Global Macro Economic Assessment

Definitive Capital Management and Definitive Asset Management manage both domestic as well as international portfolios on a direct segregated basis. The macro economic factors that have a direct or an indirect influence on the assets held are constantly monitored together with a continual bottom up analysis of individual securities.

Some of the economic variables that are monitored include, but are not limited to: Leading economic indicators, indicators of economic activity (GDP and inflation), manufacturing PMI, business confidence, retail sales, consumer sentiment, unemployment, vehicle sales, interest rates, budget and current account deficits as well as capital flows into equities and bonds.

Asset Class Assessment

The process includes a general assessment of each asset class including:

Equities
Bonds
Property
Alternative Strategies
Cash

This assessment results in the determination of the expected return and risk profile within each asset class. The main theme of this analysis is to determine which asset classes are offering better relative value and will provide the best risk adjusted return for each unit of capital invested. Research is collated from several of our primary independent research houses complementing our own in house research that on a consolidated basis covers the global economic outlook.

Portfolio Modeling

The global macro economic assessment is an ongoing process which results in a monthly formal investment committee meeting. The investment committee is responsible for determining an optimal asset allocation for each client and then moving onto specific security selection within each asset class. Once the optimal asset allocation has been set our research focus is then to break down each asset class on a sector, a geographic and thematic basis to determine our optimal security selection. The process is designed to identify those securities and financial instruments that will add the greatest risk adjusted attribution to the portfolio within each asset class.

The process for each asset class is as follows:

South African Equities

Long-term portfolios follow a strong bottom up security and financial instrument selection bias based on value, growth expectations, macro economic conditions and in certain instances specific opportunities. During this process of selecting securities and financial instruments for inclusion in a portfolio quality exists as a fundamental theme throughout.

In order to be considered for selection a company must meet stringent qualitative criteria. These criteria include honest and competent management with long-term vision, a sustainable competitive advantage within its industry, financial strength, as well as a good track record. In addition to this, the company’s respective industry should feature good long-term growth prospects.

Following the successful assessment of these qualitative issues, through fundamental research, attention is then turned to valuation. Special attention is paid to both the trends and volatility of earnings.

These earnings are then rated in the context of the overall market and relative value is assessed. The process is designed to identify those businesses whose current market prices present investment opportunities. These companies often exhibit characteristics which include attractive dividend yields, low price-to-earnings and low price-to book ratios.

The process that is followed also assists in the identification of those companies that are able to grow earnings at a faster and more consistent pace relative to the overall market. While quality and value are primary drivers in the construction of portfolios, forecast risk, tradability, market capitalisation and risk diversification are also persuasive factors when achieving an optimal portfolio stock mix.

International Equities

The international investment approach is based on both a bottom-up and global macro investment framework. The offshore focus is based on strategic and tactical asset allocation within major global equity markets. Strategic and tactical asset allocation allows advantage to be taken of relative outperformance of the broad global indices through specific sector, geographic, thematic or direct positions in equities that we assess to offer superior risk adjusted returns.

Our preference has always been to express our themes in the most cost efficient, liquid and transparent manner and therefore we have a prevailing bias towards exchange traded funds (ETF’s) that offer significant cost and diversification benefits. We will also utilise third party specialist managers that are able to offer us significant alpha or specific skills within a particular sector or theme that we have identified. Once a thorough due diligence is completed, our investment mandate allows us to take advantage of these opportunities on a limited basis of up to 20% of the total equity allocation.

Bonds

Bonds form a key component for any balanced portfolio. They provide diversification and income benefits together with lower levels of associated volatility. Our assessments of the global bond markets include government, investment grade corporate, high yield as well as emerging market bonds. Within each segment we focus on forecasts and expectations of central bank/government policies, growth and inflation expectations, valuations and technical analysis. The fixed income investment process also takes key variables such as interest rates, interest rate volatility, currencies and yield spreads into account. Portfolios can be created with the objective of obtaining a higher relative risk adjusted return to the benchmark or to cover a specific liability stream. Considering these factors, various allocations are made employing strategies that include interest rate expectations, duration management and yield curve strategies that aim to capitalise on shifts in the yield curve. Institutional allocations to third party managers are often considered to provide diversification, trading/cost and access benefits.

Property

Property portfolios consist of high quality property trusts and loan stocks that are attractively priced relative to earnings growth prospects.

The portfolios are structured to create a balance between retail, office and industrial property and have a strong regional diversification and lease maturity spread. Some of the more important characteristics that are assessed are the market capitalisation, liquidity and most importantly the forward yield of the property relative to the inherent risk.

Alternative Investments

These investment strategies are highly specialised and require a significant level of expertise and understanding of both technical risk management and proactive fund management, supported by disciplined processes. The philosophy is to provide investors alternatives to traditional asset classes across a spectrum of alternative investment strategies. These solutions are engineered through sophisticated fund management techniques and are actively managed by skilled investment professionals with the relevant experience and expertise.

Capital growth and capital preservation are achieved through rigorous bottom-up analysis of the key drivers of volatility in portfolios. Our due diligence process includes a thorough operational assessment of the third party manager that we choose to allocate funds to. Thereafter we monitor the managers on a daily basis using independent risk reporting and have quarterly reviews with each manager. Our goal is to identify managers who possess a specific skill set, are able to consistently produce alpha, have absolute return benchmarks and employ robust risk management systems. Transparency and liquidity remain our primary risk parameters and our constant monitoring ensures an optimal blended allocation at all times.

Treasury

The short duration cash portion of the portfolio will be managed in order to earn a competitive interest rate. In addition, longer duration cash positions will be built utilising a variety of treasury instruments such as banker’s acceptances, notice certificates of deposit and money markets. The credit and interest rate risk assessment process culminates in the treasury dealing desk ensuring that the best risk reward tradeoff is achieved.

Portfolio Risk Management

Asset allocation is used as a primary tool for risk management. Portfolios are constructed taking into account the expected return and volatility profile of individual instruments within the context of the portfolio. Statistics such as annualised standard deviation, correlation matrices, percentage positive months, sharpe ratios and maximum peak to troughs are some of the important drivers of volatility that are assessed.

Our simple yet highly sophisticated custodial and investment approach gives us the highest level of transparency and liquidity together with the necessary discretion in order to express our views and expedite our investment decisions given the fluctuating market environments and volatility levels.

Measurement

The portfolio’s performance is constantly measured on a risk adjusted basis taking into account the investment objectives. Variances are reviewed and adjustments made according to changes in the investment environment.