Absa Discretionary Portfolios. Wealth and Investment Management

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1 Absa Discretionary Portfolios Wealth and Investment Management

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3 Contents 1. Seamless integration between Absa and Barclays 04 Introduction Advice is our core value proposition Sculpting wealth solutions around you 2. Our investment philosophy Financial personality assessment: 08 Your financial personality goes beyond traditional risk profiling The Wealth Management behavioural approach to investing 4. Strategic asset allocation: Managing risk through diversification Fund manager selection process 10 Quantitative manager screening Data screening Detailed quantitative analysis Ongoing monitoring and review Qualitative assessment and operational due diligence 6. Portfolio construction and review Sculpting solutions that reflect your financial personality FAIS Act Notice and Disclaimer 14 Absa Discretionary Portfolios 3

4 Seamless Integration Between Absa and Barclays Introduction Absa Bank Ltd, affiliated with Barclays, serves high net worth and family office clients in South Africa by providing holistic international wealth solutions using best of breed products, wealth management and investment management as well as structured lending. With the backing of Absa and Barclays, we offer clients a sophisticated, integrated wealth management proposition centred on the individual, whilst leveraging the depth and breadth of its global and local expertise. Advice is our core value proposition Advice is our core value proposition and is deeply embedded in our comprehensive wealth management service. Whilst the nature of investment advice is multi-faceted and dependent on an array of professional services, we believe that the relationship between advisor and client remains the key focal point. In our business model the Absa Advisor representative fulfils a powerful facilitative role whereby highly specialised advice services and expertise can be brought to bear on an individual client s needs. In our philosophy, advice is inextricably linked to product solutions that best address our clients needs. This stands in contrast to existing business models, which tend to more transaction focused. Our approach emphasises independence of advice and is based on a best of breed concept, which allows us to offer our clients the best investment opportunities available both within and outside Barclays and Absa. Our commitment is to deliver a durable wealth management proposition and to continuously seek out new bespoke opportunities that meet our clients needs. Whilst striving to define and remain at the cutting edge of global best practice, our business culture remains rooted in the strength of our relationships with our clients. Sculpting wealth solutions around you Investment Management Alternative Trading Strategies Cash and Shortmaturity Bonds Developed Government Bonds Wealth Advisory Multi-Asset Class Solutions Investment Grade Bonds Real Estate Investment Philosophy Commodities Banking and Credit Emerging Markets Equities Research Developed Markets Equities High Yield and Emerging Markets Bonds and Investment Bank) Investment Banking (through Absa s Corporate 4 Absa Discretionary Portfolios

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6 Our Investment Philosophy We understand that wealth means different things to different people and by using our collective expertise we can help you focus on what is important to you and help you create an investment portfolio that supports your circumstances, objectives and financial personality. Constructing investment portfolios around bespoke requirements involves a two-pronged approach: incorporating client profiling and asset optimisation. The first prong is client-centric and specific to individual circumstances, while the other relates to investment opportunities, manager selection and risk. You and Your Wealth Advice with Global Perspective Tailored Portfolio Construction Customised Management Total Wealth Review Research and Strategy Identifying the right asset allocation for you Rebalancing Financial Personality Assessment Asset allocation Fine-tuning:selecting the right implementation Monitoring and reporting Consult Advise Implement Review In the process of creating integrated client solutions, we take into account the behavioural attributes and preferences of each client in combination with modelling individual circumstances. Financial modelling is a continuous process of optimising objectives within a given set of constraints. The product of the behavioural and financial modelling exercise is a unique client profile which combines return objectives, the client s willingness and ability to take risk, specific portfolio constraints as well as individual preferences. 6 Absa Discretionary Portfolios

