We are very proud of the growth we have achieved in less than a decade

The 31st of March 2013 will mark the eighth year since Argon began operating back in 2005. It has been an amazing journey, especially for the founding members. We have grown from zero assets to now managing ZAR 12 billion in third party institutional assets, with a staff complement of 25. We pride ourselves in having attracted some of the best talent in our field. Together, our investment team has over 230 years of investment experience representing a deep and diverse skill set.

Last year we reached worthy milestones in achieving best practice and empowering graduates with true global pedigree investment training

Looking back, 2012 was a challenging and exciting year for us. We implemented Project Phoenix in the middle of 2010 and in 2012 we measured the strategic and operational outputs of this initiative. In short, Phoenix is an internal strategic project aimed at positioning Argon for achieving international best practice operationally and significantly enhancing the probability of delivering investment success on behalf of our clients. It covered numerous broad aspects we believe are key ;

1. Our investment culture, as an enabler and source of sustainable advantage.

2. Our investment processes, better articulation of our alpha thesis across all our investment propostions.

3. Our people, their engagement levels and the skills sets required to deliver on our client expectation.

While notably still a short period since implementation, the results so far have been strikingly positive. I am pleased to share with you that all our funds are currently positioned in the top quartile on a peer relative basis, and ahead of their respective benchmarks. This is hugely encouraging.

We also successfully launched our graduate trainee programme, which we run in partnership with Schroders Investment Management Ltd, a London Stock Exchange listed investment management firm with over 230 billion of assets under management and an organisational history of over 200 years. Two candidates recently came back from a four-month programme at Schroders, where they gained invaluable first-hand global investment management experience. They are now based at our Cape Town offices as trainee investment analysts.

The good, the bad and the ugly of 2012 and looking into 2013

In this issue we review what the 2012 calendar year held for some of our products: Argon SA Equities, Argon SA Core Bond, and Argon Multi Asset Class Absolute Return.

Our product heads explain what added to and detracted from alpha for their respective products, and share their views on the market and investment positioning going forward.

Enjoy the read.

Business OverviewBy Luyanda Joxo, CFA (Business Development Manager)

An African investment firm with global standards

aiming BEYOND THE BENCHMARK

Argon Multi Asset Class Absolute Return

Kyle Hulett, CFAB Bus Sc (Actuarial Science) UCT Fellow of the Faculty of Actuaries, FFA (UK)

Head of Multi Asset Class

Increased liquidity delivers spectacular asset class returns

Although 2012 got off to a slow start, the last four months of the year proved to be eventful, with the European Central Bank and the US Federal Reserve both agreeing to print unlimited amounts of money to prevent deflation and recession. This led to spectacular returns across all asset classes (as shown in the chart on the left). Equities and bonds comfortably beat cash and the fund recorded strong performance as a result.

Argon Multi Asset Class Absolute Return: Fund performance to December 2012

The fund outperformed its benchmark substantially over the past year. This was due to a combination of strong underlying market returns and the alpha we generated.

Main contributors to alpha in 2012Strategic asset allocation (SAA)

SAA has a 77% probability of outperforming CPI+4% over a rolling three-year period, in all economic environments.

Applying SAA offered a 13% downside risk of the worst 12-month historic drawdown.

House view equities underperformed the benchmark by -3.4%.

Tactical asset allocation (TAA)

TAA has a 76% probability of outperforming CPI+4% over a rolling three-year period, accounting for specific economic environments.

Applying TAA offered a 9% downside risk of the worst 12-month historic drawdown.

With the local economy in a state of stagflation (low growth and high inflation), the model specifies an underweight position in equities and an overweight position bonds and cash.

The TAA model cost the fund 1.2%, as equities outperformed bonds and cash over the 12-month period. This model should however be measured over rolling two-year periods.

Dynamic asset allocation (DAA)

The DAA model was implemented to significantly reduce downside risk.

The downside risk of the worst 12-month historic drawdown was reduced from -13% in the SAA model to -1.5%, at a cost of -3.9%.

Cost was funded by yield-enhancing strategies, with a yield of 5.8%.

The DAA model added a net 1.9% alpha and reduced risk.

Argon SA Core Bond Mokgatla Madisha B Sc (Mechanical Engineering)B Com Hons (Fin Analysis & Portf Mgt) UCT

Head of Fixed Income

Adding value with superior stock selection

We aim to outperform the All Bond Index (ALBI) by 100 basis points through duration, credit and sector allocation/term structure. In 2012, we achieved an exceptional 255 basis points of outperformance. Credit accounted for 160 basis points of the alpha. Our allocation to DV23 alone added 73 basis points - a combination of 8.8% overweight and 12.7% outperformance relative to the ALBI. A further 69 basis points came from sector allocation.

We initially positioned the portfolio for a steepening of the yield curve from the fourth quarter of 2011 onwards, because we expected the switch auctions and the long-dated funding strategy by National Treasury to overwhelm demand. However, in April 2012 Citi Bank announced that South Africa was likely to be included in the World Government Bond Index (WGBI), which drastically changed the demand supply dynamics. We switched our positioning from a steepner to a flatner by overweighting the 7-12 year sector by about 34%. The balance of the outperformance, which totals 26 basis points, came from trading.

