THE NEWS MAGAZINE OF OLD MUTUAL INVESTMENT GROUPFUNDAMENTALS

WHAT YOU'LL FIND INSIDEFLEDGLING CYCLICAL RECOVERY UNDER WAY, BUT POLITICS A RISK

RIAN LE ROUX

NO SURPRISES. BUDGET IS BOND MARKET NEUTRAL

WIKUS FURSTENBERG

BUSTING THE MYTHS IN MID- AND SMALL CAPS

WARREN JERVIS

EMERGING MARKETS AND A MAN CALLED TRUMP

SHARIEF PANSAREY & SIBONISO NXUMALO

MARCH 2017

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GLOBAL GROWTH GAINS A FOOTHOLDTINYIKO NGWENYA

4

FLEDGLING CYCLICAL RECOVERY UNDER WAY, BUT POLITICS A RISK RIAN LE ROUX

6

NO SURPRISES. BUDGET IS BOND MARKET NEUTRALWIKUS FURSTENBERG

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THE WORLD’S BEST PERFORMING EQUITY MARKET 11

DIVERSIFICATION IS THE ONE FREE LUNCH IN INVESTMENTS; USE IT.GRAHAM TUCKER

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BUSTING THE MYTHS IN MID- AND SMALL CAPSWARREN JERVIS

14EMERGING MARKETS AND A MAN CALLED TRUMPSHARIEF PANSAREY & SIBONISO NXUMALO

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EXTREME ROTATION: THE PRICE OF INSTANT GRATIFICATIONPETER BROOKE

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INSIDE THIS ISSUE

FOR MORE INFORMATION

WYNAND GOUWSHead: MarketingTel: +27 21 509 5601Email: wgouws@oldmutualinvest.com

JANINA SLAWSKIDirector of Marketing and DistributionTel: +27 11 217 1873Email: jslawski@oldmutualinvest.com

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GLOBAL GROWTH GAINS A FOOTHOLDTINYIKO NGWENYA | OLD MUTUAL INVESTMENT GROUP ECONOMIST

ABOUT THE AUTHORTinyiko is part of the Economic Research Unit. She is responsible for the analysis of macroeconomic data and key economic policy issues impacting financial markets.

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With the Dutch elections on 15 March 2017, local politics is

taking centre stage in Europe. While Brexit and Trump’s win have

demonstrated that polls are not the best predictors of an election

outcome, the latest Dutch polls do suggest that Geert Wilders’ far-

right Party for Freedom (PVV) is unlikely to gain enough seats to

form a coalition government. The PVV is strongly anti-immigration

and also in favour of the Netherlands leaving the European

Union. A Wilders-led government would most likely cause

another flare-up in concerns over a potential disintegration of the

Eurozone and may also strengthen similar nationalist sentiments

across the rest of the region.

STRONG SIGNALS FOR US RATE HIKE

Turning to the US, in President Trump’s first address to Congress

he again called for a strong fiscal boost for the US economy

through sharply higher infrastructure investment and big tax

cuts − although he did not shed any light on the details or

the timelines of his proposal. The uncertainty surrounding his

ability to successfully implement his policies supports our view

of a broadly flat US dollar through to 2018. A scenario where

Trump implements decent, but not extreme, fiscal stimulus, and

imposes only limited trade restrictions, would probably result in

the US Federal Reserve (Fed) raising interest rates pretty much in

line with market expectations.

At the beginning of February, the futures market put the chance

of a rate hike on 15 March at about one in three. By month-

end, hawkish comments by Fed chair Janet Yellen and a few

other committee members left the odds at more than two

in three. This was the Fed’s strongest signal yet that it is on

the cusp of lifting rates again − indicating that the pace of

tightening is likely to accelerate from the only one 25 basis

point hike in both 2015 and 2016 − as it seeks to prevent the

US economy from overheating.

Despite stronger global growth and the prospect of rising US

interest rates, the European Central Bank (ECB) is unlikely

to change course from its sub-zero interest rate stand and its

extensive bond-buying programme. The ECB first wants to see

inflation, currently at 1.8%, durably stabilise at around their 2%

target. While the recent rise in inflation appears to be mostly

driven by the recovery in the oil price, core inflation, which

strips out changes in food and fuel prices, is still only 0.9%.

CHINA’S HARD-LANDING FEARS FADE

At the start of this year’s National People’s Congress, the

Chinese government lowered its annual economic growth

expectation to around 6.5% − a downward revision from their

target of 6.5% to 7% for 2016. The policy debate shifted

from last year’s concerns around their growing debt levels to

government paying more attention to financial and economic

risks, even if it results in slower overall economic growth.

Government explicitly reiterated the need to rein in runaway

house prices to prevent a property bubble and also set specific

targets to reducing steel capacity.

The Chinese government’s willingness to accept a lower growth

rate reduces some fears that we had earlier of a hard landing.

The synchronised global growth recovery is becoming ever

more convincing and even though it holds some policy roll-back

risks, firmer global growth should be favourable for emerging

markets, where former headwinds are abating.

KEY TAKEOUTS:• US INTEREST RATE HIKE LOOMS

• CHINA FOCUSES ON HOUSING RISKS

• GLOBAL GROWTH RECOVERY GATHERS MOMENTUM

GLOBAL ECONOMIC OVERVIEW AND OUTLOOK

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FLEDGLING CYCLICAL RECOVERY UNDER WAY, BUT POLITICS A RISK

RIAN LE ROUX | OLD MUTUAL INVESTMENT GROUP CHIEF ECONOMIST

ABOUT THE AUTHORRian is the head of the Economic Research Unit responsible for providing insight into and forecasts of how macroeconomic developments may impact financial markets. This research informs the boutiques’ top-down views.

KEY TAKEOUTS:• SPECULATION OVER STRONG RAND

CONTINUES

• BETTER DATA AND GOOD RAINS LIFT GROWTH OUTLOOK

• AGRICULTURE HAS A STRONG MULTIPLIER EFFECT ON GDP

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After ending 2016 at R13.69 to the US dollar, a sharp firming from the almost R17.00/US$ reached at the beginning of last year, the rand strengthened further during the opening months of 2017, dropping below R13/US$ early in March.

The sustained strength of the rand continues to surprise analysts and commentators, given the depressed local business conditions, still large foreign financing requirement (needing some US$700 million of net capital inflows a month to finance), and the ongoing political noise and uncertainties in the run-up to the ruling ANC’s elective conference later this year. While the actual sources of demand for the rand will only become clearer once the South African Reserve Bank (SARB) publishes detailed data on our foreign trade and capital accounts, speculation continues as to the underlying reasons for the rand’s solid performance over the past year.

