CORONATION ASSET ALLOCATION

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1 INSTITUTIONAL 31 INVESTMENT OBJECTIVE The Coronation Flexible Fixed Income Portfolio is a flexible fixed interest solution representing Coronation s best investment view for a fixed interest portfolio. The Portfolio has a flexible mandate with no duration or term restrictions. The Portfolio invests in the traditional fixed interest assets, but can also invest in listed property, preference shares and inflation-linked bonds which are typically excluded in most specialist mandates. This flexibility allows the portfolio to maximize every opportunity in the domestic fixed interest space and produce superior returns for clients. INVESTMENT APPROACH Coronation takes a long-term and active approach to fixed interest portfolio management, with investment decisions based on proprietary research across the full spectrum of potential return enhancers. These include duration and yield curve positions, off-benchmark positions through inflation-linked assets as well as yield enhancement through credit enhanced assets. Bond portfolios are positioned on a long term strategic market view but this is balanced by taking shorter term tactical opportunities when the market lags or runs ahead of that strategic view. PORTFOLIO STRUCTURE The investments are limited to: Government and parastatal bonds Corporate bonds (investment grade only) Inflation-linked bonds Money market instruments Fixed interest derivatives Listed property stocks (max. 15%) Preference shares (max. 10%) GROWTH OF A R100M INVESTMENT Benchmark: The higher of STeFi 3m or ALBI over rolling 3 year PERFORMANCE FOR VARIOUS PERIODS (GROSS OF FEES) STEFI ALBI Since Launch (p.a.) 9.46% 5.58% 7.17% Latest 5 years (p.a.) 8.72% 5.52% 6.09% Latest 3 years (p.a.) 5.56% 5.59% 2.12% Latest 1 year 2.12% 6.08% -3.93% Year to date 2.12% 6.08% -3.93% % 5.65% 10.15% % 5.03% 0.64% % 5.34% 15.99% Launch Date: 1 July 2010 RISK STATISTICS Annualised Average return since inception 9.57% Annualised Deviation 4.54% Average monthly return 0.76% Sharpe Ratio Survey 0.85 Information Ratio 0.86 ASSET ALLOCATION 0.11% 36.81% Corporate Bonds 36.81% 0.37% Cash 33.41% 0.89% 2.47% SA Government 12.16% 3.10% Property 7.40% 3.27% 7.40% ILB (Corporates) 3.27% 12.16% Parastatals 3.10% Preference Shares 2.47% Convertible Bonds 0.89% Inflation Linked Bonds 0.37% 33.41% Municipals 0.11% Total: % MATURITY PROFILE 0 To 1 Years 12.25% 1 To 3 Years 18.49% 3 To 7 Years 27.04% 7 To 12 Years 21.09% Over 12 Years 21.13% MODIFIED DURATION Fixed Interest (incl. ILB): Fixed Interest (excl. ILB): SOUTH AFRICA Tel: Fax: [email protected]

2 INSTITUTIONAL 31 KEY BENEFITS GENERAL INFORMATION Proven track record of consistent out performance of bond markets. Access to a highly rated investment team. Dynamic, appropriate bond portfolios for different investor needs. INVESTOR PROFILE Investors seeking a managed exposure to income generating investments. Investors who believe in the benefits of active management within the entire fixed interest universe. Investors seeking exposure to and active management of other asset classes such as preference shares, listed property stocks and hybrid instruments. Minimum Investment: New Clients: Terminating Conditions Reporting: Segregated: R Pooled: None A one-month re-alignment period may be applied for new clients so as not to prejudice the performance of existing clients in the fund A 30-day notice period is required upon termination. No charges apply on either full or partial termination. Coronation reserves the right to pay the termination value in the form of scrip or cash. Available reports to clients: Monthly reports: within 5 business days Quarterly reports: within 15 business days PORTFOLIO MANAGER Mark le Roux, BCom Nishan Maharaj, BSc (Hons), MBA Mark has more than 23 years experience in managing both traditional and alternative fixed interest portfolios. As head of Coronation s fixed interest unit, he is responsible for the fixed interest investment process and performance across all portfolios. He also manages the majority of the fixed interest assets. Prior to joining Coronation in 2005, Mark held portfolio management positions at Old Mutual, African Harvest and Decillion. During his time at Decillion, he played an integral role in the development of South Africa s first fixed interest hedge fund, the Granite Fixed Income Hedge, which he also managed. Nishan is head of fixed interest research and has more than 12 years investment experience. He joined Coronation in 2012, responsible for the trading of all fixed interest instruments. For the last three years, he has also been managing a portion of the Coronation Active Bond portfolio and has been co-managing several other specialist fixed interest strategies with head of fixed interest Mark le Roux. From 1 July 2015, his portfolio management responsibilities will be broadened to managing a portion of the fixed interest assets across all strategies. Prior to joining Coronation, Nishan managed fixed interest hedge funds at Investec Asset Management and was responsible for South Africa-specific interest rate derivative trading at Standard Bank. Adrian van Pallander, BScEng, HTSdip, CFA, FRM Adrian is a portfolio manager within the fixed interest investment team with more than 13 years investment experience. He joined Coronation in January 2002 as a quantitative analyst, responsible for risk management and the monitoring of portfolio construction across all asset classes. Adrian has been co-managing the Coronation Granite Fixed Income hedge fund since 2006 and in 2011 started co-managing a number of specialist fixed interest strategies with head of fixed interest, Mark le Roux. His current responsibilities include managing a portion of the fixed interest assets across all strategies as well as analysis, asset allocation modelling and portfolio construction monitoring. The information contained herein is not approved for use by the public and must be read together with our Disclaimer that contains important information. If you are in possession of a physical copy of this document and you are unable to access our Disclaimer online, kindly contact us at [email protected] and a copy will be sent to you via . SOUTH AFRICA Tel: Fax: [email protected]

