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Investment Options: Cornelius Schoonees Business Development Actuary, Absolute Return Investments

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Cornelius Schoonees. Business Development Actuary, Absolute Return Investments 'How to get downside protection in uncertain markets without missing the upside' ... – PowerPoint PPT presentation

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Title: Investment Options: Cornelius Schoonees Business Development Actuary, Absolute Return Investments


1
  • Investment Options Cornelius SchooneesBusiness
    Development Actuary, Absolute Return
    InvestmentsHow to get downside protection in
    uncertain markets without missing the upside

2
If you're not confused, you're not paying
attention. - Tom Peters
3
  • Why uncertainty matters to the private investor
  • How to deal with uncertainty
  • An alternative to Money Market Funds
  • Key messages

Agenda
4
Why uncertainty matters
  • Market declines can be unsettling and detract
    investors from a sound long-term investment
    strategy
  • As markets decline, each savings withdrawal
    becomes a larger slice of the remaining savings
  • Each withdrawal locks in low fund values
  • With a smaller pool of savings, the potential for
    future income is reduced and it takes longer to
    recover from market downturn

5
Withdrawals become bigger slices of savings
Withdrawal
No. of units x Unit price

R1,000
1.00 x R1,000

1.11 x R900

1.25 x R800

1.43 x R700

6
Taking withdrawals amplifies market losses
Impact on unit price
Capital Builder
Impact of market decline on unit price -39
TOP40 index
Impact on no. of units
Units redeemed for fixed monthly income
Impact of market decline on number on units -7
1.01
1.03
1.02
1.01
0.99
0.99
1.00
0.99
Capital Builder units
1.00
1.03
10.1
Top40 units
1.21
1.46
1.70
1.71
1.73
1.86
2.17
1.94
1.05
1.19
16.0
Source OMIGSA
7
Resulting in longer time to recover
  • While all investors face the risk of market
    declines, investors that make withdrawals are
    particularly vulnerable
  • Lock-in of low fund values means it takes longer
    to recover from a market downturn

Rate of return Size of bear market downturn Size of bear market downturn Size of bear market downturn Size of bear market downturn Size of bear market downturn
Rate of return -10 -20 -30 -40 -50
2 5 yrs 11 yrs 18 yrs 26 yrs 35 yrs
4 3 yrs 6 yrs 9 yrs 13 yrs 18 yrs
6 2 yrs 4 yrs 6 yrs 9 yrs 12 yrs
8 1 yrs 3 yrs 5 yrs 7 yrs 9 yrs
10 1 yrs 2 yrs 4 yrs 5 yrs 7 yrs
Note Calculation based on continuous
compounding and recovery time rounded to nearest
year
Source OMIGSA
8
How to deal with uncertainty
There are 5 key steps...
  • Understand macro picture
  • Understand asset-specific picture
  • Diversify to address asset-specific risk
  • Protect capital against downside risk through
    selective use of put options
  • Build a safety margin (alpha returns) through
    active management

9
Protect capital against downside risk
Relative return strategies do not protect capital
and tend to move in the same direction as a
benchmark
Absolute return strategies aim to protect capital
by pursuing positive returns with less volatility
over time
10
Historic demand for Absolute Return funds
  • Strong net inflows and large growth in number of
    funds prior to market decline

Source Micropal and Association for Savings and
Investment SA (ASISA)
11
More recently flows have shifted to Money Market
  • In 2008 some 81 of unit trust net inflows went
    into money market funds (up from 29.3 in 2007)
  • High degree of risk aversion following market
    decline
  • Prospects of poor returns as interest rates
    decline

Source Association for Savings and Investment
SA (ASISA)
12
An alternative to Money Market Funds
13
Capital BuilderFund objectives
Risk
Return
  • Targets Cash 3 p.a. (gross) over rolling 3
    year period
  • Targets quarterly positive returns

14
Capital BuilderFund positioning
High
Balanced Funds
AbsoluteReturnFunds
RETURN
Capital Builder
EXPECTED RETURNS
VariableIncome
Cash
RISK
Low
Stable
Volatile
CONSISTENCY OF QUARTERLY RETURNS
15
Capital BuilderProcess - How the fund works
Base case
PHYSICAL EQUITY 75
  • Invest in 15-25 large cap shares (generally
    components of the Top 40 index)
  • Tracking error to the TOP40 between 2 - 4

CASH MONEY MARKET 25
16
Capital BuilderProcess - How the fund works
(continued)
Base case
EFFECTIVE EQUITY 0-40
  • Physical equity is hedged with listed TOP40 put
    options
  • Generally 1-year options are used and rolled
    quarterly to lock in gains

CASH-EQUIVALENT HEDGED EQUITY 35-75
CASH MONEY MARKET 25
17
Capital BuilderPerformance history since
inception
  • Targets gross return of Cash 3 over rolling 3
    year period