TREASURY SENDS CLEAR MESSAGE TO RATINGS AGENCIES In last month’s commentary, we highlighted a number of fundamental reasons that might be behind the rand’s unexpected strength in recent months. The Budget Speech would likely have added to the positive sentiment, as the significant tightening of fiscal policy, through R28 billion of tax hikes, increases the confidence in fiscal consolidation over the next few years. Indeed, the Finance Minister’s willingness to tighten fiscal policy, notably in the face of a soft economy and an already pressured consumer, sends a strong message about the intentions of National Treasury to rebuild the fiscal space and hopefully stabilise SA’s foreign currency rating at investment grade.

POSITIVE SIGNAL OF ECONOMIC RECOVERY Despite the tightening in fiscal policy, and while fourth quarter 2016 GDP will, in all likelihood, contract marginally, incoming data continues to send more positive signals about the economy. These include several months of successive increases in the leading indicators index (a reliable predictor of future growth trends), surveys of manufacturing conditions and vehicle sales. In addition, the good rains during the summer rainfall season have vastly improved agricultural conditions over broad swathes of the country, and the first estimate of this year’s maize crop indicates a 14 million ton harvest, almost double last season’s yield. As a result, our long-held view that GDP growth

will rebound from 2016’s estimated 0.4% pace to little under

1.5% in 2017 remains unchanged. Indeed, with both mining

and agriculture set to fare better this year, and hopefully the

same for manufacturing, there is a possibility that growth could

actually surprise moderately to the upside of our current forecast.

While such growth is still way too slow, given the rapid growth

in the labour force and already high unemployment, at least it

seems as if the five-year long slowdown in the economy may

have been arrested.

A further bit of good news over the past month was that the

foreign trade balance recorded the smallest January deficit in

five years. In fact, adjusting the data for seasonal fluctuations,

the underlying data suggests that the trade balance actually

recorded a sizeable surplus in January. Current account deficit

contraction is a key requirement for currency stability as a

smaller deficit will lower SA’s foreign financing requirement. This

process, which has been under way at a gradual pace over the

past few years, may speed up this year on account of higher

commodity prices, stronger foreign demand for SA goods

abroad and a potentially considerable improvement in the trade

balance within agricultural goods.

INFLATION STUBBORNLY ABOVE 6%

On a more negative note, inflation remains outside the Reserve

Bank target range, with January’s number easing only slightly

to 6.6% from December’s 6.8%. Still, despite inflation still

being sticky and outside of the target range, we remain of the

opinion that the combination of sharply lower grain prices, the

stronger rand and the stable oil price will cause inflation to

ease quickly over the next few months.

Pulling all of this together, we believe that, as a result of a

combination of tighter fiscal policy, a narrower current account

deficit, a stable currency and declining inflation, the South

African Reserve Bank will lower interest rates during the second

half of 2017. On top of better exports, this will lend support to

the economy through an eventual recovery in domestic demand

too. Finally, after years of growth slowdown and disappointment,

the economy may well be on the verge of recovery and possibly

even upside surprises. This will require, though, not again being

subjected to a political shock that will drain business, consumer

and investor confidence anew.

LOCAL ECONOMIC OVERVIEW AND OUTLOOK

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NO SURPRISES. BUDGET IS BOND MARKET NEUTRAL

WIKUS FURSTENBERG | PORTFOLIO MANAGER AT FUTUREGROWTH

ABOUT THE AUTHORWikus manages a range of institutional and retail fixed income portfolios at Futuregrowth Asset Management, which include income, core bond and flexible interest rate funds. He also heads up the Futuregrowth Interest Rate team.

KEY TAKEOUTS:• BONDS BUFFETED BY GLOBAL

SENTIMENT SWINGS

• BUDGET: SOEs AND REVENUE SHORTFALL A CONCERN

• CONSUMER AND PRODUCER INFLATION STARTING TO SLOW

9

INTEREST RATE MARKET OVERVIEW AND OUTLOOK

Based on daily closing yields, the intra-month trading range for the yield of the benchmark R186 RSA government bond (maturity 2026) turned out to be fairly wide, moving between 8.57% and 8.85%. Various factors served as the catalyst for this volatility. From a global perspective, sentiment ebbed and flowed between those investors strongly in favour of the so-called reflation trade and those of the opinion that markets are already priced for this trade. These sentiment swings were mainly reflected in US Treasury and US dollar movements, which, in turn, had a direct impact on the South African bond and currency markets. At home, persistent rumours about an “imminent” cabinet reshuffle and nervousness ahead of the delivery of the 2017/18 National Budget also contributed to volatility. Even so, the R186 bond yield still managed to close the month 3 basis points stronger at 8.79%.

As a result, the All Bond Index managed to eke out a total return of 0.7% for the month. This was slightly higher than the cash return of 0.5%, while handsomely beating the 0.1% rendered by the official inflation-linked index (IGOV). Although inflation-linked bonds are still benefiting from recent high inflation data, investors are more focused on a much lower expected near-term inflation rate, which does not favour this asset class. As supply for inflation protection currently outstrips demand, upward pressure on real yields − and thus a negative price movement − is inevitable.

REASONABLE BUDGET UNDER DIFFICULT CIRCUMSTANCES February is traditionally the month when a lot of emphasis is placed on the delivery of the National Budget to parliament. Since the budget deficit is mainly funded in the local bond market, it comes as no surprise that it always receives more than its fair share of attention from both local and foreign bond investors. Once again, the Minister of Finance, with the assistance of the highly regarded and competent team at National Treasury, managed to pull off a reasonably well-balanced budget under difficult circumstances. All in all, no significant positive surprises were forthcoming, so we regard this budget, at best, as bond market neutral. That said, we remain concerned about the ability to turn around poor management at some state-owned enterprises, which has a direct impact on the size of the contingent liabilities at national level. We are also spooked by the sizeable tax revenue shortfall relative to the initial February 2016 and October 2016 budget estimates.

Other data releases were mixed, with the rate of inflation at both consumer and producer levels starting to slow, while the latest external trade account showed a larger than expected deficit. None of these data releases had a significant impact on market sentiment, though.

With the exception of the US, and more encouraging signs of some improvement in other G10 countries, the global growth recovery still remains fragile. This sets the scene for a modest rise in global inflation as well as monetary policy divergence. It also implies a steady tightening cycle for the few economies that are in a position to normalise monetary policy, especially the US. This should limit significant upside to global bond yields, especially following the recent bearish correction. On the negative side, the continued uncertainty about the global, and particularly the Chinese, growth outlook remains a risk − especially for emerging market commodity producers with a weak external position in both absolute and relative terms, like South Africa. The anti-global trade tirade by the Trump administration is expected to add uncertainty to the mix.

