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Dedicated to Fixed Income
Fixed Income Views and
Product Range
Senate Group Conference
March 2012
Fund Range
Atlantic Fund Descriptions
Atlantic Stable Income Fund Atlantic Stable Income Fund is an actively managed fund which is designed to deliver returns that are higher than that of call accounts and traditional money market unit trust funds.
This fund differs from a money market fund due to the fact that the Fund Manager is able to invest in income generating instruments that have a higher return than typical money market instruments.
Average weighted term to maturity limit is 90-180 days.
This Fund is suitable for investors wanting a monthly income and capital stability.
Atlantic Enhanced Income Fund Atlantic Enhanced Income Fund is an actively managed income-producing fund, which seeks to provide income levels in excess of that provided by money market and income funds while at the same time provide moderate capital growth.
This will be achieved by actively allocating and diversifying between various interest-bearing asset classes including listed property.
The objective of the fund is to preserve capital and to maximise income returns for investors. It is suitable for investors who require capital preservation and high levels of income before and during retirement.
Regulation 28 Compliant.
Atlantic Real Income Atlantic Real Income Fund is an actively managed fixed income fund which aims to deliver inflation beating returns over time. The Fund targets CPI+3% after cots on a rolling 3 year basis.
The fund will invest primarily in inflation linked bonds as well as other high yielding fixed income securities.
The fund manager may also invest in listed property and a basket of selected equity securities (to a maximum of 25%) to ensure the targeted return is achieved.
The maximum combined equity and property exposure is 35%.
The Fund aims to protect investors capital and at the same time generate an inflation beating income stream.
Regulation 28 Compliant
Atlantic Enhanced Income FundAtlantic Real Income FundAtlantic Stable Income Fund
Forward Yield and AA
4Source: Atlantic Asset Management, Moneymate. See disclaimer for more details.
Fixed Income Universe
Instruments Stable Income Fund
Enhanced Income Fund
Real Income Fund
Cash
Money market
Bonds
Non-gvnt Bonds
Corporate Bonds
Inflation linked Bonds
Preference shares
Listed property
Structured trades
International
Equity
Atlantic Stable Income Fund
INVESTMENT UNIVERSE
The Fund will make use of a flexible mix of debt
securities, including but not limited to money
market instruments, government bonds, fixed
deposits, listed debentures and other higher
yielding securities such as short dated corporate
bonds.
ANNUAL MANAGEMENT FEE
0.45% per annum (exVAT)
AVERAGE TERM TO MATURITY
Limited to a maximum of 180 days.
Fixed Income Risk Spectrum
Money Market Portfolios
These portfolios seek to maximise interest income, preserve the portfolio’s capital and provide immediate liquidity.
This is achieved by investing in money market instruments with a maturity of less than one year while the average maturity of the underlying assets may not exceed 90 days.
The portfolios are typically characterised as short-term, highly liquid vehicles.
Income Portfolios
These portfolios invest in bonds, fixed deposits and other interest earning securities which have a fixed maturity date and either have a predetermined cash flow profile or are linked to benchmark yields, but excluding any equities. To provide relative capital stability, the average modified duration of the underlying assets is limited to a maximum of two years. These portfolios are less volatile and are characterised by a regular and high level of income.
Benchmark: BEASSA All Bond 1 to 3 year split index
Bond Portfolio
These portfolios invest in bonds, fixed deposits and other interest-bearing securities. These portfolios may invest in short, intermediate and long-dated securities. The composition of the underlying investments is actively managed and will change over time to reflect the manager’s assessment of interest rate trends. These portfolios offer the potential for capital growth, together with a regular and high level of income.
Benchmark: BEASSA All Bond index
Fixed Interest-Varied Specialist Portfolio
These portfolios invests in bonds, fixed deposits, structured money market instruments, real estate, listed debentures and other high yielding securities, provided that not more than 5% may be invested in ordinary equities. They seek to maximise income with either preservation and stability of capital, or an offer of potential growth of capital.
