Partnering · Alexander Forbes view on prescription. AF Private Markets and its impact. David...

A prescription to change investment focus

Partnering for better financial well-being outcomes

Agenda

The stock market is not the economy

Alexander Forbes view on

prescription

AF Private Markets and

its impact

David MooreHead of Alternative

Investments

Speakers

Isaah MhlangaExecutive Chief Economist

Janina SlawskiHead of Investments

Consulting

Riccardo Fontanella Head of Investments Technical Marketing

Facilitator

Introduction from our CEO

Dawie de VilliersChief Executive Officer


Consulting


Investments

Speakers


Scenarios for the economic recovery

Can the private capital return narrative be shifted and expanded?

COVID-19 confirmed cases continue to rise but deaths fall in major countries

4 434

2 446

1 494824

453 395 390 348 326 3000

500100015002000250030003500400045005000Thousands

020406080

100120140160 US Brazil UK Mexico

Italy France Spain IndiaIran Peru

Cumulative deaths (Thousands)

0

500

1000

1500

2000

2500

3000

3500

02/03 17/03 01/04 16/04 01/05 16/05 31/05 15/06 30/06 15/07

US Brazil UK MexicoItaly France Spain IndiaIran Peru

Deaths per day (7-day average)

101 0102 0103 0104 0105 0106 0107 0108 010

02/03 23/03 13/04 04/05 25/05 15/06 06/07 27/07

DM EMDeaths per day (7-day average)

Source: Bloomberg and Alexander Forbes Investments; Note: Confirmed cases do not reflect all positive cases, they depend on testing

Slow exit from lockdown hinders growth

Source: Bloomberg, Oxford COVID-19 Government Response Tracker and Alexander Forbes Investments.Note: Confirmed cases do not reflect all positive cases, they depend on testing.

‘Second wave’ begins while infections persist in emerging markets

The second wave in South Korea resulted in reintroduction of lockdown measures.

SA’s stringent lockdown provided healthcare system time to prepare for the worst, but the resumption in activity has resulted in faster pace of infections.

Usually as countries observe deceleration in infections they resume economic activity.

Outline

Investing for financial returns and economic development

COVID-19 update

Macroeconomic scenarios for South Africa

Six pillar policy bridge to a higher growth

1

2

3

4

COVID-19 impact has long-term economic damage and delaying economic recovery

Source: IMF and Alexander Forbes Investments

Global economy in a crisis like no other

Growth in advanced economies to be the biggest detractor

In the worst case scenario, SA economy to suffer

The local economy is likely to follow U-shaped

1.7

-8

4.8

2.9

-4.9

5.43.7

-3

5.9

-10

-8

-6

-4

-2

0

2

4

6

8

2019 2020 2021

%

Advanved economiesGlobal growthEmerging Market and Developing economies

Global growth projections downwardly revised


Source: IMF, SARB, National Treasury and Alexander Forbes Investments

Detraction in SA economy to last longer than expected

In the worst case scenario, the National Treasury forecast SA economy to suffer deepest contraction of -16%.

Global economy in a crisis like no other, increasing uncertainty around meaningful recovery.

Growth in advanced economies to be the biggest detractor in global output this year.

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

2009 2012 2015 2018 2021 2024 2027 2030

Total (Gross Domestic Product - GDP)

SARB scenario [2020 (-10%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]

NT scenario [2020 (-16%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]

2019 level

Rtn

The local economy is likely to follow U-shaped or swoosh Nike-shaped recovery with economic activity remaining permanently below the pre-COVID-19 level.


2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

2009 2012 2015 2018 2021 2024 2027 2030

Total (Gross Domestic Product - GDP)SARB scenario [2020 (-10%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]NT scenario [2020 (-16%), 2021 (3,8%), 2022 (3,0%), 2023 onwards (2,0%)]2019 level

Rtn

24%

26%

28%

30%

32%

34%

36%

38%

40%

42%

2016 2018 2020 2022 2024 2026 2028 2030

Unemployment Rate (2019 - 2030)

30

32

34

36

38

40

42

44

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Poverty Rate (%, 2019 - 2030)

Baseline Scen Low-Mild Scen High-High Scen

15

17

19

21

23

25

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

RAT

IO (%

)

Poverty Gap (2019 - 2030)

Baseline Scen Low-Mild Scen High-High Scen

Source: IMF, SARB National Treasury, ADRS and Alexander Forbes Investments

Outline


COVID-19 update



1

2

3

4

COVID-19 impact has long-term economic damage

Let us work together to emerge from this pandemic with a more humane society, marked by an economy that is more inclusive, more equitable and in which all South Africans prosper. Labour, business and civil society must join with government in a new social compact for national reconstruction.