RATE CUTS UNLIKELY ANYTIME SOON Locally, the downward trend in inflation is imminent, supported mostly by significantly lower food price increases. While the South African Reserve Bank has now adopted a neutral bias, it is unlikely that they would consider interest rate cuts soon. The external trade imbalance is simply too big to allow for a lower real repo rate, while unpredictable currency swings continue to pose a risk to the more benign inflation outlook. Although the Minister of Finance is clearly determined to rectify the damage to fiscal policy credibility and, by implication, avoid a sovereign credit downgrade to non-investment grade status, the jury is still out on actual delivery. Therefore, the risk of a credit rating downgrade over the next 12 months still lingers. In the short term, local political uncertainty remains a nagging risk.

Considering the above, we will continue to approach the market with caution. The emphasis therefore remains on capital preservation. This is expressed by the large underweight modified duration and 12+ year nominal bond positions. We have reduced our inflation-linked bond holding significantly in response to the more benign 12-month inflation outlook and have instead opted to create an overweight position in short- and medium-dated nominal bonds. The biggest risk to our cautious stance is US dollar weakness and consequent rand strength.

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5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

0 5 10 15 20 25 30 35 40

Brea

k-ev

en in

flatio

n

Term to Maturity

R212

I2029

R210I2025

R197

I2033R202

I2038I2046

I2050

Sources: Bloomberg, Futuregrowth

SOUTH AFRICAN INFLATION BREAK-EVEN CURVE (YIELD SPREAD BETWEEN NOMINAL AND INFLATION-LINKED BONDS WITH SIMILAR TERM TO MATURITY PROFILE)Market inflation expectations, as implied by the South African inflation break-even curve, are too high when compared to market consensus and our own inflation forecast. As a result, the yields offered by inflation-linked bonds are deemed too low (thus expensive) and should therefore not be considered as an off-benchmark investment choice in the near term.

The local bond market delivered a mere 1.8% a year – in line with the world’s average annual return, but well behind the front-runner Denmark’s 3.3% (after-inflation returns from between 1900 and 2016).

Looking at South Africa over the past 20 years, we see that our market has outperformed the S&P 500 Index in US dollars. This further reinforces what we all know: not to get drawn in by short-term volatility, but rather approach investing with a long-term goal in mind.

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South Africa had its BEST YEAR in 1933 when it delivered a return of 102.9% in US dollar terms

South Africa had its WORST YEAR in 1920 when the stock market lost 52.2% in US dollar terms

7.2% real return a year (after inflation) between 1900 and 2016

More than 2% above the world average of 5.1% of a year

-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Austria

Italy

Belgium

France

Germany

Portugal

Spain

Japan

Norway

Ireland

Switzerland

Netherlands

World

Denmark

Finland

United Kingdom

Canada

Sweden

New Zealand

United States

Australia

South AfricaEquities Bonds

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FTSE/JSE All Share Index (total return)

S&P 500 Index (total return)

BEST MARKETS SINCE 1900Annualised real returns (% per year) 1900 - 2016

SOUTH AFRICA OUTPERFORMS S&P 500 OVER 20 YEARS (USD) 31 January 1997 - 28 February 2016

Sources: Bloomberg, Credit Suisse Group AG, London Business School Source: FactSet

Source: Unless otherwise stated, all data is sourced from Credit Suisse Global Investment Returns Yearbook 2017 Summary Edition – Dimson, Marsh, Staunton

DID YOU KNOW?SOUTH AFRICA HAS BEEN

THE WORLD'S BEST PERFORMING EQUITY MARKET SINCE 1900

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DIVERSIFICATION IS THE ONE FREE LUNCH IN INVESTMENTS; USE IT.

GRAHAM TUCKER | PORTFOLIO MANAGER

ABOUT THE AUTHORGraham is a portfolio manager at MacroSolutions and is responsible for their range of balanced funds. He is also a quantitative strategist, risk manager and a member of the asset allocation team.

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After time in the market, diversification is the second most valuable tool you can use to manage risk − as it reduces the impact that a single poorly performing asset has on your overall portfolio.

Investors tend to have a low tolerance for pain, with the fear of losing money outweighing the greed for gains. This is especially true when it comes to investing in equities, due to their higher level of volatility.

To better understand this volatility, we look at the drawdowns of equities and bonds in real terms (after inflation), which is a harsher light, as inflation normally softens the impact of a long-term bear market.

DRAWDOWNS ARE PAINFUL – AND COSTLYMarket declines are measured by the amount of money lost from the peak and how long it takes to recover the losses. Both equities and bonds have exposed investors to painful periods of negative returns.

THE WAY TO MANAGE THIS RISK IS THROUGH DIVERSIFICATIONA simple 50% equity : 50% bond blend dramatically improves the drawdown profile.

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Post World War II

Great Depression

1969 crash

1987 crash 2008 Global

Financial Crisis

1998 Asian crash

-70%

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CHART 5: DRAWDOWNS OF SA EQUITYDecember 1924 – December 2016

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CHART 6: DRAWDOWNS OF SA BONDSDecember 1924 – December 2016

CHART 7: DRAWDOWNS 50% SA EQUITY : 50% SA BONDSDecember 1924 – December 2016

15 years to get back to breakeven 63.5% lost in just 2.5 years Financial history clearly shows the truth in the

old adage “Don’t put all your eggs in one basket.”

This article is an extract from the 2017 edition of Long-Term Perspectives – a yearbook that scrutinises the performance and behaviour of select asset classes over the past 87 or more years. Visit our website for more information.

EQUITIES-63.2%

BONDS-60.8% 50:50

PORTFOLIO

-45.2%

WORST DRAWDOWN

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BUSTING THE MYTHS IN MID- AND SMALL CAPS

WARREN JERVIS | PORTFOLIO MANAGER

ABOUT THE AUTHORWarren is the portfolio manager of the Old Mutual Mid & Small-Cap Fund, as well as other client portfolios. He also manages the mid- and small cap components of Old Mutual Investment Group’s institutional funds.

KEY TAKEOUTS:• MYTH-BUSTING THESE

MISUNDERSTOOD SECTORS

• EXPERIENCE COUNTS WITH MID- AND SMALL CAPS

• OFFERING A PORTFOLIO TILT THAT ADDS RETURNS FOR LESS RISK

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For more than two decades to December 2016, mid-cap companies have generated 2.66% and small caps 2.30% a year more than the Top 40 Index. This makes these two segments of the market hugely important contributors to the potential returns generated by pension funds and lifetime retirement savings, given the significant compounding effect of those superior returns over time.

