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Managing a Balanced Mandate Herman Steyn - Executive Chairman Prescient Investment Management March 2011.

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Presentation on theme: "Managing a Balanced Mandate Herman Steyn - Executive Chairman Prescient Investment Management March 2011."— Presentation transcript:

1 Managing a Balanced Mandate Herman Steyn - Executive Chairman Prescient Investment Management March 2011

2 Source: Alexander Forbes

3 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.

4 Prescient Process Enhancements Benchmark Risk limits Return opportunity Why are we different? QuantPlus®

5 Assets Under Management  Retirement funds  Medical aid funds  Multi managers  Corporate treasury  Individual retirement savings  Individual discretionary savings

6 Let us try to predict the markets!

7 SA Money Market Valuation Source: Reuters

8 Scenario Analysis Source: PIM

9 Scenario Analysis

10 Bond Valuation Source: Reuters

11 SA Yield Curve Inflation Discounted Source: Reuters

12 Country Risk Premium Little Room for Error!

13 Foreigners Buying SA Bonds

14 Funding Boom

15 US Bonds Jan-72Jan-78Jan-84Jan-90Jan-96Jan-02Jan-08 US Bonds Japan Bonds

16 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.

17 G7- Era of Negative Real Interest Rates Average G7 short tem real rates. Source: Reuters Average G7 short term real rates Feb-91Feb-92Feb-93Feb-94Feb-95Feb-96Feb-97Feb-98Feb-99Feb-00Feb-01Feb-02Feb-03Feb-04Feb-05 Feb-06Feb-07Feb-08Feb-09Feb-10

18 Credit Bonds and Swaps Source: Reuters

19 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

20 Property Index

21 Rand – Purchasing Power

22 Global Oil Supply Disruptions by Average Gross Supply

23 S&P / Case-Schiller Home Price Indices

24 What happens when the Fed stops buying? 70% ???

25 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.

26 S&P 500

27 Nikkei 225

28 Human Behaviour

29 Required Return to Retire

30 Must Hold Equity to Build Real Return Source: Prescient, FTSE/JSE, BESA 51 yrs 21 yrs 11 yrs 31 yrs 7 yrs 36 yrs

31 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

32 Rolling Returns

33 What is Risk? Pleasure Pain LossProfit

34 What is Risk? Pleasure Pain LossProfit

35 Maybe there is a better way?

36  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

37  Consider the risk adjusted pricing of different assets  Income  Volatility  Look at different strategies payoff profiles to determine optimal allocation Asset Allocation: Asset Pricing

38 Asset Allocation: Pricing Scenario Scenario Current Scenario Equity Div Yield5%1.9%2.0% Interest Rates7%13%5.5% Option cost8%20%10% Inflation5%12%3.7% Asset Allocation Equity75%0%50% Fixed Interest25%100%50%

39 Consistency To end February 2011

40 Balanced QuantPlus ® Asset Allocation January 2011 Underlying equity exposure = 57% (Net effective 51%)

41 Balanced Fund Performance Sensitivity

42 Sensitivity Analysis Positive Return Fund

43 Value of Downside Protection in a Balanced Mandate

44 Meeting Expectations (Rolling 12 Month Returns) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Dec-99Nov-00Oct-01Sep-02Aug-03Jul-04Jun-05May-06Apr-07Mar-08Feb-09Jan-10Dec-10 Prescient Positive Return Composite

45 Meeting Expectations (Rolling 12 Month Returns) -10% 0% 10% 20% 30% 40% 50% Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10 Prescient Balanced Composite

46 Asset Allocation Global Balanced Fund

47 Performance: Balanced QuantPlus ® Period Performances to end February Inception = January 2001

48  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

49

50 Taking the Emotion out of Investing

51 Quantitative investment style

52 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

53 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:

54 Realised and Implied Volatility

55 Equity Allocation: Risk Adjusted Pricing 0% 5% 10% 15% 20% 25% 30% 35% 40% Jul-95Jul-96Jul-97Jul-98Jul-99 Jul-00Jul-01Jul-02Jul-03Jul-04Jul-05 Jul-06 Jul-07 Jul-08 Jul-09Jul-10 Capped Beven % Uncapped Beven %

56 Source: PIM, FTSE/JSE Dynamic Process

57 Prescient Positive Return Gross returns to end February Inception = Jan 1999

58 Risk/Return Inception of Fund January 1999 to February 2011

59 Risk/Return Inception of Fund January 1999

60 Risk/Return Inception of Fund January 1999

61 Effect on Total Portfolio Return with Different Downside Constraints

62 Performance TAA vs. Asset Classes

63 Global Positive Return (Euro) Fund Returns to end February 2011.

64 Asset Allocation: Global Positive Return (Euro) Fund

65 Asset Allocation: Global Growth

66 Equity Carve-Out Performance


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