The underlying risk and return objectives of individual portfolios may vary as dictated by each portfolios mandate and stated investment objective and strategy.
Source: Atlantic, ASISA Fund Classification Standards
Duration limit average 180 days
Performance review
Source: Bloomberg, Atlantic AM, Moneymate
100
102
104
106
108
110
112
114
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
ASIF vs MM ave
ASIF MM Ave ASIF Cumulative MM Ave Cumulative
Atlantic Stable Income Fund vs Average Money Market Category
Asset Allocation – Stable Income Fund
Cash on Call9.5%
Atlantic Stable Income Fund Asset Allocation 29 February 2012
Money Market < 3 months20.4%
Floating Rate > 3 months30.9%
Fixed Rate > 3 months39.2%
Atlantic Enhanced Income Fund
INVESTMENT UNIVERSE
The fund may invest in:
• government bonds
• inflation-linked bonds
• corporate bonds
• non-sovereign bonds
• money market securities
• preference shares
• listed property securities
• other income-yielding debt securities
• hedged offshore allocation
Website: www.atlanticam.com
FUND MANAGER
Arno Lawrenz B.Sc(Hons),
CFA
Money Market -Floating Rate
48.2%
Property6.6%
Inflation Linked Bonds5.1%
Non-Govt Bonds3.0%
Pref Shares2.8%
Foreign - Currency Hedged12.3%
Atlantic Enhanced Income Fund Asset Allocation 29 February 2012
Money Mkt-Fixed Rate
3.3%
Cash on Call11.4% Govt Bonds
7.3%
Asset Allocations Atlantic Enhanced Income Fund
Foreign ExposureHedged into Rands
High Yield creditShort duration
Cash has been used to buy bonds
AEIF Asset Allocation over time
12
Notes: Included in the Floating Rate Securities are CLN’s which are linked to offshore bonds, but have no currency volatility. We therefore don’t have offshore un-hedged exposure. Powder is still dry! These assets are JIBAR linked with very good yield pick-up. See pie chart and slide showing allocation to these.
Inflation protection via a Fixed Income Fund
the Atlantic Real Income Fund is…an income fund with an inflation protection theme:
How is this achieved? Uses Inflation-linkers to deliver real income growth
Makes us of inflation correlations to determine equity exposure,
including dividend income inherent in equity exposure
Listed property is added to provide additional income growth
in addition hybrid instruments to capture upside return
Atlantic Real Income Fund
Provide income generation with an inflation-protection framework.
Maximum combined equity and property exposure of 35%
Unique features: The conversion of equity
risk into income The capturing of inflation
bias via equity exposure
Downside risk still a key requirement - capital preservation measured on a 12 month basis.
Conservative risk rating
Low TER
UNIQUE FEATURES OF THE FUNDFUND MANDATE
Equity inclusion process
Capturing Inflation Drivers
• First Overlay : Identification of Inflation-drivers– Determination of equity bias : Food inflation, Oil, Currency risks
• Second overlay : Inflation correlations– Monitoring of liquid stocks– Analysis of relative valuations– Decision on spread vs capital gain capture
• Third overlay : Further breakdown of CPI basket– Decision on emerging secondary risks e.g. medical inflation
• Fourth Overlay : Inflation-linked dividend yields– Decision on relative contribution of dividend yields
Equity HoldingsREAL INCOME FUND : Equity Holdings and Income Yields
9.39 %1 701 802.20 3.66 8.44 6.93