Mid- and small cap shares are also an excellent differentiated source of alpha for investors and therefore should comprise a permanent component of an investor’s portfolio. In the South African market, the universe of potential investment opportunities is limited and therefore it makes sense to consider the full array of investment opportunities, especially when they have generated superior returns over time. In the Old Mutual Mid & Small-Cap Fund, we invest in quality companies, with excellent management striving to achieve superior compounding returns over time.

The mid- and small cap sectors consist of more than 120 stocks, roughly 60 stocks in each, that are very diverse in nature. Business models range from quarrying, poultry production, power generation, financial services and technology, to car

sales and many others. Understanding their business models,

management teams, competitive strengths and where they are

in the business cycle enables better investment decision-making.

Clearly, experience counts in a part of the market where successful stockpicking is the primary determinant of investment success. The understanding of the business models and key business drivers enables you to leverage your information advantage in an under-researched area of the market.

To successfully invest in this sector, there are a number of mid- and small cap sector myths that you need to consider.

MYTH 1: SECTOR RETURNS ARE EASILY EXPLAINEDOver certain periods of time, different sectors have been the key drivers of the mid- and small cap performance. Two examples in the mid-cap sector have been property companies and the general retailers:

• Property company returns have been driven by mergers and acquisitions (R230bn of capital raised), the revaluation of assets and superior yields.

• Retailer returns were due to superior earnings growth and a strong rerating of the shares, largely driven by the closure of rating discounts to their global peers.

These sizable sectors can be excellent drivers of three to four years of outperformance, but it remains a relatively short-term phenomenon.

All asset classes still move, more or less, in line with the overall business cycle. In 2016, as an example, the Retail Index derated and its relative performance was poor.

Indices also change over time and many businesses either come to the market, restructure or are bought out. Consider some these names: Mvelaphanda, Gijima AST, JD Group, Curro, Alexander Forbes, Sibanye and Dis-Chem. All of them have had some impact on the constituents and weightings of the various indices. All indices change over time – it is a given, and certain constituent changes can have a substantial short-term impact on any given index, but in the longer term these anomalies should normalise.

Take the Gold Index in 2016 as an example. At the start of the year all of the major gold stocks (AngloGold, Sibanye and Gold Fields) were in the Mid-Cap Index. By the end of July 2016,

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FTSE/JSE Africa Mid-Cap Index

FTSE/JSE Africa Small Cap Index

FTSE/JSE Africa Top 40 Index

1 299.54

1 004.97

864.89

MID-CAP, SMALL CAP AND TOP 40 INDICES SINCE 1996

Source: I-Net Graph, January 2017

16

the Gold Index was up 168%, and shortly thereafter all three

stocks were then included in the Top 40 Index. AngloGold

moved back into the Top 40 Index just prior to the other two.

Post July 2016, after being included in the Top 40 Index, the

Gold Index was subsequently down over 58%. Constituent

changes and extreme volatility clearly had an impact on the

various indices.

There are also individual anomalies, such as AngloGold, which

entered the Mid-Cap Index in November 2015 with a 4.5%

weighting, and within three months had doubled in market cap

and moved back into the Top 40 Index. Three months later it

began to decline in line with Sibanye and Gold Fields.

The other major sector that had a significant impact on the

performance of the mid-caps last year was the mining sector

in general, which strongly recovered off a very low base

in 2015. Overall, however, the Mining Index was a major

detractor from the Top 40 Index performance over the previous

five years. If you look over the longer term, the Mining Index

had two very strong periods of outperformance lasting more

than five years each. The short, sharp corrections post these bull

markets were also fairly brutal. Over a long period of time, 21

years, it is not simply a case of saying that the Mining Index

hindered the overall Top 40 Index performance. Again, sectors

can have a major impact over the short to medium term, but

over the longer term they have much less influence.

The mining sector has clearly impacted the Top 40 Index

returns over time, but so has Naspers with a massive >600%

performance over an eight-year period alone. Sizable

constituents also play a huge role in the overall performance

of indices.

From an attribution point of view, we looked at the Old Mutual

Mid & Small-Cap Fund against the Mid- and Small Cap Index

dating back to 2004 (as far back as we could go with reliable

data). The average resources weighting in the index was

13.0%, with the Property Index weighting at 14.8%. The unit

trust had a long-term resources underweight position and this

added alpha over the period. Resources as a whole has been

a negative contributor to all the main indices, such as Top 40,

Mid- and Small Caps. Interestingly, despite the higher 14.8%

property weighting in the index and the unit trust’s low exposure

to the asset class, the performance foregone as a result of

being underweight was far less than expected. Despite strong

Property Index performance over the last 10 years, the portfolio

exposure to performing industrial shares limited the damage of

a property counter underweight.

Regardless of what the sectoral drivers are in the short term, or

what the various constituents of the index are, the fact remains

that long-term assets should still be suitably exposed to the mid-

and small cap area of the market. It is a sizable opportunity set

of potential investment opportunities that should not be ignored.

J150 (1585.010)2 9002 8002 7002 6002 5002 4002 3002 2002 1002 0001 9001 8001 7001 6001 5001 4001 3001 2001 1001 000

900

O N D J F M A M J J A S O N D J

2015 2016 2017

2 9002 8002 7002 6002 5002 4002 3002 2002 1002 0001 9001 8001 7001 6001 5001 4001 3001 2001 1001 000900

GOLD INDEX (J150)

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MINING INDEX VERSUS TOP 40 INDEX

Source: I-Net Graph, January 2017

Source: I-Net Graph, January 2017

17

Source: Morningstar

Source: Old Mutual Investment Group, January 2017 Source: Old Mutual Investment Group, January 2017

MYTH 2: SUPERIOR ALPHA GENERATION IS IN THE TOP 40 STOCKSThe average annual performances for the three sectors over

21 years are:

Top 40 Mid-Cap Small Cap

15.78% 18.43% 18.08%

Mid-caps have outperformed the Top 40 by an average of

2.66% per annum and small caps have outperformed the

Top 40 by an average of 2.30% per annum. The compounding

effect of these superior annual returns is astounding.

When looking at the compounding of superior returns over

a longer time period, we did the following simple exercise.

Investing R1 million into each of the three segments over 21 years

would yield a 70.6% better result in the mid-cap sector (growing

to R25 117 783), and a 50.3% better result in the small cap

sector (R22 137 801) than the Top 40 sector (R14 725 051).

This is a significant difference generated by better annual results

compounding over a 21-year period.

