Cameron Luke Wilson

CC CAPITAL PTY (LTD) Investment Policy Statement Family Wealth Plan Mrs Balewa (First Priority/Primary) & Mr Balewa (Second Priority/Secondary) Approved on 19 August 2018 This investment policy statement should be reviewed and updated at least semiannually or during the event of changing asset management. Any change to this policy should be communicated in writing to, and approved by, all interested parties in a timely manner. CC CAPITAL PTY (LTD) Executive Summary Client Type: Individuals (Mrs & Mr Balewa), Taxable Current Assets: R5,000,000.00 lump sum + R36,871.95 monthly contribution Time Horizon: Greater than 10 years with planned withdrawals (3 – 5 years) Modelled Return: Greater than 12% - 15% Benchmark: Consumer Price Index (South Africa) + 4% Value at Risk: 3.05% per annum or 0.88% per month or; R152,420.47* per annum or R44,089.19* per month at the 5% level of significance. *based on R5,000,000.00 lump sum Asset Allocation: Lower Limit Strategic Allocation Upper Limit 35% 40% 45% Foreign Equity 5 10 15 Domestic Bonds 15 20 25 Foreign Bonds 5 10 15 Domestic Property 5 6 15 Foreign Property 5 9 15 Money Market 5 5 10 Domestic 60 71 90 Foreign 15 29 45 Domestic Equity CC CAPITAL PTY (LTD) 0.9 Optimal Portfolio Effective Annualised Returns vs CPI + 4% 0.8 0.7 0.6 RETURNS - 2015 2016 2017 YEAR Fund CPI + 4% CC CAPITAL PTY (LTD) Purpose The purpose of this Investment Policy Statement (IPS) is to assist the Client and Financial Advisor (Advisor) or Fund Manager (Manager) in effectively supervising, monitoring and evaluating the Client’s Investment Portfolio (Portfolio) in a transparent and responsible manner. The Client’s investment programme is detailed in the following sections of this IPS by: i. Investor Personal and Personality Profile ii. Investment Goals iii. Asset Allocation Model iv. Investment Decisions v. Portfolio Records and Monitoring Background This IPS has been prepared for Mandisa (Primary Client) and Tadelesh (Secondary Client) who together (the Client) are a taxable entity. This IPS covers a lump sum investment of R5,000,000.00 together with monthly deposits by debit-order of R36,871.95. Assets not covered by this IPS include defined contribution pension plans offered by The University of Cape Town and The Emirates Group for the Primary Client and Secondary Client respectively. Other assets not covered by this IPS include an Old Mutual Retirement Annuity Unit Trust for The Client (who, together, make joint contributions). CC CAPITAL PTY (LTD) i. Primary Client Personal Profile Name: Mandisa Grace Balewa Age: 43 Gender: Female Race: Black Marital Status: Married Spouse Details: Name: Tadelesh Tatenda Balewa Age: 41 Gender: Male Race: Black Occupation: Commercial Pilot (Captain) A340-300, Emirates Gross Income: US$96,000.00 tax free (Subject to ZAR tax law) Dependent (1): Female – 15 years old Dependent (2): Male – 13 years old Occupation: Senior Lecturer (UCT) Gross Income: R786,717.00 Tax Bracket: R708,311 – R1,500,000 (207,448 + 41% of taxable income above 708,310) Gross Tax Expense: R207,448.00 + 0.41*(R- – R-) = R239,594.901 Net Income: R547,122.13 Medical Aid: R3,310.00 per month (R39,720.00 per annum). Fed-Health Maxima Standard, unlimited coverage. Dependents covered by Secondary Client Savings: R5,000,000.00 joint money market account and fixed deposits (available for investment), and a healthy joint retirement annuity and defined contribution pension plans (Not available for further investment). Planned Contribution: 20% of gross household income (0.2*((96,000(14.5) +786,717)) = R442,463.40 per annum. 