A NON BANK INVESTORS VIEW. MARKET 8 October, STANLIB Kenya Limited

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1 A NON BANK INVESTORS VIEW ON THE REGIONAL LOAN MARKET 8 October, 2013 K th K i Chi f I t t Offi Kenneth Kaniu Chief Investment Officer, STANLIB Kenya Limited

2 Group Structure Loan Market Association

3 STANLIB KENYA LIMITED STANLIB is one of the leading investment management companies in East Africa Provides innovative and tailor made investment solutions to wide clientele base Pan-African presence Diversified investment management services We manage funds in excess of USD 2 Billion in East Africa Rebranded d from Stanbic Investments t in 2012

4 Case for East African Fixed Income Our Perspective Proven (though unappreciated!) source of alpha for existing investors in the asset class Has provided relatively stable returns, year on year, over the medium term Returns show low correlation to (more volatile) domestic equity market returns Provides clear portfolio / investment diversification benefits

5 Our Beliefs Loan Market Association Frontier African fixed income markets are relatively under developed and highly inefficient, providing tremendous opportunities for astute and well informed investors to generate attractive investment returns Why are frontier fixed income markets inefficient? - Scarcity of issuance supply in corporate and sovereign debt - Low levels of secondary market trading / liquidity in corporate and long term government securities - Relatively undeveloped derivatives / repo markets - Nascent and often fledgling regulatory regimes - Limited availability of research / analytical coverage on market opportunities and trends As a result, mispriced i securities are available and asset risks are often overstated due to the limited availability of market information, providing positive asset valuation gaps Over time, we expect markets to become more efficient as they develop breadth and depth.but this will only happen gradually over the long term

6 Loan/Debt related RBA Investment Guidelines Item Categories of Assets Maximum percentage of aggregate market value of total assets of scheme 1 Cash and Demand Deposits in institutions licensed under the Banking Act of the Republic of Kenya 2 Fixed Deposits, Time Deposits and Certificates of Deposits in institutions licensed under the Banking Act of the Republic of Kenya or pooled fund 5% 30% 3 Commercial Paper, Corporate Bonds, Mort-gage Bonds and loan stocks approved by the Capital Markets Authority non listed bonds and other instruments issued by private compa-nies, provided that the bond or instrument has been given investment grade rating by a credit rating agency registered by the Capital Markets Authority, and collective investment schemes incorporated in Kenya and approved by the Capital Markets Authority reflecting this category 30% 4 Kenya, Uganda or Tanzania Government Secu-rities and infrastructure bonds issued by public institutions and collective investment schemes incorporated in Kenya, Uganda or Tanzania and approved by the Capital Markets Authority reflecting this category 90%, or 100% in the case of scheme receiv-ing statutory contributions 6 Any other assets 10%

7 Pension Fund Allocations in Kenya 2% 2% 0% 10% 10% 5% 41% Govt Securities Equities Corporate Bonds Money Markets Offshore 30% Cash Property Private Equity

8 STANLIB Kenya Non Pension Fund Guidelines -Pan Africa Credit -Can be unlisted -Can be USD or EUR denominated -Prefer tenors with a maximum of 12 months -Preferred sectors are manufacturing, FMCG, downstream oil and gas, consumables, staples -Deal size up to USD equivalent of 5 10 million

9 Types of Loan Instruments Invested In -Corporate Bonds: Circa KES 62 billion issued and listed -Commercial Paper: Arranged by various investment banks and advisors -Syndicated Loans: Arranged direct for clients by commercial banks -Loan Sell Downs: Assists manage single obligor limits and creates paper -Bilateral Structures

10 How We Make Decisions Source: STANLIB Kenya Limited

11 Challenges Faced Ongoing pressure to balance business imperatives / local relationships with strict investment criteria to ensure sound investment decisions Management information challenges often difficult to obtain pre-deal company information from some issuers Lack of due regard for investors arranges and issuers often treat investors with impunity / disdain Pi Pricing i anomalies /i inefficiencies i i scarcity of issuance supply and artificially low interest rates (govvy yields) result in unfavourable riskreturn trade-offs for investors Lack of secondary market liquidity to exit investments and immediately follow through on any sell recommendations

12 Thanks!