managing a balanced mandate herman steyn - executive chairman prescient investment management march...
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Managing a Balanced MandateHerman Steyn - Executive Chairman Prescient Investment Management
March 2011
Source: Alexander Forbes
What Defines Prescient Quantitative asset management vs. Qualitative
Deliver through asset allocation (being in the right asset class at the right time). No company visits. No stock picking.
Valuation driven
Consider what is priced into market, rather than forecasting returns
Risk focussed
Quantify potential outcomes. Manage risk because we can measure it. Not diversifying but managing risk
Focus on reduced risk and improved consistency by minimising losses in negative markets
Maximise position for:
Best upside in positive markets
Internally driven
Deep understanding of investment philosophy and results
Long-term investors.
Prescient Process
Enhancements
Benchmark
Risk limits
Return opportunity
Why are we different?
QuantPlu
s®
Assets Under Management
Retirement funds Medical aid funds Multi managers Corporate treasury Individual retirement savings Individual discretionary savings
1.1 1.4 2.85.7
9.512.5
17.2
31.2
39.7
51.1
69.9
6.8 6.5
87.5
86.3
1.4
2.40
4.3
4.2
5.5
94.0
1.1 1.4 2.85.7
9.512.5
18.6
33.6
44.0
55.5
75.4
93.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 J an-11
AUA
AUM
Let us try to
predict the
markets!
SA Money Market Valuation
Source: Reuters
I MPLIED 3 MONTH J I BAR
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
0 1 2 3 4 5 6 7 8 9 12 15 18 21
Now
1 month ago
3 months ago
Scenario Analysis
Source: PIM
Scenario Analysis
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
0 3 6 9 12Months
Retu
rns a
bove F
RN
's
Cut 50bp J an (repo at 5%)
Hike 50bp Jul, Sep (repo at 6.5%)
Flat Rates
Hike 50bp Jul, Sep, Nov (repo at 7%)
Hike 50bp Jul (repo at 6%)
Scenario Analysis
Scenario Analysis
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
Cut 50bp Jan (repoat 5%)
Hike 50bp Sep, Nov(repo at 6.5%)
Hike 50bp Sep, Nov,Jan (repo at 7%)
Hike 50bp Sep, Nov,Jan, Mar (repo at
7.5%)
Flat Rates
Prime Spread 3m J IBAR Fixed Rates 2-year fixed CLN (transnet)
Bond Valuation
Source: Reuters
RSA 10 year bond valuation
6.0%4.6%
3.9%3.3% 3.8%
4.4% 4.7%4.1%
2.1%
3.8% 3.3% 3.5%
3.4%
2.7%
2.4%
1.6%1.2%
0.8%1.0%
1.5% 5.8%
1.5% 1.5%
4.9%
3.6%4.5%
4.7% 4.9%
2.3%2.0%
2.8%
-0.5%
3.6%
3.3%3.9%
1.7%
8.9%8.1%
9.2%7.3%8.4%
7.7%7.5%
9.9%9.6%
10.8%10.9%
14.3%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NowUS$
US Rates Sovereign Risk Inflation Differential SA Rates
SA Yield CurveInflation Discounted
Source: Reuters
SA Implied I nflation - From US Bonds
R157
R203
R204R207
R208
R186
R209
R206
R201
5.5
6.0
6.5
7.0
7.5
- 5 10 15 20 25 30
Time
Imp
lied
in
flati
on
Country Risk PremiumLittle Room for Error!
EMBI spread to US treasuries & RSA risk premium
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
Jan-9
9
Jul-
99
Jan-0
0
Jul-
00
Dec-
00
Jul-
01
Dec-
01
Jun-0
2
Dec-
02
Jun-0
3
Dec-
03
Jun-0
4
Dec-
04
Jun-0
5
Dec-
05
Jun-0
6
Dec-
06
Jun-0
7
Dec-
07
Jun-0
8
Dec-
08
Jun-0
9
Dec-
09
Jun-1
0
Dec-
10
Sp
read
in
bp
s.
