Brandywine Global Investment Management

Brandywine Global Investment Management

01 Our belief Our franchise model 02 Global solutions Overview The team 03 Investment philosophy Investment process and portfolio construction 05 Portfolio risk management Research process 07 Risk management Investment 08 Competitive advantage Products Contact details 09 Appendix Team profiles

STANLIB Focused Investing

STANLIB is a leading asset management company in Africa, with assets under management and administration of R561 billion* for over 400 000 retail and institutional clients across the African continent. We have a physical presence in nine African countries and are able to leverage from a wider Standard Bank Group Africa footprint. STANLIB Focused Investing Our belief There is no one size fits all investment solution for clients. Diverse clients need diverse investment outcomes. We therefore look at investments through many lenses and from many angles to give us an in-depth understanding of an ever-changing investment landscape. Our investment model houses multiple focused units with unique philosophies, which cater for diverse client needs. Our franchise model The STANLIB investment team consists of franchises made up of specialist teams of investment professionals. They manage clients assets in their area of expertise, namely: fixed interest, property, equities, multi-asset allocation, multi-management and alternatives. These specialist investment teams handle market changes with agility and speed, as they are supported by dedicated research, trade, implementation, risk management and compliance teams. Our multi-specialist franchise model truly reflects the complex investment world we operate in and echoes our desire to deliver tailored solutions for diverse clients. The result is a broad investment offering designed to deliver our investment promise to clients. The Power of Focus and the Strength of Diversity STANLIB - Built to meet the ever-evolving needs of our clients *As at 30 June 2014 1

Global solutions We partner with the best. STANLIB adds value through our superior research and rigorous investment process, with a specific focus on asset valuation. We actively seek out assets that trade at levels below their intrinsic value. It is our view that each investment area requires different skills and approaches and hence we create small teams, each with a dedicated focus. These multi-asset teams allow us to appoint talented and passionate people with the specific skills to deliver the best potential outcome for our clients, backed by our rigorous process. We follow the same philosophy in our approach to offshore investing but where necessary, we complement our in-house skills by partnering with experienced offshore asset managers who share the same valuation-driven approach. We have partnered with Brandywine Global Investments, a boutique fixed interest asset manager, to manage our global fixed interest portfolios. Brandywine Global Investment Management, LLC ( Brandywine Global ) is a mid-sized boutique investment firm with assets under management in excess of $60 billion*. Headquartered in the United States, Philadelphia, they also have offices in San Francisco, Montreal, Toronto, Singapore and London. Their emphasis on individual thought and responsibility enables them to drive a culture of partnership and teamwork. They have teams of experienced, performance-driven investment professionals and their investment philosophies are tailored to the nature of the asset classes in which they invest. Overview Founded in 1986, Brandywine Global is a wholly owned, independently operated subsidiary of Legg Mason, Inc. The Brandywine Global mission is to deliver superior investment solutions and performance for their clients. To attain this mission, they listen to clients; aim to hire, support, and retain the industry s best people; encourage independent thinking by sponsoring an open marketplace for ideas; promote a culture of integrity and partnership; and find value throughout the world that others have not yet recognised. The team David Hoffman, Stephen Smith and Jack McIntyre lead the Global Fixed Income Team, managing an extensive suite of active, value-based global bond strategies. The team s investment strategies seek attractive long-term total returns by targeting elevated real yields globally and limiting investment to only the few countries and currencies the team expects to outperform given their macroeconomic outlook. David Hoffman Managing Director and Portfolio Manager 39 years industry experience Stephen Smith Managing Director and Portfolio Manager 38 years industry experience Jack McIntyre Portfolio Manager and Senior Research Analyst 27 years industry experience 2 *As at 30 September 2014