The young are encouraged to start saving early as the

compounding effect, over long periods of time, of returns on

their retirement savings is quite staggering. Adding exposure

to the mid- and small cap sectors of the market would further

enhance portfolio returns.

MYTH 3: MID- AND SMALL CAPS ARE RISKYThe level of return per unit of risk (as measured by the standard

deviation) of small to mid-cap stocks versus the Top 40 Index

has also been superior. Looking at the average return divided

by the standard deviation gives return per unit of risk figures

of 67.8% for the Top 40 Index, 91.2% for mid-caps and

80.8% for small caps. This is not a definitive risk answer, as the

definition of risk is way more complex than that. However, it

does help in understanding whether mid- and small cap shares

are too risky for investors or not.

RETURNS PER UNIT OF RISK

Top 40 Mid-Cap Small Cap

Std Deviation 23.3% 20.2% 22.4%

Maximum 79.17% 47.53% 55.72%

Minimum -23.58% -27.40% -31.20%

Median 13.31% 21.39% 20.60%

Return/Risk Unit 67.8% 91.2% 80.8%

One of the key parameters of risk management for me as a

portfolio manager is the protection of clients’ capital. There

are many types of risks out there and at all times a portfolio

manager needs to consider an appropriate risk return trade-

off when making investment decisions. Avoiding many of the

share calamities is a key component of mid- and small cap

investing, and that is where the experience of the portfolio

manager is vital.

I am often told that mid- and small caps are risky regardless of

what the return per unit of risk numbers say. So I decided to look

at the unit trusts of the mid- and small cap peer group versus the

general equity unit trusts in the same asset management house

over the last five years. Quite simply, you have returns on one

axis and standard deviation (risk) on the other axis. Although

standard deviation is not a comprehensive risk measure, as

mentioned, it is nevertheless appropriate for graphical purposes.

STANDARD DEVIATION AND RETURNS OF MID- AND SMALL CAP VERSUS GENERAL EQUITY UNIT TRUSTS

SWIX

Coronation Smaller Companies

Coronation Top 20 A

Investec Emerging Companies R Investec Equity R

Momentum Equity A

Momentum Small/Mid-Cap A

Nedgroup Inv Entrepreneur R

Nedgroup Inv Rainmaker R Old Mutual Investors’ ROld Mutual Mid & Small-Cap R

SIM General Equity R

SIM Small Cap R

8

9

10

11

12

13

14

15

16

12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.5

Ann

ualis

ed 5

-Yea

r To

tal R

etur

n (%

)

Risk (Annualised 5-Year Standard Deviation)

Risk/Return: 10 years ending 31 October 2016: Mid- & Small Cap and Core Equity Funds

Source: Morningstar

Mid- & Small Cap UT Peers

Core and specialist equity funds

SWIX

18

Of the six asset managers that were chosen, and assuming the

same overall “house view” assumptions applied, there were five

mid- and small cap unit trusts with lower risk profiles than the

asset managers’ general equity funds. The only outstanding fund

was a fund that was recently decimated by a large holding in

African Bank during the assessment period. So over the last five

years, the mid- and small cap funds have not been more risky

than the general equity unit trusts in the same asset managers.

MYTH 4: TOO ILLIQUID TO INVEST INI hear too often from general equity portfolio managers that the

sector is too illiquid for large asset managers. I agree. However,

where does the management of liquidity risk fit into the overall

investment process and what are the parameters being used to

determine liquidity?

Quite simply, liquidity is a function of the assets under

management in which you are trying to invest. The more funds

you manage, the harder it will be to participate in the small

cap sector and a natural shift towards more mid-cap stocks will

occur. In our mid- and small cap investment process, liquidity is

the first starting point of the process and is a key risk to analyse.

It is vital to understand how long it will take to move stock into

and out of the portfolio, and what the overall equity holding will

be in the company once the targeted portfolio weighting has

been reached. Many stocks such as Bell, Basil Read, Hulamin,

Caxton, Mustek and Rainbow are too illiquid to consider for a

fund that has even assets under management of R2 billion.

In our mid- and small cap universe, 24 stocks out of 123

stocks available are currently excluded based on liquidity

issues. So slightly less than one-fifth of the universe is currently

excluded, and this number of exclusions will slowly increase

as assets are accumulated.

Given liquidity concerns, actual practical experience still provides

more insight than a detailed spreadsheet, and in the recent

past we have also been able to transition over R3bn within a

three-month period in the sector. So provided you have a quality

portfolio of stocks that are appropriately priced, you will always

find willing buyers or sellers in the market. However, trying to exit

a 20% stake in a very poor business is not an easy task when

things go wrong in the company. Liquidity is a constraint, but it

is still not enough of a reason to completely exclude the sector

purely on liquidity concerns. It is a vital part of the investment

process and needs to be managed carefully.

19

- R20

R0

R20

R40

R60

R80

R50

R100

R150

R200

R250

R300

Cum

ulat

ive

Exce

ss V

alue

(Ran

d)

R100

initi

al in

vest

men

t

Cumulative Excess Value (RHS)

Old Mutual Mid & Small-Cap Fund

(ASISA) South African EQ Mid-/Small Cap Peer Group Average

Aug

-09

Dec

-09

Ap

r-1

0

Aug

-10

Dec

-10

Ap

r-1

1

Aug

-11

Dec

-11

Ap

r-1

2

Aug

-12

Dec

-12

Ap

r-1

3

Aug

-13

Dec

-13

Ap

r-1

4

Aug

-14

Dec

-14

Ap

r-1

5

Aug

-15

Dec

-15

Ap

r-1

6

Aug

-16

Dec

-16

OLD MUTUAL MID AND SMALL-CAP UNIT TRUST VERSUS THE PEER GROUP AVERAGE SINCE SEPTEMBER 2009

Source: Old Mutual Investment Group (Pty) Ltd, January 2017

SOLUTION: A MID-CAP AND SMALL CAP TILT IN THE PORTFOLIOSmall and mid-cap shares offer an uncorrelated additional

source of alpha within an overall portfolio and thus, as a large

asset manager, it is appropriate to have some exposure to

these companies. The extent of this portfolio tilt depends on the

level of knowledge of these companies and the proportion of

the portfolio that is able to be invested in equities in general.

Mid- and small caps are never meant to be a substitute for

Top 40 exposure. They should be considered as a portfolio tilt

that adds additional returns for less risk. Consider a 100% Top

40 portfolio versus three portfolios with tilts of 10%, 20% and

30% respectively towards mid-caps only. Over 21 years, the

additional 10% tilt to mid-caps would have yielded an additional

7.1% return; a 20% mid-cap tilt a 14.1% return, and the 30%

mid-cap tilt would have yielded a 21.2% additional return.

