RISK AND MARKET VOLATILITY. Truly Understanding and Managing It

Transcription

1 RISK AND MARKET VOLATILITY Truly Understanding and Managing It

2 MetAM Ameer Amod Ameer initially qualified as an engineer Lecturing at Technikon's Joined investment industry in 2002 He spent two years at Peregrine Quant Ameer Amod M.Sc (Eng), M.Com Quantitative Portfolio Manager Asset Management as a quantitative analyst Prior to joining MetAM he was head of quantitative research with Futuregrowth Asset Management

3 WELCOME PF130 an appropriate balance between optimal investments and risk taken benefits promised to be optimal and the risks associated with that minimal maintain an up to date understanding of risk management, investment risks and strategies risk management is a vital component of the governance of the fund risk anticipate the future intent of PF130 mitigate quality decisions in the face of uncertainty

4 WELCOME mathematically... The volatility of unexpectedoutcomes which can represent the value of assets, equity or earnings theoretically the standard deviationof average returns is inversely proportional to the holding period, if asset returns follow a random walk... a near death experience adultery gambling welcome

5 WELCOME Talmud Kethuboth 9q... a man may divorce his wife for adultery without penalty, but notif he claims that the adultery occurred before marriage... double doubt the groom? was it by violence or by free will? a chance ½ x ½ = 25% cannot divorce on those grounds

6 WELCOME gambling 1400 s Luca Paccioli... how does one dividethe stakes of an unfinishedgame between two players when one of them is ahead?... Pascal and Fermat probability theory decisions and forecast with the help of numbers! genesis

7 SOURCES OF RISK the gold standard Sep 20, 1931 England going off the gold standard expand credit fall in value of pound => exports a lesson from history liquidity and easy credit critical plus to stock values sustained inflation hyperinflation explosion of money supply world experienced no overall inflation 19 th & 20 th

8 SOURCES OF RISK source: Siegel JJ, Stocks for the Long Run, 4ed, 2007

9 SOURCES OF RISK price soared in 1980 s inflation under control price fell GOLD ($/OZ) Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 source: INET

10 SOURCES OF RISK fixed exchange rate system breaks down 1971 R/$ EXCHANGE RATE Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 source: INET

11 SOURCES OF RISK oil price shocks 1970 s high inflation, interest rates correlation with bond yields bear market of 1974 & 1975 MOVEM ENT IN OIL PRICES ($ BRENT) V BOND YIELDS Jan-04 Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-06 Jan-08 OIL source: INET YIELD

12 SOURCES OF RISK Oct 19, US stocks -23% -wiping out $1tn Sep 11, $1.7tn S&P Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 source: INET

13 SOURCES OF RISK Asianturmoil of 1997 three quarters of the dollar capitalisation in Indonesia, Korea, Malaysia & Thailand Russiandefault in August 1998 global financial crisis near failure of LTCM devastating effects of the recent credit crisis unpredictability whereis the risk coming from? business cycles, inflation, government policy, wars unforeseen natural phenomena technological innovations credit extension fixed exchange rates

14 MARKET RISK Bill Sharpe... higher E{R} only by incurring additional risk... two prices time risk r i = r + β ( r r ) + θ f i M f i what risk free rate?

15 MARKET RISK Projects: better or worse than expected? Competition: stronger or weaker than anticipated? Exchange rate and Political risk Interest rate, inflation, news about the economy FIRM SPECIFIC MARKET only one firm few firms many firms all investments adapted: Damodaran, Understanding Risk

16 MARKET RISK 24.77% 23.98% 6.20% WEIGHT CONT. VOL WEIGHT CONT. VOL BIL 13.66% 21.63% CFR 2.95% 2.14% AGL 9.94% 11.99% NPN 2.48% 1.92% SOL 6.19% 7.62% FSR 1.86% 1.80% MTN 6.89% 7.05% HAR 1.33% 1.68% IMP 3.93% 5.79% OML 1.68% 1.17% ANG 3.93% 4.63% ASA 1.11% 0.91% SAB 6.26% 3.53% SLM 1.21% 0.86% SBK 4.06% 3.48% ACL 0.68% 0.76% GFI 2.31% 2.90% RMH 0.65% 0.65% AMS 1.71% 2.48% ABL 0.68% 0.62% 73.5% 83.6% source: UC Securities