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8 Financial Personality Assessment: Understanding You Your financial personality goes beyond traditional risk profiling Defining your risk profile involves assessing both behavioural characteristics and situational factors in order to determine both your ability and willingness to assume risk. Behavioural attributes define willingness to assume risk, whilst individual circumstances dictate ability to assume risk. Behavioural profiling identifies psychological patterns, characteristics and the influence they have on investment decision-making. Through this process, your subjective attitudes and tolerance towards risk are assessed. It identifies your attitudes towards markets, fund manager skill and desire to be involved in the decision-making process. Many of these attributes tend to be stable over time. Situational profiling involves assessing your personal circumstances. Present and future assets and liabilities are defined and incorporated within the context of stated objectives in order to identify the financial ability to assume risk. This ability of a client to assume risk is dynamic and usually changes as circumstances change. The Wealth Management behavioural approach to investing Traditional Approach ABSA Behavioural Approach Risk Tolerance Questionnaire Financial Personality Assessment High Risk attitude High Decision style High Dynamic, Active or Passive Greater belief in skill signals a willingness to invest in actively managed solutions such as Dynamic and Active, with Dynamic being a extended belief in skill. Lower belief in skill indicates a preference for Passive as a portfolio solution. Low Risk tolerance Composure Market engagement Low Perceived financial expertise Desire for delegation Belief in skill Low Involvement Lower levels of delegation signal willingness to be more involved with managing overall portfolio and taking greater responsibility for portfolio performance. A greater allocation to self-directed satellite holdings could suit this personality trait. Smoothing Gradual Phased Investment Complexity Smoothing aims to limit volatility or short-term losses, usually at the cost of sacrificing some upside in favour of comfort with the journey. Volatility adjusted, absolute return strategies or structures should be considered in addition to a Discretionary Solution. Investment low market engagement means you may be less comfortable committing to investing. You could benefit from phasing your investment over time to reduce timing risk. Clients differ in terms of how comfortable they are with investment desicions, or with technical or complicated strategies. With suitable Strategic Asset Allocation as a starting point, the investment proposal can stretch from simplistic to intricate. 8 Absa Discretionary Portfolios

9 Strategic Asset Allocation: Managing Risk Through Diversification Asset allocation and diversification are important sources of investment returns Asset allocation is the process of allocating a proportion of investment capital to the various asset classes, including equities, fixed income, property and cash on a local and international basis. Each asset class has different risk and return characteristics. Furthermore, diversification benefits are achieved as asset class performances are not perfectly correlated, and as such, asset allocation is the primary driver of both investment performance and portfolio risk. Efficient asset allocation aims to maximise the portfolio return for each given level of risk. An investor s strategic asset allocation forms the benchmark against which the actual portfolio is constructed. Weightings are a function of expected returns and risk for each asset class. We adopt a risk-based approach to determine the correct asset allocation strategy, which is critical to aligning assets to long-term investment objectives. Movements in the prices of underlying assets may also require a periodic rebalancing of the portfolio. While asset allocation is the basis of long-term returns, diversification can help control portfolio risk. Risk is inherent in investing and can never be completely removed which is why diversification is crucial when building a portfolio. By customising diversification, we can fine tune the implicit risk in a portfolio and when implemented correctly, can not only reduce the risk, but can also increase the return. Our asset allocation process is dynamic and forward looking Experience and judgement are essential to crafting appropriate strategies, yet equally critical is a sound basis for portfolio construction that is supported by evidence and backed by proven theory. Ours is rooted in Modern Portfolio Theory, which assumes investors are risk averse and that they will only take on increased risk if expected to be compensated for it. We have embedded this thinking by employing the market-leading Black-Litterman model. Black-Litterman Optimisation The Black-Litterman methodology was first developed in the 1990s, following rigorous stress-testing, it is now recognised as market-leading. It addresses weaknesses of traditional optimisation such as over-reliance on subjective views and the need for excessive constraints in modelling. Strategic Asset allocation A suitable strategic asset allocation becomes the reference point against which your portfolio is managed and balanced over time. For any given investor, the optimal strategic asset allocations a confluence of client-specific circumstances and extensive research into asset class optimisation. Review Tactical Asset Allocation The blend of the implied returns and the investment Committee s views aims to achieve optimised returns for each given risk level. The results in larger/smaller positions in each asset class, market or region (compared to the initial benchmark allocation). Absa Discretionary Portfolios 9