As a small and mid-cap manager, we strive to generate alpha for our clients and we believe we have a competitive advantage in the sector. We have achieved superior performance against the peer group average over 1-, 2-, 3-, 5- and 10-year periods.

Given the superior risk-adjusted returns delivered by the mid- and small cap segments of the market, can you ignore the value they could potentially add to your retirement savings portfolio over time? We think not.

Note: The performance quoted is for a lump sum investment and in respect of the Old Mutual Mid & Small-Cap Fund. The actual highest, average and lowest 12-month return figures since inception to 31 January 2017 are 108.3% (highest), 17.1% (average) and -40.3% (lowest). The fund was launched on 30 April 1997. Performances are in ZAR and as at 31 January 2017.

20

KEY TAKEOUTS:• POLITICAL NOISE CAN CREATE GREAT

OPPORTUNITIES

• DESIGNED IN CALIFORNIA. ASSEMBLED IN CHINA

• BUY INTO BUSINESSES THAT CAN WITHSTAND CRISES

21

When Presidents Defy Economic Gravity, Gravity Usually Wins

– The Wall Street Journal headline on Donald Trump

Globalisation has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital − the world’s best talents and greatest ideas.

- Jack Welch (Former CEO of General Electronic)

EMERGING MARKETS AND A MAN CALLED TRUMP

ABOUT THE AUTHORSSharief is a senior equity analyst within the Global Emerging Markets boutique. He is responsible for listed resources and industrial companies globally as well as for broad market analysis.

Siboniso is the joint boutique head of Global Emerging Markets. He is also one of the fund managers of the Old Mutual Global Emerging Market Fund.

SHARIEF PANSAREY | INVESTMENT PROFESSIONAL

SIBONISO NXUMALO | BOUTIQUE HEAD

The life of an emerging market fund manager is nothing short

of dramatic under normal circumstances. It’s a world filled

with political noise − a constant stream of political drama

that often gives both fund managers and clients something to

worry about. Most of the queries, concerns and questions we

receive have something to do with some “political” event that’s

just occurred. Over the past few years Brazil’s president has

been impeached, South Korea’s prime minister is undergoing

her own impeachment trial, the Turkish prime minister is

seeking authoritarian powers after the failed coup attempt,

South Africa’s own government has been at war with itself

and, well, then there is Russia, so you get the picture.

All this political noise creates great investment opportunities

for investors like us. We thrive in environments where markets

discount great businesses to highly attractive prices for us

due to perceived uncertainty. Especially when this uncertainty

has nothing to do with the underlying fundamentals of the

companies in which we invest.

2016 was the year we were introduced to the concept of

political risk in the developed world. First with Brexit, then with

the man that’s currently dominating water cooler conversation

or, as the millennials would say, “trending on Twitter” – President

Donald Trump.

A question we often get asked is: What effect will Donald

Trump’s "America first" policy have on emerging markets?

Before we gaze into the crystal ball, in investing it often helps to

look back in history. Trump’s primary rhetoric has been directed

against globalisation, with the ambition of bringing jobs back

to America – with a particularly keen interest on bringing back

manufacturing jobs.

Let us look back at the fascinating history of US manufacturing.

Manufacturing as a percentage of GDP and manufacturing

employment peaked in 1953. Therefore, manufacturing in the

US and its employment has been in decline for 64 years.

22

President Trump is trying to reverse a 64-year trend in his first

few weeks in office. Digressing a little, it’s fascinating to note

that global manufacturing as a percentage of GDP has also

been in decline. Mexico’s manufacturing peaked in 1987 at

27% and bottomed out at 16% in 2010 before rising to the

current 18%. Even China, the world’s leading manufacturer, has

been in decline since 1978.

So what is the issue here? The world has changed and

President Trump seems to have failed to acknowledge this.

The list alongside reflects the largest companies in the US in

1960 and at the present day. In1960, these were heavy

industry companies in the auto, steel and oil industries.

THE LARGEST 10 COMPANIES IN THE US (WHEN THE USWAS STILL A MANUFACTURING POWERHOUSE)

TOP 10 LARGEST COMPANIES ON S&P 500 IN 1960

TOP 10 LARGEST COMPANIES ON S&P 500 IN 2017

1. General Motors 1. Apple Inc.

2. Exxon Mobil 2. Microsoft Corporation

3. Ford Motor 3. Exxon Mobil Corporation

4. General Electric 4. Amazon.com Inc.

5. U.S. Steel 5. Berkshire Hathaway Inc.

6. Mobile 6. Johnson & Johnson

7. Gulf Oil 7. Facebook Inc.

8. Texaco 8. JP Morgan Chase & Co

9. Chrysler 9. General Electric Co

10. Esmark 10. AT&T Inc.

Sixty years on and the same S&P 500 Index is dominated by

companies that manufacture very little. They are marketplaces,

social networks and new-economy companies. You have to work

very hard to find heavy industry companies that are thriving in the

US these days or, for that matter, in the rest of the world.

Now take time to refer back to the Wall Street Journal’s

headline on Trump. We suspect there could be some truth in

this headline: When Presidents Defy Economic Gravity, Gravity

Usually Wins – 7 December 2016

Ultimately, our job is not to speculate on the economics of

the murky world of politics. We are bottom-up fundamental

investors and hence our expertise is in the detailed analysis

and understanding of specific companies. Specific company

examples always add context, therefore let us take a look at

a few.

CUTTING-EDGE MANUFACTURING Apple is the largest, fastest growing and one of the most loved

companies in the world. President Trump has spoken extensively

about Apple moving some of their production facilities back to

the US.

Globalisation has resulted in the global consumer gaining

access to better quality products at lower prices. To be able to

deliver these products efficiently, companies have developed

40%

35%

30%

25%

20%

15%

10%

1960 1970 1980 1990 2000 2010

US MANUFACTURING EMPLOYMENT AS % TOTAL

EMPLOYMENT

Source: BCA Research

Source: S&P 500 as at 31 January 2017

34%32%30%28%26%24%22%20%18%16%14%12%10%

1950 1960 1970 1980 1990 2000 2010

US MANUFACTURING AS % GDP

Source: BCA Research

23

intricate and complex, yet highly efficient, global supply chains

that have been engineered over decades to deliver quality at

the best price.

