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1 Investment Options: Cornelius Schoonees Business Development Actuary, Absolute Return Investments How to get downside protection in uncertain markets.

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Presentation on theme: "1 Investment Options: Cornelius Schoonees Business Development Actuary, Absolute Return Investments How to get downside protection in uncertain markets."— Presentation transcript:

1 1 Investment Options: Cornelius Schoonees Business Development Actuary, Absolute Return Investments How to get downside protection in uncertain markets – without missing the upside

2 2 If you're not confused, you're not paying attention. - Tom Peters

3 3 Why uncertainty matters to the private investor How to deal with uncertainty An alternative to Money Market Funds Key messages Agenda

4 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 5 Withdrawals become bigger slices of savings WithdrawalNo. of units x Unit price= R1, x R1,000= 1.11 x R900= 1.25 x R800= 1.43 x R700=

6 6 Taking withdrawals amplifies market losses… Units redeemed for fixed monthly income Top40 units: Capital Builder units: Impact of market decline on unit price -39% Impact of market decline on number on units -7% Capital Builder TOP40 index Impact on unit price Impact on no. of units Source: OMIGSA

7 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 Rate of return Size of bear market downturn -10%-20%-30%-40%-50% 2%5 yrs11 yrs18 yrs26 yrs35 yrs 4%3 yrs6 yrs9 yrs13 yrs18 yrs 6%2 yrs4 yrs6 yrs9 yrs12 yrs 8%1 yrs3 yrs5 yrs7 yrs9 yrs 10%1 yrs2 yrs4 yrs5 yrs7 yrs Note: Calculation based on continuous compounding and recovery time rounded to nearest year Source: OMIGSA

8 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 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 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 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 12 An alternative to Money Market Funds

13 13 Risk Targets quarterly positive returns Targets Cash + 3% p.a. (gross) over rolling 3 year period Capital Builder Fund objectives Return

14 14 EXPECTED RETURNS High Low StableVolatile CONSISTENCY OF QUARTERLY RETURNS RISK RETURN Cash Absolute Return Funds Variable Income Capital Builder Balanced Funds Capital Builder Fund positioning

15 15 Invest in large cap shares (generally components of the Top 40 index) Tracking error to the TOP40 between 2% - 4% CASH + MONEY MARKET 25% Capital Builder Process - How the fund works PHYSICAL EQUITY 75% Base case

16 16 Physical equity is hedged with listed TOP40 put options Generally 1-year options are used and rolled quarterly to lock in gains CASH + MONEY MARKET 25% Capital Builder Process - How the fund works (continued) EFFECTIVE EQUITY 0-40% Base case CASH-EQUIVALENT HEDGED EQUITY 35-75%

17 17 Capital Builder Performance history since inception 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). Targets gross return of Cash + 3% over rolling 3 year period Dec-05Mar-06Jun-06Sep-06Dec-06Mar-07Jun-07Sep-07Dec-07Mar-08Jun-08Sep-08Dec-08Mar-09 Cash (9.2%) Cash + 3% Capital Builder (11.7%) Source: OMIGSA

18 18 Capital Builder Performance history since inception TAX QUARTERS(Dec 05, Jan, Feb 06)(Dec, Jan, Feb 09) Aims for quarterly capital protection 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 19 Capital Builder Performance history since inception Avg negative monthly returns Avg positive monthly returns 7.6% participation 41.7% participation Attractive non-linear pay-off profile Note: Split determined by equity market performance (-ve or +ve) Out-performed both cash & equities Participate more in equity upside, and less in equity downside Source: OMIGSA

20 20 EXPECTED RETURNS High Low StableVolatile CONSISTENCY OF QUARTERLY RETURNS RISK RETURN Cash Absolute Return Funds Variable Income Capital Builder Balanced Funds Capital Builder Tax efficiency tax

21 21 Capital Builder Example of effective tax rate for individuals COMPONENTS OF TOTAL RETURN 100%40%19% 17% 64% 40% 0% 10% 1. Interest 2. Dividends 3. Capital Gains Effective tax rate (ignoring tax deferral) Applicable tax rate EFFECTIVE TAX RATE ON CAPITAL BUILDER Applicable tax rate Proportion of total return EFFECTIVE TAX RATE ON CASH DEPOSIT 100% 40%14% Source: OMIGSA

22 22 Capital Builder Illustration of returns net of fees and net of tax Notes: 1.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) 2.Cash returns from Standard Bank Call deposit 3.Fees calculated as 0.9% + (15% of benchmark outperformance) + VAT 11.7% pa 1 9.2% pa 2 Capital BuilderCall deposit 40% taxed investor Fees = 1.4% 3 Tax = 3.7% (tax rate = 40%) Tax = 1.4% (tax rate = 14.0%) 8.9% pa 5.5% pa 1.1% untaxed investor 3.4%

23 23 Capital Builder Summary 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 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 25 Regulatory Information Old Mutual Investment Group (South Africa) (Pty) Limited Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405 Telephone number: 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 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


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