Quarter 4

2017

ONTRACK INSIGHT

South Africans have come into 2018 on a cautiously optimistic note due to a singular development in mid-December

of 2017: the election of Cyril Ramaphosa as new ANC president. It is still early, but the signs are there that Mr.

Ramaphosa means business (no pun intended), having already instituted changes to Eskom’s executive board and

ordering a clamp-down on the Guptas and their corrupt associates. Zuma seems as good as gone.

2018 will hopefully bring welcome relief to South African investors who haven’t experienced the same strong

returns that the rest of the world has been experiencing. In fact, many South Africans might be unaware just how

good the global economy is currently performing. The US is growing at 3% and US consumer confidence is at a 17-

year high; Japan is witnessing its longest stretch of uninterrupted growth in more than 15 years; China continues

to defy its sceptics and even the beleaguered oil price logged 6 straight months of gains.

In light of the strong global economy, this quarter’s OnTrack features articles on the imminent shift in global

monetary policy, as well as one of our current high-conviction holdings, the WisdomTree Europe Domestic Economy

Fund.

GLOBAL MONETARY POLICY – A NEW ERA by Nerina de Clercq, Analyst

The first monetary policy experiment (commonly referred to as Quantitative Easing) had its roots in Japan in 2001,

when the Bank of Japan (BoJ) took desperate measures to rid the economy of a prolonged recession and

deflationary pressures. The BoJ tackled these problems by injecting liquidity into the banking system in order to

promote lending and, in turn, stimulate growth. Although it worked to some extent, a return to growth took longer

than expected due to Japan’s extremely weak economy and the QE program came to a halt in 2006.

Ever since this first QE experiment showed signs of success, more central banks around the globe increasingly

adopted some form of QE in an attempt to improve economies that were still struggling in the wake of the 2008

financial crisis. The end result was improved economic growth, but also a massive increase in central bank debt to

$14.5 trillion (as seen in Chart 1).

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Chart 1: Central banks have supported economies through massive asset purchases

Now that QE is set to come to an end, what will the impact be on financial markets?

As seen in Chart 2 below, QE programs have had a major positive impact on equity markets, with the current bull market coinciding with central bank liquidity. Due to this strong relationship, it is reasonable to assume that markets could move down when central banks reverse QE. However, markets have continued to rise and the impact of policy tightening has been minimal so far. Still, there is a risk that markets will experience a downturn when tapering reaches more advanced stages.

Chart 2: Relationship between QE and Global Equities

Central Banks purchased $7 trillion in

assets from 2011 to 2017

Source: Citi Research – Global Perspectives and Solutions

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Strong earnings growth to counteract policy tightening

Apart from the strong relationship between markets and monetary easing, markets also tend to move together

with corporate earnings. This means that, in the absence of QE, markets will have to rely on strong earnings in order

to sustain momentum in 2018 and beyond.

Chart 3: Relationship between Earnings and Global Equities

Conclusion

For now, it seems that clear communication from central banks, as well as very gradual policy tightening, has

prepared markets in order to avoid another taper tantrum such as the one seen in 2013. As such, 2018 can be

another good year for equity markets, especially when one considers the strength of the global economy and

improving corporate profits.

Risks have, however, increased in the US where strong earnings growth is already reflected in high valuation levels.

Some fundamentals have also started to point to the end of its economic cycle. Therefore we believe markets such

as Europe, Japan and India offer better value. The South African market is also due for a rebound as many SA focused

companies are still trading below 12x P/E’s. In order to take advantage of this outlook, the True North portfolios

have been positioned accordingly.

ECONOMIC DATA

CPI: Nov (’17) 4.60% PPI: Nov ( ’17) 5.10%

Unemployment (Q3 ’17) 27.70% Repo Rate 6.75%

Prime rate 10.25% GDP (Q3 ‘17) 2.00% q/q

SOURCE: STATS SA, SARB

Source: Citi Research – Global Perspectives and Solutions

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STOCKWATCH by Nerina de Clercq, Analyst

WisdomTree Europe Domestic Economy Fund

The WisdomTree Europe Domestic Economy Fund is a smart beta ETF (Exchange Traded Fund) which True North

has been purchasing for private client portfolios as well as the True North IP Flexible Equity Fund during the past 6

months. This ETF is designed to track the investment results of European companies that are sensitive to economic

growth prospects in the Eurozone and that derive more than 50% of their revenue from Europe.

Although we have had a positive view on European equities for a while now, we are concerned that the strong Euro

will decrease the competitiveness of European exporters, which should ultimately result in weaker-than-expected

earnings growth for these companies. This is specifically why we sought a smart beta ETF that (1) excludes exporting

companies and (2) maximizes exposure to European companies that may benefit from Europe’s economic recovery.

Sector and country allocation

Source: Reuters

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FUND COMMENTARY FOR Q4 OF 2017 by Wim Prinsloo, Portfolio Manager

TRUE NORTH IP FLEXIBLE EQUITY FUND

It was widely anticipated that #ANC54 would be the big event to disrupt the usually quiet December period for

markets. How wrong can you be?

Steinhoff crashed and burned, leaving many fund managers sleepless when they should have been winding down

the stress levels.

Unfortunately, we were no different and December was a disappointing month for the True North IP Flexible Equity

Fund (TNFE), as it declined by 5.20%. This decline erased what was up to then a solid 11% total return for 2017.

Now we are left with a below par 4.83% return for 2017.

Lesson learned: We need to follow through

Our lesson with regards to the Steinhoff scandal is that we need to follow through all the way on our conviction,

philosophy and process. We got it mostly right in 2017, selling both EOH and Brait before they crashed.

Unfortunately, we did not execute the big fish.

In this regard we believe the following quote by Naspers CEO, Bob van Dijk, provides sound guidance on how to

execute investment and business decisions:

“If we see things that work exceptionally well, we accelerate them to the maximum. And we weed out the under-performing assets as quickly as we can.”

Taking advantage of extreme market movements

Despite our temperament being severely tested in December, we are pleased with our decision-making as we were able to take advantage of extreme volatility to improve the quality of the portfolio. Apart from selling Steinhoff, we were able to buy PSG Group and Steinhoff Africa Retail (STAR) ─ two high-quality companies that also felt the brunt of the Steinhoff scandal.

PSG Group: We have been eyeing an entry into high-quality PSG for a while now and was able to buy it at around R 240 after Steinhoff was forced to sell its own holding in PSG. Our purchase price represents a 20% discount to its sum-of-the parts value.

STAR: Steinhoff’s African affiliate owns some exceptional assets, most notably Pep Africa. Although STAR is not directly implicated in Steinhoff’s alleged fraud, we are weary of some related transactions with its parent that might come under scrutiny upon further legal investigations. As such we allocated a sensible 2.5% of TNFE to STAR.

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TRUE NORTH IP ENHANCED PROPERTY FUND

The election of Cyril Ramaphosa as the new ANC president led to a strong ~10% bounce in “SA Inc.” assets during December. This drove the SA Listed Property Index to return a healthy 4.21%, with the SA segment of the index outperforming the offshore segment by a large margin. True North IP Enhanced Property ultimately ended with a +9.37% total return for 2017, as the stronger rand weighed on some good stock selection throughout the year. Highlights included MAS Real Estate (+43%), Sirius Real Estate (+53%) and Equites Property Fund (+41%). Investors willing to go beyond the status quo to be well rewarded in 2018

The SA economy could be at a key turning point if Cyril Ramaphosa is able to restore business and investor confidence and further downgrades can be avoided. Inflation is trending downward which could result in a cut in interest rates by the SARB. This is all positive for local property as an asset class. The combination of divergent sector fundamentals, increased short-sellers, and the emergence of sector specialists (logistics, self storage) means SA Listed Property is evolving into a more nuanced asset class ─ in-line with global trends. This ultimately requires an increased emphasis on detailed stock and sector selection, with investors that are willing to go beyond the status quo to be well rewarded in 2018. For more details on holdings and performances, please view the Minimum Disclosure Documents which can be downloaded from our website: www.tncm.co.za.

For more details on holdings and performances, please view the Minimum Disclosure Documents which can be downloaded from our

website: www.tncm.co.za.

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Funds administered by: 6

Disclosure

Collective Investment Schemes are generally medium to long term investments. The value of participatory interests or the investment may go down as well as

up. Past performance is not necessarily a guide to future performance. The performance is calculated for the portfolio. The individual investor performance may

differ as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Collective investment schemes are traded at

ruling prices and can engage in borrowing and scrip lending. The fund is invested in a portfolio of collective investment schemes that levy their own charges,

which could result in a higher fee structure for the fund of funds. A schedule of fees and charges and maximum commissions is available on request from the

manager. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The Manager retains full legal responsibility

for the Fund, regardless of Co-Naming arrangements. Transaction cut off time is 14:30 daily. Valuation time is 15:00 (17h00 at quarter end). Prices are published

daily and available newspapers countrywide, as well as on request from the Manager. IP Management Company (RF) Pty Ltd is the authorised Manager of the

Scheme – contact 021 673 1340 or clientservices@ipmc.co.za. Standard Bank is the trustee / custodian – contact compliance-IP@standardbank.co.za. Additional

information including application forms, the annual report of the Manager and detailed holdings of the portfolio as at the last quarter end are available, free of

charge, from clientservices@ipmc.co.za. IP Management Company is a member of ASISA. Financial Advisor fees as agreed between the Investor and the Advisor

may apply and payment to the Advisor will be facilitated on behalf of the Investor. A statement of changes in the composition of the portfolio during the

reporting period is available on request.

The portfolio may include foreign investments and the following additional risks may apply: liquidity constraints when selling foreign investments and risk of

non-settlement of trades; macroeconomic and political risks associated with the country in which the investment is made; risk of loss on foreign exchange

transactions and investment valuation due to fluctuating exchange rates; risk of foreign tax being applicable; potential limitations on availability of market

information which could affect the valuation and liquidity of an investment. All of these risks could affect the valuation of an investment in the fund.

CONTACT DETAILS FOR IP MANAGEMENT COMPANY CONTACT DETAILS OF THE TRUSTEE

Tel 021 673 1340 Compliance-IP@standardbank.co.za