Equipping clients to deal with turbulent times

1. Equipping clients to deal with turbulent times October 2008

2. Overview Nobody knows for certain what will happen in the short term. Share prices will go up and come down. However, we have much greater clarity over what will happen in the long term - investments in shares have been and will continue to be a key component of wealth creation. Whilst there is much turmoil and bad news, such scenarios often present opportunities for patient and sensible investors. It is therefore important to stick to your strategy and not be distracted by emotion. 2

3. Purpose • To provide some background to the crisis and how it impacts clients • To help clients understand the credit crisis within a longer-term context • To explore common investor mistakes and help clients avoid these • To assist clients to develop sustainable strategies for long-term wealth creation 3

4. Citigroup & Merrill Lynch have huge write-downs Bear Stearns Hedge Fund Bail-out US Home Prices in Freefall UBS & Morgan Stanley have further write- downs UBS Shows Strain US Housing Bubble Bursts Barclays & Fortis make further write-downs Northern Rock Bail-out Freddie Mac Refinances BNP Paribas Fund Failures Northern Rock is nationalised Barclays writes down bad loans UBS Chairman resigns Old Mutual & Freddie Mac announce losses Bear Stearns, Lehman Brothers & Merrill Lynch in lots more trouble Bear Stearns announces sale to JP Morgan IndyMac Collapses Lehman Brothers declares bankruptcy & Merrill Lynch to be sold US Congress rejects $700bn bailout plan Source: I-Net, FM Timeline of the crisis 4

5. Causes of the crisis • Inappropriate loans made to high-risk borrowers • Repackaging of these loans & selling them to investors searching for yield • Excessive leverage of the investment banks • Poor understanding of risks by credit rating agencies • Lack of transparency and poor regulation ... all relied on house price’s continued increase (which began falling last year) 5

6. Impact on SA companies • Low direct exposure to sub-prime • SA banks relatively unscathed as a result of • Exchange controls • Tougher monetary policy (higher interest rates) • Legislation (National Credit Act) • Indirect impact potentially much greater • Slower economic growth • Lower exports • Falling commodity prices • Negative sentiment 6

7. What should you do? • Educate yourself – understand the facts • Focus on what you can control • Your objectives • The time horizon to achieve these objectives • Your strategy • The risk you need to accept to achieve your goals (and whether you can tolerate this risk) • Employ experts to assist in decision making Develop a sound financial plan 7

8. Understanding the investment realities • Fact 1 – Recent returns in context • Fact 2 – Unrealistic expectations • Fact 3 – Risk & return are related • Fact 4 – Diversification adds value • Fact 5 – Time is your friend • Fact 6 – Maintain your strategy 8

9. Fact 1 – Recent returns in context • Short-term returns have been poor across most asset classes • Longer-term returns (5 years and longer) remain acceptable 9

10. Global equity returns Source: I-Net 10

11. SA sector and commodity returns Source: I-Net Source: I-Net 11

12. Fact 2 – Unrealistic expectations • Recent returns (last 5 years) have been extraordinarily good and are well above long-term averages • Historical returns above inflation over the last 100 years – and a reasonable proxy of what expectations should be - are as follows: 12

13. 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 -10% -20% -30% Long-term average 1 Year Return Source: I-Net Recent SA equity returns have been significantly above long-term averages 13

14. Fact 3 – Risk & return are related • Over the long-term equities have significantly outperformed cash, bonds and inflation ... but have done so with greater risk • Over longer periods of time, cash may actually be a more risky asset class (in terms of the probability of achieving your objectives) than equities 14

15. The importance of equities in a growth portfolio 15

16. Corrections are a normal part of market behaviour 16

17. Nominal Nominal Return 2/3 Return 2/3 Return 2/3 Return 2/3 Volatility Volatility return return of the time of the time of the time of the time % % - 1 year - 20 years % % – 1 year – 20 years Low risk: Low risk: 6 6 2 2 3 to 9 3 to 9 5 to 7 5 to 7 cash asset cash asset High risk: High - risk: 12 12 20 20 21 to 45 - - 21 to 45 5 to 19 5 to 19 equity asset equity asset Source: Triumph of the Optimists & Nedgroup Investments Equity risk reduces over time Over the long-term cash may be regarded as the more risky asset (i.e. less chance of achieving your objectives) - don’t be recklessly conservative! 17

18. Fact 4 – Diversification adds value • By diversifying your investments across asset classes, currencies, sectors and stocks you are able to reduce the risk of the portfolio 18

19. Best Worst Diversification adds value It is difficult to select the top performing asset class each year but a diversified portfolio can help to mitigate risk 19

20. Fact 5 – Time is your friend • The longer the investment horizon, the greater the reduction in risk • Be careful of trying to time the market - a comprehensive study done by the University of Michigan over an 80-year period showed that investors consistently earn lower rates of return by switching between funds at the wrong time (up to 5% p.a.) • Being out of the market is risky. For the 10 years to 30 September 2008, the ALSI returned 432%. If you missed the best 10 days your return halved 20

21. Equity market returns analysed since 1960 Long Term Average Variability of returns decrease with time 21

22. return return Wow Wow – – told you told you Wow Wow – – told you told you 16 16 so, this is great! so, this is great! so, this is great! so, this is great! Markets have their Markets have their ups and downs ups and downs – – this is just part of the this is just part of the cycle. cycle. We have never seen We have never seen Can Can ’ ’ t get out now I t get out now I market performance market performance We have never seen We have never seen have lost too much have lost too much such as this such as this – – I must I must market performance market performance money! money! get a piece of the get a piece of the such as this such as this – – I must I must action. action. get a piece of the get a piece of the action. action. This just keeps getting Yes things are Yes things are worse worse – – my portfolio is my portfolio is looking better but looking better but worth so little now worth so little now look what happened look what happened might as well just sell might as well just sell last time! last time! Told you so! Told you so! out out – – cut my losses. cut my losses. time time Being human destroys value 22

23. The effect of missing the best days of the market over a 10 year period 23

24. Fact 6 – Maintain your strategy • After market corrections it pays to stay invested, as subsequent returns are often good • There is a significant opportunity cost of moving into cash for long-term investors 24

25. 45% 40% 35% 30% 25% Annualised Return 20% 15% 10% 5% 0% 1 year 3 years 5 years Subsequent Returns Market returns after a significant decline Average annualised returns after a sudden market drop of 30% or more 25

26. Fund value after moving into cash Disinvesting after a crash In the long-run investors sacrifice future growth by moving into cash 26

27. What should you do? • Educate yourself – understand the facts • Focus on what you can control • Your objectives • The time horizon to achieve these objectives • Your strategy • The risk you need to accept to achieve your goals (and whether you can tolerate this risk) • Employ experts to assist in decision making Develop a sound financial plan 27

28. Wise words “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or insider information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” Warren Buffett “To buy when others are desperately selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate dividends” Sir John Templeton “The psychology of the speculator mitigates strongly against his success. By relation of cause and effect he is most optimistic when prices are highest and most despondent when they are at the bottom.” Benjamin Graham 28