3 Review for the quarter The All Bond Index (ALBI) suffered a torrid end to 2015 as it lost 6.67% in December, which dragged down returns for the fourth quarter and the year to -6.43% and -3.93%, respectively. There was no safe place to hide on the bond curve as yields widened across the curve by approximately 125 basis points (bps) during the quarter (and some 175bps over the year). The worst-hit area of the curve was bonds with maturities of 12 years and longer; month-to-date and year-to-date returns were -8.55% and -7.04% respectively. The one-to-three year area of the curve outperformed, delivering 4.1%. The index itself experienced significant changes during the course of the year as its weighting of bonds with maturities of longer than 12 years increased from 36% to 51%. As one would expect, the riskiness of the index (as measured by the modified duration) increased from 6.54 (at the start of the year) to a peak of However, following the sell-off in the final months of the year, this has now settled at Still, the fortunes of the index will continue to remain largely a function of longer maturity (of more than twelve years) bond performance. The defensive positioning and low duration of Flexible Fixed Income meant the strategy was well protected during the extreme market conditions experienced towards the end of Flexible Fixed Income significantly outperformed the ALBI over the calendar year but underperformed cash. The strategy returned 1.93% for 2015 versus ALBI at -3.93% and 3m SteFi at 6.08%. Performance in this portfolio is measured over a rolling 3 year period given the objective to outperform the higher of cash or bonds, which it has successfully done over the measurement period. Over 5 years Flexible Fixed Income has outperformed cash by 3.23% and bonds by 2.65% p.a was a difficult year for emerging markets (EM), and specifically for South Africa. The global environment was plagued with concerns of a more pronounced slowdown in China, a European economy that was struggling to lift itself out of recession and the effects of the first interest rate hike in the US following the financial crisis of The commodity slump added to pressure on many EM countries. These factors, combined with high levels of uncertainty (as reflected by the increase in asset price volatility) left EM currencies battered. South Africa, unfortunately, did very little to differentiate itself in a positive way from its peer group. Its deteriorating growth outlook, along with concerns around government finances and an increase in both socioeconomic unease and political uncertainty, contributed to a slump of 33.7% in the rand over the course of This weighed on local government bonds, and intensified negative sentiment during the last quarter of 2015, resulting in a significant widening of these yields. Domestic inflation has been relatively well-behaved over the last year. Falling oil prices and limited pass-through from the weakening rand have helped keep both actual and expected inflation fairly contained. The SA Reserve Bank (SARB) expects inflation to breach the upper end of the target band in the first quarter of 2016, averaging just over 6% for the year. These expectations were based on assumptions of an electricity price increase of 12%, an oil price of $56, slightly lower world food prices and a weakening in the real effective exchange rate of 4% (as at the November meeting of the monetary policy committee). Since then, the rand price of oil has moved lower by 5%, the rand is 11% weaker, white maize prices increased by a whopping 50% and the outlook for the second-round effects of higher food prices has deteriorated. The food component of CPI represents just under 15% of the basket, implying that the risks to current inflation expectations are firmly to the upside and that the expected inflation average of 6% for 2016 is too benign. A more prudent and realistic expectation would be an inflation average of 6.3% to 6.5% for Growth and its underlying components have and will continue to remain weak, hampering the ability to pass through price increases to the consumer. The lower growth prospects will continue to restrict the SARB from acting as aggressively as it would like to limit the second rounds effects of a persistent breach of inflation targets. Current market levels suggest that the repo rate will rise close to 200bps (bringing the repo rate to 8.25%) during the course of 2016 as the SARB will be forced to act on its hawkish rhetoric. While this would seem like a fair expectation in any other cycle, it is very difficult to see such rate hikes over the next year given the poor growth backdrop. We expect a repo rate of between 7.25% and 7.5% (hikes of between 100 and 125bps) will be more palatable for the ailing local economy. Three- and five-year negotiable certificates of deposit (NCDs) traded at 9.71% and 10.47% at year-end, respectively. NCDs continue to hold appeal amid the interest rate outlook and offer inherent protection by their elevated yields. However while these instruments look relatively attractive at current levels, the fund has not added aggressively to its holdings due to the possibility of increased volatility over the short term, which may result in more attractive entry levels. Bank funding remains strained due to a combination of new regulatory requirements (Basel III) and the increasing drawdowns on loan facilities by infrastructure