10 Fund Manager Selection Process In selecting underlying investment managers we have a process that is systematic, disciplined and robust. We identify unique opportunities and investment managers that have a demonstrated track record of investment excellence and sound risk management. Our analysis combines a qualitative approach with a rigorous underlying quantitative screening process. Quantitative manager screening Although past performance does not necessarily provide a good indication of future performance, it is recognised that investors regard performance as an important measure in evaluating the quality of advice and the extent to which their investment expectations have been met. Taking this into consideration the analysis of past performance of the unit trust universe provides the starting point for identifying a short list of suitable funds. Data screening Only funds with an appropriate investment track record are included within the initial database. Thereafter, our initial filtering process focuses on the two key characteristics consistent performance and superior risk elements. Qualifying funds are tested against metrics such as maximum drawdown and recovery time, alpha generation in bull, bear and flat markets as well as tracking error / correlation to an appropriate benchmark. Detailed quantitative analysis Once the initial quantitative screening process has been completed a more detailed quantitative and qualitative analysis of the qualifying funds is undertaken. Some of the quantitative metrics include rolling performance and volatility figures, riskadjusted returns and information ratios. Ongoing monitoring and review The information gathered from the quantitative process and the qualitative evaluation is integrated and analysed resulting in a recommended fund list as well as a watch list of funds. To ensure that the range of funds meets our clients needs criteria such as asset classes, geographic regions, investment styles and fund managers are taken into consideration. All recommended funds are monitored on a regular basis in terms of the following aspects: Significant changes in performance ratings Changes within the asset management team Regulatory requirements Changes to underlying sector exposure Potential financial market impact Qualitative assessment and operational due diligence The process of selecting appropriate fund managers requires not only performance and other quantitative measures but also knowledge of aspects that are somewhat objective. It is important to understand the investment manager s philosophy. An in depth analysis consists of discussions with the key decision makers, together with an analysis of the company structure, investment team, investment process as well as understanding the manager s competitive advantage and examining their risk management and control procedures. Organisations And Operations Investment Team Investment Process This analysis covers the ownership structure of the business, staff remuneration and incentives, staff turnover, succession planning and resource management. In addition, computer systems, backup and recovery processes and compliance processes are reviewed. Managers are assessed according administration capabilities, as well as the quality, experience and depth of their back of office staff. Analysing the team involves a focus on the composition of the overall investment team, the identification of key individuals, formal qualifications, relevant investment experience and quality of research. The consistency of the application of the investment process is analysed, together with the consistency of the portfolio when compared to the stated process. Asset managers with unique investment processes are favoured. Their portfolio construction and review processes are also analysed. 10 Absa Discretionary Portfolios

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12 Portfolio Construction and Review Fund Selection Once manager selection criteria have been met, an in-depth analysis on specific fund mandates is required to test for suitability for inclusion in our portfolios Of critical importance are factors such as tracking error to ensure constancy with our portfolio objectives and mandates Current asset allocation in our Active and Dynamic solutions is required to understand the direction and extend of active positions Portfolio Construction The portfolio construction processes aims to achieve optimal blending of approved managers to give effect to the strategic asset allocation and investment approaches of out solutions This processes needs to be especially rigorous and precisely engineered given the use to which the funds will be used Portfolios need to be constructed so that efficiency in risk and return is continuously optimised within our solutions Portfolio Monitoring and Risk Management Risk is managed pro actively rather than reactively. Portfolios are monitored to ensure that they are managed in accordance with their stated objectives and mandates Should performance of a specific manager become uncompetitive and there is reason to suspect that this might be sustained, the manager will be removed from the portfolio Systematic rebalancing ensures continuous alignment with the respective strategic asset allocation towards which the fund is managed The final phase involves the culmination of all the aspects in the Portfolio Management process which brings forward a solid framework in which the portfolios are managed. 12 Absa Discretionary Portfolios

13 Sculpting Solutions That Reflect Your Financial Personality Three distinct investment approaches that speak to individual preferences Strategy Passive Active Dynamic Objective The Passive approach intends to achieve market-related returns through the use of low cost index tracker funds, while minimising deviations from the benchmarked indices (tracking error). The Active approach aims to achieve marketrelated returns through the use of single asset class fund managers who pursue excess returns over a defined benchmark (alpha). Investment returns will comprise market return (beta) and alpha, which is a reflection of the stock selection capabilities of the underlying fund managers. The Dynamic approach seeks market-related returns through the use of actively managed single and multi asset class fund managers who pursue excess returns (alpha) over a defined benchmark through their stock selection and market timing capabilities. Asset allocation Strategic Strategic Strategic and Tactical Security selection Passive Active Active Underlying funds Low-cost index trackers Actively-managed, single asset class funds Actively-managed, single and multi-asset class funds Mandate flexibility Little Moderate High Source of return Market returns (beta) Market returns (beta) and security selection (alpha) Market returns (beta), market timing and security selection (sources of alpha) Risk Very close to benchmark risk Similar to benchmark risk returns (beta) and security selection (alpha) Moderately variable around benchmark risk Absa Discretionary Portfolios 13

