Our solution for seamless advice

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1 Our solution for seamless advice

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3 Financial advisers are facing increased pressure when solving for clients needs in the current volatile, uncertain, complex and ambiguous environment. Changing regulation, a low-growth investment environment, increased political and economic risks and portfolio construction challenges add to the daily complexity of creating and managing effective investment portfolios.

4 The importance of portfolio construction for performance Construction of a suitable investment portfolio is a disciplined, customised process in which the individual risk and return characteristics of underlying investments are considered alongside clients unique needs, goals and risk parameters. Today, investors are presented with a much larger range of asset classes and a wider range of diversification opportunities than ever before. Professional investment portfolio construction therefore involves detailed research into the widening investment landscape to achieve an optimally diversified investment portfolio.

5 Building an effective investment strategy involves detailed steps that ensure the investment portfolio constructed delivers the intended investment results. Key to constructing effective investment portfolios is ensuring that the investment strategy is unique to an investor s objectives, risk tolerance and constraints. There are some generally accepted guidelines that provide guidance in the strategy-setting process.

6 The diagram below summarises the investment portfolio construction process and how each layer contributes to overall investment performance. Investment portfolio construction is not just about individual components, but also about ensuring all aspects of the investment strategy are optimal in relation to the investment objective. Step 3 Implement tactical asset allocation Step 2 Implement the strategy through trusted fund managers Step 1 Design a goal-driven investment strategy Determine investment objectives Understand and model the goals and liabilities of the client Investment objectives refer to defining the purpose or goal of an investment. This is a key factor in determining the appropriate risk budget and strategy with which to invest assets. Strategic asset allocation (SAA) is the long-term asset allocation that the investor aims to track. This is based on an investor s objectives, risk tolerance and constraints. Fund manager research deals with the implementation of the fund selection by allocating assets to appropriately screened and selected fund managers, and choosing the correct products with these managers to ensure that investment performance is properly monitored and assessed. Tactical asset allocation (TAA) refers to adapting the current asset allocation around the long-term asset allocation (SAA) to take advantage of the current market environment. The constant asset allocation adjustments, to implement short-term optimal asset allocation, are referred to as dynamic asset allocation (DAA).

7 Model portfolios, and similarly fund of funds, help to make the investment research and decision-making processes more seamless to allow financial advisers to focus more on relationship building with their clients.

8 For financial advisers and investors alike, the key features of using model portfolios and/or fund of funds as part of the investment strategy are numerous Pooled research and insights Built-in advice components Consistency and uniformity We partner with leading industry professionals such as RisCura to ensure financial advisers and clients benefit from shared views and expert insights. Ongoing monitoring For model portfolios, fund managers are selected and constantly monitored to ensure they meet their targeted outcome and manage risk appropriately. For the fund of funds offering, Riscura selects underlying funds from qualifying Discovery funds only, managed on our behalf by Investec Asset Management. Advice components are built into model portfolio and fund of funds structures, alleviating the pressure placed on financial advisers and maximising the opportunity to provide sound advice. Administrative efficiencies The decision-making process involved in selecting fund managers takes less time away from financial advisers. This process comprises the selection of the fund managers and the regular adjustments to the investment portfolio to ensure their clients investment objectives are continuously met. This allows them to focus more on clients financial planning needs. The investment team makes the necessary adjustments to the model portfolio to maintain an optimal portfolio structure, which allows uniformity across client investment portfolios at all times. Reduced risk of non-compliance A thorough investment process, backed by rigorous research and monitoring, ensures that financial advisers consistently meet increasingly stringent regulatory standards.

9 Our model portfolios and the fund of funds solution, developed in partnership with RisCura, use a sophisticated asset allocation framework designed to optimise returns at relevant risk levels on an ongoing basis.

10 Our model portfolios, the Discovery House View and House View Drawdown Porfolios offer three risk-profiled options; conservative, moderate and aggressive. Our Dynamic Asset Optimiser (DAO) offering, the Discovery DAO Fund of Funds and Drawdown Funds also offer three risk profiles. These solutions are constructed to meet a specific investment target. These investment solutions are invested in underlying funds that are weighted in order to match as closely as possible to the optimal asset allocation that would best allow for the investment goal to be met. The underlying funds consist of qualifying Discovery funds only for the DAO Fund of Funds offering. The weightings between the underlying funds are rebalanced regularly to meet this goal. In creating these solutions, the burden of optimising asset allocation and fund manager selection within the regulatory framework is removed from financial advisers and placed in the hands of a dedicated and experienced investment management team that specialises in each step of the investment process.

