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CORONATION GRANITE FIXED INCOME FUND as at 31 May 2016 Limited liability partnership ZAR 01 October 2002 R1 million Domestic Fixed Income Cash + 3% Cash + high-water mark 1% (excl. VAT) 20% (excl. VAT) Liquidity Exit fees Fund AUM (R'Million) Notice period Reporting Portfolio manager Monthly Not applicable R 367.14 1 month Monthly Mark le Roux, Adrian van Pallander & Nishan Maharaj Ernst & Young Investment Data Services Auditor Administrator INVESTMENT OBJECTIVE AND STRATEGY PERFORMANCE SINCE INCEPTION Sharpe ratio (annualised since inception) Sortino ratio (annualised since inception) Index correlation (ALBI) Number of longs Number of shorts Fund Jul-15 Feb-16 Dec-14 Oct-13 May-14 Mar-13 Jan-12 Aug-12 Jun-11 Apr-10 Nov-10 Sep-09 Jul-08 ALBI Feb-09 Dec-07 0.28 0.42 Oct-06 1.40 2.35 4.1% 37 16 FRODS 0.6% 167.4% 7.5% 6.26% 5.7% 5.5% 12.3% 4.9% 100.0% 100.0% 0.6% May-07 ALBI -1.5% 241.1% 9.4% 0.96% 4.4% 7.1% 23.6% -5.6% 70.1% 50.0% 7.0% 4.6% -6.7% -1.4% -7.9% Mar-06 Fund 0.9% 274.5% 10.1% 7.46% 7.4% 7.6% 17.3% 6.4% 99.4% 100.0% 1.9% 1.1% -1.2% -1.2% -1.2% FRODS MONTHLY RETURNS (Net of Fees) 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Monthly return Total return Average annualised return (since inception) 1 Year Return 3 Year annualised return 5 Year annualised return Best 12-month rolling return Worst 12-month rolling return % positive months (since inception) % positive months (last 12 months) Standard deviation (annualised since inception) Downside deviation (risk free since inception) Largest monthly drawdown Average monthly drawdown Largest cumulative drawdown Jan-05 PERFORMANCE AND RISK STATISTICS Aug-05 Sep-02 The fund is expected to have low volatility with a very low correlation to the All Bond Index (ALBI). Investment decisions are driven by fundamental proprietary in-house research. The fund’s target return is cash plus 3%. The objective is to achieve this return with low risk, providing attractive riskadjusted returns through a low fund standard deviation. Jun-04 The Coronation Granite Fixed Income Fund makes use of six core and distinct fixed income strategies, namely: Directional View Taking, Yield Curve Positioning, Corporate Credit Opportunity, Arbitrage, Quantitative and Relative Value Trades in the pursuit of producing consistent absolute returns independent of general market direction. Apr-03 400.00 380.00 360.00 340.00 320.00 300.00 280.00 260.00 240.00 220.00 200.00 180.00 160.00 140.00 120.00 100.00 Nov-03 Investment structure Currency Launch date Minimum investment Fund category Target return Performance fee hurdle rate Annual management fee Annual outperformance fee COMPARISON OF CONSISTENCY OF RETURNS 4.0% HISTOGRAM OF MONTHLY NET RETURNS 3.0% 90 2.0% 80 1.0% 70 0.0% 60 -1.0% Frequency 50 -2.0% -8.0% 40 -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% All Bond Index 30 EXPOSURE BY UNDERLYING STRATEGY 20 Current Value (+1bp) Value 10 Directional Strategy Relative Value Strategy Switch Strategy Credit Strategy Real Directional Strategy Residual Strategy Prime Brokering Less -2.00% -1.50% -1.00% -0.50% 0.00% than 2.5% MONTHLY PERFORMANCE RETURNS (NET) Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 SOUTH AFRICA Jan 0.69% 0.43% 0.11% 0.46% 0.74% 0.77% 0.65% 3.49% 1.76% 0.88% 1.38% 0.08% 0.48% 1.41% Feb 1.01% 0.69% 0.53% 0.58% 0.63% 0.99% 0.78% 1.95% 0.68% 1.27% 1.81% -1.22% 0.82% 0.46% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% Greater than 3.5% May 0.92% 0.60% 0.57% 0.47% 0.55% 0.80% 0.67% 0.77% 1.09% 0.99% 0.91% 0.37% 0.82% 1.46% Jun Baskets Mar 0.61% 0.55% 0.71% 0.29% 0.44% 0.68% 1.72% 0.92% 0.27% 0.82% 0.56% 3.16% 0.47% 1.30% Apr 0.68% 0.65% 0.60% 0.58% 0.60% 0.95% 0.70% 0.53% 0.47% 0.93% 0.28% 0.61% 0.00% 1.18% Tel: +27 21 680 2000 | Fax: +27 21 680 2100 | [email protected] 0.57% 0.86% 0.37% 0.61% 0.43% 0.32% 0.55% 0.71% 0.25% 0.97% 1.67% 0.65% 1.06% Jul 0.55% 0.72% 0.78% 1.10% 0.72% 1.21% 0.73% 0.60% 0.16% 0.91% 0.30% 0.04% 1.19% Aug 0.63% 0.56% 0.62% 0.75% 0.82% 1.23% 0.58% 1.24% 1.10% 0.68% 0.61% 0.13% 1.16% Sep 0.48% 0.45% 0.82% 0.34% 1.43% 0.79% 0.57% 1.11% 1.15% 0.80% 1.16% 0.50% 1.27% Oct 0.60% 0.80% 0.77% 0.68% 0.34% 0.31% 0.65% 1.03% 0.10% 0.79% 0.97% 3.01% 0.89% Point -219 321 13 174 010 698 821 146 284 115 1 356 698 85 476 10 714 982 -212 600 13 174 010 146 285 358 1 356 698 85 476 10 720 550 Nov Dec 0.45% 0.20% 0.54% 1.02% 0.73% 0.78% 1.09% 1.12% 0.23% 1.23% 1.29% 1.70% 0.75% Rand per 0.03% 0.79% 0.60% 0.58% 0.56% 0.56% 0.59% 1.36% 1.11% 1.04% 0.84% 0.75% 0.83% 6 721 -32 1 243 5 568 Total 3.97% 6.41% 7.12% 7.10% 8.34% 9.62% 10.16% 13.11% 12.05% 9.36% 11.41% 10.21% 9.73% 13.74% www.coronation.com CORONATION GRANITE FIXED INCOME FUND as at 31 May 2016 MONTHLY COMMENTARY The fund returned 0.92% in May, taking the one-year return to 7.46%. This leaves the fund return 1.20% ahead of cash over the last 12 months. May was a poor month for domestic markets, including the bond market, which gave away some of the gains made in March and April. The All Bond Index (ALBI) fell by 1.49% in May, with longer-dated maturities delivering the weaker performance. Bonds with a maturity of 12 years or longer lost 2.03%, compared to those with maturities of one to three years that returned 0.3%. Inflation-linked bonds delivered a return of -0.55%, while the cash return was strongest at 0.62%. Table 3 : Bond and Money Market (local currency returns) Code ALBTR Index GOVTR Index OTHTR Index JSEI06TR Index JSEI02TR Index JSEI03TR Index JSEI04TR Index Name All Bond GOVI OTHI Bonds 1-3 Years Bonds 3-7 Years Bonds 7-12 Years Bonds 12+ Years May 2016 -1.49% -1.44% -1.63% 0.31% -0.67% -1.80% -2.03% 3 months 3.0% 2.9% 3.2% 2.6% 3.0% 2.5% 3.2% 6 months -0.2% 0.1% -0.9% 3.1% 1.9% -0.3% -1.3% 12 months 1.0% 1.5% -0.4% 6.4% 4.6% 1.1% -1.2% STEFI Index CILITR Index TFJPREFZ Index jpeiglbl Index Cash JSE Composite Inflation-linked Bonds Index Preference Share Index JPMorgan EMBI Global 0.62% -0.55% -0.27% -0.30% 1.77% 3.4% 12.1% 5.00% 3.44% 2.7% 11.0% 5.30% 6.80% 7.0% 12.1% 4.55% Year-todate 6.9% 6.6% 7.7% 4.6% 5.8% 6.5% 7.9% 2.88% 4.58% 12.1% 6.91% Source: Deutsche Securities Following comments from the US Fed, global market volatility picked up again in mid-May, tempering the rally in risk assets. On balance, global growth data remained positive, but the Fed’s more hawkish tone realigned market expectations for further rate normalisation this year, which bolstered the dollar. In the US, employment data remained decent – albeit with tentative signs of some moderation in employment growth, but earnings improved and retail sales in April were strong. GDP data published for the first quarter of 2016 are consistent with growth of about 2% in real terms this year, but there were more mixed data from the housing market: sales rose, but broader capex intentions were lower. There were also some signs of greater price traction, with the PCE deflator rising modestly and CPI ticking higher as base effects become less favourable. The Federal Open Market Committee statement was generally interpreted as being slightly hawkish, with ‘most participants’ judging that a June hike would be appropriate, although the balance of risks were more equally distributed. European data have been resillient. Eurozone domestic demand remains solid, supported by easy monetary policy, relatively low oil prices, some strength in labour markets and an increase in fiscal outlays. GDP data published for the first quarter of 2016 surprised to the upside, and the region is expected to grow by 1.6% this year. The manufacturing sector has held up well, and both the Eurozone PMI and German IFO data in April improved. The weak Japanese economy prompted an announcement of further stimulus, and the pending VAT hike was delayed to October 2019. The UK’s Brexit outlook remains hard to call, with the ‘leave’ vote gaining ground after the public debate focused more sharply on migration. The run-up to the UK Brexit referendum will continue to overshadow market and economic data until D-day on June 23. In South Africa, activity data point to a GDP contraction in the first quarter of 2016, with both the mining and manufacturing sectors under pressure, and agriculture suffering the ongoing effects of the drought. Mining production fell almost 20% compared to the fourth quarter of last year, mostly due to safety-related stoppages in the platinum group metals sector. Agricultural production is also likely to have remained weak as the lingering effect of the national drought continues without relief. Crop estimates continue to forecast a small maize harvest this year. There should be a small improvement in manufacturing output off a weak base, but not enough to be a significant contributor to growth. Inflation also moderated in the March and April data, reflecting a temporary