Key Value Pair List

World Axis: Flexible Fund

26 July 2017

offshore

unitised

quity-offshore

The Investec Flexible Fund (“the Fund”) provides exposure to global equities, bonds, property, cash and - at times - alternative investments. Investments are made in a selection of some of the world’s finest investment managers and performance is measured against similar types of global funds.

Our portfolio manager strives to outperform the benchmark over the longer term by focusing on: Selecting investment managers who provide returns in proportion with risk taken Allocating assets based on our in-house strategic view of the market environment Blending investment managers appropriately in order to reduce risk without infringing on underlying performance. The mandate of the Fund differs from other funds in the World Axis range of funds because it allows for greater flexibility in terms of tactical asset allocation. This means that the manager is not constrained by benchmark considerations when making asset allocation decisions. We perform stringent due diligence on all investment managers, based on both a qualitative and quantitative investment process, in order to ensure that rigorous hurdles are cleared on an investment basis.

The World Axis Flexible Fund produced a return of +3.5% (US dollars, net of fees) for the fourth quarter of 2017, compared to the Fund’s benchmark return of +2.8%. This brings the calendar year return for 2017 for the Flexible Fund to +17.6%, compared to the global peer group average of +11.9%. Investors in the Flexible Fund enjoyed strong US dollar returns in 2017 largely as a result of positive manager selection and more specifically outsized returns from select growth (equity) managers. By way of example, Baillie Gifford produced a return of 52.3%, 30% ahead of the MSCI Word Index, while Sands Capital’s Global Growth Fund returned 38.5%. Both funds have significant exposure to technology, the best performing sector of the 11 sectors in the MSCI World Index last year. In addition both funds would have benefitted from elevated exposures to companies domiciled in emerging markets (in Sands’ case one third of its portfolio) as the MSCI Emerging Market Index outpaced the MSCI World with a return of 37.3%, helped by a softer dollar. We recently spent a significant amount of time with the co-portfolio manager of Sands and will be visiting Baillie Gifford in Edinburgh in the next few weeks. Based on our interactions with them, we are confident in both managers’ ability to deliver superior returns over a full market cycle by building concentrated portfolios of some of the world’s leading growth companies. As we move into 2018, our current asset allocation is balanced between exposure to risk assets and defensive/insurance assets, albeit with a tilt toward pro cyclical assets as the macro economic environment remains constructive. Central bank policy and the corporate earnings backdrop should remain supportive of risk assets in the short term, and the recently passed tax reform package in the US will provide a further fiscal boost to the after-tax profitability of US corporates. That being said, a more positive outlook has increasingly become the market consensus – as is reflected by the historically low volatility, which suggests a degree of investor complacency. This is not helped by valuations being toward the top end their historic range, although one could argue that this is justified, given where real interest rates are. We have pointed out many times in the past that we believe the market is too complacent when it comes to the prospect of higher interest rates as a result of an inflation pick-up, and this could be the catalyst for a market correction, both in equities and fixed income. The outlook for bonds remains negative as the economic expansion continues to gather pace, the Fed continues to hike rates (probably more than is currently expected), central bank asset purchases decline and inflation expectations rise. Risks for G7 government bond yields are decidedly to the upside, with the potential for a sharp rise. As such we remain light on government bonds and short duration in the portfolio into 2018.

Glossary Summary: Annualised return: Annualised return is the average return per year over the period. Bloomberg Barclays Global Aggregate: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The effective annual cost (EAC): Is a measure which has been introduced to allow you to compare the charges you incur and their impact on investment returns when you invest in different Financial Products. It is expressed as an annualised percentage. The effect of some of the charges may vary, depending on your investment period. The EAC calculation assumes that an investor terminates his or her investment in the financial product at the end of the relevant periods shown in the table. Method of calculation: Unit prices are calculated on a net asset value basis by determining the total market value of all assets in the Investec World Axis portfolio, including any income accruals, less any permissible deductions. The following costs may be deducted from the portfolio: brokerage fees, security services tax, auditor’s fees, bank charges, trustee and custodian fees and the annual management fees of the manager. Monetary policy: Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. NAV: the Net Asset Value (NAV) represents the value of the assets of a fund less its liabilities. OECD: The Organisation for Economic Co-operation and Development, founded in 1960 to stimulate world trade and economic progress. Total expense ratio (TER): Includes the annual management fee, performance fee and administrative costs but excludes portfolio transaction costs (except in the case of an entry or exit charge paid by a fund when buying or selling units in another fund) expressed as a percentage of the average daily value of the Fund calculated over a rolling three years (or since inception where applicable) and annualised to the most recently completed quarter. Transaction cost (TC): Transaction costs are a necessary cost in administering the Fund and impacts returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of financial product, the investment decisions of the investment manager and the TER Calculations are based on actual data where possible and best estimates where actual data is not available. Total investment charge (TIC): This is the sum of the TER and TC. YTD: Year to date.