4 products. As such, bank credit spreads have remained at their recent wide levels of approximately 140bps (in the five-year range). This has enhanced the attractiveness of floating-rate assets for the fund. The fund maintains a cautious outlook and we prefer to be selective in its exposure given the current phase of the credit and business cycle. Foreign outflows (R8.4 billion) from the local bond market during the fourth quarter contributed to a fall of 11.65% in the rand. Local macro-economic risks re-emerged and continued to highlight SA s vulnerabilities among its peers. The rand underperformed its emerging market counterparts, reflecting increased negativity amid souring fiscal and socio-political factors. The weak rand will continue to assist in a recovery of the trade account and help offset the slump in commodity prices for our exports. However, given the continued risks posed to growth from electricity supply shortages, structural bottlenecks in the economy, the recent deterioration in SA s terms of trade position (following the fall in commodity prices) and increased political risk, we believe that the rand might be the only pressure valve for the local economy in the shorter term. The combination of a hawkish tilt at the SARB, a tepid growth outlook and poor fiscal discipline implies the need for a greater risk premium in the pricing of SA assets. The steepness of the yield curve and high absolute levels of the longer maturities suggest there is some value in attractively priced credit in those tenors, while the fund continues to target floating-rate exposure in the shorter end of the curve (less than five years) due to the prospect of rising shorter-term rates. At current levels, we believe duration assets are starting to look cheap on a valuation basis, but our conviction levels have been tempered by fragile underlying fundamentals. The fund will continue to add selected exposure to longer-dated fixed and shorter-dated floating-rate corporate bonds through new issuances. Only those that offer attractive entry levels, based on our assessment of the underlying credit quality, will be considered. SA s risk profile has been significantly elevated relative to its peers following the replacement of finance minister Nhlanhla Nene by the relatively unknown David van Rooyen, who was then swiftly replaced by Pravin Gordhan. Although the reappointment of Gordhan, a former finance minister, did offer some calm to the markets, it is highly unlikely to expect the risk premium to decrease in the run-up to the February national budget. All eyes will be on the new finance minister, and how willing and able he is to take on fiscal consolidation. Furthermore, concerns surrounding the approval of the nuclear programme do leave a very dark cloud hanging over SA s fiscal future. The listed property market fell in sympathy with the bond market in December, losing 6.1%. While listed property s quarterly return was -4.7%, its performance for the full year remained positive at 7.99%. The yield gap between the property index and the current 10-year government bond remains quite stretched. However, it is important to note that many property stocks are trading at one-year forward yields in excess of 8.5%, making them relatively attractive. If the low-yielding high-cap stocks from the sector are excluded, the yield on the property sector rises to just under 9%. The fund has been adding selectively what we consider to be undervalued, high-quality stocks to its holdings. It will continue to take advantage of any property stocks that offer upside to their net asset value (NAV) valuations. The fund maintains property holdings that offer strong distribution and income growth. In the event of a moderation in listed property valuations, which may be triggered by further bond market weakness, the fund will look to increase this exposure at more attractive levels. We also continue to favour preference shares, given the steady dividend yields on offer, and maintain the current level of holdings in the fund. Preference shares are linked to the prime rate and, depending on the risk profile of the issuer, currently yield between 8.5% and 11% (subject to a 15% dividends tax, depending on the investor entity). The change in capital structure requirements as mandated by Basel III will discourage banks from issuing preference shares. This will limit availability (and boost possible buybacks). In addition, most of the bank-related preference shares trade at a considerable discount, which enhances their attractiveness for holders from a total return perspective and increases the likelihood of bank buybacks. Our current holdings of ILB s serve to protect against an outside risk of a spirally inflation profile due to excessive pass through from the weaker ZAR. The fund s current holdings in inflation linked bonds has not changed as current inflation breakeven rates are around 7.5% in the belly of the curve and 8% in the longer end of the curve. We believe the inflation linked curve to be expensively priced given our inflation forecast and do not view any ILB s as offering value relative to their nominal counterparts. The I2050 currently sits around a 2% real rate while the R2048 sits at a nominal rate of 10.3%, implying nominal bonds offering a better pick up given an inflation assumption of 8.1% (forecasted average over the coming year).

5 We remain vigilant of risks emanating from the dislocations between stretched valuations and the underlying fundamentals of the South African economy. However, we believe the current fund positioning correctly reflects appropriate levels of caution. As short-term rates move higher, the benefit from the longer-term rise in fund yield, due to our increased floating-rate exposure, should dampen any element of shorter-term capital loss. Unfortunately the current local backdrop looks negative as SA is differentiating itself from its peers in all the wrong ways. Until we see a strong shift towards sustainable economic growth and definite political commitment to making the necessary tough decisions, the appeal of the asset class will only increase if yields widen more to reflect the necessary risk premium. As is evident, we remain cautious in our management of the fund. We continue to only invest in assets and instruments that we believe have the correct risk and term premium so as to limit investor downside and enhance yield.