1 Assumed gross tax expense barring any deductibles attributed to other investment vehicles or personal income tax deductibles. CC CAPITAL PTY (LTD) Investor Personality Profile The Client acknowledges that taking on risk is required to earn real returns in line with her medium and long-term investment goals. The Client acknowledges that fluctuations in the net asset value (NAV) of her portfolio are pertinent due to the intrinsic uncertainty associated with domestic and foreign capital markets. The establishment of risk tolerance of this IPS with respect to the Primary Client’s risk appetite for medium and long-term variations in NAV has been considered and finalised until further revision is required. The Primary Client is moderately risk averse as suggested by personality questionnaires pertaining to risk appetite2. The Client is willing to take on moderate risk to meet medium and long-term investment objectives and is financially able to take on moderate risk. This has been determined by The Client’s stable joint income and joint retirement annuities. Future income is expected to remain highly stable for The Client and current savings (joint retirement annuity and defined benefit contribution plans) are expected to appreciate in real terms at a rate deemed acceptable by the Advisor and Manager. 2 See Appendix for risk tolerance questionnaires completed by The Primary Client. CC CAPITAL PTY (LTD) ii. Statement of Objectives (Investment Goals) This IPS describes the investment process the Manager deems acceptable to meet The Client’s medium and long-term investment objectives given The Client’s ability and willingness to take on moderate risk. The investment process has been designed to meet the following objectives: 1. Provide additional financial security for retirement (over and above current retirement investment vehicles set in place) 2. Maintain and grow current nest-egg (R5,000,000.00) for medium-term purchases a. University Fees (Present value (PV) of R100,000.00 per year per dependent for 3 years each b. First vehicles for each dependent (PV of R120,000.00 per vehicle, paid in cash) c. Apartment purchase for dependents’ study term (PV R1,600,000.00) cash or 20% (R320,000.00) bond down-payment). Asset to be used for investment purposes after dependents’ study term 3. Ensure excess funds for semi-annual holiday during retirement period (PV of R80,000.00 per holiday) It is assumed that a principal of R5 million will be deposited with monthly contributions of R36,871.95, occurring at the beginning of each month, will be compounded at an effective annual rate (EAR) of 19.3% up until 2023. It is expected that the optimal portfolio will generate an EAR of 12% per annum thereafter, ceteris paribus. Required Funds Per Objective as they Fall Due OBJECTIVE PV FV University Dependent 1 300,000.00 377,913.60 3 years University Dependent 2 300,000.00 440,798.40 5 years Vehicle Dependent 1 120,000.00 151,165.40 3 years Vehicle Dependent 2 120,000.00 176,319.40 5 years 1,600,000.00 2,015,539.20 3 years Apartment Purchase Cash Holiday Fund 907,074.70 2,877,394.34 Assume discount factor of (1+CPI + 2%) =(1+ (±8% )) per annum TIME HORIZON 15 years CC CAPITAL PTY (LTD) Estimated Funds Available through Investments as Objectives Fall Due (Chronological Order) OBJECTIVE Withdrawal Balance Vehicle Dependent 1 Available by Objective Date 10,253,087.00 151,165.40 10,101,921.60 Apartment Cash 10,101,921.60 2,015,539.20 8,086,382.40 8,086,382.40 377,913.60 7,708,468.80 Vehicle Dependent 2 12,040,573.57 176,319.40 11,864,254.17 University Dependent 2 11,864,254.17 440,798.40 11,423,455.77 Holiday Fund 81,131,737.38 2,877,394.34 78,254,343.04 University Dependent 1 Assume Optimal Portfolio Maintained where Effective Annual Returns = 19.30%. Assume that Effective Annual Returns pull back to 12% after University Dependent 2 paid for. Assuming a discount factor of CPI + 2%, the present value of the investment, ceteris paribus, is R24,669,032.52. CC CAPITAL PTY (LTD) iii. Asset Allocation Model Management has selected a moderately risky portfolio with emphasis on balance between the major asset classes whilst leaning towards domestic and foreign equity over the other available instruments. Although Management wanted to weight foreign equity more heavily, given domestic uncertainty, the available exchange traded funds (ETFs) offered by our service providers, Sharenet and SATRIX, were limited. It is not favourable to purchase foreign currency denominated ETFs due to the transaction costs and management fees quoted in the respective foreign currencies. However, Management has elected to purchase a select group of foreign ETFs which make up approximately 7.05% of the Portfolio. Management has chosen to select a basket of passive investment vehicles, predominantly ETFs, as they are liquid, have low transaction costs (provided they are purchased in domestic currency), require low management fees, and are already highly diversified. Management has opted to keep domestic property weights low due to property rights uncertainty in South Africa with regards to commercial agricultural land. This uncertainty is believed to affect Real Estate Investment Trusts (REITs), who manage agricultural property, adversely. Finally, Management has elected to create a hedged fund as this management style has produced superior Sharpe ratios compared to long-only fund management styles during the time frame analysed. This is discussed further in the Investment Decision section. The Client is satisfied with the portfolio choice, management style, and the policy asset allocation model proposed. The risks of the portfolio align with The Client’s ability and willingness to take on said risk. Asset Allocation: Lower Limit Strategic Allocation Upper Limit 35% 40% 45% Foreign Equity 5 10 15 Domestic Bonds 15 20 25 Foreign Bonds 5 10 15 Domestic Property 5 5 15 Foreign Property 5 10 15 Money Market 5 5 10 Domestic 60 70 90 Foreign 15 30 45 Domestic Equity Although a hedged fund has been created, net short positions in asset classes is not permissible. CC CAPITAL PTY (LTD) iv. Investment Decisions Asset Selection Management has identified seven classes of investable assets which, when weighted correctly, will create a well-diversified portfolio. These asset classes are; domestic and foreign equity, domestic and foreign fixed income bonds, domestic and foreign property investments, and the money market. The tables below show how each individual asset has been weighted according to its asset class in relation to the Portfolio. The tables also show a comparison between the hedged fund strategy versus the long-only fund strategy. HEDGED FUND (With 1x Leveraging) ASSET CLASS ASSET STX DIV PLUS STX FINI STX INDI Domestic Equity STX RAFI STX BALANCED CLASS 1 Equally Weighted Top 40 MSCI WORLD MSCI EM STX S&P 500 Foreign Equity STX NASDAQ 100 FTSE 100 EUROSTOXX50 ABSA GLOBAL FEEDER FUND Domestic Property GPT Foreign Property ISHR GBL PROP SC EQ IDX-D AC Domestic Bond STX BOND Foreign Bond iShares Citigroup G7 Global Government Bond INAV Money Market AG Money Market Weight of Committed Capital Portfolio Return per month Statistics Portfolio Variance per month Sharpe Ratio per month Value at Risk (5% level of significance) per month WEIGHTS WEIGHTS - - -0.3113 -0.4054 - 0.4500 0.0705 Hedged Fund Management Strategy CC CAPITAL PTY (LTD) LONG-ONLY FUND ASSET CLASS Domestic Equity Foreign Equity Domestic Property Foreign Property Domestic Bond Foreign Bond Money Market Statistics ASSET STX DIV PLUS STX FINI STX INDI STX RAFI STX BALANCED CLASS 1 Equally Weighted Top 40 MSCI WORLD MSCI EM STX S&P 500 STX NASDAQ 100 FTSE 100 EUROSTOXX50 ABSA GLOBAL FEEDER FUND GPT ISHR GBL PROP SC EQ IDX-D AC STX BOND iShares Citigroup G7 Global Government Bond INAV AG Money Market Weight of Committed Capital Portfolio Return per month Portfolio Variance per month Sharpe Ratio per month Value at Risk (5% level of significance) per month WEIGHTS WEIGHTS- Long-Only Fund Management Strategy The above tables show optimised portfolios per strategy during the period under consideration (2014 to 2018 monthly continuous returns) given the strategic policy weightings as constraints. It is noticeable that the traditional long-only strategy concentrates risks in one asset per asset class instead of diversifying between individual assets in each asset class. This will result in a lack of exposure to desired markets. Concentration of this risk is evident when comparing the portfolio variances between the two strategies employed. The hedged fund strategy has considerably less risk with a variance of 0.0001 compared to the long-only strategy with a variance of 0.006. By taking the square root of these variances can we compare the degree of riskiness with more clarity. The standard deviation of the long-only fund is 2.40% per month compared to the standard deviation of the hedged fund at 1.21% per month. The returns by the long-only strategy fall below the returns of the hedged fund strategy with 0.77% per month versus 1.48% per month respectively. The combination of higher risk and lower returns on the long-only fund results in a comparably low Sharpe ratio (excess return per CC CAPITAL PTY (LTD) unit of risk using the R186 rate)3 of 0.0103 per month versus 0.6137 per month of the hedged fund strategy. Finally, the value at risk (VaR)4 for each strategy is more telling. The long-only fund has a monthly VaR of 3.94% per month at the 5% level of significance. Translated into monetary terms, the fund is susceptible to a maximum draw down of R196,795.07 per month based on the R5 million principal. The nominal value increases when the monthly contributions are considered. The VaR for the hedged fund strategy is 0.88% at the 5% level of significance, translated into monetary terms, the fund is susceptible to a maximum drawdown of R44,089.20 per month, considerably less than that of the long-only strategy. Annualised Summary Statistics Weight of Committed Capital Portfolio Return Portfolio Variance Portfolio Standard Deviation Sharpe Ratio Long-Only-%-% 0.0837 Hedged-%-% 2.4904 Annualised Summary Statistics Long-Only Hedged Weight of Committed Capital- Portfolio Return 9.5957% 19.3025% Portfolio Variance- Portfolio Standard Deviation 8.3110% 4.1771% Sharpe Ratio- Value at Risk (5% level of significance) 13.6344% 3.0546% Investment Fees SATRIX ETFs incur fees of 0.5% per annum (VAT inclusive) with similar products offering approximately similar fees, except for the Allan Gray Money Market Fund which incurs 0.29% per annum (VAT inclusive). International ETFs, barring SATRIX products, incur an average expense ratio of 0.44% before currency transaction costs. Due to the relationship with Management’s brokers, the fund can secure favourable exchange rate spreads far below what an individual investor has access to5. 3 The excess return is simply the expected return less the risk-free rate, where the risk-free rate is the current yield on the South African R186 10-year government bond of 8.98% 4 Value at Risk is a statistical measure using the variation of returns to determine the maximum draw down or loss expected at a given level of significance. 5 Average spreads offered by retail banks to retail and personal investors average 3.5% to 4% (FNB.com) CC CAPITAL PTY (LTD) Management investment fees, after tax, are in line with competitive hedge funds at 1% with a 20% performance fee over and above the benchmark of CPI + 4% and is subject to highwater marks6. Management fees are charged for the active management and rebalancing of the portfolio and for general costs associated with managing The Client’s portfolio. A full break down of management fees are available through our Investor’s Portal on our website cccapital.co.za/investor_portal/management_fees/. 6 Performance fees are only charged once NAV of portfolio/fund exceeds previous levels, thus protecting the investor against double charging when a fund/portfolio recoups losses from previous periods. CC CAPITAL PTY (LTD) v. Portfolio Records and Monitoring The Client’s Portfolio is recorded by Management for convenience and can be viewed through The Client’s Investor Profile on our website cccapital.co.za/investor_portal/my_investments/. Alternatively, Management sends out a monthly email summarising NAV movements of the Portfolio. Additionally, a semi-annual report on the Portfolio is distributed to The Client, labelled “The Last 6 Months in Review” , and discusses key market related concerns and general forecasts made by Management. Portfolio Management Evaluation Management performance is evaluated annually against the respective benchmark (CPI + 4%). Should Management miss the benchmark, the Advisor will call in a management review. Management is required to release an annual report on Portfolio performance and highlight reasons as to why the Portfolio missed the benchmark should this event occur. If the benchmark is missed two years in succession, all management fees will be waived, and transfer-of-management costs will be revised downwards. As previously mentioned, the Portfolio is evaluated against CPI + 4%. 0.9 Optimal Portfolio Effective Annualised Returns vs CPI + 4% 0.8 0.7 0.6 RETURNS - 2015 2016 2017 YEAR Fund CPI + 4% CC CAPITAL PTY (LTD) References Asset Price Data: Bloomberg Terminal Average Captain’s Remuneration (Emirates): https://www.linkedin.com/titlecaptain-atemirates-airline CPI Data (StatsSA): http://www.statssa.gov.za/publications/P0141/CPIHistory.pdf Forex Spreads (FNB): https://www.fnb.co.za/rates/ForeignExchangeRates.html Investor Questionnaire (Vanguard Capital): https://personal.vanguard.com/us/FundsInvQuestionnaire Medical Aid Quotes (FedHealth): https://www.fedhealth.co.za/medical-aid-plans/maximastandard/ South African Tax Brackets (SARS): http://www.sars.gov.za/TaxTypes/PIT/Pages/default.aspx UCT Compensation: http://www.hr.uct.ac.za/hr/benefits/remuneration/coe_ranges/academic CC CAPITAL PTY (LTD) Appendix Investor Risk Tolerance Questionnaires These questionnaires are provided online, for free, independent from CC Capital. All rights belong to respective questionnaire providers. Questionnaire 1: Result = Moderately Risk Averse. Advice: 50% Equities, 50% Fixed Income. 1. I plan to begin taking money from my investments in ... 1 year or less 1 – 2 years 3 – 5 years 6 – 10 years 11 – 15 years More than 15 years 2. As I withdraw money from these investments, I plan to spend it over a period of ... 2 years or less 3 – 5 years 6 – 10 years 11 – 15 years More than 15 years 3. When making a long-term investment, I plan to keep the money invested for ... 1 – 2 years 3 – 4 years 5 – 6 years 7 – 8 years More than 8 years CC CAPITAL PTY (LTD) 4. From September 2008 through November 2008, stocks lost more than 31%. If I owned a stock investment that lost about 31% in 3 months, I would … (If you owned stocks or stock funds during this period, select the answer that corresponds to your actual behaviour.) Sell all of the remaining investment. Sell a portion of the remaining investment. Hold onto the investment and sell nothing. Buy more of the investment. 5. Generally, I prefer investments with little or no fluctuation in value, and I'm willing to accept the lower return associated with these investments. Strongly disagree Disagree Somewhat agree Agree Strongly agree 6. During market declines, I tend to sell portions of my riskier assets and invest the money in safer assets. Strongly disagree Disagree Somewhat agree Agree Strongly agree 7. I would invest in a mutual fund or ETF (exchange-traded fund) based solely on a brief conversation with a friend, co-worker, or relative. Strongly disagree Disagree Somewhat agree Agree Strongly agree CC CAPITAL PTY (LTD) 8. From September 2008 through October 2008, bonds lost nearly 4%. If I owned a bond investment that lost almost 4% in 2 months, I would … (If you owned bonds or bond funds during this period, select the answer that corresponds to your actual behaviour.) Sell all of the remaining investment. Sell a portion of the remaining investment. Hold onto the investment and sell nothing. Buy more of the investment. 9. The chart below shows the greatest 1-year loss and the highest 1-year gain on 3 different hypothetical investments of $10,000.* Given the potential gain or loss in any 1 year, I would invest my money in … A (loss of $164, gain of $593) B (loss of $1,020, gain of $1,921) C (loss of $3,639, gain of $4,229) *The maximum gain or loss on an investment is impossible to predict. The ranges shown in the chart are hypothetical and are designed solely to gauge an investor's risk tolerance. 10. My current and future income sources (for example, salary, Social Security, pension) are … Very unstable Unstable Somewhat stable Stable Very stable CC CAPITAL PTY (LTD) 11. When it comes to investing in stock or bond mutual funds or ETFs—or individual stocks or bonds—I would describe myself as ... Very inexperienced Somewhat inexperienced Somewhat experienced Experienced Very experienced 12. My current asset allocation Enter the current asset allocation in whole numbers. Your percentages must total 100%. If you don't enter any percentages, the questionnaire will assume that 100% of your assets are in short-term reserves. Short-term reserves % Bonds % Stocks % CC CAPITAL PTY (LTD) Questionnaire 2: Result = Moderately Conservative Advice: 5% Cash, 45% Fixed Income, 50% Equity. 1. What is your age? A) 35 years or under B) 36-54 C) 55 or above 2. What do you expect to be your next major expenditure? A) Buying a house B) Paying for a college education C) Capitalizing a new business D) Providing for retirement 3. When do you expect to use most of the money you are now accumulating in your investments? A) At any time now...so a high level of liquidity is important B) Probably in the future...2-5 years from now C) In 6-10 years D) Probably in 11-20 or more years from now 4. Over the next several years, you expect your annual income to: A) Stay about the same B) Grow moderately C) Grow substantially D) Decrease moderately E) Decrease substantially 5. Due to a general market correction, one of your investments loses 14% of its value a short time after you buy it. What do you do? A) Sell the investment so you will not have to worry if it continues to decline B) Hold on to it and wait for it to climb back up C) Buy more of the same investment...because at the current lower price, it looks even better than when you bought it CC CAPITAL PTY (LTD) 6. Which of these investing plans would you choose for your investment dollars? A) You would go for maximum diversity, dividing your portfolio among all available investments, including those ranging from highest return/greatest risk to lowest return/lowest risk B) You are concerned about too much diversification, so you would divide your portfolio among two investments with historically high rates of return and moderate risk C) You would put your investment dollars in the investment with the highest rate of return and most risk 7. Assuming you are investing in a stock, which one do you choose? A) Companies that may make significant technological advances that are still selling at their low initial offering price B) Established, well-known companies that have a potential for continued growth C) 'Blue chip' stocks that pay dividends 8. Assuming you are investing in only one bond, which bond do you choose? A) A high-yield (junk) bond that pays a higher interest rate than the other two bonds, but also gives you the least sense of security with regard to a possible default B) The bond of a well-established company that pays a rate of interest somewhere between the other two bonds C) A tax-free bond, since minimizing taxes is your primary investment objective 9. You expect inflation to return and it has been suggested that you invest in 'hard' assets, which have historically outpaced inflation. Your only financial assets are long-term bonds. What do you do? A) Ignore the advice and hold on to the bonds B) Sell the bonds, putting half the proceeds in 'hard' assets and the other half in money market funds C) Sell the bonds and put all the proceeds in 'hard' assets D) Sell the bonds, put the proceeds in 'hard' assets, and borrow additional money so you can buy even more 'hard' assets 10. You have just reached the $10,000 plateau on a TV game show. Now you must choose between quitting with the $10,000 in hand or betting the entire $10,000 in one of three alternative scenarios. Which do you choose? A) The $10,000 -- you take the money and run B) A 50 percent chance of winning $50,000 C) A 20 percent chance of winning $75,000 D) A 5 percent chance of winning $100,000 CC CAPITAL PTY (LTD) THIS PAGE IS PURPOSEFULLY LEFT BLANK CC CAPITAL PTY (LTD) THIS PAGE IS PURPOSEFULLY LEFT BLANK CC CAPITAL PTY (LTD)