In the Old Mutual Emerging Market Fund, our clients’ money

is invested in companies that participate in the Apple supply

chain. It is thus very important for us to pay close attention

to any activity related to Apple’s supply chain. One such

company is Taiwan Semiconductor (TSMC). TSMC is the largest

independent semiconductor foundry in the world. One product

they exclusively manufacture is the A10 chip, which effectively

runs Apple’s latest flagship phone (iPhone 7).

What’s fascinating about this Taiwan-based company is that

it employs around 45 000 employees. Around 19 000 of

these employees have at least a master’s degree or a PhD.

A further 12 000 have a bachelor’s degree. TSMC’s highly

skilled staff produce chips that operate the products at the

leading edge of human ingenuity and innovation. The idea

of moving TSMC’s capability to the US should prove to be

a little more complicated than simply sending a tweet. Mind

you, at the unemployment rate of 4.8%, the US is pretty much

at full employment (with the unemployment rate of college

graduates at 2.5%). President Trump’s call for jobs in the US

is thus peculiar. TSMC spends about US$10 billion annually

on enhancing research & development and manufacturing

capability. Can you imagine how much a US company would

have to spend today to replicate this capability?

On the back of Apple devices is a telling inscription: “Designed

by Apple in California. Assembled in China”. Two sentences

that abbreviate a very complex supply chain. Our analysts

have travelled to Taiwan, China and Korea several times to

visit the facilities of these companies. We’ve spent many hours

interrogating the management of over 30 companies in the

mobile telecommunications arena.

DOUBLE VISIONLargan Precision, for example, is another one of the Taiwanese

companies we’ve spent extensive time with. They design and

manufacture advanced camera modules for high-end phones.

Their latest innovation is the dual camera as seen on the iPhone 7

Plus. Apple dedicated a large segment of their product launch

to profiling the advanced photographic abilities of this camera.

Dual camera capability is an innovation originated in Taiwan,

through significant R&D spend.

A CASE IN POINTCatcher Technologies is another company in the Apple supply

chain. They specialise in the manufacture of casings (basically

the outside of an iPhone). Walking around their factory is a

fascinating experience as we had completely underestimated

the complexity of making the covers for these high-end phones.

To us, the casing was merely a commoditised product that could

easily be replicated in China. There are only three approved

casing manufacturers globally in the Apple supply chain, and

this for good reason – it’s a highly complex process. Then

finally, all these components are sent to Hon Hai for assembly.

This is possibly the simplest part of the value chain that could be

replicated in the US. However, we should bear in mind that it’s

assembled in China for economic reasons (very cheap labour).

Last year the same Foxconn (a subsidiary of Hon Hai) replaced

60 000 factory workers with robots. These are probably not

the kind of jobs the US president is talking about.

During times like this, we like to refer back to our investment

philosophy. We seek to invest in quality companies in

emerging markets, trading at attractive valuations with sound

corporate governance. Our disciplined adherence to this

philosophy has allowed us to generate pleasing returns on

behalf of our clients and thus we will continue investing in

accordance with our philosophy.

We are unable to predict the future. Therefore we firmly believe

in buying strong businesses (with proven sustainable competitive

advantages), at attractive valuations and with sound corporate

governance, as they tend to withstand crises and continue

growing their earnings in the long run.

Whether Trump adheres to his policies and what that means for

emerging markets, is thus of far less importance to us than our

assessment of the strength and competitive advantages of the

companies we invest in.

In short – we believe that strong, quality businesses with

attractive valuations "trumps" all other considerations….

24

EXTREME ROTATION: THE PRICE OF INSTANT GRATIFICATION

PETER BROOKE | HEAD OF MACROSOLUTIONS

ABOUT THE AUTHORPeter heads up MacroSolutions, our multi-asset class boutique. He is also the fund manager for Profile Edge28 Portfolio, Old Mutual Maximum Return Fund of Funds and Old Mutual Flexible Fund.

KEY TAKEOUTS:• 2016 SAW A LARGE DISPERSION IN

RETURNS

• CHASING WINNERS IS A LOSING GAME

• CHOOSE A CONSISTENT PERFORMER, AND STICK WITH IT

25

South African equities had a challenging 2016, with the JSE

returning just 2.6% for the year. However, this masked what

was actually happening at a stock level, as there was a wide

dispersion in returns. This dispersion was caused by a massive

rotation as global investors moved away from growth-style

investing to value-oriented shares and away from defensive to

cyclical shares.

This rotation was especially pronounced in SA, due to our

market’s high number of globally focused companies and the

heavy weighting of cyclical resources share. This meant that in

2016 we saw large price moves, as previous winners were

crushed and some resources shares skyrocketed (Glencore rose

124% and Kumba Iron Ore was up 286%).

This rotation played into fund performance, as seen

in the tables below.

Using the South African multi-asset high equity category, where

the balanced funds reside, we compared the ranking of the top

10 performing funds (based on three-year returns to the end of

2015) with the rankings one year later. Of those top performing

funds, only two were in the top quartile at the end of 2016. In

fact, the top fund at the end of 2015 came second last in the

category in 2016 (102 out of 103 funds).

Looking at the worst performing funds over the three years, the

bottom fund was No. 1 in 2016, with half of all these bottom-

ranked funds moving into the top 10 in 2016 and 70% being

top quartile performers.

RANK 3 years to December 2015 RANK 2016

1 102

2 92

3 98

4 97

5 25

6 57

7 60

8 68

9 90

10 21

RANK 3 years to December 2015 RANK 2016

94 6

95 13

96 35

97 93

98 14

99 9

100 7

101 2

102 75

103 1

Sources: Morningstar, Old Mutual Investment Group

TOP 10 BOTTOM 10Morningstar rankings of all multi-asset high equity funds with a four-year track record.

26

NAVIGATING THE EXTREME (and the not-so-extreme) There are many great lessons to learn from these extreme moves and the same rules would apply when the market is relatively stable:

1. Don’t get distracted by the noise. These extreme market moves reinforce just how important it is to position your portfolio in advance − moving to where the opportunities lie. Our investment philosophy (which blends “top-down” macroeconomic research with rigorous “bottom-up” fundamental analysis) has resulted in a pragmatic approach to investing – enabling us to make significant changes in our portfolios ahead of time.

2. Have a long-term view. We all know that, over time, the probability of negative returns significantly reduces.

Our Long-Term Perspectives yearbook analyses 87 years of

data and proves this point in multiple ways. Look out for the

2017 edition, which will be released in March.

3. Stick to your plan − don’t chase your tail. While

the performance rankings tables on the previous page

make a strong case for not chasing winners over the short

term, the same is true over the longer term.