11 In constructing and reviewing the Discovery model portfolios and the DAO offering, a continuous and consistent approach is employed that includes market and economic research; asset manager research encompassing both qualitative and quantitative analysis; as well as performance analysis and monitoring. This approach focuses on: Strategic asset allocation Asset allocation: A proprietary framework is used to determine the long-term asset allocation of each solution based on the investment objectives. Key market views and historical information are used to determine investment objectives, which drives optimal asset allocation within specific practical and regulatory constraints. Tactical asset allocation Asset class rebalancing: Asset allocation is reviewed monthly to ensure it remains optimal. Outcomes are weighed against RisCura s market views to drive tactical asset allocation decisions. These views are constantly reviewed and updated. Any changes filter into product allocations. These may, however, be less frequently than monthly. Product allocations: This refers to the underlying fund manager or building block weights changing on a periodic basis to meet optimal asset allocation requirements. Product allocations in the portfolios are rebalanced to align with the optimal asset allocation.

12 Fund selection Idea generation: This stage identifies potential fund managers, using a number of sources, including databases, manager networks, the media, and clients. An initial qualitative and quantitative screening process is used to identify managers that will be included for further fundamental analysis fund selection. Fundamental analysis: This phase includes conducting investment, operational and governance due diligence. Once a fund manager has successfully been through the due diligence process and is considered to have performed strongly throughout the vetting process, they form part of the prospective fund manager list. This list is continuously updated and managed by the research team. Blending managers: The blending phase ensures that prospective managers are combined according to each portfolio s risk profile and asset allocation mandate. For cash, bonds and property allocations, a best-of-breed approach is used. In the case of equities, this approach is diversified by using fund managers following various investment styles. Ongoing monitoring: Viewed as the most pivotal aspect of the investment process, the research team connects with each fund manager on a regular basis to discuss key changes and views. Monthly risk and performance reports are generated and reviewed. Manager rebalancing: A fund manager will be flagged if ongoing monitoring reveals fundamental changes including key team member changes, investment style or process changes, or persistent underperformance. The investment team will be informed of such changes and the manager will be monitored more closely. This could have a number of consequences including the reduction of the fund manager s weighting or even a complete disinvestment. The fund selection for our DAO offering is from a range of qualifying Discovery funds.

13 There are six pre-retirement and six post-retirement, advice solutions each targeting distinct investment targets and risk profiles. Our advice solutions allow your clients to benefit from the value of integration through the retirement boost *, which gives them the opportunity to receive up to 15% to their investment, or reduce their annual administration fees to zero, while the boost is positive. They can also get up to 50% more money for their retirement income through the retirement income boost **. * Retirement boost = Retirement Upfront Investment Integrator ** Retirement income boost = Retirement Income Investment Integrator

14 If you have an existing model portfolio, you can import it onto our platform, which will allow you to maintain your current underlying fund mix. Alternatively when you use a portion in Discovery funds, your clients can benefit from the value of integration. Enjoy 0% platform fees

15 Pre-retirement Our House View Portfolios and Dynamic Asset Optimiser (DAO) Fund of Funds solutions aim to match a certain rate of return, depending on the client s risk appetite, while the client saves for their retirement. These solutions will target a certain CPI-related return. The CPI-related targets are used to generate the optimal portfolios for each risk level, when constructing and rebalancing the portfolios and funds. Model portfolio Discovery Aggressive House View Portfolio Discovery Moderate House View Portfolio Discovery Conservative House View Portfolio Dynamic Asset Optimiser (DAO) offering Discovery Aggressive DAO Funds of Funds Discovery Moderate DAO Funds of Funds Discovery Conservative DAO Funds of Funds Risk profile Aggressive Moderate Conservative Objective/ target return CPI + 6% over a rolling three-year period CPI + 4% over a rolling two-year period CPI + 2% over a rolling one-year period Strategic aims Capital growth and income with moderate volatility, in line with the South African Multi-Asset High Equity sector Capital preservation and income within a moderate risk profile, in line with the South African Multi- Asset Medium Equity sector Capital protection within a conservative risk profile, in line with the South African Multi-Asset Low Equity sector Who should invest Investors seeking a diversified mix of asset classes and management companies, with an emphasis on income and capital growth over the long term Investors seeking a diversified mix of asset classes and management companies, with an emphasis on achieving moderate returns and reduced levels of volatility Investors seeking a diversified mix of asset classes and management companies, with an emphasis on capital protection and low risk Investment integration Model portfolios: partial investment integration as portfolios comprise both Discovery and external funds. DAO offering: full investment integration as the DAO Fund of Funds comprise of Discovery funds only. Providing your clients with zero admin fees.

