Value fund (41.2%) and the Investec Value fund (39.1%). These results aren’t surprising given the strong rally commodity prices and therefore resource stocks, which dominate the above portfolios.

Meanwhile the worst performing funds included the Investec Africa fund (-16.2%), Prescient China Balanced fund (-14.0%) and the Flagship IP Worldwide Flexible Fund of Funds (-13.2%). Rand strength as well as unfavourable market movements were the key drivers of underperformance of the above mentioned funds over the quarter.

In conclusion, 2016 has seen a long-awaited return to form of the value style of investing, which outperformed the growth and momentum styles in the first quarter.

*unless otherwise stated returns are quoted in Rand terms

Commentary A turnaround in fortunes for local categories as domestic asset prices and the Rand gained ground in what was a highly volatile, yet positive, period for markets.

Local equities, property and bonds post positive returns during a period of Rand strength and strong gains in commodity prices...


Russell KinnelDirector of Manager Research

If you've been following Morningstar's research for long, you know how important we think expense ratios are to the fund selection equation. The expense ratio is the most proven predictor of future fund returns. We find that it is a dependable predictor when we run the data. That's also what academics, fund companies, and, of course, Jack Bogle, find when they run the data.

But it's been a couple of years since I provided the proof statement, so we have updated the data to show just how strong and dependable fees are as a predictor of future success. That's not to say investors should use them in isolation. There are many other things to consider, but investors should make expense ratios their first or second screen.

How We Ran the Test

To begin any test of predictive power, we use historical data so that we are using the data that investors would have had access to at the time. That includes funds that no longer exist. In fact, that's a key part of the story because higher-cost funds are much more likely to fail and be merged away. If you do not factor them in, you will see better performance from higher-cost funds than was the reality, as those that survived naturally are more likely to have produced better performance while so many failures have been culled.

We looked at a few different measures to test how expense ratios worked: total return over the ensuing period, load-adjusted returns, standard deviation, investor returns, and subsequent Morningstar Rating. In addition, we calculated a success ratio for all the above measures. The success ratio is our way of factoring in mutual funds that were merged away or liquidated over the ensuing time period. The other figures only include data on funds that survived the whole time period. But the success ratio asks, "What percentage of funds survived and outperformed their category group?" Only funds that did both count toward the success ratio, as it is hard to argue that funds that no longer exist or underperformed were successful. For our tests, we began by grouping funds into quintiles within their peer group and then rolled that up into an asset class. That means we ordered each Morningstar Category, such as large growth, high-yield muni, and so on, into quintiles. Then we grouped all the cheapest-quintile funds in an asset class, then the second-cheapest-quintile funds, and so on.

We also ran all of the above tests against a universe in which only one share class per fund was included. Some readers of past studies wondered whether fees were as strong for selecting between funds rather than among share classes of the same fund. So, to eliminate comparisons of multiple share classes of the same fund, we limited this test to the oldest share class of a fund.

We looked at the five years ended December 2015, the four years ended 2015, and so on.

The Answer: Costs Really Are Good Predictors of Success

We've done this over many years and many fund types, and expense ratios consistently show predictive power.

Using expense ratios to choose funds helped in every asset class and in every quintile from 2010 to 2015. For example, in U.S. equity funds, the cheapest quintile had a total-return success rate of 62% compared with 48% for the second-cheapest quintile, then 39% for the middle quintile, 30% for the second-priciest quintile, and 20% for the priciest quintile. So, the cheaper the quintile, the better your chances. All told, cheapest-quintile funds were 3 times as likely to succeed as the priciest quintile. (If you're wondering why only one quintile had a success ratio above 50%, it's because many funds did not survive the time period. If no funds were merged away, then the overall success rates would average something close to 50%.) As it was, about 20% of the funds were merged away, making 40% the average success ratio point.

Fund Fees Predict Future Success or Failure

Fund Fees have remarkable predictive power, and investors can put them to their advantage

Commentary


The pattern was pretty similar in other asset classes. For example, international-equity funds had a 51% success ratio for the cheapest quintile compared with 21% for priciest. Balanced funds had a 54% success rate for the cheapest quintile compared with 24% for the priciest. Taxable-bond funds were even more striking, as the cheapest quintile delivered a 59% success rate versus just 17% for the priciest quintile. Muni bonds had a similar pattern, with a 56% success rate for the cheapest quintile and 16% for the priciest. The predictive power also holds up in the other areas we tested. It points investors to a better outcome for investor returns and for load-adjusted returns. That makes some sense, as both are fairly closely tied to total returns.

It was a much weaker predictor of standard deviation, though that's not a big surprise, as fees and volatility are not very closely linked. For U.S. equity funds and sector funds, standard deviation was a hair lower for lower-cost funds. There wasn't much pattern for the other asset classes. Funds with high costs, especially in bonds, do tend to take greater risk in order to produce a competitive yield. However, that generally means taking on more credit risk, and credit risk damps standard deviation except when it blows up.

So, what if we limit our fee test to just one share class per fund? It actually shows stronger predictive power. For example, the success rate of returns in U.S. equity funds rose to 64% with just one share class versus 62% with all of them, and the priciest quintile falls to 15% versus 20% for all share classes. This was true in most asset classes except for international equity, where the success rates became more compressed. More important than the slight improvement in results is the larger point that this clearly helps you choose among funds and that the share-class criticism of fee studies does not hold up.

Finding Cheapest-Quintile Funds

Now that you know expense ratios are a crucial part of fund selection, how do you find the cheap ones? On Morningstar.com, you can search for below-average fees using the Fund Screener. Also, on individual fund data pages, we describe fund expense ratios from Low to High on the Expense tab. Finally, the Fund Spy selector on mfi.morningstar.com tells you whether a fund's fees are in the cheapest quintile. Just enter the fund ticker.

Fund Fees Predict Future Success or FailureCommentary


©2016 Morningstar, Inc. All rights reserved. The information, data, analyses, and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

2016 q1 morningstar fund observer

Economy & Finance