Speaker 0:
Hi, I'm Anton Aza. I'm the CEO of, uh, 10 X Investments. And I'm here today with Chris Eddie, who runs our multi asset funds to talk you through 10 X multi asset investing. So we're gonna cover quite a few things today. Uh, we're gonna cover firstly how we think about asset allocation and how we manage our funds. We're gonna really get a deep dive into, um, offshore investing. Obviously the R 28 changes last year how we think about the offshore allocation, the portfolio,

Speaker 0:
and we're gonna finish off with a special topic on including global credit in your portfolio. Now that we're seeing yields higher in global markets, is it a good time to allocate to to global credit? But before we do that, we want to spend a little bit of time introducing you to 10 X. Uh, a lot of you in the audience won't actually know 10 X as a business, and we would like to introduce you to the business and just just just spend five minutes or so talking about us what we do and on RT asset funds.

Speaker 0:
So 10 X, uh, as a business has been around for a number of years for 15 years with a 15 year track record. It was set up at the end of 2007 to really focus on the retirement, uh, fund industry to provide very simple investment solutions for retirement savings. Uh, it's grown over the years, uh, to become a 39 billion rand business.

Speaker 0:
Uh, at the end of last year, we acquired uh, core shares and core shares. Uh, is is focused on the ETF and index based, uh, business, which we purchased at the end of 2022. The team, which we have now there are 11 of us in the investment team. Uh, my background is in global fixed income. I spent, um, 20 years of my career in London, managing global fixed income,

Speaker 0:
uh, and join 10 X at the end of, um 2021 as part of this new kind of initiative to build out the 10 X investment business into a fully fledged, um, asset manager

Speaker 0:
uh, Chris Eddie, who I mentioned who manages the multi asset funds, who will join me in a few minutes. Um, has been with 10 for the last eight years. Uh, Chris has been really important in building out the 10 X, uh, investment business, um, over that time and runs, uh, the multi asset funds, um, with myself, Uh, we're an independent as a manager, which is really important in terms of how we think about building partnerships. Um, with our clients and with intermediaries.

Speaker 0:
So today, uh, we're already here to talk mostly about the multi asset solutions. But when I get into that, firstly, before I do, um, I want to talk about the other strategies you run. Um, on the left hand side, you can see, uh, we run about 11 billion or so in beta building blocks, so this is effectively index strategies. So if you want to own the S and P 500 you can either buy that through an ETF or a unit trusts. So about 25% of our assets are in beta building blocks,

Speaker 0:
and then the middle bit, which is the bulk of our assets, is in multi asset solutions. This very much comes from the retirement business that Tenex has built up over the years. So roughly 21 billion or so in multi asset solutions, and then finally a big growth area for ourselves is bespoke solutions. We run just over 7 billion in bespoke solutions. We work very closely with clients to design some strategies, for example, combining active and index based strategies. Uh, with them in mind,

Speaker 0:
the multi asset range, uh, as you can see, is a very, um, you know, traditional. Very familiar, uh, group of products across, um um, high equity across medium equity and low equity. Uh, we launched a multi asset income fund at the end of 2022 our, uh, 10 income fund, which we launched at the Unit Trust at the end of last year.

Speaker 0:
And we introduced that into an exchange traded fund. Uh, a couple of weeks ago, in fact, we launched the first active ETF, uh, fund to the local market in, uh, a couple of weeks ago. So we're very proud of bringing that, um, to the market. We're gonna talk about all of these funds, but really focus in on the 10. Your future fund, the 10. Your future fund was the main fund which was launched 15 years ago. Ready to enable, uh uh, you know, saving for retirement. It's grown into being a 16 billion rand, uh, product. So it's one of the largest,

Speaker 0:
um, multi acid funds in the market. It targets, um, CP. I plus, uh, plus 5.5 with a with a 5 to 5 year plus, uh, time horizon. But everything we talk about Chris and I as we go through this presentation really applies to all of our our our multi asset funds.

