CHALLENGING BELIEFS THE SOUTH AFRICAN EXPERIENCE MANAGED VOLATILITY

Transcription

1 CHALLENGING BELIEFS THE SOUTH AFRICAN EXPERIENCE MANAGED VOLATILITY Grant Watson Saliegh Salaam

2 HIGH RISK = HIGH RETURN? Falling Risk Rising Risk 2 Source: Quantitative Investments, INET Negative returns in rising risk expectation environment Positive returns in falling risk expectation environment

3 LOW VOLATITY HAS OUTPERFORMED IN SOUTH AFRICA 3 Source: Factor Index Weekly MSCI South Africa

4 CHALLENGE High risk does not necessarily equal high returns! Can a low volatility strategy outperform over time? 4

5 PROFITING FROM VOLATILITY 5 Source: Old Mutual Investment Group Dec-09 to Feb-14

6 PROFITING FROM VOLATILITY Falling Risk Rising Risk 6 Negative returns in rising risk environment Positive returns in falling risk environment Source: Quantitative Investments, INET December 2009 to March 2014

7 7 FUND PHILOSOPHY SMOOTHER RETURN PATH

8 CONSISTENTLY LOWER VOLATILITY 8 Source: Old Mutual Investment Group Systematically managing portfolio volatility

9 SOURCES OF OUTPERFORMANCE IN SOUTH AFRICA Diversified sources of long term outperformance 9 Source: BARRA Dec 1992 Apr 2014

10 10 WHAT QUALIFIES AS A BUY? Only low volatility shares? Must all style attributes be present? NO!

11 SCREENING FOR ATTRIBUTES IS NOT VIABLE Percentage of universe that has desired attributes 11 Source: Barra and Old Mutual Investment Group

12 12 EACH SHARE PLAYS A ROLE

13 13 ADDRESSING THE CHALLENGE Higher risk does not necessarily lead to higher returns In the long-term, low volatility portfolios will outperform the market, as capital is being preserved on the downside Value, yield and momentum have the longest track record of outperformance within SA represent good diversification By consistently constructing low volatility portfolios and exposing our portfolios to these three themes, we are able to generate outperformance

14 14 OUR SOLUTION TO MARKET VOLATILITY IS MANAGED VOLATILITY Managed Volatility outperforms the benchmark in the long-term, whilst creating a smoother return path and lower volatility than the benchmark Designed for clients who have total risk as a primary objective Strategy is not highly correlated with the returns of other active equity portfolios Our primary objective is to create portfolios with lower total risk than their benchmarks, whilst managing exposure to value, yield and momentum in order to enhance returns

15 15 HOW WE DO IT Optimally account for interaction between shares to reduce volatility

16 Return TOP RISK ADJUSTED RETURN 25% 20% 15% Old Mutual Managed Vol Return vs Volatility Coronation Coronation Old Mutual Houseview Coronation Aggressive Core Prudential Core Momentum MoM Active Quant Stanlib Core Argon IS Classic Stanlib Enhanced Pure Specialist Kagiso Managed Momentum Kagiso Core Old IS Entrepreneur Prescient Active Investec Mergence Mutual AM Equities Core Index SYmmETRY Quant ELECTUS Multi-Cap Afena Capital Taquanta Active 10% Element Investec RI 5% 0% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% Volatility Consistently lower total risk 16 Source: Old Mutual Investment Group and Alexander Forbes I Dec Feb 2014

17 MARKET LEVEL ?? Bull market Global Financial Crisis ZAR blow out Tech bubble Mexican Peso 1 Banks Asian Crisis Source: FTSE/JSE Alsi, I-Net, MacroSolutions, Old Mutual Investment Group

18 VOLATILITY EXPECTATIONS Expectations of future market volatility at all time low Portfolio well positioned for increase in volatility Source: SAVI, I-Net: Feb-07 to May-14

19 MANAGED VOLATILITY - CURRENT POSITIONING 15% Tilts in each Vol Category 10% 5% 0% -5% -10% -15% Low Vol Tilt Medium Vol Tilt High Vol Tilt High/Medium/Low Ti 19 Source: Quantitative Investments

20 MANAGED VOLATILITY - FUND STRUCTURE Fund Benchmark Contribution to volatility Technology Total risk 9.2% 12.4% Value Momentum Yield Financials Telecom Consumer Services Health Care Consumer Goods Vodacom 5.5% 0.9% 4.1% Billiton 4.9% 3.4% 9.9% Naspers 4.8% 9.2% 8.1% Mondi 4.2% 0.5% 6.2% Sasol 4.2% 6.8% 6.4% Industrial Basic Materials Oil & Gas Active Tilt in % 20 Source: Barra and IMAPS

21 21 WHY MANAGED VOLATILITY? A smoother return path and stable risk-adjusted returns Reduces the risk that an equity component brings to a portfolio and frees-up risk budget Source of diversification - Low correlation with other active equity strategies

22 APPLICATION

23 MANAGED VOLATILITY - APPLICATION 23 Source: Quantitative Investments, INET December 2009 to March 2014

24 APPENDIX

25 MANAGED VOLATILITY - TOP 5 AND BOTTOM 5 ATTRIBUTION TOP 5 CONTRIBUTORS TO RETURN : MAY 2011 TO APRIL 2014 TOP 5 DETRACTORS FROM RETURN : MAY 2011 TO APRIL Old Mutual Investment Group

26 Contribution to Alpha MANAGED VOLATILITY - TOP 5 AND BOTTOM 5 ATTRIBUTION Weights 26 Source: Old Mutual Investment Group, May-11 to Apr-14

27 27 REGULATORY INFORMATION Old Mutual Investment Group (Pty) Limited Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405 Telephone number: Old Mutual Investment Group (Pty) Limited (Reg No 1993/003023/07) is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers ( to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 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. The investment portfolios may be market-linked or policy based. Investors rights and obligations are set out in the relevant contracts. 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. Disclosures: 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 the Old Mutual Investment Group are remunerated with salaries and standard incentives. Unless disclosed to the client, no commission or incentives are paid by the Old Mutual Investment Group to any persons other than its representatives. All inter-group transactions are done on an arms length basis. We outsource investment administration of our local funds to Curo Fund Services (Pty) Ltd, 50% of which is owned by the Old Mutual Investment Group. Disclaimer: The contents of this document and, to the extent applicable, the comments by presenters do not constitute advice as defined in FAIS. Although due care has been taken in compiling this document, Old Mutual Investment Group does not warrant the accuracy of the information contained herein and therefore does not accept any liability in respect of any loss you may suffer as a result of your reliance thereon. The processes, policies and business practices described may change from time to time and Old Mutual Investment Group specifically excludes any obligation to communicate such changes to the recipient of this document. 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