16 Post-retirement Our House View Drawdown Portfolios and Dynamic Asset Optimiser (DAO) Drawdown Funds have been specifically introduced for our Linked Retirement Income Plan. These post -retirement solutions aim to match the clients risk appetite as indicated by their annuity drawdown percentage in retirement. Higher annuity drawdown percentages result in clients being heavily dependent on cash in the short term to match their needs, hence a conservative risk profile. Lower annuity drawdown percentages indicate that the client can afford to be invested in more risky assets, hence a moderate or aggressive risk profile. Model portfolio Discovery Aggressive House View Drawdown Portfolio Discovery Moderate House View Drawdown Portfolio Discovery Conservative House View Drawdown Portfolio Dynamic Asset Optimiser (DAO) offering Discovery Aggressive DAO Drawdown Fund Discovery Moderate DAO Drawdown Fund Discovery Conservative DAO Drawdown Fund Risk profile Aggressive Moderate Conservative Objective/target return Provide a regular long-term inflation-linked income, starting at an annual annuity drawdown of 4% of initial capital, for approximately 30 years Provide a regular long-term inflation-linked income, starting at an annual annuity drawdown of 5% of initial capital, for approximately 20 years Provide a regular long-term inflation-linked income, starting at an annual annuity drawdown of 6% of initial capital, for approximately 10 years CPI + 6% over rolling three years period CPI+4% over rolling two year period CPI + 2% over rolling one year period Strategic aims Capital growth and income with moderate volatility, in line with the South African Multi-Asset High Equity sector Capital preservation and income within a moderate risk profile, in line with the South African Multi- Asset Medium Equity sector Capital protection within a conservative risk profile, in line with the South African Multi-Asset Low Equity sector Who should invest Investors seeking a diversified mix of asset classes and management companies, with an emphasis on income and capital growth over the long term Investors seeking a diversified mix of asset classes and management companies, with an emphasis on achieving moderate returns and reduced levels of volatility Investors seeking a diversified mix of asset classes and management companies, with an emphasis on capital protection and low risk Investment integration Model portfolios: partial investment integration as the Drawdown Portfolios comprise both Discovery funds and external funds. DAO offering: full investment integration as the DAO Drawdown Funds comprise of Discovery funds only. Giving your clients up to 50% more income in retirement.

17 Our solutions enhance the advice process for financial advisers by making the investment research and decision process easier.

18 Discovery Dynamic Projection Tool Through the Discovery Dynamic Projection Tool built specifically for our House View Portfolios and DAO offering, your clients can see how our advice solutions and integration help them reach their investment goals and desired income in retirement under various market conditions. The tool allows you to determine your clients likely retirement income, relative to their desired income, taking into account the risks inherent in the investment market (based on different market conditions), your clients personal and investment details, and the benefits of investment integration. The tool can be accessed on the Financial Adviser Zone.

19 Conclusion With the ability to offer zero platform fees, Discovery is one of South Africa s most cost effective platforms for advice solutions. This document highlights the unique positioning of the portfolios we offer.

20 It is clear that building an investment strategy contains many underlying moving parts, with each part playing a crucial role in the ultimate success of the portfolio strategy. These can be summarised as: Clear objectives Setting the strategic asset allocation In-depth fund research and selection Taking into account any relevant economic, political and social factors that affect investment views through a tactical asset allocation view Implementing these views through a dynamic asset allocation process, and finally ending with constant monitoring and review. The Discovery model portfolios and fund of funds structure are constructed using the above philosophy with the idea of leveraging the expertise of a specialist team at each level of the investment process, ensuring depth of research and a diverse skill set as well as remaining true to the shared-value investment model by providing clients with enhanced value and zero platform fees.

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22 Discovery Invest Contact centre discoverysouthafrica Discovery_SA youtube/discoverysa Discovery Life Investment Services (Pty) Ltd branded as Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07. GM_50106DI_11/12/2017_V1