We believe South African bonds, specifically corporate credit, offer good value

Our view for 2013 is that South African bonds still offer value relative to other emerging markets. In fact, we are the fifth highest yielding emerging market, and the devaluation of the rand in 2012 has made South African assets cheap. We continue to see good value in corporate credit. The economy (ex-mining) will grow faster than last year, which should support the profitability of financial and industrial companies.

Argon SA Core Bond: Fund performance to December 2012

An African investment firm with global standards

Source: Argon Asset Management

Source: Argon Asset Management

Source: Argon Asset Management

Source: Argon Asset Management

Source: Argon Asset Management

Argon Asset Management (Pty) Ltd is an independent investment management company registered in South Africa, company registration number 2002/016801/07 and an authorised financial services provider under the Financial Services Board (FSB) registration number 835 as well as FSB section 13B pension funds administrator registration number 24/434. The main business of Argon Asset Management is the provision of investment management services to institutional clients. Argon Asset Management manages South African specialist equity portfolios, SA fixed income portfolios and multi-asset class absolute

return portfolios.

Address:

CPT: 1st Floor, Colinton House, The Oval, 1 Oakdale Road, Newlands, 7700 JHB: 7th Floor, Fredman Towers, 13 Fredman Drive, Sandton, 2146

www.argonassetmanagement.co.za

Argon Asset Management (Pty) Ltd is an authorised financial services provider.

An African investment firm with global standards

Argon SA Equities

Saul Miller M Bus Sc (Actuarial Science) UCT Fellow of the Faculty of Actuaries, FFA (UK)

Head of Equities

2012 a tough year for value managers because of global uncertainty

Last year global uncertainty and paltry bond yields pushed investors into shares with generous dividend yields and reasonable growth prospects. This was clearly evident in emerging markets like South Africa, where the high growth and high dividend-yielding retail sector strongly outperformed the FTSE/JSE All Share Index (ALSI). The main reason for this performance was the sectors extremely high levels of profitability and valuation, which reached historic highs in 2012. With Argons emphasis on valuation, we had negligible exposure to this sector, which contributed to underperformance during 2012. Trading updates released after December 2012 indicate that many of the expectations being factored into the retail sector were overly optimistic. Although some of the retail shares fell during January 2013 after these trading updates, we believe they are not yet offering sufficient value. Many of the tail winds that drove the strong revenue growth in these counters wont have such a significant impact going forward. We are seeing a tightening in the granting of unsecured debt and growth in government grants should eventually slow.

Sector-specific performance and our positioning

Financial sector

We remain overweight the financial sector via Old Mutual. The share has lagged the performance of many of the European insurers and still trades on a discount to its embedded value, unlike the other South African insurers.

Mining sector

After a poor performance from most mining shares in 2012, some are showing limited value. Although commodity prices remain high, we are still concerned about the negative impact of continuing cost pressures on profits. Anglo American will hopefully turn around some of their ailing divisions with new management. This may however take a few years. Within the platinum sector, we remain primarily exposed to Impala because of its low positioning on the cost curve of platinum miners.

Consumer sector

We maintain our overweight position in Steinhoff. They have performed well operationally. However, investor concerns over their exposure to a struggling European economy has weighed negatively on their share performance. On a forward price earnings ratio of 8x, versus the FTSE/JSE ALSI at over 12x, the negative European economic fundamentals are adequately discounted in the Steinhoff share price. We expect earnings growth over the next few years to be derived from efficiencies and procurement benefits from their acquisition of Conforama, as opposed to higher furniture sales to struggling European consumers.

Healthcare sector

Netcares share price has come under pressure due to investor concerns over the high level of gearing in its UK hospitals property business. This business is ring-fenced from the South African business and there will be no further capital injections into this business. At worst, the UK business can be valued at zero. This implies that the South African business is trading on a price earnings ratio of 13x. This is reasonable given the strong cash generative nature and high barriers to entry of hospitals in South Africa. Netcare is on a meaningful discount to its competitors, Life Healthcare and Mediclinic.

We remain committed to our long-term perspective linked to intrinsic value. Over the short term, unpredictable economic news flow and investment themes will drive share prices, whereas over the long term we believe share prices will be driven by their intrinsic value. Although 2012 was a tough year, we remain committed to our investment philosophy of purchasing shares below their intrinsic value, in that way preserving long-term returns.

Argon SA Equity: Fund performance to December 2012

The outlook for 2013

Europe: The Long-term Refinancing Operation has not filtered into the real economy. We believe that the recovery will take longer than the market expects and will weigh on global growth.

Japan: The Japanese economy should experience strong tailwinds due to the weak currency and low bond yields an unusual combination. However, the G7 conference is alive with talk of currency wars sparked by the moves in the Yen.

US: The negative impact of spending cuts and policy uncertainty is supportive for growth. Overall: Despite growth remaining disappointing, the market continues to rally to new highs. There is currently a major

disconnect between market movements and data surprises. It may not pay to fight the liquidity argument, but at the same time we recommend staying cautious in the near term.

Source: Argon Asset Management