998 497.50 2.15 7.03 8.69458 280.00 0.99 7.17 11.43429 420.00 0.92 9.84 10.52433 350.00 0.93 7.24 6.83344 268.00 0.74 7.16 4.99
6.75 %738 988.47 1.59 4.23865 331.00 1.86 1.84824 568.00 1.77 1.97709 830.00 1.53 0
7.80 %24 504.28 0.05 10.416 877.12 0.04 7.8
1 391 324.80 2.99 8.6630 247.92 1.36 8.6912 300.00 1.96 9.4642 941.76 1.38 8.3
3.02 %566 190.00 1.22 7.74839 031.00 1.81 7.48
26.98 8.18
Dividend Yield Equity12m Fwd
Div Yld3 Yr Fwd Div
Growth
ALT ALLIED TECHNOLOGIES LIMITED
Listed Property
Inflation-themed Equity
Preference Shares
PGFP PSG PREFERENCE SHARE
SHFF STEINHOFF INV PREFS
GLD NEW GOLD ISSUER LIMITED
SOL SASOL LIMITED
ADR ADCORP HOLDINGS LIMITED
EMI EMIRA
FPT FOUNTAINHEAD PROPERTY TRUST
AWB ARROWHEAD PROP LTD B
FFA FORTRESS INCOME FUND LTD A
RDF REDEFINE PROPERTIES LIMITED
CDZ CADIZ HOLDINGS LIMITED
AWA ARROWHEAD PROP LTD A
CML CORONATION FUND MANAGERS
ARL ASTRAL FOODS LIMITED
OMN OMNIA HOLDINGS LIMITED
AGL ANGLO AMERICAN PLC
KIO KUMBA IRON ORE LIMITED
Real Income Fund : Performance
ARIF CPI+3% Rel Perf3m 3.78% 2.19% 1.59%6m 4.20% 4.28% -0.08%12m 7.90% 7.97% -0.07%2y 20.93% 15.84% 5.09%3y 30.44% 27.59% 2.85%
90
95
100
105
110
115
120
125
130
135
Cumulative Performance
Real Income Fund CPI+3%
Real Income Fund : Performance
-1.5000%
-1.0000%
-0.5000%
0.0000%
0.5000%
1.0000%
1.5000%
2.0000%
2.5000%
Monthly Performance
Real Income Fund CPI+3%
Asset Allocation – Real Income Fund
Money Market42.0%
Pref Shares2.9%
Foreign - Currency Hedged
8.0%
Atlantic Real Income Fund Asset Allocation 29 February 2012
Inflation Linkers4.4%
Equity16.3%
Listed Property9.7%
Cash on Call 8.7%
GovtBonds8.0%
Market Views
• Fed/Japan /Euro are committed to keeping rates low – this will ultimately be the cause of the greatest misallocation of capital ever.
• We are still in a 2-zone inflation world – DM on the lower side (with sub-par growth) and EM on the higher side, but already peaking. SA questions about structural risks in inflation outlook.
• Debt crisis will continue to haunt overleveraged countries – Risk appetite will be more subdued and capital flows lower than recent past.
• State, municipal and European peripheral finances destined to end in tears – Squeeze on revenues due to politically expedient austerity will lead to severe financing crunch. Banking systems are still vulnerable.
• 2011’s mid-cycle growth slowdown has morphed into possible 2012 recession – flight to safety will remain as a key theme and inflation is a non-starter. High oil prices a tax on growth.
• Locally, SARB at the mercy of global conditions – but constrained by rising inflation above upper target.
22
1H2012 Key Global Themes
Investment Recipe for 2012?
It Ain’t over yet.
Beware of (bond) Bubbles!
Be Conservative.
What’s changed?
1. Fed has committed to low rates into 2014.
2. ECB has provided unlimited 3 year liquidity to banking sector.
3. EM’s like Brazil & India easing more aggressively than expected.
4. Etc etc…
What’s changed?
1. So, with a global easing bias; and
2. Risky assets already pricing in bad news
means :
Markets in risky assets will rally this year?
Are things improving? Yes, but….
Market scenarios
27
Scenario 1 : Spain, Italy, France are moving into debt trap territory. Everything else is just noise.
Scenario 2 : Too much is at risk for the Euro to fail. This is just a blood on the streets point in time – time to be brave.
Everything else is noise…
28
Scenarios – Expected Returns
29
SCENARIO 1 : Income Capital gain TotalCash 5.0% 0.0% 5.0%Money market 5.5 1.0** 6.5Nominal Bonds 8.5 -6.5 2.0ILB’s 9.8 -1.7 8.1Listed property 8.0 -5.0 3.0Preference Shares 7.8 -1.0 6.8
SCENARIO 1 : Income Capital gain TotalCash 5.0% 0.0% 5.0%Money market 5.5 1.0** 6.5Nominal Bonds 8.5 -6.5 2.0ILB’s 9.8 -1.7 8.1Listed property 8.0 -5.0 3.0Preference Shares 7.8 -1.0 6.8
SCENARIO 2 : Income Capital gain TotalCash 5.5% 0.0% 5.5%Money market 6.0 1.0** 7.0Nominal Bonds 8.5 4.0 12.5ILB’s 8.5 0.3 8.8Listed property 8.2 2.5 10.7Preference Shares 8.2 0.0 8.2
** Not capital gain, but credit spread.
SCENARIO 2 : Income Capital gain TotalCash 5.5% 0.0% 5.5%Money market 6.0 1.0** 7.0Nominal Bonds 8.5 4.0 12.5ILB’s 8.5 0.3 8.8Listed property 8.2 2.5 10.7Preference Shares 8.2 0.0 8.2
** Not capital gain, but credit spread.
Japan is the template
30Source: Bloomberg, Atlantic AM
0.00
1.00
2.00
3.00
4.00
5.00
6.00
May-94 Nov-95 May-97 Nov-98 May-00 Nov-01 May-03 Nov-04 May-06 Nov-07 May-09 Nov-10
Japan 10 year bond yield
South Africa Bond yields – have we “peaked” already?
10 year average = 5.9%
3.00
5.00
7.00
9.00
11.00
13.00
15.00
17.00
19.00
21.00
Jan-97 Mar-98 May-99 Jul-00 Sep-01 Nov-02 Jan-04 Mar-05 May-06 Jul-07 Sep-08 Nov-09 Jan-11
SA 10 year bond yields
South Africa Bond yields – going nowhere slowly?
10 year average = 5.9%
A major 2015 worry…
33
Japan’s debt bubble will also burst one day…
A major 2015 worry…
34
2012 Investment Strategy
1. Look for safe income : Dividends, High quality credit, high running yield bonds.
2. Run with the bulls (and the bears!)
Contact details
DisclaimerThe information and opinions contained in this document are recorded and expressed in good faith and in reliance on sources believed to be reliable. However, no representation, warranty, undertaking or guarantee of whatever nature is made or given concerning the accuracy and/or completeness or such information and/or the correctness of such opinions. Any investment is speculative and involves significant risks and in making any investment decision, or in advising a third party in respect of an investment decision, you will rely solely on your own view and examination of the facts, information opinions and the records relating to such investment. Past performance of the investment is not an indication of the future performance. Atlantic Asset Management (Pty) Limited (Atlantic) shall have no liability or responsibility of whatever nature in respect of any claim, damage, loss or expense arising out of or in connection with the reliance by anyone on the contents of this document. Views expressed are those of Atlantic and are subject to change without notice.
Notes on performance and asset allocation charts:
Forward Yield* An expected return for the fund in 12 months time.All calculations are indicative and use current market pricing and fund compositions and will change from time. All yields are calculated net of costs.
The portfolio performance is calculated on a NAV to NAV basis and does not take any initial fees into account. Income is reinvested on the ex-dividend date. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Past performance is not necessarily an indication of future performance. Prices are calculated on a net asset value basis. The single price (NAV) per unit reflects the total assets of a portfolio less permissible deductions, divided by the number of units in issue. Permissible deductions include any costs related i.e. running a portfolio e.g. trustee/custodian fees, audit fees, manager’s annual fee and regional services council levies, MST and brokerage fees. Lump sum investment with income reinvested.
Atlantic Asset Management (Pty) Limited is an authorised discretionary financial services provider (FSP number 31756).
Arno [email protected]
079 876 8001
Murray Anderson
083 676 5284