1 May 2020

““

Six pillar policy bridge

Pillar 1Macroeconomic

policy reform

Pillar 2Microeconomic policy reform

Pillar 3Private sector-participation

Pillar 4Trade and industry reform

Pillar 5Education and skills

Pillar 6Social policy

reform

Pillar 1 | Macroeconomic policy reforms

The 2020 Budget medium-term austerity proposal is set aside

Government’s budget for transfer spending is increased

An additional R50 billion to government final consumption expenditure

Immediate allocation of financial support to businesses

4% increase in the social infrastructure investment budget

Reductions in the interest rate and an increase in low cost borrowing

Short term COVID-19 mitigation measures


policy reform

Pillar 1 | Macroeconomic policy reforms

Government’s annual current expenditure is increased by an additional 3%

A commitment from government to restructure spending towards investment from wages

Monetary policy to contribute to achieving a growth target of 6%

Credit guarantee scheme extended beyond COVID-19

Government and public corporations increase their investment in economic infrastructure, social infrastructure and economic services by 10% annually over the next 11 years

Long term (2021-2030)


policy reform

Pillar 2 | Microeconomic (structural) reforms

Tourism sector exports expand

Trade, catering and accommodation services

Agriculture sector grows by an additional 1% in 2021 & 0,5% thereafter

Price of the transport, storage and communication sector declines

Labour productivity increases

Transition in the energy sector towards renewable energy

Increases in competitiveness

Pillar 2Microeconomic policy reform

Pillar 3 | Private sector and international support

Foreign direct investment in South Africa gradually increases

Public-Private Growth Initiative (PPGI), the private sector increases investment

Public Investment Corporation (PIC) increases its investment

Pillar 5Education and skills

Outline


COVID-19 update



1

2

3

4

Stylised facts about the listed equity sector and economy

*Earliest data available for India (2003), Colombia (2005) and Russia (2009) Source: World Bank and Alexander Forbes Investments

0

1000

2000

3000

4000

5000

6000

7000

8000

Can

ada

Kore

aAu

stra

liaM

alay

sia

Thai

land

Indo

nesi

aPh

ilippi

nes

Indi

aU

SU

KBr

azil

SAR

ussi

aC

hile

Mex

ico

Arge

ntin

aC

olom

bia

2000 2019Number of listed companies

0

50

100

150

200

250

300

350

Can

ada

Mal

aysi

aAu

stra

liaTh

aila

ndKo

rea

Philip

pine

sIn

done

sia

SA US

UK

Indi

a*C

hile

Braz

ilC

olom

bia*

Rus

sia*

Mex

ico

Arge

ntin

a

2000 2019Market capitalisation (% of GDP)

Financial and economic rationale for broadening the investment universe


Australia Canada

Indonesia

Korea

MalaysiaPhilippines

Thailand

0

2

4

6

8

0 500 1000 1500 2000 2500 3000 3500 4000

Rea

l GD

P (%

)

Number of listed companies

Argentina

BrazilChile

Colombia

India

Mexico

Russia

SA

UK

US

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500

Rea

l GD

P (%

)

Number of listed companies

Financial and economic rationale for broadening the investment universe


Australia

Canada

Indonesia

Korea Malaysia

PhilippinesThailand

-4.0

-2.0

0.0

2.0

4.0

6.0

40 60 80 100 120

GFC

F (y

/y %

gro

wth

)

Market Cap (% of GDP)

Argentina

BrazilChile

Colombia

India

Mexico

RussiaSAUK

US

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

0 50 100 150 200 250 300 350

GFC

F (y

/y %

gro

wth

)

Market Cap (% of GDP)

