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If you're not confused, you're not paying attention. - Tom Peters

Investment Options: Cornelius Schoonees Business Development Actuary, Absolute Return Investments “How to get downside protection in uncertain markets – without missing the upside”. If you're not confused, you're not paying attention. - Tom Peters.

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If you're not confused, you're not paying attention. - Tom Peters

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  1. Investment Options: Cornelius SchooneesBusiness Development Actuary, Absolute Return Investments“How 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. 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 Why uncertainty matters

  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% Capital Builder units: 1.01 1.03 1.02 1.01 0.99 0.99 1.00 0.99 1.00 1.03 10.1 1.21 1.46 1.70 1.71 1.73 1.86 2.17 1.94 Top40 units: 1.05 1.19 16.0 Source: OMIGSA

  7. 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 Resulting in longer time to recover Note: Calculation based on continuous compounding and recovery time rounded to nearest year Source: OMIGSA

  8. 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 How to deal with uncertainty There are 5 key steps...

  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 Capital Builder RETURN 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. 10% Quarterly Returns 8.5 Cash 8% 6% 4.9 4.1 GROSS RETURN PER QUARTER 4.0 4.0 4% 3.0 2.9 2.8 2.9 2.9 2.7 2.7 2.6 2.4 2.2 2.2 2.1 2.1 1.9 1.7 1.5 1.5 2% 1.0 0.7 0% -0.4 -0.8 -2% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Capital BuilderPerformance history since inception • Aims for quarterly capital protection (Dec 05, Jan, Feb 06) TAX QUARTERS (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 positive monthly returns Avg negative 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 Capital Builder RETURN 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 Proportion of total return Applicabletax rate Proportion of total return Applicabletax rate 1. Interest 19% 40% 100% 40% 2. Dividends 17% 0% 3. Capital Gains 64% 10% 100% 100% Effective tax rate(ignoring tax deferral) 14% 40% Source: OMIGSA

  22. Capital BuilderIllustration of returns net of fees and net of tax 11.7% pa1 Fees = 1.4%3 untaxedinvestor Tax = 1.4%(tax rate = 14.0%) 40% taxedinvestor 1.1% 9.2% pa2 Tax = 3.7% (tax rate = 40%) 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 + 3%pa over 3 year rolling period • Tax efficient return compared to cash and money market

  24. 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 Capital protection is important

  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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