17 MARKET RISK LIQUIDITY: DAYS TO TRADE (R10bn) % % 350 M CAP DAYS % 10.0% % 200 DAYS MCAP % % % - 0.0% AGL MTN SBK ANG FSR ACL MUR KIO BAW SHF TBS PPC ABL WHL RMH SHP APN MVL PIK MTX SIM GRF JSE NPK HVL FPT APB TON ILV ALT EMI HLM HCI ATN SHARE M AR K E T C O N C E N T R AT IO N % % % % % % % % source: INET % T O P 4 0 A L S I A L S I EW

18 INVESTMENT POLICY Brinson et al, 1991 investment policy v quarterly plan returns framework for dissecting plan returns asset allocation policy active asset allocation security selection IV II IV II actual portfolio return policy and active asset allocation return 100% 93.3% III I III I policy and stock selection return policy return (passive portfolio benchmark) 96.1% 91.5%

19 ASSET ALLOCATION diversification several types of asset classes low or negative correlation goals, time horizon & risk tolerance strategic asset allocation (SAA) investment policy: bonds v cash v equity inflation linked bonds, private equity, foreign asset liability matching primary risk exposure attributed to SAA need to understand risk/return tradeoff

20 ASSET ALLOCATION YRS CASH EQUITIES BONDS INFLN 1 6.5% 17.2% 8.1% 6.4% 3 6.5% 15.8% 8.0% 6.5% 5 6.5% 15.1% 7.9% 6.6% % 14.5% 7.1% 7.2% ROLLING ASSET CLASS RETURNS YRS CASH EQUITIES BONDS 1 5.9% 25.1% 9.8% 3 5.8% 13.7% 6.7% 5 5.7% 9.9% 6.1% % 5.7% 5.1% VOLATILITY OF ASSET CLASS RETURNS source: METAM

21 ASSET ALLOCATION

22 ASSET ALLOCATION 30% 25% EQUITIES STD. DEVIATION 20% 15% 10% 5% 0% BONDS TIME HORIZON source: METAM

23 ASSET ALLOCATION YRS CASH EQUITIES BONDS #YRS OF NEGATIVE REAL RETURN no. years equities, bonds & cash underperformed inflation equities over 20 year horizon => positive real returns ~40 periods where cash & bonds < inflation equities have kept pace with inflation long horizon. Why? source: METAM

24 ASSET ALLOCATION YRS EQUITIES<BONDS EQUITIES<CASH 1 48% 50% 3 34% 35% 5 27% 27% 20 1% 1% EQUITY V BONDS & CASH dominance of stocks over the long run 1, 3 & 5 year periods? High probability of underperformance equities can fail as a short-term hedge against inflation source: METAM

25 ASSET ALLOCATION reasons central bank & real short-term rates government deficits & spending historical prices v selling prices 30% 25% EQUITIES STD. DEVIATION 20% 15% 10% 5% 0% BONDS TIME HORIZON bond volatility volatility of bonds mean aversion source: METAM

26 PF130 sources of risk and the SA market an appropriate balance between optimal investments and risk taken maintain an up to date understanding of risk management, investment risks and strategies investment policy and asset allocation benefits promised to be optimal and the risks associated with that minimal risk management is a vital component of the governance of the fund

27 IN SUMMARY... let every man divide his money into three parts, and invest a third in land, a third in businessand a third let him keep in reserve... Talmud 1200BC 500 AD

28 CONTACT DETAILS Ameer Amod Portfolio Manager Metropolitan Asset Managers (MetAM) Tel: (021) Fax: (021) Cell: Snowy Musundwa Client Relationship Manager Metropolitan Asset Managers (MetAM) Tel: (011) Fax: (021) Cell:

29 THANK YOU Metropolitan Asset Managers is an Authorised Financial Services Provider The content of this presentation and all information and opinions provided are of a general nature with no regard to the specific investment objectives, financial situation or particular needs of any particular individual or entity (as defined in the Financial Advisory and Intermediary Services Act) and have been prepared solely for information purposes. The information and opinions do not constitute any investment advice or recommendation to conclude any transaction or enter into any agreement. No one should act upon such information without first obtaining appropriate legal, tax, investment or other professional advice. Every care has been taken to provide accurate and timely information, but no representation, undertaking or warranty, express or implied, is given with respect to the correctness, accuracy or completeness of the information and opinions. Past performance of any investment product is not necessarily an indication of future performance.