Und

erre

pres

ente

d

Und

erre

pres

ente

d

Und

erre

pres

ente

d

Und

erre

pres

ente

d

How does South Africa’s economic structure compare with emerging markets

Source: Stats SA, Bloomberg and Alexander Forbes Investments

22.8%

2.7%

22.9%

14.6%

9.6%

13.6%

7.9%

2.0%3.6%

19.0%

6.2%

16.9%13.8%

8.1%

21.7%

4.7%3.0%

6.7%

Finance, realEstate

& BusinessServices

Agriculture GeneralGovernment

Services

Wholesale,retail and

Motor trade

Transportand Comms

Manufacturing Mining Energy Construction

SA GDP EM

How does long-term investors invest in the South African economy

Source: Stats SA, JSE and Alexander Forbes Investments

Und

erin

vest

ed

Und

erin

vest

ed

Und

erin

vest

ed

Und

erin

vest

ed

22.8%

2.7%

22.9%

14.6%

9.6%13.6%

7.9%

2.0% 3.6%

23.6%

1.6% 2.6%

10.7%

34.9%

7.3%

17.0%

0.5% 2.3%

Finance, realEstate

& BusinessServices

Agriculture GeneralGovernment

Services

Wholesale,retail and

Motor trade

Transportand Comms

Manufacturing Mining Energy Construction

SA GDP JSE SWIX

South Africa’s economic growth has stagnated

Concluding remarks

Unemployment, poverty and inequality has worsened

Long standing structural constraints kept growth low

The COVID-19 pandemic worsened and exposed faulty lines in society

The economic, social and political sustainability of the country is at risk

A transition towards an inclusive economy

Private investors can drive growth by focusing at returns and growth


Investments

Speakers


Janina SlawskiHead of Investments Consulting

Alexander Forbes view on prescription

Prescribed assets | What are they?

First introduced Scrapped

Prudential Investment Guidelines (PIGs):

Government and SOE bonds ~53% in the case of retirement

funds

19891956 2019

Investing in the economy for

inclusive growth

Transform and diversify the

financial sector

ANC Manifesto Secure funding from SA retirement funds?

SOEs and municipalities

South Africa’s developmental

imperatives

2020

Prescribed assets | Regulation 28

The introduction of more draconiandirectives, like prescribed minimum

assets, into Regulation 28 would be a significant reversal of these gains.

It could be argued that prescribed

assets already exist in the form of

Regulation 28

Regulation 28 are prescribed with a spirit

of having the best interests of investors

at heart

Prescribed assets | The opportunity costs

Nominal returns Opportunity costs

Equities Prescribed assets Inflation

Equities returns –Prescribed Assets returns

= “Opportunity Cost”

Prescribed Assets returns -inflation

= “Real Opportunity Cost”

1960s 11.3% 4.9% 3.0% -6.4%

1970s 24.5% 7.3% 11.3% -17.2% -4.0%

1980s 20.2% 13.5% 14.5% -6.7% -1%

Source: Gill Raine, Senior Policy Advisor at ASISA, Presentation to ASSA Investment Seminar 13 June 2019

Our history with prescribed assets has not been a good one

Prescribed assets | Winners and losers

Defined Benefit Funds

THEN AND NOW

Opportunity costs

Employers

Lower funding levels

Employers

Defined benefits

Members

Prescribed assets | Winners and losers

* Dependent on period over which contributions are made and age at retirement. Quoted results are based on a 14% contribution rate and a member, joining at age 25 retiring after 40 years of contribution at age 65.

Defined Contribution

Funds

NOW

Impact of 1% p.a. reduction in investment return

* Dependent on period over which contributions are made and age at retirement. Quoted results are based on a 14% contribution rate and a member, joining at age 25 retiring after 40 years of contribution at age 65.

Opportunity costs

Members

Reduce expected pensions

~14%*~ 3.5%*p.a. extra contributions to replace income

Prescribed assets | The trustee dilemma

Requiring retirement funds to channel assets whose potential return and risk profiles make them unattractive

1

Lower returns for defined contribution members would mean lower retirement benefits

2

Lower returns on assets of defined benefit funds would mean lower funding levels3If SOEs and municipalities would be the government’s preferred conduit for social and economic development, this would result in unintended consequences

4

Trustees have a fiduciary duty to ensure members’ interests are always protected

Prescribed assets | Prescription vs impact

Requires that investors invest into specified assets

Prescription

Government’s funding needs

Investors’ risk/return needs? xDifferentiated investment propositions? x

Positive incentives and structures that improve the social and economic well-being

Impact investing

Government’s funding needs

Investors’ risk/return needs?

Differentiated investment propositions?

win-win

Prescribed assets | The alternative

Organised by the Investment and Infrastructure Office (IIO) in the Presidency

*While these were in the pipeline before the current economic crisis, there has been an urgency to fast-track these opportunities where possible to lift South Africa’s economic trajectory.

Sustainable Infrastructure Development Symposium (SIDS) initiative

Impact without prescription

Purposeunderspend on infrastructure and position key projects

RepresentativesASISA, Batseta, private sector institutions, multi-lateral development banks to name a few

Number of projects presented*200+ opportunities

Total estimated valueApproximately R2.1 trillion for investment over the next few decades

Prescribed assets | The win-win game

Value for money and value for the economy has been the missing link in the prescription debate

Why are we so enthusiastic

Growth and job creation

Differentiated and attractive investment

propositions

Dramatic shift in investment into the social

and economic well-being of the country

Prescribed assets | The illiquid investment challenge

Retirement Fund investors are subject to limits imposed in terms of Regulation 28; current discussion relates to whether increases in limits would mobilise additional assets into infrastructure

Why are we so enthusiastic about the development of the SIDS process and other similar initiatives?

It is not the availability of capital that is the issue … it is the availability of opportunities …

The right incentives and investment propositions have the potential to attract swathes of eager capital

Prescribed assets | Our position

Any potential for sub-optimal investment outcomes Committed to

lead and shape engagements

with the relevant authorities

Opposing Safeguarding

Pensioners reliant on

investment returns

Members of retirement

funds

Prescribed assets | Our position

Voluntary impact

investmentCommitted to

lead and shape engagements

with the relevant authorities

Supporting Safeguarding

Pensioners reliant on

investment returns

Members of

retirement funds

SupportingSA’s citizens

and economy

Speakers



Consulting David MooreHead of Alternative Investments

Private MarketsAn alternative to prescription

Private markets cover the following strategies:

Private markets | What are they?

Private equity

AgricultureDirect

property

Infrastructure

Private debt

Alternative investments that are not available on a public exchange

Private market assets in the risk/return spectrum

Ret

urn

pote

ntia

l

Main investment objective Capital gainCurrent yield

Private equity

Opportunisticreal estate

Infrastructure

Illus

trativ

e

Private Debt

SeniorPrivate debt

Asset classes thathelp drive performance

Balanced performance/income focus

Asset classes that helpgenerate stable cash flowsand match long-term liabilities

NaturalResources

Target returns are not a guarantee of future performance, and there is no certainty that investment and performance goals will be reached.

5%

8%

7-10%

11-13%

8-12%

Private markets | Why invest in them?

Uncorrelated, less cyclical, lower volatility

Diversification

Two- to twenty-year time horizons

Long term

Targets ESG attributes

Societal benefits

Alternative source of income generation

Enhanced return

Partnership arrangements allows

wider opportunity set in unlisted assets

Access

Returns linked to inflation

Inflation protection

AF Private Markets | SDG aligned to create impact

AF Private Markets | Creates sustainable energy infrastructure

AF Private Markets via its partner providers actively develop a broad range of renewable energy assets across South Africa. A tangible example within our portfolio with explicit alignment to SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action) is that of Cookhouse Windfarm, (“Cookhouse”) which is a 139MW power plant located in the Eastern Cape.

Cookhouse provides enough green, clean electricity to power c. 43,000 households for a year whilst concurrently offsetting 384,000 tones of Carbon Dioxide, (“C02”) emissions typically produced by traditional fossil fuel based power plants. Cookhouse also aligns to SDG 4 (Quality Education) via the Early Childhood Development, (“ECD”) programme it has implemented in the surrounding communities of Adelaide, Cookhouse, Bedford and Somerset East for children between the ages of 0 and 6 years old.

AF Private Markets | Invest in and create sustainable social infrastructure

AF Private Markets via its partners actively invests in primary and secondary schooling infrastructure across KZN, Gauteng and the Eastern Cape amongst others to achieve commercially acceptable returns for pension fund clients whilst simultaneously creating sustainable, social infrastructure

AF Private Markets via its partners provide funding for the completion of retirement village and frail care accommodation for the elderly in urban and peri-urban communities across KZN, Gauteng and the Western Cape.

Mobile COVID-19 Testing

AF Private Markets via its partners/investee companies are manufacturing mobile testing laboratories on a national scale which allow mass-testing of both urban and rural populations.

Personal Protective Equipment

AF Private Markets via its partners/investee companies are active in the supply of Personal Protective Equipment, (“PPE”) to hospital, their staff and individuals through retail outlets.

Treatment & Essential medicine

AF Private Markets via its partners/investee companies are active in (1) convalescent plasma transfer treatment for COVID-19 patients; (2) ramp-up of production of essential medicines to provide immune support; and (3) supply of key hospital infrastructure – ventilators/defibrillators, etc.

AF Private Markets | COVID-19 relief efforts

https://businesstech.co.za/news/government/386887/south-africa-launches-new-mobile-coronavirus-testing-vans/

Portfolio construction | Private markets portfolios

Access to high-rated managers, early bird

discounts, quick decision-making

Managers that have been thoroughly

researched

Liquidity budgeting, portfolio design

Legal and tax issues covered

Smooth drawdown process

Investments built to target allocation and

maintained

Effective diversification of managers, vintages, etc.

Clear reporting, accounting, etc.

Source: Mercer 2019

What does a successful investment in private markets look like?

FAIS compliance statement

Alexander Forbes Investments Limited (registration number 1997/000595/06) is an authorised Financial Services Provider (FSP711), in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act), as amended. Alexander Forbes Investments Limited is a registered insurer (insurer number: 10/10/1/155), and pension fund administrator (administrator number: 24/217).

Alexander Forbes Investments Limited is licensed in terms of Category I (advice & non-discretionary intermediary services), Category II (discretionary intermediary services) and Category IIA (Hedge Fund FSP).

Alexander Forbes Investments Limited is authorised to provide financial services in respect of the following financial products: Long-term insurance subcategory B1; Long-term insurance subcategory B2; Long-term insurance subcategory B1-A; Long-term insurance subcategory B2-A; Structured Deposits; Participatory interest in a hedge fund; Long-term insurance subcategory C; Retail Pension Benefits; Pension Fund Benefits; Shares; Money market instruments; Debentures and securitised debt; Warrants, certificates and other instruments; Bonds; Derivative instruments; Participatory Interests in a collective investment scheme; Long-term Deposits; Short-term Deposits; General Category IIA experience (Hedge Fund FSP).

The information contained in this presentation in respect of any product is factual and does not constitute financial advice, as contemplated in section 1 of the FAIS Act. No guarantee is provided.

Opinions and views expressed on various issues such as, but not limited to, economic, legal or regulatory overviews during th is presentation should not be construed as advice nor should it be construed as express or implied recommendations, guidance, or proposals that any particular transaction in respect of a product is appropriate for your particular investment objectives, financial situation, or particular needs.

• Therefore, the opinions expressed during this presentation should not be relied on for the purposes of making any financial, investment or other decision and you should consult with your own independent expert adviser, such as an economist, legal or tax adviser or financial services provider, before entering into any transaction.

Certain divisions within Alexander Forbes Investments may have been appointed by the client to furnish advice to the client.• A portion of this presentation may deal with the advice furnished by the relevant division within Alexander Forbes Investments.• The individual giving this presentation is not necessarily part of that division.• Any advice and/or recommendation is not advice and/or recommendation of the presenter, but of the division within Alexander Forbes Investments, authorised to

provide the advice.• Reliance should not be placed on the information in this presentation, but rather on the official report containing the advice.

FAIS compliance statement

The value of a portfolio can go down, as well as up, as a result of changes in the value of the underlying investments, or of currency movement. An investor may not recoup the full amount invested. All policies issued or underwritten by Alexander Forbes Investments are linked policies, under which no guarantees are issued. The policy benefits are determined solely on the value of the assets, or categories of assets, to which the policies are linked. Past performance is not necessarily an indication of future performance. Forecasts and examples are for illustrative purposes only and are not guaranteed to occur. Any projections contained in the information are estimates only and are not guaranteed to occur. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be realised in the future.

Alexander Forbes Investments holds professional indemnity and fidelity insurance cover, in excess of the minimum requirements stipulated in the General Code of Conduct and Board Notices to the FAIS Act.

Any information disclosed to the authorised representatives in their professional capacity will be treated as confidential and will not be disclosed to third parties without written consent, unless the disclosure of such information is required in the public interest or under specific law.

The Conflicts of Interest Management Policy is available on the Alexander Forbes Investments website (www.alexanderforbesinvestments.co.za). Portfolios managed by Alexander Forbes Investments may include investments of associate companies. Alexander Forbes Investments may provide investment services to clients who receive other investment services from associated companies. Alexander Forbes Investments Limited is a wholly-owned subsidiary of Alexander Forbes Limited. The company structure is available upon request.

Alexander Forbes Investments aims to treat all customers fairly. The Complaints Policy is available on the Alexander Forbes Investments website (www.alexanderforbesinvestments.co.za). Complaints should be addressed to the Compliance Officer: [email protected]

Alexander Forbes Investments shall not be liable for any damage or loss suffered resulting from any action taken by any person based on this presentation, information provided in it or any discussions relating to it.

Please be advised that there may be supervised representatives.

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Partnering · Alexander Forbes view on prescription. AF Private Markets and its impact. David...

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