The chart below shows what would have happened if, every

year, you traded into the previous year’s worst performing

fund (blue line) and best performing fund (red line) based on

three-year returns. When compared with remaining in one

fund, the Old Mutual Balanced Fund, both these strategies are

obvious losers. Choose a consistent performer that is managed

according to a sound and proven investment philosophy.

Old Mutual Unit Trust Managers (RF) (Pty) Ltd (OMUT) is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. The fund fees and costs that we charge for managing your investment are accessible in the relevant fund’s Minimum Disclosure Document (MDD) or Table of fees and charges, both available on our public website, or from our contact centre. The Net Asset Value (NAV) to Net Asset Value figures are used for the performance calculations. The performance quoted is for a lump sum investment and in respect of the Old Mutual Balanced Fund. The actual highest, average and lowest 12-month return figures since inception to 31 December 2016 are 45.5% (highest), 13.7% (average) and -23.2% (lowest). The fund was launched on 1 March 1994. Performances are in ZAR and as at 31 December 2016.

0

100

200

300

400

500

600

700

800

900

1000

1100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Old Mutual Balanced Fund R

Selection based on best performer

Selection based on worst performer

DON’T CHASE YOUR TAIL

Constructed portfolio based on three-year past performance − calendar year rebalancing

Sources: Morningstar and Old Mutual Investment Group, 31 December 2016

27

DY % P/E Ratio 1 Month %* 12 Months %*FTSE/JSE All Share Index 2.9 19.8 -3.1 6.3FTSE/JSE Resources Index 2.3 16.3 -9.9 19.1FTSE/JSE Industrial Index 3.0 15.7 -1.6 0.9FTSE/JSE Financial Index 4.6 13.9 0.2 10.2FTSE/JSE SA Quoted Property Index 6.0 16.6 -0.4 11.0ALBI BEASSA Bond Index 0.7 13.5STEFI Money Market Index 0.6 7.5MSCI World Index (R) -0.2 1.1MSCI World Index ($) 2.8 22.0

Economic Indicators Latest Data Previous YearExchange Rates Rand/US$ February-17 13.1 15.8 Rand/UK Pound February-17 16.3 22.1 Rand/Euro February-17 13.9 17.2 Rand/Aus$ February-17 10.0 11.3Commodity Prices Gold Price ($) February-17 1248.7 1237.7 Gold Price (R) February-17 16368.6 19732.5 Oil Price ($) February-17 55.8 36.6Interest Rates Prime Overdraft February-17 10.5% 10.3% 3-Month NCD Rate February-17 7.3% 7.0% R186 Long-bond Yield February-17 8.8% 9.4%InflationCPI (y-o-y) January-17 6.6% 6.2%Real EconomyGDP Growth (y-o-y) September-16 0.7% 1.1%HCE Growth (y-o-y) (Household Consumption Expenditure) September-16 1.1% 1.6%GFCF Growth (y-o-y) (Gross Fixed Capital Formation) September-16 -5.2% 3.4%Manufacturing Production (y-o-y) (seasonally adjusted) December-16 -0.8% -0.3%Balance of PaymentsTrade Balance (cumulative 12-month) January-17 $0.1 -$4.8Current Account (% of GDP) September-16 -4.1% -4.5%Forex Reserves (incl. gold) January-17 $46.5 $47.5

MARKET INDICATORS

Sources: JSE, Iris, I-Net

*Total return index percentage change

AS AT 28 FEBRUARY 2017

DISCLAIMER: The content of this document does not constitute advice as defined in FAIS.

The following entities are licensed Financial Services Providers (FSPs) within Old Mutual Investment Group (Pty) Ltd Holdings, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS). These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are members of the Old Mutual Investment Group.• Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No 604.• Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No 45255.• Futuregrowth Asset Management (Pty) Ltd (Futuregrowth) (Reg No 1996/18222/07), FSP No 520.

The investment policies are market linked. Products are either policy based or unitised in collective investment schemes. Investors’ rights and obligations are set out in the relevant contracts. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. Unit trusts are generally medium- to long-term investments. Unit trusts can engage in borrowing and scrip lending. Fund valuations take place on a daily basis at approximately 15h00 on a forward pricing basis. The fund’s TER reflects 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. A schedule of fees is available from Old Mutual Unit Trusts Ltd, an approved Collective Investment Scheme in Securities. For more information please refer to the Fund’s Minimum Disclosure Document (MDD), www.omut.co.za.

Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price-sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of Old Mutual Investment Group are remunerated with salaries and standard short-term and long-term incentives. No commission or incentives are paid by Old Mutual Investment Group to any person. All inter-group transactions are done on an arm’s length basis. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Limited, who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group. In respect of these products, no fees orcharges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Old Mutual Investment Group has comprehensive crime and professional indemnity insurance, as part of the Old Mutual Group cover. For more detail, as well as for information on how to contact us and on how to access information, please visit www.oldmutualinvest.com.

Old Mutual Investment Group (Pty) Limited. Physical address: Mutualpark, Jan Smuts Drive, Pinelands 7405. Telephone number: +27 21 509 5022

*As at 31 January 2017. Source: Old Mutual Investment Group (Pty) Ltd.Old Mutual Investment Group (Pty) Limited (Reg No 1993/003023/07) (FSP 604) and each of its separately incorporated boutiques (jointly referred to as Old Mutual Investment Group) are licensed financial services providers, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37, 2002. Investment portfolios are market-linked. Pooled products are either policy based, via a linked policy of insurance issued by Old Mutual Life Assurance Company of South Africa Ltd, which is a registered Long-Term Insurer, or unitised in collective investment schemes. Investors’ rights and obligations are set out in the relevant investor agreements and/or mandates. Market fluctuations and changes in exchange rates as well as taxation may have an effect on the value, price or income of investments and capital contributions. Since financial markets fluctuate, an investor may not recover the full amount invested. Past performance is not necessarily a guide to future investment performance. Old Mutual Investment Group has comprehensive crime and professional indemnity insurance which is part of the Old Mutual group cover.

INVEST WHERE THE FUND MANAGERS INVEST

FCB10021318JB

/E

www.oldmutualinvest.com/asinvested

By investing in Profile Edge28, I am confident that both my clients and I will have a retirement we can look forward to.

Peter BrookeBoutique HeadMacroSolutions

At Old Mutual Investment Group, our fund managers invest their own money alongside yours.

The Old Mutual Profile Edge28 Fund aims to maximise the growth opportunity available in the retirement fund investment environment, delivering growth that’s outperformed inflation by 10.3% a year over the last 20 years*.

Speak to an Old Mutual financial adviser or your broker about investing alongside our fund managers or call 0860 INVEST (468378).

10022325JB 297x210E Peter B_02.indd 1 2017/02/21 2:46 PM