High

Growth

25 November 2009

Investec Wealth & Investment

Total Investment Charge (TIC) Annual Management Fee 1.25% Other 0.79% TER 2.04% TC 0.08% TIC 2.12%

USD

R200 000

Morningstar Flexible Allocation Average (USD)

102.38

2017 will go down as one of the least volatile years on record – and one of the best for risk assets. Despite a barrage of policy, political and geopolitical headlines that threatened to upset the applecart, markets refused to curtail their charge higher. A combination of synchronous economic growth, accelerating earnings and supportive financial conditions (in the form of low interest rates, a soft US dollar and tighter credit spreads) provided a positive fundamental backdrop. As a result, global equities continued to make gains across the board and reached all-time highs in 2017. Strong macroeconomic fundamentals continued to underpin a constructive view on economic growth. Even in the US, where the economic cycle is more advanced, leading indicators do not suggest that the economic cycle is about to turn. While the current expansion has been long in duration, it has not been large in terms of magnitude. Consumer confidence, employment and business sentiment all remain robust. As economic activity marches on, the slack in the economy continues to be eroded: unemployment is at a 17-year low in the US, and multi-decade lows in the UK, Germany and Japan. Inflation, or the lack thereof, played its part in keeping monetary policy accommodative. Despite strong growth and tight labour markets, wage pressures have remained largely absent. This has helped maintain the Goldilocks-type macro environment, where a go-slow Fed has prolonged the bull market. Looking ahead however, the market’s extrapolation of no inflation ever has led to what we believe is an underestimation of the near-term path of policy rates, with just over two hikes expected in 2018. Market pricing diverges even more widely from the Fed’s guidance in 2019 and beyond. A gradual convergence of the market toward the Fed’s expected path is probable over the course of the year, as inflation rebounds, and the Fed again follows through on its guidance. If inflation rebounds strongly, leading to a sharp increase in interest rates, this would represent the biggest risk to the continued strong performance in equity and credit markets. As we head into 2018, the fundamental backdrop remains supportive. Global growth remains above trend and tax cuts in the US are starting to be implemented. Earnings are expected to be a tailwind. Central bank tightening is still in its early stages, with US real policy rates outright negative at present. A little worryingly, the yield curve – which has typically been an important signal to watch – is flattening, but it is unlikely to invert in the short term. Crucially, stocks have never peaked before the yield curve has become inverted. That being said, as we head deeper into the latter stages of this already mature bull market, the risks are growing and expected returns from risk assets have fallen – following the stellar returns investors have achieved of late. This doesn’t mean the bull market is over. It just means the risk/reward payoff isn’t nearly as attractive as it was a year ago and investors shouldn’t expect a repeat of 2017’s impressive nominal returns.

Although information has been obtained from sources believed to be reliable, Investec Wealth & Investment, a division of Investec Securities Proprietary Limited or its affiliates and/or subsidiaries (collectively “ISL”) does not warrant its completeness or accuracy. Opinions and estimates represent ISL's view at the time of going to print and are subject to change without notice. Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No security, financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments May be difficult to value or sell. The price or value of such securities and instruments May rise or fall and, in some cases, investors May lose their entire principal investment. Past performance is not necessarily a guide to future performance. Returns and benefits are dependent on the performance of underlying assets and other variable market factors and are not guaranteed. Levels and basis for taxation May change. Exchange rate fluctuations May have an adverse effect on the value of certain investments. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. ISL and/or its employees May hold a position in any securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of investment, financial or banking services by ISL. ISL accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, good will or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the or reliance on the information contained in this document, whether authorised or not. ISL does not make representation that the information provided is appropriate for use in all jurisdictions or by all investors or other potential clients who are therefore responsible for compliance with their applicable local laws and regulations. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of ISL. Investec Wealth & Investment a division of Investec Securities Proprietary Limited. 1972/008905/07. Member of the JSE Equity, Equity Derivatives, Currency Derivatives, Bond Derivatives and Interest Rate Derivatives Markets. An authorised financial services provider 15886. A registered credit provider registration number NCRCP262.