Presentation on theme: "Managing a Balanced Mandate Herman Steyn - Executive Chairman Prescient Investment Management March 2011."— Presentation transcript:
Managing a Balanced Mandate Herman Steyn - Executive Chairman Prescient Investment Management March 2011
Source: Alexander Forbes
What Defines Prescient Quantitative asset management vs. Qualitative Deliver through asset allocation (being in the right asset class at the right time). No company visits. No stock picking. Valuation driven Consider what is priced into market, rather than forecasting returns Risk focussed Quantify potential outcomes. Manage risk because we can measure it. Not diversifying but managing risk Focus on reduced risk and improved consistency by minimising losses in negative markets Maximise position for: Best upside in positive markets Internally driven Deep understanding of investment philosophy and results Long-term investors.
Prescient Process Enhancements Benchmark Risk limits Return opportunity Why are we different? QuantPlus®
Assets Under Management Retirement funds Medical aid funds Multi managers Corporate treasury Individual retirement savings Individual discretionary savings
Let us try to predict the markets!
SA Money Market Valuation Source: Reuters
Scenario Analysis Source: PIM
Bond Valuation Source: Reuters
SA Yield Curve Inflation Discounted Source: Reuters
Country Risk Premium Little Room for Error!
Foreigners Buying SA Bonds
US Bonds 0 2 4 6 8 10 12 14 16 18 Jan-72Jan-78Jan-84Jan-90Jan-96Jan-02Jan-08 US Bonds Japan Bonds
S & D Dynamics in the Bond Markets Holdings of US Treasuries Fed $ 1200 bn China $ 846 bn Japan $ 821 bn Current deficit = $1.5 tr p.a.
G7- Era of Negative Real Interest Rates Average G7 short tem real rates. Source: Reuters Average G7 short term real rates - 1.00 2.00 3.00 4.00 Feb-91Feb-92Feb-93Feb-94Feb-95Feb-96Feb-97Feb-98Feb-99Feb-00Feb-01Feb-02Feb-03Feb-04Feb-05 Feb-06Feb-07Feb-08Feb-09Feb-10
Credit Bonds and Swaps Source: Reuters
Interest Bearing Asset Summary Money market and short bonds discounting a resumption in i-rate hikes Reasonable value in SA bonds overall but supply is an issue Credit reasonable value at current levels ILBs remain expensive
Rand – Purchasing Power
Global Oil Supply Disruptions by Average Gross Supply
S&P / Case-Schiller Home Price Indices
What happens when the Fed stops buying? 70% ???
See the share of global foreign- exchange transactions involving the dollar, and the dollar's share of official global foreign-exchange reserves. The Dollar's reign is coming to an end.
Required Return to Retire
Must Hold Equity to Build Real Return Source: Prescient, FTSE/JSE, BESA 51 yrs 21 yrs 11 yrs 31 yrs 7 yrs 36 yrs
Source: Prescient, FTSE/JSE, BESA But … Protect Against Equity Volatility Credit Crunch IT Bubble Emerging Markets Crisis Early 90’s Recession 90’s Bull Market IT Bubble 2000’s Bull Market
What is Risk? Pleasure Pain LossProfit
What is Risk? Pleasure Pain LossProfit
Maybe there is a better way?
Risk Benchmark Minimum Return= No risk of capital loss over 12 months Performance Target CPI + 4% pa Maximise performance subject to minimum return requirement Fund Benchmarks
Consider the risk adjusted pricing of different assets Income Volatility Look at different strategies payoff profiles to determine optimal allocation Asset Allocation: Asset Pricing
Performance: Balanced QuantPlus ® Period Performances to end February 2011. Inception = January 2001
Decide on your investment objectives See what asset classes can deliver Decide on the volatility you can live with Look at your long term asset allocation Select the fund with that long term asset allocation Let the professionals manage it Balanced Funds
Taking the Emotion out of Investing
Quantitative investment style
Quantitative analysis relies on mathematical and statistical methods to develop and test theories against real-life streams of security price information. The purpose behind quantitative analysis is to create a mathematical model of market behaviour. That model is then used for designing portfolios and investment strategies. As markets become more efficient, through faster dissemination of market information and improved assimilation of market news into the market places, the more amenable they become to quantitative analysis. Quantitative Analysis
1.Developing accounting based models using databases and forecasts 2.Using the models to rank the stocks 3.Identifying attractive stocks 4.Applying fundamental analysis to determine which stocks to buy or sell There is no emphasis on risk. Qualitative portfolio managers believe that they add value by means of their judgement and forecasting ability. The qualitative approach uses models to provide quantitative input to the judgement process, as well as to understand what is happening in the companies and generate ideas. Qualitative Management Involves: