1. Understanding risk and its effective management Romeo Makhubela CEO

2. Introduction – what is risk? 3 big picture concepts –Time –Fund dynamics –Regime switching. Conclusion Agenda

3. Institute of Risk Management considers Uncertainty (travel arrangements) Danger (skydiving) Probability (SA to win Rugby World Cup 2011) Variability (buying a lotto ticket) Dread (shark attack). Peter Bernstein in his book “Against the Gods: the Remarkable Story of Risk” demonstrates a perspective that requires one to “define what may happen in the future and choose among alternatives”. he states that risk should not be feared, and goes hand in hand with challenge and opportunity. Its all about perspective What is risk?

4. The quantifiable likelihood of loss or less-than-expected returns due to Currency-Interest Rate- Inflation-Equity- Principal-Credit- Country-Unsystematic- Economic-Call- Mortgage-Business- Liquidity-Counterparty- Prepayment-Purchasing power- Opportunity-Event- Income- ……….RISK Investor Words definition What is investment risk? What factors are in play that can derail the expected outcome?

5. Risk is the future uncertainty of a current decision. To be make money, we need to be exposed to it. How much we can tolerate depends on –how financially wealthy we are, –what we are trying to achieve, and –how much time we have to wait. It is the amount of exposure to risk, of the right kind, that determines success or not; but: Risk is NOT independent of expected return. Some commentary

6. Time –As a general rule of thumb, the longer the time to one’s target date, the more aggressively one can invest. Fund dynamics –one “solution” does not fit all; requires migration through complementary solutions –risk management solutions can no longer be static. Prevailing environment (Regime switching) –within this dynamic solution, one must respond to differing market environments. 3 big picture concepts that impact ability to assume risk Risk acceptance

7. 00010203040506070809 190015%18%4%-7%22%-20%15%-11%41%30% 1910-14%-15%7%-6%-12%7%12%-3%6%33% 1920-43%2%76%10%17%16%25%8%2%-2% 1930-7%-6%34%113%33%17%28%-20%1%-7% 19400%16%-3%19%8%22%-4%-13%-9%25% 1950-10%-1%-8%0%18%-7%-6%-4%19%32% 1960-2%10%27%22%15%4%16%18%48%-14% 1970-30%2%52%-4%1%-22%-12%18%23%70% 198021%-12%22%3%-3%20%33%-17%2%35% 1990-17%13%-11%41%12%2%0%-10%-16%51% 2000-7%21%-17%11%20%41%34%10%-32%22% 201014% over the short term 1 year real returns Time: Equity returns are uncertain... data: annual total return and inflation data from 1900 to 2011data source: Prof C Firer annual data 1900 – 2008

8. 00010203040506070809 19009% 19106%3% 0%3%2%3%0%1% 1920-3%-2%3%5%8%9%10%11% 8% 193013%12%9%17%18% 15% 14% 194015%17%14%7%5% 2%3%2%5% 19504%2% 0%1%-2% -1%2%3% 19603%4%8%10% 11%13%16%18%13% 19709% 11%8%7%4%1% -1%6% 198012%10%8%9%8%13%18%14%11%9% 19905%7%4%8%9%7%4%5%3%4% 20006% 5%3%4%7%10%12%11%8% 201011% 10 year real returns (rolling annualised) Equity returns... data: annual total return and inflation data from 1900 to 2011data source: Prof C Firer annual data 1900 – 2008 exceed inflation over almost all periods of 10 years or longer

9. 00010203040506070809 1900 16%-6%0%10%11%9%12%4%8%-1% 1910 -11%1%0%1%3%-15%-7%-5%2%-7% 1920 -20%25%28%6%4%6%7%5%6%5% 1930 6%9%3%35%8%9%3%-4%-1%0% 1940 2%4%-3%-1% 2%6%-3%-9%-3% 1950 -5%-9%-10%4% -3%1% -4%5% 1960 2%-2%20%3%-2%-10%-4%5%4%3% 1970 -11%-6%5%0%-17%-6%-8%3%9%-1% 1980 -19%-10%16%-13%-10%-6%15%0%-4%6% 1990 1%-2%17%21%-17%22%-3%22%-4%27% 2000 12%14%4%18%10%8%0%-4%7%-7% 201011% 1 year real returns data source: Prof C Firer annual data 1900 – 2008 Bond market returns data: annual total return and inflation data from 1900 to 2011data source: Prof C Firer annual data 1900 – 2008 are driven by inflation

10. 00010203040506070809 19006% 19103%4% 3%2%0%-2%-3% -4% 1920-5%-3%0% 2%4%5% 6% 19309%8%6%8%9% 8%7%6% 19406%5% 2%1%0% -1% 1950-1%-3% -2% 1960-1% 2% 1%0%1%2% 19700% -1%-2%-3% -4%-3% 1980-4%-5%-4%-5% -2%-3%-4%-3% 1990-1%0% 3%2%5%3%5%6%7% 20008%9%8% 11%9%10%7%8%5% 2010 5% 10 year real returns (rolling annualised) Bond market returns data: annual total return and inflation data from 1900 to 2011data source: Prof C Firer annual data 1900 – 2008 stay negative in real terms for long periods as inflation rises

11. 00010203040506070809 19000%-5%1%13%9%10%11%5%4%-3% 1910-11%-1%1%2% -1%0%-4%-3%-6% 1920-14%16%23%6%2%3%5%2%3% 19306% 9%4%-1%1%0%-2%-3%-1% 1940-4%-6%-8%-5%-4%-1%-2%-4%-6%-3% 1950-6%-7%-5%1%-2%0%1%0% 19602%3%2%1%-1%2%1%4%3%2% 19702%1%0%-4%-3%-2%1%-1%-2%-7% 1980-9%-1%4% 7%3%-5%-4%1%3% 19905%2%6%3%1%7%6%11%10%8% 20003%4%1%8%4%3% 1% 3% 20103% 1 year real returns Cash returns data: annual total return and inflation data from 1900 to 2011data source: Prof C Firer annual data 1900 – 2008 are not the perfect hedge against inflation (even before tax)

12. 00010203040506070809 19004% 19103%4% 3%2%1%0%-1%-2% 1920-3%-1%1% 2% 3%4%5% 19307%6%5%4% 3% 2% 19401%-1%-2%-3% -4% 1950-4%-5%-4% -3% -2% 1960-1%0%1% 2% 19702% 1% 0% -1%-2% 1980-3% -2% -1%0%-1% 0% 19902% 1%2%3%5%6% 20006% 5%6% 5%4% 3% 20103% 10 year real returns Cash returns data: annual total return and inflation data from 1900 to 2011data source: Prof C Firer annual data 1900 – 2008 over the short or long term

13. riskinvestment horizon - years equities bonds cash absolutelow riskmoderate risk equity oriented growth Asset class risk vs time Equities deliver higher returns but with exponentially higher risk over the short term

14. Risk management solutions can no longer be static. Consider a closed pension fund with members with characteristics differing by –age –retirement date –gender –contribution value –tax rate –accumulated benefits. The solution for the retirement fund as a whole is driven by the aggregate cash flows, which include contributions (by active members) and withdrawals by retired members. This solution is not simply 100% allocation to one fund, to and from which contributions and withdrawals are made. Fund dynamics

15. Dynamic solution superior

16. Economic cycles, a starting point Regime switching normal

17. need to be viewed in three distinct states Economic cycles

18. Equilibrium strategic asset allocation Opportunity seeking allocation Risk mitigating allocation to the long term SAA to reflect the dynamics of each macro environment Temporal adjustment EquityBondCash Con132760 Mod261955 Agg351550 EquityBondCash Con292942 Mod502525 Agg651520 EquityBondCash Con403228 Mod64279 Agg7520 5

19. value add Combining time, dynamics & environment Statistic Balanced (Static) Balanced (Risk mitigating) Balanced (Opportunity seeking) Balanced (Regime switching) Annual Return 16.2%13.3%17.0%17.9% Annual stdDev 10.8%6.2%13.2%10.5% Sharpe ratio 0.7 0.60.8 Maximum Drawdown -19.3%-8.1%-25.7%-13.4%

20. Risk is the future uncertain outcome of a current decision. Especially in the new millennium, three important facets to recall and consider are time, fund dynamics and regime switching. Time in the markets is a management tool. Static solutions: no more. Regime switching, as a critical component of the dynamic solution. Conclusion

21. Questions?

22. Regulatory information Vunani Fund Managers (Pty) Ltd Physical Address: 6 th Floor, Letterstedt House Newlands on Main Newlands 7700 Telephone number: 021 670 4900 Internet website: www.vunanifm.co.za Vunani Fund Managers (Pty) Ltd is an authorised financial services provider (license no. 608) approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisors and Intermediary services Act 37 of 2002. 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. All returns are in rand terms, unless otherwise stated. Investment deals done on behalf of clients by Vunani Fund Managers are all done on an arm’s length basis. Vunani Fund Managers (Pty) Ltd has been GIPS verified for the periods 1 January 2005 to 31 December 2010. A copy of the verification report is available on request.