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March / April 2016

March / April 2016

Weak Rand eliminates option of offshore diversification for investment managers
After the financial crisis, when the United States Federal Reserve introduced its large scale asset purchase programme and reduced its repo to 0.25%, when commodities and the oil price were running hot, things were not extremely well with many resource driven emerging economies and with oil producing countries. Their interest rates were low, their currencies and bourses appreciated substantially driven by foreign investors looking for yield. Those were the days when many of these countries started to think about how to break the shackles of the global hegemony. There were moves to trade crude in currencies other than the US Dollar in an effort to break the US Dollar monopoly. We read about the BRICS countries having resolved to establish a BRICS Bank in order to break the shackles of the IMF and World Bank.
A number of oil exporting countries that became more outspoken on their anti US sentiments experienced civil uprisings, some experienced regime changes and with the dramatic fall of the oil price, those regimes that survived are at last also experiencing severe economic problems. If we look at the BRICS countries, Brazil, Russia, India, China and South Africa it seems too much of a coincidence that all of them, barring perhaps India, are also now suddenly facing serious economic difficulties. Their currencies have depreciated severely while the windfall from high commodity prices was blown away.
It seems that all plans to break the shackles had to be abandoned. We have not heard of BRICS Bank as the BRICS countries are under extreme pressure to salvage their economies. So it seems the oil price and the Fed interest rate levers have certainly strengthened the position of the US by weakening the ability of those rogue countries that attempted to challenge the US. These countries are down – but they are not out yet and are still a threat to the US. Will they be able to survive to overcome the hegemony or will they buckle down eventually? And we are really only talking about China and Russia here that have the potential to pose a serious challenge and only if they establish a strong alliance. Russia is in a much weaker position and if a regime change can be achieved there the challenge posed by China can then be tackled in earnest.
If these global strategic goals are behind the dramatic decline of the oil price, one should expect this to continue until we have ‘mission accomplished’ in Russia, i.e. Mr Putin and his party are removed from power. Not seeing a strong alliance between Russia and China, this is the most likely scenario at this stage.
What is worse is that we may see the economic measures being complemented with military measures which may then start looking very ugly also for bourses around the globe.
As far as South Africa is concerned, the dream of a BRICS Bank is probably off the table and that challenge to US dominance has died. Our commodity prices will move in sympathy with the oil price which we do not expect to recover substantially anytime soon. Our currency may well recover as it was totally oversold but it will remain under pressure for quite some time as the result of likely further Fed repo rate increases. This will at the same time maintain pressure on local interest rates and with that also on the local consumer for quite some time to come.
We do not expect an improvement in the global economy soon. Equity markets will continue to drift sideways while interest bearing assets, including property, will face headwinds with anticipated increases in interest rates. Investing in the right asset classes and in the right assets within each class is a skill that should still produce acceptable investment returns.
We therefore like prudential balance pension portfolios in the current scenario where the manager can move between asset classes. This has proven a successful recipe over many years and has delivered returns well above inflation, the ultimate enemy of anyone who is concerned about retiring in dignity.
Our view is unchanged. We believe the commodity sector may offer selective buying opportunities but it may require patience to realise gains.
The consumer facing increasing pains, and the fact that Consumer Goods and Consumer Services had a terrific run since the beginning of 2006, it is hard to see this sector continuing on its trajectory. The financial sector too is likely to suffer in sympathy with the consumer.
The excessively depreciated Rand indicates that it should recover along with an increasing oil price and other commodities. The weak Rand at this point eliminates the option of offshore diversification although offshore should otherwise always be part of an investor’s strategy of diversifying risk. This leaves the Industrial sector as a sector we believe to also offers prospects, in light of the weak Rand and low commodity prices.
In terms of diversification between different asset classes locally, the likelihood of further repo rate increases suggests that interest bearing investments do not hold good prospects at this stage. However the prospect of accelerating inflation favours inflation linked bonds.

About The Author

Sanlam 2018 Annual Results

7 March 2019


Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at