MARKET VIEWS AND ASSET ALLOCATION UPDATE PETER BROOKE, BOUTIQUE HEAD, MACROSOLUTIONS
AGENDA Why MacroSolutions Investment views & positioning 2
STRUCTURALLY POSITIONED FOR SUCCESS
WHY MACROSOLUTIONS Solutions Aligned with Wealth range, delivery to objective Solid, differentiated single manager Structurally positioned for success: Boutique model and alignment Team Size Fees Proven differentiator: Asset allocation experts Integrated Solutions Blends well with multi-manager 4
BOUTIQUE MODEL AND ALIGNMENT Co-investment with clients Equity ownership As invested as you are! Client Portfolio manager Accountability MacroSolutions Team Old Mutual Investment Group Specialist Old Mutual Trust 5
MACROSOLUTIONS TEAM Peter Brooke Boutique Head (20 Yrs) Graham Tucker Portfolio Manager (14 Yrs) John Orford Portfolio Manager (12 Yrs) Denzil Burger Portfolio Manager (31 Yrs) Urvesh Desai Portfolio Manager (12 Yrs) Gary Davids Research Analyst (6 Yrs) Aggressive Balanced Conservative Arthur Karas Portfolio Manager (24 Yrs) Warren vd Westhuizen Portfolio Manager (14 Yrs) Alida Jordaan Portfolio Manager (21 Yrs) Evan Robins Portfolio Manager (15 Yrs) Khangwelo Nemukongwe Property Analyst (5 Yrs) Rian Le Roux Chief Economist (35 Yrs) Johann Els Economist (29 Yrs) 6 ASSET ALLOCATION SA Equities Listed Properties Economics EQUITY SELECTION
BALANCED FUNDS AUM AS AT END DECEMBER 2014 180 Billions 160 140 120 100 80 60 40 20 0 7 Source: MacroSolutions
THEME & PRICE
Bottom Up Price: Valuations PHILOSOPHY: THEME AND PRICE Top Down Macro Environment Integrating top down & bottom up Deteriorating theme Improving theme Expensive Sell all Reduce 9 Cheap Buy some Buy lots
10 WAITING ON THE WORLD TO CHANGE THEMES Oil price Better global growth Lower inflation SA surprises Lower inflation & rates Stronger consumer China transition Consumption > Investment Low return world Dividend yield
LOWER OIL, BETTER GROWTH G7 leading indicator (y-o-y % change) OECD 6% 4% 2% 0% -2% -4% Brent oil price (y-o-y % change, 3ma, 6mth lead, inverted scale) -60% -40% -20% 0% 20% 40% 60% 80% 100% -6% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 120% 11 Source: BAML, Bloomberg, Old Mutual Investment Group
SOUTH AFRICA 12 Source: FINWEEK, 1 January 2015
13 SOUTH AFRICA SURPRISES Current account deficit NARROWS Oil at $55 in 2015 will lower the oil import bill by ±3% of GDP Rate CUTS? Inflation down to 3.8% in 2015 No rate hikes in 2015 Economic growth DOUBLES Petrol price saves consumers R20bn Reduced strike impact Better budget? Lower bond yields? STRONG rand?
ASSET CLASS RETURNS YTD 31 DECEMBER 2014 Rand returns (%) US dollar returns (%) SA returns FTSE SWIX 15.4 5.1 SA Listed Property 26.6 15.3 SA Bonds 10.2 0.3 SA Cash 5.9-3.5 Global returns MSCI AC World 15.0 4.7 Emerging Markets 7.8-1.8 Bonds 10.5 0.7 Cash 9.9 0.1 14 Source: MacroSolutions
REAL RETURNS A LONGER TERM PERSPECTIVE Returns to 31.12.2014 1 year 5 years 10 years 20 years 50 years 80 years SA Equities 5.3% 10.1% 11.3% 7.5% 7.8% 7.2% SA Property 20.3% 15.4% 14.6% 9.7% - - SA Bonds 4.6% 4.5% 2.4% 6.5% 1.5% 0.9% SA Cash 0.6% 0.6% 1.3% 3.7% 1.8% 0.4% Global Equities 10.0% 15.1% 8.1% 7.2% 6.0% 7.6% Global Bonds 5.0% 6.1% 4.8% 5.4% 4.1% 3.1% Gold 3.4% 5.1% 11.6% 5.8% 4.2% 3.0% Balanced Index 5.9% 9.4% 9.1% 7.7% 6.3% 5.4% 15 Source: MacroSolutions. Returns in Rands
Coming Soon LONG-TERM LESSONS Equities for the long term Cash is trash Time is your friend Inflation is the enemy The power of compounding Don t put all your eggs in one basket Asset allocation adds value 16
PRICE: LONG-TERM ASSET ALLOCATION VIEW Real return View Comment SA Neutral More balanced outlook Equity 5.0% Neutral Key risk is earnings delivery Property 4.5% Neutral More expensive but benefits from oil price Bonds Cash Global* Equity Bonds Cash 2.5% 0.5% 5.0% -1.0% -1.0% + Neutral + Lower inflation is very supportive Better real returns but lacks leverage Maintain diversification for risk management Best risk adjusted returns Record low yields = low returns Cash is trash 17 Source: Old Mutual Investment Group NB: These are long-term, real returns expected over the next five years, as at 15 January 2015 * The international return expectations above are in US Dollar terms; any rand depreciation will add to returns in rands.
ASSET ALLOCATION: BALANCED FUND EFFECTIVE EXPOSURE AS AT 31 DECEMBER 2014 SA Property 5% (5%) Global Equities, 25% (20%) SA Equities 40% (45%) Global Bonds, 0% (5%) SA Convertible Bonds, 1% SA Nominal Bonds, 16% (15%) Commodities, 1% (2.5%) SA Money Market 12% (7.5%) 18 Source: Old Mutual Investment Group Benchmark in brackets
QUEST FOR YIELD SOUTH AFRICAN BONDS STAND OUT 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% SA BOND YIELD GLOBAL BOND YIELD 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 19 Source: MacroSolutions, I-Net, Global bond yield is a weighted index of Japan, Europe, US and UK
OVERWEIGHT FINANCIALS 20 Source: MacroSolutions
OLD MUTUAL UNIT TRUST BALANCED FUND TOP TEN SHARES AS AT 31 DECEMBER 2014 Tilt 12 Months % Total Return Naspers Richemont 6.6% 10.9% -0.8 4.0 SWIX: 15.4% 2.1 38.7 BAT 6.5% 2.4 17.8 Nedcor 6.4% 5.3 23.6 Investec 5.8% 4.7 33.2 Old Mutual 5.8% 3.9 10.4 Steinhoff 5.6% 2.4 35.2 Sasol 5.5% 0.4-13.1 Firstrand 4.7% 1.4 47.3 MTN 4.6% -3.7 7.2 0% 2% 4% 6% 8% 10% 12% 14% 16% -20% 0% 20% 40% 60% 21 Source: MacroSolutions
22 CONCLUSION Oil price Overweight global equity Overweight Europe & Japan; Africa pauses Overweight Barrow Hanley South Africa surprises Overweight SA bonds; offshore pauses Overweight SA inc. Neutral property Low return world Overweight SA financials Alternatives BALANCED is BACK
2014 INSTITUTIONAL SURVEY 1 year 3 year Aggressive Balanced 8th Conservative 23 Source: Alexander Forbes Dynamic, Global Large Manager Watch and Conservative surveys
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