EMBI spread
RSA 10yr CRP
Foreigners Buying SA Bonds
Cumulative Foreign Bond Purchases
-20
0
20
40
60
80
100
120
140
Jan
-06
Ap
r-0
6
Jul-
06
Oct
-06
Jan
-07
Ap
r-0
7
Jul-
07
Oct
-07
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Funding Boom
Monthly govt funding from J an 2008
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Jan
-08
Ma
r-08
Ma
y-0
8
Jul-
08
Se
p-0
8
No
v-0
8
Jan
-09
Ma
r-09
Ma
y-0
9
Jul-
09
Se
p-0
9
No
v-0
9
Jan
-10
Ma
r-10
Ma
y-1
0
Jul-
10
Se
p-1
0
No
v-1
0
Jan
-11
Ma
r-11
Ma
y-1
1
Nominal
ILB
US Bonds
0
2
4
6
8
10
12
14
16
18
Jan-72 Jan-78 Jan-84 Jan-90 Jan-96 Jan-02 Jan-08
US Bonds
Japan Bonds
S & D Dynamics in the Bond Markets
Holdings of US Treasuries
Fed $ 1200 bn
China $ 846 bn
Japan $ 821 bn
Current deficit = $1.5 tr p.a.
G7- Era of Negative Real Interest Rates
Average G7 short tem real rates. Source: Reuters
Average G7 short term real rates
-1.00
-
1.00
2.00
3.00
4.00
Feb-9
1
Feb-9
2
Feb-9
3
Feb-9
4
Feb-9
5
Feb-9
6
Feb-9
7
Feb-9
8
Feb-9
9
Feb-0
0
Feb-0
1
Feb-0
2
Feb-0
3
Feb-0
4
Feb-0
5
Feb-0
6
Feb-0
7
Feb-0
8
Feb-0
9
Feb-1
0
Credit Bonds and Swaps
Source: Reuters
R155
LGL1
T018
WSP1
WS04
TN17
FRB05
SZ18
IV01
DV23
ES26
NRA018
SBK8
HWAY20
TN20
SBK12DV22
NBK3A
MTN04 TN25
IPL6
ABL11A
R213
ABS3
NED5
BAW1SBK5
NED7BEER01
AB05
UTR02
SLI1
R206
NED8
AB07BID01
R201
AB06
SBK7
R157
R203
SNT01
SLI2
R204
AIR01
WSP3
WSP2
WSP4
ABS6
WSP5SZ25
R186
E170
TN27NED11
R207DV21
ABL7
ABS5
TL15
TL12
AIR02
R208
CCT01
NRA022 NRA028
BAW2
AIR03ES18
CCT02
FRX11
FRX15
NBK2A
CCT03
NBK6A
AA03
ES15
5.75%
6.00%
6.25%
6.50%
6.75%
7.00%
7.25%
7.50%
7.75%
8.00%
8.25%
8.50%
8.75%
9.00%
9.25%
9.50%
9.75%
10.00%
10.25%
10.50%
10.75%
11.00%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
TTM
Y.T
.M.
Interest Bearing Asset Summary
Money market and short bonds discounting a
resumption in i-rate hikes
Reasonable value in SA bonds overall but supply
is an issue
Credit reasonable value at current levels
ILBs remain expensive
Property Index
Rand – Purchasing Power
PPP Model: USD vs Rand exchange rate
0
2
4
6
8
10
12
Dec-
80
Dec-
82
Dec-
84
Dec-
86
Dec-
88
Dec-
90
Dec-
92
Dec-
94
Dec-
96
Dec-
98
Dec-
00
Dec-
02
Dec-
04
Dec-
06
Dec-
08
Dec-
10
Cheap
Expensive
Global Oil Supply Disruptions by Average Gross Supply
S&P / