“importance of asset allocation in a low yield environment” – element investments
TRANSCRIPT
Senate Group
The importance of asset allocation in the current low yield environment
René Prinsloo – Portfolio Manager Jeléze Hattingh – Portfolio Manager
14 March 2013
René Prinsloo Portfolio Manager
8 years’ industry experience
B Sc Hons (Act Sci)
Lecturer at Stellenbosch University
Glacier, Investment Analyst
FFA - Actuary
CFA
Joined Element in November 2007
Appointed Portfolio Manager in June 2012
2
Agenda
The Importance of Asset Allocation
Overview of the Current Low Yield Environment
Element Real Income Fund
Impact of Asset Allocation decisions on Performance
Current Asset Allocation
Macro factors affecting portfolio positioning
3
The Importance of Asset Allocation
Asset Allocation: The most important decision?
One way of breaking down the performance of a balanced fund:
Asset classes exposed to over a period (strategic AA)
Switches between asset classes over period (tactical AA)
Instruments held in portfolio
Switches between instruments
Secondary considerations:
Fees, taxes, etc.
5
“Stock Picking”
“Asset Allocation”
Reasons why AA may be most important
1. Law of large numbers
6
Law of large numbers
In layman’s terms:
The more (independent) bets I take, the more certain the
combined outcome
7
Gambling example
Venetian Macao:
Largest Casino in the world
3400 slot machines
800 gambling tables
8
Golden Valley Casino, Worcester
One of the smaller casinos in Sun
International’s stable
220 slot machines
6 gambling tables
Which of these two is a better business?
Gambling example
With 800 gambling tables, this casino is likely to make a steady profit every night
Should experience very little change in profit margin from one night to the next
Lots of independent bets => certain outcome
9
Gambling example
Small casino example:
Some nights the casino will make a large (compared to what was gambled) profit
and on other nights a large loss
Difficult to say if the casino will make or lose money on any given night
10
Insurance example
11
If you had to provide life insurance to one of these two crowds,
which would you choose?
As a life insurer:
The more people you insure, the less your uncertainty
Statistically, this type of outcome has a variance that is proportional to
1 ÷ √n
Investment example
Consider the following examples:
A manager of an equity fund who chooses between 100 stocks:
Assume 60% of his choices are good
He will likely have a steady, consistent outperformance of the
benchmark
A manager of a balanced fund chooses between 6 asset classes
Assume he also makes the right decision 60% of the time
Out or under-performance of benchmark likely to vary much
more
Bottom line: Asset allocation is a choice between few
alternative asset classes, so NB to get choice right
12
Reasons why AA may be most important
1. Law of large numbers
2. Performance between asset classes is more different than
performance within asset classes
13
14
Average Correlation: 6%
0%
-50%
-100%
100%
50%
Correlations between asset classes
SA
Equities
SA
Property
SA
BondsSA Cash
Foreign
Balanced*
SA Equities 100% 28% 2% -19% 38%
SA Property 28% 100% 61% -3% -18%
SA Bonds 2% 61% 100% 13% -30%
SA Cash -19% -3% 13% 100% -16%
Foreign Balanced* 38% -18% -30% -16% 100%
Asset Class Correlations, Monthly, 2000 to 2012
Correlations within equity market
Considered all All Share Index constituents that were listed in
2000 (105 in total)
Correlation with the All Share Index:
Average: 39%, Max: 84%, Min: 4%
15
0%
-50%
-100%
100%
50%
ANGLO 84% IMPERIAL 51% CITYLDG 40% GFIELDS 36% GROWPNT 26%
BHPBILL 78% NASPERS-N- 51% ALTRON 39% FAMBRANDS 35% SHOPRIT 26%
IMPLATS 73% PERGRIN 51% MVELA GRP 39% JDGROUP 34% ADCORP 25%
AMPLATS 73% SANLAM 51% PINNACLE 39% SUPRGRP 34% FPT 24%
SABMILLER 64% ALTRON PP 49% SANTAM 39% PPC 34% SENTULA 23%
LONMIN 64% GRINDROD 49% TFG 38% BELL 34% RAINBOW 23%
OLDMUTUAL 61% AECI 48% LIBHOLD 38% DISCOVERY 33% SA CORP 23%
ARI 60% ILLOVO 47% ASSORE 38% WBHO 32% CERAMIC 23%
BARWORLD 60% MMI-HLDGS 46% NEDBANK 38% ALTECH 32% PETMIN 22%
NORTHAM 60% CAPSHOP 45% AFROX 37% OMNIA 31% SYCOM 20%
SASOL 60% WOOLIES 44% AVI 37% MR PRICE 31% CAPITAL 20%
SAPPI 58% ABSA 44% M&RHLD 37% MEDCLIN 30% EOH 20%
INVPLC 57% MTNGROUP 44% AFGRI 37% SPURCORP 29% CASHBIL 17%
STEINHOFF 56% SUNINT 43% HUDACO 37% PICKNPAY 29% KGMEDIA 16%
DATATEC 55% ANGGOLD 43% NAMPAK 37% TRUWTHS 28% HYPROP 16%
INVLTD 55% AVENG 42% PSG 37% ASPEN 28% PREMIUM 14%
MERAFE 55% REUNERT 41% GROUP5 36% BASREAD 27% OCTODEC 14%
BIDVEST 54% BRAIT 41% TRENCOR 36% METAIR 27% HCI 14%
STANBANK 52% CLICKS 41% HARMONY 36% DAWN 27% OCEANA 12%
RMBH 52% ADVTECH 40% ABIL 36% DRDGOLD 27% KAP 11%
FIRSTRAND 51% PALAMIN 40% NETCARE 36% INVICTA 26% BRIMSTN-N- 4%
Correlation with Alsi, 2000 to 2012
Performance between asset classes is more different than performance within asset classes
16
In bull markets:
Most equities should rise
Not immediately obvious how other
asset classes will perform
Decision to be in equities is more
important than which equities to
be in
In bear markets:
Most equities should fall
Not immediately obvious how other
asset classes will perform
Decision to avoid equities is more
important than which equities to
avoid
Reasons why AA may be most important
1. Law of large numbers
2. Performance between asset classes is more different than
performance within asset classes
3. Conforms with intuition
17
The intuitive reason
18
Over some periods asset classes give very similar returns
Here stock picking will be of greater importance
Over other periods asset classes give very different returns
Here asset allocation will be more important
The intuitive reason
19
Asset classes, however, rarely have the same volatility
So if you are looking at both risk and returns at the same
time, different asset classes almost always deliver different
outcomes
Reasons why AA may be most important
1. Law of large numbers
2. Performance between asset classes is more different than
performance within asset classes
3. Conforms with intuition
4. Impact of asset allocation decisions can be material
20
Value of R100 invested in 1960 in 2012
21
What impact could asset allocation have had?
22
Asset Allocation: Margin for error is small
23
Reasons why AA may be most important
1. Law of large numbers
2. Performance between asset classes is more different than
performance within asset classes
3. Conforms with intuition
4. Impact of asset allocation decisions can be material
5. Illustration by way of a simple example
24
By way of an example
Here we look at the period between June 2002 and June 2012
We consider the return and risk of a standard balanced fund over that time,
invested as follows:
50% SA Equities
10% SA Property
15% SA Bonds
10% SA Cash
10% Offshore Equities
2.5% Offshore Bonds
2.5% Offshore Cash
We use standard benchmarks (e.g. FTSE/JSE All Share Index) to calculate
returns
We compare this standard balanced fund with what would have been achieved
by:
Altering the asset allocation
Having been able to choose the best manager for a specific asset class
25
By way of an example
SA Equities: 50% -> 60%
26
SA Equities: ALSI -> Best Manager SA Equities: 50% -> 40% SA Equities: ALSI -> Worst Manager
SA Property: 10% -> 20% SA Property: 10% -> 0% SA Property: Index -> Best Manager SA Property: Index -> Worst Manager
SA Bonds: 15% -> 25% SA Bonds: 15% -> 5% SA Bonds: Index -> Best Manager SA Bonds: Index -> Worst Manager SA Cash: 10% -> 20% SA Cash: 10% -> 0% SA Cash: Index -> Best Manager SA Cash: Index -> Worst Manager Foreign Equities: 10% -> 20% Foreign Equities: 10% -> 0% Foreign Equities: Index -> Best Manager Foreign Equities: Index -> Worst Manager
Foreign Bonds: 2.5% -> 12.5% Foreign Bonds: 2.5% -> 0% Foreign Bonds: Index -> Best Manager Foreign Bonds: Index -> Worst Manager
Foreign Cash: 2.5% -> 12.5% Foreign Cash: 2.5% -> 0% Foreign Cash: Index -> Best Manager Foreign Cash: Index -> Worst Manager
Reasons why AA may be most important
1. Law of large numbers
2. Performance between asset classes is more different than
performance within asset classes
3. Conforms with intuition
4. Impact of asset allocation decisions can be material
5. Illustration by way of a simple example
6. Academic studies generally suggest that this is the case
27
Academic studies on the topic
“Determinants of Portfolio Performance” (& follow up), Brinson, Randolph
and Beebower, 1986
Effectively concluded that Strategic AA explains 94% of all
“Total Return Variation”, i.e. short-term performance
movements
“Does asset allocation policy explain 40, 90 or 100 percent of
performance?”, Ibbotson and Kaplan, 2000
Findings:
Explains 90% of short-term price movements
About 40% of the differences of fund performance over
long periods of time can be explained by this
It also explains about 100% of the level of fund
performance
28
Bottom line
When you control the asset allocation:
The choice of how much you invest in equities and
bonds is more important than choosing a equity
manager and a bond manager
Make the choice carefully as the outcome can be either very
good or bad
When your fund manager makes the asset allocation decision:
It is important that he gets it right, as it is likely the most
important investment decision!
So choose balanced fund managers carefully
29
Overview of the current low
yield environment
Jeleze Hattingh Portfolio Manager
M Sc (Cum Laude), CFA, CMT
Business Mathematics and Information
Quantitative Risk Management
8 years’ experience in financial services
Allan Gray Ltd – Fixed Interest
Credit Suisse and Deloitte Consulting (UK) – Risk Management
Standard Bank (SA) – Risk Management
Joined Element in May 2010
Appointed Portfolio Manager in June 2012
31
SA’s nominal yields back to the 1970s lows
32 Source: Element Investment Managers Research, I-Net, 8 March 2013
FRA Market no longer expecting rate cut
33 Source: I-Net, Element Investment Managers Research, 8 March 2013
6.50
6.70
6.90
7.10
7.30
7.50
7.70
7.90
8.10
8.30
8.50
-20,000
-10,000
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
01Jan12
16Jan12
31Jan12
15Feb12
01M
ar1
2
16M
ar1
2
31M
ar1
2
15Apr1
2
30Apr1
2
15M
ay12
30M
ay12
14Jun12
29Jun12
14Jul1
2
29Jul1
2
13Aug12
28Aug12
12Sep12
27Sep12
12O
ct1
2
27O
ct1
2
11N
ov12
26N
ov12
11D
ec12
26D
ec12
10Jan13
25Jan13
09Feb13
24Feb13
Cumulative Foreign Flows since Jan 2012 (R'm) vs ALBI YTM
Cumulative Foreign Bond Flows Cumulative Foreign Equity Flows ALBI YTM
Foreign Flows – can they continue?
34
WGBI announcement
Foreigners buy R64bn bonds
Marikana
Q2 CA Deficit disappoints
Moody’s downgrade
WGBI Inclusion
S&P Downgrade
Fitch Downgrade
3 downgrades, still net inflows
Source: Element Investment Managers Research, I-Net, 28 February 2013
0
5
10
15
20
25
30
35
40
45
50
55
60
65
Deb
t as a
% o
f G
DP
South Africa: Debt as a % of GDP
Net debt as % of GDP Total debt (net debt + provisions + contingent liabilities) as % of GDP
SA Debt-to-GDP deteriorating…
35
0
5
10
15
20
25
30
35
40
45
50
55
60
65
Deb
t as a
% o
f G
DP
South Africa: Debt as a % of GDP
Net debt as % of GDP Total debt (net debt + provisions + contingent liabilities) as % of GDP
Source: National Treasury, RenCap, Element Investment Managers. Updated 27 February 2013
And SA also deteriorates against peers
36
Source: National Treasury, 2013 Budget Review. Updated 27 February 2013
“downgrade South Africa and upgrade Malaysia…(SA) appears to
have lost its safe haven status, as the mining crisis and weak consumer
credit threaten the pace of economic growth. Furthermore, the ZAR is
under pressure from twin deficits. The South African market is fully
valued …we do not think it is too late to sell the market.”
~ UBS Global EM Strategy Team – 12 March 2013
SA bonds relatively unattractive post FX hedge
37
Source: UBS Research, 6 March 2013
Majority of foreign bond inflows at stronger ZAR
38
Source: UBS Research, 6 March 2013
Is a repeat of 2012’s performance possible?
39 Source: Standard Bank Research, March 2013
Higher yields = negative capital growth
40 Source: Element Investment Managers, February 2013
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Mar-
01
Jul-
01
Nov-0
1
Mar-
02
Jul-
02
Nov-0
2
Mar-
03
Jul-
03
Nov-0
3
Mar-
04
Jul-
04
Nov-0
4
Mar-
05
Jul-
05
Nov-0
5
Mar-
06
Jul-
06
Nov-0
6
Mar-
07
Jul-
07
Nov-0
7
Mar-
08
Jul-
08
Nov-0
8
Mar-
09
Jul-
09
Nov-0
9
Mar-
10
Jul-
10
Nov-1
0
Mar-
11
Jul-
11
Nov-1
1
Mar-
12
Jul-
12
Nov-1
2
Rolling 12m ALBI TR Decomposition
Income Return Capital Growth Total Return
41 Source: I-Net, Element Investment Managers Research, 8 March 2013.
13y avg real yield = 3.4%
Real yields are at record lows in SA
ILBs: Further potential re-rating limited
42 Source: Element Investment Managers, March 2013
Real GDP expectations: 2013: 2.7% 2014: 3.5% 2015: 3.8%
R189
R211
R212R197
I2025R210
R202
ABLI03
FRS46
IV019ABLSI1IV030
DIAFFA
HPA
SGA
AWA
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
0 2 4 6 8 10 12 14 16 18
Re
al Y
ield
Modified Duration
Real Yields: ILBs vs Property Dual Listed A-Shares
Gov ILBs Element ILB Property A-units
Difficult to beat CPI + 3%-7% targets
43 Source: Element Investment Managers Research, 8 March 2013.
CPI + 3%-7% will be a difficult target to beat in the short to medium-term with conventional inflation protection ILBs.
Dual Listed Property Shares:
• A-listed shares with “guaranteed” max 5%
or CPI distribution growth
• Income protection via preferred pay out structure
• Real spread pick-up between 5.5% - 7% above gov ILBs
“New” CPI + targets
Real yields are abnormally low due to global QE and loose monetary policies
This means that the domestic historical real risk free rate of 2% - 2.5% has
reduced to below 1%
Equities have also re-rated as a result of QE
Similarly, projected real returns are around a percentage point
lower than long-term averages
Implications:
A portfolio of assets that returned CPI + x% over the long term is more
likely to return CPI + x% - 1% going forward
I.e. to get CPI + x% you would now need to take more risk
44
Nominal expected return for equities
45
Currently 9.5% p.a. for 5y in nominal terms I.e. inflation + 3.5% assuming 6% inflation
Source: Element Investment Managers Research, February 2013
Element Real Income Fund
Inception (30 November 2002) to 28 February 2013 Benchmark CPI + 3% Current Fund Size R309,2m
Performance – Real Income Fund
As at 28 February 2013 Element Real Income Fund
Benchmark CPI + 3%
Relative
Annualised since Inception 11.7% 8.6% 3.1%
Annualised 10 Year 12.0% 8.6% 3.4%
Annualised 7 Year 8.2% 9.3% -1.1%
Annualised 5 Year 7.1% 8.9% -1.8%
Annualised 3 Year 10.0% 8.2% 1.8%
1 Year 15.1% 8.7% 6.4%
YTD 3.1% 1.6% 1.5%
Real Income: Performance & Risk
Performance Ranking* Ranking Quartile
Over 10 years 3/5 3rd
Over 7 years 6/7 4th
Over 5 years 15/17 4th
Over 3 years 11/22 2nd
Over 1 year 7/28 1st
Risk Stats over 3 years* Ranking Quartile
Sortino 8/22 2nd
Sharpe 12/22 3rd
Maximum drawdown 2/22 1st
*Comparing Real Income Fund to the Multi Asset - Low Equity Funds with a track record for the history under review (excludes Fund of Funds)
At 28 February 2013
Prudential Inflation Plus
Coronation Balanced Defensive
Nedgroup Investments Stable
Personal Trust Conservative Managed
STANLIB Balanced Cautious JM Busha MET Real Return PortfolioOld Mutual Real IncomeAbsa Absolute
Old Mutual Stable Growth
Momentum ConservativeElement Real IncomeGrindrod EnduranceLion of Africa MET Real Return CPI Plus
5 MiPlan IP Inflation Plus 3Absa Inflation BeaterAtlantic Real Income
Investec Cautious Managed
Allan Gray StableContego B2 MET Protected Income
Prescient Income Provider1
Old Mutual Capital Builder
Allan Gray Optimal
BM: CPI+3%
4%
6%
8%
10%
12%
14%
16%
1 2 3 4 5 6
An
nu
alised
Retu
rn
Risk(Annualised Standard Deviation)
Risk-Return for Multi-Asset Low Equity Peer GroupData for the 3 years ending February 2013
- Bubble size represents relative current Fund size
- Includes all funds in ASISA Multi-Asset Low Equity Group (excl. FoF).
- Benchmark = CPI+3%. Bubble size is the average Fund size of the Peer Group, with the average Annualised Standard Deviation.
*Comparing Element Real Income Fund to the Multi Asset - Low Equity Funds (excluding FoF)
Benchmark: CPI+3% = 8.2%
3 Year Performance to Feb’13: AA Low Equity
Source: Morningstar Research, Element Investment Managers, March 2013.
Source: Alexander Forbes Asset Consultants, January 2013
Value/Contrarian style out of favour
50
3 Year Performance to Jan’13: Active Managers
51
Value/Contrarian style in favour
*Note: In August 2009 the company name was changed from Fraters Asset Management to Element Investment Managers.
3 Year Performance to Feb’09: Active Managers
Source: Alexander Forbes Asset Consultants, February 2009
Asset Allocation Funds Investment Process
Balanced Funds
Equity Income Foreign
Bonds ILBs FRNs/ Cash Property
Credit Duration Curve Shape Liquidity
Asset Allocation
Income Allocation
Security Selection
Prefs
Implementation
52
Asset Allocation – Real Income Fund
At 28 February 2013
Retailers’ bull run looks unsustainable
54 Source: Reuters, 8 March 2013
Sun International & Shoprite: Earnings per Share
55
June Year ends: 2011: SUI (504cps)*, SHP (508cps) 2012: SUI (606cps)*, SHP (607cps) 1H13: SUI (720cps)*, SHP (642cps) => both companies earned exactly the same the previous 2 years, with SUI earning 12% more in the last 6 months.
* Adjusted HEPS < HEPS in graph
Source: I-Net, 12 March 2013
56
Yet Shoprite’s share price is 67% higher than Sun International’s - despite both companies earning the same for the previous 2
years, and SUI earning more in the last 6months!