Speaker 0:
Importantly, the fund has done extremely well. This is the 10 extra future fund, uh, five years into its, uh, life. So in 2012, uh, it outperformed, uh, the peer group and has done that every single year for the last 10 years. So we have 100% out performance since inception versus the C AC C a category. And really, what this is showing you is really the importance of consistent out performance, but also the importance of fees. Fees can really, really erode returns. And you can see there in this graph that,

Speaker 0:
uh, first quarter, which is really where the fees are the highest, so, uh, 2.6% per annum. You can see that much less than 38% of the time is they out performance. However, as you go towards the right and as those fees um, decrease, there's a much better consistent, um, generation of our performance leading to our ourselves with 100% our performance on eroding five year basis.

Speaker 0:
The total total expense ratio on this, uh, fund is, uh, 34 basis points. Once we add into the T IC, we get to around 38 basis points. So it really is, um, the lowest cost product available in the high equity fund, uh, space. So the management fee of 25 then plus VAT and total T IC is at 38 basis points. So it's

Speaker 0:
very important we'll talk a little bit about that in the next slide in terms of in terms of fees. So overall, just to move on now and to talk about how we think about managing money, But overall, we have one of the largest, um, high equity funds in the market with 16 billion Uh uh, Rand under management. Uh, it's coming in with performance, which has been consistently outperforming and a fantastically or, uh cost all in.

Speaker 0:
So yeah, let's, uh, let's move into how, uh, how we think about managing money and, uh, what Chris and I are gonna unpack in the next few slides is to really delve into how we think about asset allocation,

Speaker 0:
you know, So as asset allocation is the main driver of returns, uh, and if you get the right asset allocation looking forward in the end that ultimately delivers fan fantastic returns, we spend a lot of time Chris and I thinking about as a location and thinking about how we position our our multi asset funds. And we do that through two steps, which Chris is gonna unpack in the next few sides. Firstly, is we look backwards to determine the right growth defensive split that we want to hold across our multi asset funds to deliver the outcome.

Speaker 0:
But then also very importantly, looking forward is we look at what our longer term, uh uh, return expectations are, and the main driver for that is the current valuation that we see across as a classes. So we're gonna unpack in the next few slides how we think about valuations.

Speaker 0:
But the really important point that I want to note here is that this to us is the key part of how we deliver our performance. Too often in this industry, we're very short term focused. Too often we think about, really, what are we gonna do in the next three months in the next six months? And often what we do through that is we miss this much more longer term,

Speaker 0:
um, opportunity that you can, uh uh, through generating returns. And I think back through my active management career where I often had 3 to 5 year horizons but often really thought about Well, what am I doing over the next quarter or even the next month? What's happening with the news flow over the next couple of weeks? And it's that noise which often gets into thinking, Really, what are the big themes? What are the big drivers of markets in terms of? And the big drive in markets in terms of valuations for

Speaker 0:
is the key driver of of investment returns. So we're gonna talk you through how we think about that, how we think about valuations, how we stress valuations in the next few slides and then finishing off on diversification and costs. We really believe in index management. We believe in smart construction of of diversified portfolios through index is a great way to generate returns. It also manages down costs and ensures that we're not trading too frequently across these portfolios.

Speaker 0:
So with that, I'm gonna hand over to Chris. He's gonna talk you through our SA a and valuations based approach. Thank you.

Speaker 1:
Thank you, Anton. So as Anton mentioned, our our process is really grounded in looking back over the last 120 years of data. Why? Because we start with the outcome that we're looking to deliver. So for the future fund, that's inflation plus 5.5 of a rolling five year time horizon.

Speaker 1:
And looking back over the last 120 years, it's quite clear. In order to meet that hurdle, one has to have a high allocation to growth assets like International Equity and South African equities, which, over 100 and 20 years on average, have delivered in the region of 6.5 to 7% above inflation.

Speaker 1:
We start there and we look back and decide, uh, what type of split between growth, assets and defensive assets we need in the portfolio. And with the 75% allocation to growth assets and a 25% allocation to defensive assets. We would have achieved that outcome with the static asset allocation

Speaker 1:
on average 56% of the time. So on average that static asset allocation would have delivered the outcome that we're looking to achieve. However, at 56% there's quite AAA lot that one can do to manage the risk around achieving that outcome. And for us, really. We use acid allocation to do that. And, importantly, valuations play an important role.

Speaker 1:
Quite quite interestingly, if you look at over the last decade, what you'll see is that the asset class returns over the last decade have differed significantly to the longer term. Average

Speaker 1:
international equity is a great example almost double the returns that one would have received on average, whereas international bonds delivered almost a third of what that average return would have been and why, Well, the environment and the starting valuations at preceding that decade played a really important role. You can think about international equities coming out of the GFC with really low valuations, whilst for global fixed income, with interest rates held close to zero artificially for a really long time

Speaker 1:
impacted the type of returns that we received over the last decade compared to that longer term average.

Speaker 1:
Interestingly, if you flick back to the, uh, decade preceding that, so during the early two thousands, the picture effectively flipped on its head. What you can see, a powerful combination of really high starting real rates in South Africa, together with low valuations,

Speaker 1:
created the environment for really strong returns to South African fixed income and equity. Interestingly, South African fixed income delivered inflation plus five, with starting real yields quite similar to where we are today, whereas

Speaker 1:
South African equity is really a strong, uh, return of about inflation plus 13, which, interestingly, contrasted quite significantly to the last decade. If you look at global equities in that early two thousands decade, well at inflation plus three, that's half of the longer term average. So, really, the key takeaway from this is that whilst one can set a good foundation, looking back over the last 120 years,

Speaker 1:
long term time periods as much as 10 years can differ significantly from that longer term average and ultimately incorporating starting asset class valuations into our process is how we look to manage the risks around delivering the outcome for our clients.

Speaker 1:
Starting valuations matter. They matter across asset classes, they matter across geographies.

Speaker 1:
Here we've taken two examples, one being the US US equities, which has been represented by the S and P 500 the other South African fixed income so effectively South African Gay Index.

Speaker 1:
Importantly, starting valuations play a significant role in determining the subsequent long term real return. They don't have a strong relationship with the next 36 or even 12 month returns taking US equities. Uh, we've used the valuation metric called the cyclically adjusted PE ratio, or the cape ratio for short. What it does is it takes the last 10 years of earnings. It removes inflation and averages that out and compares it to the current price level

Speaker 1:
with the highest starting valuation at, uh around 26 times earnings. The subsequent 10 year real return to U US equities has been around about inflation plus three, which, quite interestingly, is roughly aligned to uh, the two thousands decade that we looked at on the earlier chart. And what you can see is the strong inverse relationship between starting yield and subsequent 10 year return. As those starting valuations decrease, the subsequent 10 year returns increase quite significantly.

Speaker 1:
We see the same picture where, when we look at South African fixed income here, the valuation metric is your starting yield and the lower the starting yield the lower the subsequent 10 year real return to South African bonds. Interestingly, we've got we have a real yield of close to 5% currently. And with that type of environment and a starting yield on South African nominal government bonds of around about 12% the subsequent 10 year real return has been about inflation plus five

Speaker 1:
on on the US in US equities. Where are we now? Well, interestingly, we're quite close to that, uh, highest valuation quartile with the cap ratio at around 27 times earnings. And with that starting valuation point the next year, next 10 year, uh, real return that can be expected from U Equities is around about inflation plus three. Now it's all good incorporating valuation metrics into your investment process.

Speaker 1:
But for us, the key is really converting that into a systematic, rules based process that drives asset allocation regardless of concerns around short, uh, short term news. Scary headlines, Because when valuations are excessively cheap, there's often a reason for that that can deter investors based on short term outlook. Where

Speaker 1:
and really that key starting valuation point is is important to incorporate in determining your subsequent, uh, return. So for us, what we do is we look at the current environment. So with the cape ratio at 27 times earnings, we really unpack the drivers behind that.

Speaker 1:
So we've pulled up, uh, S and P 500 earnings, and we've compared that to the longer term trend. And what you'll see first off is that those earnings really have a mean reversion characteristic around trend earnings. And the reason for that is ultimately, earnings over the longer term are really constrained by broad economic growth.

Speaker 1:
Where, where are we sitting currently? Well, earnings are really elevated at about UH, $207 compared to trend earnings at about 100 and $78 a share.

Speaker 1:
So what we do is we stress those earnings and say, Look, if S and P 500 earnings revert back to trend, at what level do we think the S and P 500 would be fair value. And where we're sitting now at around about 4300 on the S and P for us, fair value is effectively 3500. Further, we stress that even more and say Look, in these cyclical earnings recessions, uh, on average earnings during E earnings, recessions have sold off about 25% off that peak.

Speaker 1:
And if we have a similar recession in in S and P 500 earnings, what level would represent attractive value for us and for us, whilst fair value will be at 3500? Uh, the price level where we systematically decide that we'll allocate to US equities would be at 3200.

Speaker 1:
So that really talks to how we, uh, take and incorporate starting valuations for asset classes and convert that to a systematic rule that really drives our asset allocation process.

Speaker 1:
When we look at S a equities, this is quite an interesting example in terms of how one has to look out over a longer term time horizon because if you look at the last 12 months, uh, earnings PE ratio, or price earnings ratio using the last 12 months. Earnings well, S A equities would really look like an attractive value opportunity with a PE ratio of around about eight or nine times earnings, which has really been at the lower end of that range. Over the longer term,

Speaker 1:
however, the E component has really been driven by many cyclical businesses. You can think about resource shares that make up a large component of the S, a equity market with high and elevated com commodity prices over the last 18 months supported the last 12 months earnings and the other cyclical component of our market being financials. Uh, really, we saw a lot of the unwind of covid provisions really supported many financial, uh, financial businesses earnings over the last 12 months.

Speaker 1:
So if you're in an environment where the cyclicality of that earnings is really removed through, think about a potentially a slowdown in growth in global growth. Well, what happens to valuations and the cape ratio really, uh, presents an opportunity for us to remove that cyclicality again, understand S a equities through a longer term valuation lens, and for us well, S a equities aren't necessarily the screaming buy that the last 12 month valuation represents for us, they fair value.

Speaker 1:
And if you cast your mind back to those long run average asset class returns where we really ground our processor

Speaker 1:
over the longer term S a equities have delivered about inflation plus seven. So if S a equities for us, are fair value, well, that would be the expectation for S a equities over the next 10 years. And and that's where we're sitting. If you add up the 5.5% with the 1.8% you get to about 7.3 which so we expect from S a equities over the next 10 years. Inflation plus uh, 7.3% which is roughly in line with that longer term average.

Speaker 1:
However, if you contrast the attractive opportunity on offer in South African fixed income, so from South African government bonds, uh, expecting a return of about 5.5% over the next 10 years, well, really, South African bonds really stand out as, uh, a real return opportunity that is significantly above that longer term average and really a place where where we are allocating to in our portfolios currently,

Speaker 1:
what's quite interesting is when you contrast that 7.3% on offer from S A equities to the 3% on offer, or 2.9% on offer from US equities.

Speaker 1:
The incremental risk that you're taking on for investing in South African equities relative to South African bonds is roughly in line with the INC incremental risk that you're taking for investing in US equities relative to, uh, US fixed income and and really through that lens S a, uh, S a bonds are, uh, an attractive asset class for us.

Speaker 1:
You take a slight, uh, pivot now from, uh, the valuations view and the long term, uh, structural drivers of of asset class returns through the cycle to step back and really reassess the investment opportunity set available to South African retirement investors, with the change in Regulation 28 now allowing 45% offshore exposure, up from 30% last year.

Speaker 1:
So when one looks at the rand, it really, uh, plays an important diversification role in growth asset portfolios. You can cast your mind back to the covid selloff in March 2020 where we saw the rand aggressively sell off in the face of a global risk off environment. More recently, during the month of March, with, uh, the Lady R controversy, we saw how the rand was really the release valve that sold off due to S a specific risk.

Speaker 1:
So we know the rand is an important diversify, but equally it's a really volatile currency.

Speaker 1:
And there's this natural tension between the diversification benefit of the currency as well as the volatility that it brings into portfolios. So our starting point is to always go back to the client outcome that we're looking to deliver and at inflation plus 5.5 for us, the optimal currency exposure that one should have in a portfolio to trade off that diversification benefit with the additional volatility is around about 35%.

Speaker 1:
Now there are two observations with that. The first is that under the old regime, at a 30 max 30% allocation to offshore, well, you had suboptimal exposure to currency as a diversify, so that's the first point. The second point is now as well being able to take offshore exposure up to 45% when we start from a first principles basis.

Speaker 1:
When looking at diversification, we know how small South African economy is as a percentage of the global economy. From a market cap perspective, S a equities make up less than half a percent of the global market cap. So really, what we're trying to avoid is not necessarily fall into that home buyers trap of over allocating a proportion of our assets to this really small open economy. And we really believe in maximum global diversification. But we look to separate out

Speaker 1:
the currency aspect with the global assets, uh, opportunities that are on offer.

Speaker 1:
And really when we talk about currency hedging, which is the mechanism whereby we can separate out the currency exposure from the asset exposure. What what we're talking about here is really earning the hard currency return along with the interest rate differential between the rand and global market. So take, for instance, South African interest rates at about 8% US interest rates at about 5%.

Speaker 1:
If you strategically hedge out that currency, you're gonna earn that 3% yield on top of the global asset yield And global high yield is really an interesting asset class to view through this lens of currency hedging because over the last 20 years, Global High Yield and Rand terms has delivered a return of about 12% per annum, with the volatility of about 15%.

Speaker 1:
But strategically hedging out that currency, you've been able to deliver that same strong return at around about 12 with a roll down at about 10. So our view to the the offshore question is we think that you must ultimately maximise your offshore exposure to really limit that home buyer so that you can bring in as much diversification as possible. But think about how much currency you need in your portfolio from a diversification perspective, based on the outcome that you're looking to deliver

Speaker 1:
when we look at, uh, really the outcome from our valuations framework, you can see the asset classes that are attractive, fair and expensive through our lens and the resultant asset allocation,

Speaker 1:
but ultimately for us. And, uh, Anton spent, um, many years working in global credit. Um, the opportunity available in global credit is really important from global diversification, but also will give you an insight into how we think about implementation from an asset class perspective,

Speaker 1:
because while we focus our the most of our time worrying about asset allocation, and it as it is, the key driver of returns when it comes to asset class implementation.

Speaker 1:
We really want to focus on delivering that asset class beta, and not have any one single company or or issue a risk that potentially could impact the broader outcome that we're looking to deliver to deliver. So, Anton, if you can maybe, uh, step up and, uh, and provide some context in terms of the opportunity on offer from global credit, and potentially contrast that to the S a credit universe.

Speaker 0:
Great. Thanks, Chris. Yeah, Credit is a fantastic asset loss to add to a portfolio. One of the big challenges we have in the local market is just really just how small and how limited the opportunities are in terms of investing in in in credit. So when you say credit credit are are are corporate bonds issued by you know, large Corporates into the local market and and into global markets, and you can see in the chart here, uh, on the right hand side, what we've outlined is the S, a credit universe, um,

Speaker 0:
which you can really see is highly concentrated to you know, to invest it across financials and and real estate. In fact, there are only 53 issuers across the whole of the of the local market.

Speaker 0:
And this has really decreased significantly over the last few years in terms of opportunities, Uh, by virtue of just how how little there is in terms of, uh, in terms of issuance into the local market. So 53 issuers, you know, roughly 80% in real estate and financials. Um, it really means a lot of the issuance that comes to market, gets by, gets brought up by a lot of the, uh, large insurance companies and really doesn't doesn't trade.

Speaker 0:
So, unfortunately, in in the local market, we we don't have great opportunities to add to to credit and and therefore, by adding to credit, you can add some yield. You can add some spread to the portfolio and and very nice diversification away from government bonds.

Speaker 0:
Um, so it is a challenge. You know, we really do, you know, hope that the local credit market, uh, does does grow. It's very important for the growth of the local economy that we are able to finance the energy transition so we are always looking at opportunities, but unfortunately, the opportunity is very, uh, limiting. We'll talk a little bit about the spreads in the next in the next slide as we get there,

Speaker 0:
however, the global market presents much more interesting opportunities, and you can see on the left hand side there, uh, we have an index which we have constructed, which we which we, uh, track, which has got 425 names across global markets.

Speaker 0:
And these will be names that you're very familiar with in terms of what you own in your global equity portfolio. So names like a AT&T or Apple or Google or WalMart or the large issuers issuing into the global fixed income market So they'll have equity, uh, via the stock market. And there will be, uh, corporate bonds, which they'll be frequently issuing into into those markets. And why is it that South African investors haven't participated in global credit, whereas they've been very active in investing in

Speaker 0:
global equity and this kind of ties to this point that Chris was making, uh, that previously when the offshore limit was 30% you took that full limit up to, uh, up to, uh, the full 30% into equities, and you didn't really invest in credit because it really was a wasted opportunity relative to your equity exposure.

Speaker 0:
But now that we're at a much higher limit, we need to start thinking about other opportunities and global credit. Um provides a great opportunity for us in terms of, um, accessing global markets. The index we've constructed is a is a blend of investment grass that's triple B rated Corporates and above and, uh, sub investments grade, which is triple B rated

Speaker 0:
below Now you'll think about, for example, the South African, uh, government bond. We're a double B rated. Uh um uh, sovereign issuer. So a lot of the markets here, banks, et cetera, are therefore Subin Investments grade issuers. Whereas in global markets you have access to much higher quality, uh, names in terms of default risk.

Speaker 0:
And that's really played out in this, uh, slide share, which you can see. So what we have in front of you is on the right hand side, uh, is talking about S a credit which you can see. I mentioned that double B rated, which is a sub investments grade rating. spread of around 100 and 20 basis points, comparing that to the global high yield market, which is the average rating of also double B, where the spread is 450 basis points. So that's 4.5% spread over the risk free compared to 1.2%.

Speaker 0:
So you're getting close to four times the amount of spread for the same amount of default risk. So it really does make no sense in terms of allocating locally compared to that opportunity that you have in in in global markets.

Speaker 0:
And it's important just to add to the point that Chris made is that when we think about this allocation the same way we do in equity, same way we do in credit is we see it very different as a separate allocation decision to our currency exposure. We will hedge the currency risk, we will hedge the rate risk and what we're trying to capture is that additional spread that we're adding to the portfolio. And if you recall from the slide that Chris put up a few minutes back is global high yield currency, Hedge was one of the best,

Speaker 0:
uh, returning from a risk adjusted basis Asset classes over the last, uh, 20 years. So from our perspective, because we don't have this local stock selection bias, what we really focus on is an asset allocation. Once we've made that asset location, we are very indifferent as to which markets we need to go to. We're not biassed by virtue of our courage of the local market versus foreign markets,

Speaker 0:
and we're able to invest globally and therefore access these markets, which previously are markets where, um, as local investors, you would not be investing in. So it really points to this point around diversification accessing markets in a way which is, um, sensible, not just pure passive, but investing in markets. Which gives us that diversification, Um, that we're looking for.

Speaker 0:
So we've covered a lot of ground. Um, I finish off here talking about how we can add global high yield and global investment grade to a diversified portfolio. Chris spent a lot of time talking about asset allocation. It's really for us, the most important driver in terms of how we think about portfolios and as an investor, your asset allocation and how much you invest in the local market and how much you invest in the offshore market and

Speaker 0:
the currency exposure really generates the far the greatest majority of the return across your portfolio and is hence why we spend all of our time thinking really about that as the location, the currency exposure, focusing on valuations and understanding where the opportunities sit in markets. But really looking out over a long term, we're not trying to generate this kind of short term tactical return.

Speaker 0:
It also presents great opportunities in terms of when you look at markets, you're able to invest in markets like, uh, global credit that I've mentioned. So thank you for your time. Uh, I I'm I'm been it's been great to try and introduce, uh, 10 X to you.

Speaker 0:
But also importantly, talk about how we think about managing money and the importance of, uh, Long-term investing, the importance of diversification and the importance of managing costs down across the portfolio. Thank you for your time.