14 FAIS Act Notice and Disclaimer This brochure/document/material/report/communication/commentary (this commentary) has been prepared by Absa Global Research and Investments Africa, a unit within Absa Bank Limited a registered bank in the Republic of South Africa with company registration number: 1986/004794/06 and with its registered office at: Absa Towers East, 170 Main Street, Johannesburg, Republic of South Africa (Absa). Absa is regulated by the South African Reserve Bank. Absa has issued this commentary for information purposes only and You must not regard this as a prospectus for any security or financial Product or transaction. Absa does not expressly, tacitly or by implication represent, recommend or propose that the securities and/or financial or investment Products or services (the Products) referred to in this commentary are appropriate and/or suitable for Your particular investment objectives or financial situation or needs. This commentary is not, nor is it intended to be, advice as defined and/or contemplated in Financial Advisory and Intermediary Services Act, 37 of 2002, (FAIS Act) or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever (advice). You have to obtain Your own advice prior to making any decision or taking any action whatsoever based hereon and Absa disclaims any liability for any direct, indirect or consequential damage or losses that You may suffer from using or relying on the information contained herein even if notified of the possibility of such damage or loss and irrespective of whether or not You have obtained independent advice. This commentary is neither an offer to sell nor a solicitation of an offer to buy any of the Products, which shall always be subject to Absa s internal approvals and a formal agreement between You and Absa. Any pricing included in this commentary is only indicative and is not binding as such on Absa. All the risks and significant issues related to or associated with the Products are not disclosed and therefore, prior to investing or transacting, You should fully understand the Products and any risks and significant issues related to or associated with them. The Products may involve a high degree of risk including, but not limited to, the risk of (a) low or no investment returns, (b) capital loss, (c) counterparty or issuer default, (d) adverse or unanticipated financial market fluctuations, (e) inflation and (f) currency exchange. The value of any Product may fluctuate daily as a result of these risks. Absa does not predict actual results, performances and/or financial returns and no assurances, warranties or guarantees are given in this regard. The indicative summaries of the Products provided herein may be amended, superseded or replaced by subsequent summaries without notice. The information, views and opinions expressed herein are compiled from or based on trade and statistical services or other third party sources believed by Absa to be reliable and are therefore provided and expressed in good faith. Absa gives no recommendation, guide, warranty, representation, undertaking or guarantee concerning the accuracy, adequacy and/or completeness of the information or any view or opinion provided or expressed herein. Any information on past financial returns, modeling or back-testing is no indication of future returns. Absa makes no representation on the reasonableness of the assumptions made within or the accuracy or completeness of any modeling or back-testing. All opinions, views and estimates are given as of the date hereof and are subject to change without notice. Absa expressly disclaims any liability for any damage or loss as a result of errors or omissions in the information, data or views contained or expressed herein even if notified of the possibility of such damage or loss. Absa does not warrant or guarantee merchantability, non-infringement of third party rights or fitness for a particular use and/or purpose. Absa, its affiliates and individuals associated with them may (in various capacities) have positions or deal in securities (or related derivative securities), financial Products or investments identical or similar to the Products. Absa intends to make this commentary available in South Africa to persons who are financial services providers as defined in the FAIS Act, as well as to other investment and financial professionals who have professional experience in financial and investment matters. You should contract and execute transactions through an Absa Bank Limited branch or affiliate in Your home jurisdiction unless local regulations permit otherwise. Absa Bank Limited is a licensed Financial Services Provider. Absa has taken no action that would permit a public offering of the Products in any jurisdiction in which action for that purpose is required. The Products shall only be offered and the offering material shall only be distributed in or from any jurisdiction in circumstances which will result in compliance with any applicable laws and regulations and which will not impose any obligation on Absa or any of its affiliates. In this commentary reference is made to various indices. The publishers and sponsors of those indices (the publishers and sponsors) do not endorse, sponsor or promote the Products and make no warranty, guarantee, representation or other assurance (express, tacit or implied) relating to the indices. 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The illegal or attempted illegal copying or use of this information or views may result in criminal or civil legal liability. 14 Absa Discretionary Portfolios

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