Investment philosophy The Brandywine Global philosophy and process work to capture the significant return potential created by the interestrate, currency, and credit cycles as they play out in developed and emerging markets around the world. They believe that currencies and interest rates serve as economic regulators and that the tendency towards mean-reversion in the bond and currency markets is an exploitable phenomenon, providing the potential for excess return. By employing an active, value-oriented and macro-driven investment approach, Brandywine believes global bond investors can meaningfully improve absolute and risk-adjusted performance relative to passive strategies. They believe active management is critical for success in global bond investing because methodological flaws in most global fixed income benchmarks ultimately guide passive investors to inferior riskreward profiles as these benchmarks are dominated by the largest issuers of debt, and therefore are generally poor guides to investment opportunity. They take a decidedly active, benchmark-indifferent approach by concentrating exposure in those countries offering attractive value. Brandywine Global believes that a rigorous macroeconomic analysis effort conducted by an experienced investment team should be at the core of any process designed to recognise undervalued assets and protect against underappreciated risks in bond and currency markets. This is why each of their global fixed income strategies emphasises a macrodriven approach building exposure to a few broad, often uncorrelated, investment themes across a select number of countries that they feel offer the most compelling valuations or superior fundamentals. They can then rotate through their investment universe as valuations change and fundamentals evolve, with a constant mindset directed towards downside protection and the potential for consistent generation of positive returns, both in absolute terms and relative to their clients chosen benchmarks. Brandywine Global believes this value-orientation is a natural approach for global bond investors. High real yields boost income returns through time and position investors to take advantage of the mean-reversion properties of interest rates. Interest rates mean-revert because they are such powerful economic regulators. Elevated real interest rates restrict consumption and discourage capital investment, which can ultimately slow economic growth and bring down inflation, thus allowing bond yields to decline. At their extremes, currency valuations also act as economic regulators, slowly forcing changes in corporate and individual economic behavior. Currency markets offer similar meanreversion characteristics and active currency management plays an integral role in their investment process. Investment process and portfolio construction Brandywine Global efforts focus on the discovery of unsustainable pricing anomalies in the global bond universe along with a deep understanding of the prevailing macroeconomic conditions in order to determine if the conditions for an unwinding of the price anomaly may fall into place. In their process of identifying attractive investment opportunities they search for the highest real-yielding countries in the world and focus on currencies offering the most value, while monitoring political, economic and policy environments. Their analysis begins with a ranking of global bond and currency markets. Valuation metrics drive this ranking process with real interest rates driving their ranking of global bonds and a variety of valuation methods informing their ranking of currencies. Fundamental factors such as the economic cycle, inflation, external imbalances, capital and trade flows, and policy considerations are analysed to determine whether pricing anomalies in asset markets have led (or may lead) to the kind of economic and policy conditions which provoke mean reversion. Rather than simply focusing on current conditions, Brandywine Global analysis considers historical long-term trends in the larger global markets, including inflation trends, political risks, monetary trends, and business cycle and liquidity measures. The Brandywine Global investment universe is comprised of the sovereign debt and currencies of countries in the Citigroup World Government Bond Index, as well as the investmentgrade corporate bond and mortgage-backed securities markets in those countries. They may also invest, to limited degrees, in emerging market and high yield debt, as well as in countries rated A or better by a nationally recognised statistical rating organization. 3

The following diagram illustrates the Brandywine Global investment process: Systematic and disciplined macro economic research Valuation process Macro process Where is the valuation opportunity? Where is the price risk? What is the intrinsic value? Where is the information opportunity? Where is the risk? Bonds: We analyse high real yield, inflation expectations, default risk, and our internal valuation models. Currencies: We analyse PPP, REER, real rates, and our internal valuation models Analysing macro factors such as: Each country s business and liquidity cycle Secular and political factors Establish investment themes Country decision Currency decision Duration decision Credit decision Portfolio construction and market risk analysis Global and international fixed income portfolios 4