150
140
Capital Builder (11.7)
130
Cash 3
120
Cash (9.2)
110
100
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Notes Returns until February 2008 are based on
the Capital Builder institutional portfolio,
while returns from March 2008 onwards are the
unit trust returns (gross of unit trust related
fees).
Source OMIGSA
18
Capital BuilderPerformance history since
inception
  • Aims for quarterly capital protection

TAX QUARTERS
(Dec 05, Jan, Feb 06)
(Dec, Jan, Feb 09)
Note Returns until February 2008 are based on
the Capital Builder institutional portfolio,
while returns from March 2008 onwards are the
unit trust returns (gross of unit trust related
fees).
Source OMIGSA
19
Capital BuilderPerformance history since
inception
  • Participate more in equity upside, and less in
    equity downside

Out-performed both cash equities
Avg negative monthly returns
Avg positive monthly returns
Attractive non-linear pay-off profile
7.6 participation
41.7 participation
Note Split determined by equity market
performance (-ve or ve)
Source OMIGSA
20
Capital BuilderTax efficiency
High
Balanced Funds
AbsoluteReturnFunds
tax
RETURN
Capital Builder
tax
tax
EXPECTED RETURNS
VariableIncome
tax
Cash
tax
RISK
Low
Stable
Volatile
CONSISTENCY OF QUARTERLY RETURNS
21
Capital BuilderExample of effective tax rate for
individuals
COMPONENTS OF TOTAL RETURN
EFFECTIVE TAX RATE ON CASH DEPOSIT
EFFECTIVE TAX RATE ON CAPITAL BUILDER
Applicabletax rate
Applicabletax rate
Proportion of total return
Proportion of total return
100
40
19
40
1. Interest
17
0
2. Dividends
64
10
3. Capital Gains
Effective tax rate(ignoring tax deferral)
40
14
Source OMIGSA
22
Capital BuilderIllustration of returns net of
fees and net of tax
11.7 pa1
untaxedinvestor
40 taxedinvestor
1.1
9.2 pa2
3.4
8.9 pa
5.5 pa
Capital Builder
Call deposit
  • Notes
  • Cash return 2.5 pa (based on Capital Builder
    Institutional Fund returns from 1 Dec 05 to 28
    Feb 08, and the Unit Trust class B returns
    thereafter until 31 Mar 09)
  • Cash returns from Standard Bank Call deposit
  • Fees calculated as 0.9 (15 of benchmark
    outperformance) VAT

23
Capital BuilderSummary
  • Very low risk, stable returns
  • Aims for quarterly capital protection
  • Targets gross return of cash 3pa over 3 year
    rolling period
  • Tax efficient return compared to cash and money
    market

24
Capital protection is important
  • Consistent returns are important to keep
    financial plans on track
  • Diversification alone does not protect capital
  • Cost-effective hedging of downside risk is
    available through selective use of put options
  • Money market investors should consider the
    enhanced returns and greater tax efficiency
    available from a protected equity solution

25
Regulatory Information
Old Mutual Investment Group (South Africa) (Pty)
Limited   Physical Address Mutualpark, Jan Smuts
Drive, Pinelands, 7405   Telephone number 27
21 509 5022
Old Mutual Investment Group (South Africa) (Pty)
Limited is a licensed financial services
provider, FSP 604, approved by the Registrar of
Financial Services Providers (www.fsb.co.za) to
provide intermediary services and advice in terms
of the Financial Advisory and Intermediary
Services Act 37 of 2002. Old Mutual Investment
Group is a wholly owned subsidiary of Old Mutual
(South Africa) Limited. Reg No 1993/003023/07.
The investment portfolios may be market-linked
or policy based. Investors rights and
obligations are set out in the relevant
contracts. Market fluctuations and changes in
rates of exchange or taxation may have an effect
on the value, price or income of investments.
Since the performance of financial markets
fluctuates, an investor may not get back the full
amount invested. Past performance is not
necessarily a guide to future investment
performance. Personal trading by staff is
restricted to ensure that there is no conflict of
interest. All directors and those staff who are
likely to have access to price sensitive and
unpublished information in relation to the Old
Mutual Group are further restricted in their
dealings in Old Mutual shares. All employees of
Old Mutual Investment Group are remunerated with
salaries and standard short-term and long-term
incentives. No commission or incentives are paid
by Old Mutual Investment Group to any persons.
All inter-group transactions are done on an arms
lengths basis. In respect of pooled, life
wrapped products, the underlying assets are owned
by Old Mutual Life Assurance Company (South
Africa) Limited who may elect to exercise any
votes on these underlying assets independently of
Old Mutual Investment Group. In respect of
these products, no fees or charges will be
deducted if the policy is terminated within the
first 30 days. Returns on these products depend
on the performance of the underlying assets. Old
Mutual Investment Group has comprehensive crime
and professional indemnity insurance. For more
detail, as well as for information on how to
contact us and on how to access information
please visit www.omigsa.com.
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