reprieve from oil-related base effects. Headline CPI was 6.2% y/y in April, from 6.3% y/y in March and 7% in February. However, the detail remains concerning: food inflation surged to 11.3% y/y in April, from 9.8% y/y in March, and there is some emerging eidence of a pass-though from the weaker currency in vehicle and appliance prices. We continue to expect CPI to rise above 7.5% y/y by the fourth quarter this year, before moderating in 2017. Despite this, the SARB’s MPC voted in a 5-1 split to pause and reassess the impact of the hikes implemented to date against the weak growth backdrop. The governor, however, made it clear that the MPC is still in a rate normalisation cycle, and more tightening can be expected. Nonetheless, the MPC revised both its inflation and growth forecasts. A nearterm deterioration in inflation came as a result of a higher food inflation forecast. The SARB now sees inflation averaging at 6.7% (from 6.6%) for the year, peaking at 7.3% at the end of the year. Forecasts for 2017 and 2018 were left unchanged. Growth forecasts were revised lower, with GDP projected at 0.6% in 2016 and 1.3% in 2017. Statistics South Africa published retrospective revisions to both supply-side and demand-side GDP data from 2010 to 2015. This is part of the process of streamlining the GDP statistics, and formally taking over the publication of demand-side data from the SARB. There were only minor changes to both the size and growth rates in the historic data, but the distribution of growth within the data changed. The extent and speed of policy and macroeconomic adjustments – both domestic and external – have provided the fund with numerous ongoing opportunities to implement a wide array of small-scale and genuinely diverse relative value positions. Existing themes include the continued divergence between the bond and swap curves and lower inflation in the medium term, while emerging themes include complacency around US policy normalisation and a possible inflection point for SA monetary policy. As always, implementing appropriately sized relative value exposures across a range of opportunities to provide the most suitable return profile for our clients remains a key objective for this fund. SOUTH AFRICA Tel: +27 21 680 2000 | Fax: +27 21 680 2100 | [email protected] www.coronation.com The content of this document and any information provided may be of a general nature and is not based on any analysis of the investment objectives, financial situation or particular needs of any potential investor. As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that any potential investor first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the potential investor prior to acting upon such information and to consider whether any recommendation is appropriate considering the potential investor’s own objectives and particular needs. Neither Coronation Fund Managers Limited nor any subsidiary of Coronation Fund Managers Limited (collectively “Coronation”) is acting, purporting to act and nor is it authorised to act in any way as an advisor. Any opinions, statements or information contained herein may change and are expressed in good faith. Coronation does not undertake to advise any person if such opinions, statements or information should change or become inaccurate. This document is for information purposes only and does not constitute or form part of any offer to the public to issue or sell, or any solicitation of any offer to subscribe for or purchase an investment, nor shall it or the fact of its distribution form the basis of, or be relied upon in connection with any contract for investment. Hedge Fund Investments are not regulated by the Financial Services Board (FSB). The value of the investments may go down as well as up and past performance is not necessarily a guide to future performance. Investors may not receive back the full amount invested and may suffer capital loss. Investment in the fund may not be readily realisable. All income, capital gains and other tax liabilities that may arise as a result of participating in this investment structure, remain that of the investor. Coronation Fund Managers Limited is a full member of the Association for Savings and Investment SA (ASISA). Coronation Asset Management (Pty) Ltd (FSP 548) and Coronation Investment Management International (Pty) Ltd (FSP 45646) are authorised financial services providers.