Brandywine Global has a generalist approach, with each team member responsible for keeping continuously apprised of events around the world. This allows them to concentrate investments in eight to 16 countries that they believe provide the best value and total return potential. A formal structure to support and complement the process is made up of several components. Reports containing empirical representations of valuation opportunities and risks in the global bond and currency markets are generated internally. Fundamental factors affecting currencies and bonds are analysed empirically in the form of indicators, models, and ranking filters. Capital and trade flows are also considered in looking for unsustainable trends or new trends, which could meaningfully affect asset prices. Trends in the global economy are monitored for signs of change and inflection points - critical for positioning the portfolios appropriately during periods of unsustainable overshoots and undershoots in bond and currency markets. Portfolio risk management Brandywine Global believe that successful investing in global bonds relies as much on avoiding losses as pursuing gain. Rather than owning bonds issued by countries that dominate the index yet have the potential to underperform, Brandywine Global concentrates on investments in countries and currencies where they see the greatest total return opportunity. They seek to avoid overvalued countries or currencies that tend to dominate the index and thus, their positioning relative to an index may appear concentrated at times. However, they do not feel concentration necessarily equals risk, especially if their portfolio is diversified across multiple broad macro themes. Brandywine Global s risk management operates first at the macro level where the core of their investment process seeks to evaluate and arbitrage price risk versus information risk. Price risk exists when a security is significantly overvalued and could potentially decline in value by a large percentage based on some type of information risk, including negative economic news, a change in government policy, or countless other financial market drivers. They prefer to avoid situations where there is a large degree of price risk in an asset (due to overvaluation) but a complete lack of information risk (because everything seems to be going well and the recent news flow has been strongly positive). In their proactive risk management approach, Brandywine Global works hard to identify opportunities which they believe offer both the most sensible risk entry points and oftentimes the most compelling total return opportunities. Research process The foundation of the research effort is based on the analysis of macro-economic conditions in order to determine where the most attractive valuations exist from a reward/risk perspective. In the process of identifying attractive investment opportunities, Brandywine Global search for the highest real-yielding countries in the world and focus on supportive currencies, while monitoring positive political and economic environments. An integral part of their research is the ranking of countries by real yields (nominal interest rates less rate of inflation). 5

The process used by Brandywine Global to determine sector allocation, yield curve exposure, duration exposure and country/currency exposure is discussed below. Security selection Currency and country decisions are intertwined. Bonds in countries with high real rates where the currency is appreciating from an undervalued level, should be held to take advantage of the two sources of investment returns - positive returns from the country s bond market and the return from an appreciating currency. Currency exposure in countries with high real rates and an overvalued currency are typically hedged to protect investment in that country s bond market. Currency selection Since the majority of holdings in the portfolio tend to be government issues, security selection is generally a residual of country and currency selection. Brandywine Global concentrates portfolios in markets that they believe offer the greatest value and the highest return potential. Real rates are combined with currency analysis to derive value. Secular trends, political and monetary conditions, and business cycle risks are also considered in determining the likelihood of capturing the value seen in real interest rates, and contribute to country weighting decisions. They also evaluate each country s business and liquidity cycles. Assets are concentrated in countries that not only meet Brandywine Global real rate criteria but also pass the aforementioned fundamental considerations. When the economic environment is conducive and the market signals value, Brandywine Global will purchase corporate and mortgage-backed securities. Their analysis of spread products involves both quantitative and fundamental measures. Country selection Through the selection process, the investment team identifies countries, currencies, and securities that they believe offer opportunities to capture significant value. The process is fundamentally top-down rather than quantitative, statistical, and/or bottom-up. They generally avoid countries with overvalued currencies and seek countries with undervalued currencies, high real yields, and positive political or economic developments to allow those factors to return to more normal levels. Although these investments are made strategically with long-term profits in mind, the Brandywine Global investment team stays abreast of current market movements, in order to take advantage of tactical opportunities as they present themselves. Research - team structure The team and research process are structured in a way that Brandywine Global believe has helped to generate long-term outperformance. Rather than organise research efforts along country, regional or sector lines they employ a largely generalist approach which allows any team member to analyse any part of the global bond markets in the pursuit for value. By not having analysts dedicated to particular countries or sectors, they believe that the process avoids any biases. The core research team has significant experience and is well skilled at assessing relative valuations between countries, currencies and sectors that may be candidates for portfolio inclusion. 6

Research idea generation The research effort and flow of investment ideas are teambased. Each of the portfolio managers performs their own research and formulates investment ideas to share with the rest of the team. Once team members review an investment recommendation, the aggregate level of conviction among team members guides position size across the Brandywine Global suite of global fixed income strategies. For instance, when the three portfolio managers are in agreement, larger position sizes will typically reflect that conviction level. When a smaller majority is in agreement, the team may take action, albeit at a smaller position size. In the event of disagreement, co-lead portfolio managers David Hoffman and Steve Smith retain final decision-making authority. Research sources Approximately 80% of the research incorporated into the investment process is generated internally. The Director of Global Macro Research manages a proprietary data facility containing economic and financial information on over 50 countries to construct a broad range of fair-value models for interest rates, currencies, and credit. The data is also used to forecast macroeconomic variables and support the qualitative research efforts of each of the portfolio team members. Each member of the Portfolio Management Team conducts research on the countries and currencies within the Brandywine Global universe. Two analysts are based in Singapore and focus primarily on the Asian region as well as the emerging markets more broadly. Five investment professionals comprise the Global Credit Team at Brandywine Global and provide both qualitative and quantitative research on credit markets for the Global Fixed Income Team. Credit markets provide inputs to macroeconomic forecasting and fair-value models. Sell-side and other independent third-party firms produce the remainder of their research inputs. Risk management Identifying, monitoring and managing price and information risk involves input from all investment team members. A proprietary research facility produces extensive research including economic and financial information on over 50 countries to identify the risks and opportunities in current portfolio positions and the investable universe. This research forms the basis for much of the Brandywine Global quantitative macro-economic views on various economies. It also provides a wide range of proprietary currency, credit and economic models and indicators used to support the investment process. Risk at the portfolio level is monitored on an ongoing basis by the investment team using a proprietary Global Fixed Income (GFI) Dashboard, allowing the Portfolio Management Team to review the currency, country, sector, credit, curve and duration positioning of each portfolio concurrently with portfolio performance and their respective benchmarks. In addition, daily performance dispersion reports explain any performance differentials between accounts (e.g. due to cash flows, client guidelines, etc.) and an integrated fixed income attribution and risk management software is used extensively for risk monitoring purpose in variety of ways. Investment Rather than retain or eliminate various forms of risk, Brandywine Global strive to control the relevant risks. All global fixed income portfolios are managed by the portfolio managers; holdings and weightings are aligned, subject to restrictions placed by individual clients. They follow mutually agreed upon investment guidelines seeking to control absolute and relative risk. The four primary risks associated with the fixed income strategy include country risk, interest-rate risk, currency risk and credit risk. Country risk actively managed by limiting the investment universe to instruments issued in and by all countries represented in the Citigroup World Government Bond Index plus a select group of other investment-grade markets which have more recently been recognized as developed (versus emerging). They have the ability to also invest, to a limited degree, in emerging markets, limited by virtue of the allocation-range limitations, reflective of the country s size of economy and/or liquidity of its bond market Interest rate risk - acceptable levels are determined on a country-by-country basis, according to analysis of the current rate environment and economic/market influences. Portfolio duration typically ranges from one to 10 years Currency risk Brandywine Global believe market perception often lags reality in recognizing changes in fundamental trends and judging the sustainability of those changes. Currencies tend to become over- and undervalued by significant amounts as market participants pursue their trend-following biases and Brandywine Global incorporates this analysis into their currency allocation decisions. They seek to invest in undervalued currencies, while avoiding or hedging those that are overvalued according to the historic averages Credit/default risk Brandywine Global seeks to manage credit risk by investing primarily in developed countries and investment-grade securities. Where they make investments in emerging markets, they tend to favour higher-quality emerging markets 7

Brandywine Global believe their mandate is to intelligently evaluate and assume risk on behalf of clients in order to meet and exceed their objectives. They focus on the absolute value of the securities and markets they buy and believe real risk (the risk of losing money) is based upon the relationship between price risk and information risk. Prices are higher when there is little information risk and investors, perceiving no risk, are confident. Conversely prices are lower when information risk is high. Their job as value investors in bonds and currencies, is to arbitrage price risk versus information risk. They take very little price risk by purchasing undervalued securities and believe it is their skilled assessment of information risk that has produced what they believe to be superior returns over time. Competitive advantage A practical and proven investment philosophy and process reflecting a disciplined incorporation of valuation analysis, risk assessment, an understanding of the economic process and policy reaction functions Their top-down macro approach focuses on discovering unsustainable pricing anomalies in the global bond and currency markets combined with a deep understanding of prevailing macro-economic conditions in order to determine whether or not conditions are in place for a near-term unwinding of a pricing anomaly in question. A focus on global economic trends and market moving events allows Brandywine Global to concentrate investments in what they believe will provide the best value and total return potential Unique implementation - focused portfolios of meaningful positions in the markets in which they identify value. They patiently rotate among countries they believe offer the greatest value and highest return potential and take positions in undervalued but appreciating currencies Tactical approach - Brandywine Global work to capture the significant return potential created by the interestrate, currency, and credit cycles as they play out in developed and emerging markets around the world Courage of convictions - Brandywine Global take meaningful positions when they identify attractive opportunities. An experienced team and thorough research process enables us to develop strong convictions in their best ideas Team structure - the experienced investment team at Brandywine Global is perfectly suited for their style and philosophical foundation. Brandywine Global is dedicated to investing only where the greatest opportunities exist and the majority of individuals responsible for research efforts and idea generation possess decades of experience. Their combination of extensive experience and a flexible research structure allows them to employ what they believe is a focused, cohesive and agile investment process Contact details Should you have any questions about the detail provided in this document, please contact us using the following details: Jerry Mnisi Head of Institutional Distribution T +27 (0)11 448 5197 E jerry.mnisi@stanlib.com Brendan Howie Senior Client Fund Manager T +27 (0)11 448 6585 E brendan.howie@stanlib.com Gareth Connellan Senior Client Fund Manager T +27 (0)11 448 6294 E gareth.connellan@stanlib.com Letshego Rankin Senior Client Fund Manager T +27 (0)11 448 6902 E letshego.rankin@stanlib.com Len Jordaan Client Fund Manager T +27(0)11 448 5143 E len.jordaan@stanlib.com Bongiwe Khumalo Client Fund Manager T +27 (0)11 448 6590 E bongiwe.khumalo@stanlib.com Cindy Inacio Client Fund Manager T +27 (0)11 448 6035 E cindy.inacio@stanlib.com Erdmuth Moremi Client Fund Manager T +27 (0)11 448 6158 E erdmuth.moremi@stanlib.com Lucky le Padima Client Fund Manager T +27 (0)11 448 6069 E lucas.lepadima@stanlib.com Products STANLIB Global Bond Fund 8

Appendix Team profiles David Hoffman Managing Director and Portfolio Manager David is co-lead Portfolio Manager for global fixed income and related strategies. He joined Brandywine Global in 1995. Previously, David was president of Hoffman Capital, a global financial futures investment firm (1991-1995); Head of Fixed Income Investments at Columbus Circle Investors (1983-1990); Senior Vice President and Portfolio Manager at INA Capital Management (1979-1982) and Fixed Income Portfolio Manager at Provident National Bank (1975-1979). David is a CFA charterholder and earned a BA (Art History) from Williams College. He is a member of the Brandywine Global Executive Board, currently serving as the Board s chair. Stephen Smith Managing Director and Portfolio Manager Steve is co-lead Portfolio Manager for global fixed income and related strategies. He joined Brandywine Global in 1991 to diversify their investment strategies and start the global fixed income product. Previously, Steve was with Mitchell Hutchins Asset Management, Inc. as Managing Director of Taxable Fixed Income (1988-1991); Provident Capital Management, Inc. as Senior Vice President overseeing taxable fixed income (1984-1988); Munsch & Smith Management as a Founding Partner (1980-1984), and First Pennsylvania Bank as Vice President and Portfolio Manager in the fixed income division (1976-1980). Steve earned a BSc in Economics and Business Administration from Xavier University, where he is currently Chair of the university s foundation and is a member of the Board of Trustees. He is a member of the Brandywine Global Executive Board. Steve is also a member of the Board of Trustees at both St. Mary s Villa for Children and Families, a provider of services for abused and neglected children, and the Winterthur Museum & Country Estate, a nonprofit, educational institution. Jack McIntyre Portfolio Manager and Senior Research Analyst As Portfolio Manager and Senior Research Analyst for global fixed income and related strategies, Jack provides valuable analytical and strategic insight. He joined Brandywine Global in 1998. Previously, he held positions as Market Strategist with McCarthy, Crisanti & Maffei, Inc. (1995-1998); Senior Fixed Income Analyst with Technical Data, a division of Thomson Financial Services (1992-1995); Quantitative Associate with Brown Brothers Harriman & Co. (1990) and Investment Analyst with the Public Employee Retirement Administration of Massachusetts (1987-1989). Jack is a CFA charterholder and earned an MBA in Finance from the Leonard N. Stern Graduate School of Business at New York University and a BBA in Finance from the University of Massachusetts, Amherst. 9

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