Source: I-Net, 12 March 2013
Sun International & Shoprite: Share Prices
Material relative valuation differentials = opportunity
Further drill down into non-equity holdings
57
Non-Equity Asset Class % of Non-Equity % of Fund
Preference Shares 6 4
MMkt incl. Cash 10 6
Floating Rate Notes 36 24
Total Bonds 22 14
Nominal Bonds 8 5
Hedged Foreign Bonds 2 1
Net Long Foreign Bonds 13 8
ILBs 10 6
Listed Property 17 11
Total 100 66
At 28 February 2013 Holdings for Element Real Income Fund
Active management of Foreign Cash
Active management of foreign income is a material differentiator
Leverage internal knowledge of domestic companies that issue
in foreign currencies to enhance yield.
Have the option to hedge out currency risk depending on the
underlying exposure
58
Code Issuer % of
foreign income
Currency Exposure Currency
TRR* TRR* of
ALBI YTM Maturity
ABLSJ6 African Bank 7% USD USD 48% 21% 5.3% Jun 16
OLDMUT5 Old Mutual 35% EUR USD 28% 15% 7.8% Perpetual
AQPAU15 Aquarius Platinum
17% USD USD 54% 4% 11.2% Dec 15
EDCONF614 Edcon
Holdings 18% EUR USD 13% 4% 3.9% Jun 14
EDC615 Edcon
Holdings 9% EUR USD 16% 4% 10.9% Jun 15
RIN Redefine
International 14% GBP GBP 27% 3% DY: 10% N/A
100%
* TRR in ZAR, since date of first purchase (not annualised). At 28 February 2013
The cyclicality of investor emotions…
59
Richemont SABMiller
Platinum/Gold shares Resources
Retailers
… as applied to the S&P 500 index
60 Source: Advisor Perspectives Inc., 15 February 2013
US markets: The illusion of improvement Macro Statistic October 2007 March 2013
Dow Jones Industrial Average 14164.5 14164.5
Regular Gas Price $2.75 $3.73
GDP Growth +2.5% +1.6%
Americans Unemployed (in Labour Force) 6.7m 13.2m
Americans on Food Stamps 26.9 million 47.69 million
Size of Fed’s Balance Sheet $0.89 trillion $3.01 trillion
US Debt as a Percentage of GDP ~38% 74.2%
US Deficit (LTM) $97 billion $975 billion
Total US Debt Outstanding $9.008 trillion $16.43 trillion
US Household Debt $13.5 trillion $12.87 trillion
Labour Force Participation Rate 65.8% 63.6%
Consumer Confidence 99.5 69.6
S&P Rating of the US AAA AA+
VIX 17.5% 14%
10 Year Treasury Yield 4.64% 1.89%
USD JPY 117 93
EUR USD 1.4145 1.3050
Gold $748 $1583
NYSE Average LTM Volume (per day) 1.3 billion shares 545 million shares
Source: Morgan Stanley, 7 March 2013
SA Asset classes - 15 year bull markets!
Source: I-Net, 8 March 2013
62
Bond yields down 67%!
ALSI up 13 times!
Conclusion
Asset allocation is probably the most important investment decision
Despite poor equity performance (stock selection) over the last 3 years, the Element Real
Income Fund still outperformed due to our Asset Allocation decisions.
Global and local equity markets do not look cheap
Propped up by low interest rates, fiscal deficits and high asset prices – a combination unlikely
to be sustainable
We remain cautiously positioned
Both within asset allocation and within equities
Historical underperformers are trading at levels from where they usually outperform
significantly
Material relative valuation differentials = opportunity
Risks to the downside have increased and are not yet reflected in prices
63
“Probably the biggest unknown is what happens when interest
rates normalize… bond markets are so finely priced that the fallout
could be very violent for equities.” ~ Ian MacFarlane – BCA Global Asset Allocation – CFA Institute – March 2013
Disclaimer
Element Investment Managers claims compliance with the Global
Investment Performance Standards (GIPS®). The firm includes all
portfolios managed by Element Investment Managers. Element
Investment Managers is an independent, owner-managed company. It
provides discretionary investment management services to retail and
institutional clients.
Element Investment Managers has been verified for the period:
1 January 2003 to 31 December 2011
Copies of our verification reports are available on request.
A complete list and description of our composites is available by
contacting Ian Jones at:
+27 21 426 1313 or at [email protected]
64
Thank you
www.elementim.co.za
Contacts: Mandates: [email protected] Portfolio Management: [email protected] [email protected] CC: [email protected]
But can the DM’s negative shift be sustained?
66
Source: Carmen Reinhart, January 2013
Globally is the same negative real yield story
67 Source: Inet, Element Investment Managers Research, March 2013
Global debt problems have not gone away!
Reinhart & Rogoff
Greece target for 2020! Current risk
Next big risk
68
Debt-to-GDP world map - 2011
69
Source: Wikipedia, CIA Fact book. Data till end 2011.
Dark green shows very low levels of debt, dark red / black shows very high levels of debt.
Asia / EM’s improving
Our own study Defining the problem:
If I am investing my money for some future period (e.g. 5
years)
And I am concerned with both the total return of my
investment as well as short term movements (i.e. volatility
of my investment)
Should I focus more time and energy on “stock picking” or
“asset allocation”?
70
Our own study Details:
Looked at 10 balanced funds between 1998 and 2012
These funds were all managed by 10 different asset management
houses
Asset allocation data came from ASISA’s quarterly fund category
statistics
Performance data came from MoneyMate
For every balanced fund:
We calculated an “shadow fund”
This is a fund with identical asset class exposure
But where each asset class is invested in the asset class benchmark
E.g. if the balanced fund was 60% invested in its own equities and
40% in its own bonds
The shadow fund would be 60% in the Alsi and 40% in the Albi
71
Our own study
72
Details (continued):
Every shadow fund:
Has completely different stock picking than the balanced
fund it tracks
But the exact same asset allocation
By looking at the similarity of outcomes we can judge how
important asset allocation was
We can compare that to the similarity between the
manager’s balanced fund and other funds
This will show how important stock picking was
Our own study – 1st example
73
Our own study – 2nd example
74
Our own study Findings:
In 10/10 cases the shadow-fund predicted the risk
and return better than the manager’s instrument
selection
I.e. in 10 out of 10 cases asset allocation was “more
important” than “stock picking”
If you focus on both the return as well as the risk of the
investment outcome
75
Bottom line
It is important to remember that something that happened in the
past is not guaranteed to happen in future
However we think it is highly likely that asset allocation will
continue to be the most important investment decision investors
face
76
SA now 52nd (144) in Global Competitiveness The positives? Rank
Auditing standards (1)
Efficacy of corporate boards (1)
Protection of minorities (2)
Regulation of securities exchange (1)
Legal rights index (1)
Largely driven by private sector efforts
The negatives?
Corruption (110)
Burden of government regulation (123)
Business costs: Crime and violence (134)
Health: Tuberculosis (143)
Life expectancy (133)
Co-operation: Labour-employer (144)
Hiring & firing (143)
Pay and productivity (134)
77
Highlights long-term structural trends in SA that will impact SA’s ability to
compete globally.
Education: Quality of primary education SA: 132/144, ZIM: 63/144 Quality of education system SA:140/144, ZIM: 30/144 Quality of Maths/Science SA: 143/144, ZIM: 50/144
Source: World Economic Forum Global Competitiveness Report 2012-2013 (Sept 2012)
Primary responsibility lies with government
ESG research incorporated into investment process since 2001 As per UN PRI (2006), CRISA (2012)
Environmental Carbon Disclosure Project (CDP)
Signatory investor since 2007
Water research in Mining sector
Social Mining Industry
Skills, Safety, HIV/AIDS & Silicosis
Governance Voting record disclosed since 2001*
Voting & Proxy Policy available since 2001*
Material board engagements
(e.g. Nampak, AngloGold, Gold Fields, Lonmin, Freeworld)
We have an independent Advisory Board to guide Responsible
Investment
* First in SA - www.elementim.co.za/responsible-investment 78
Environmental, Social & Governance (ESG)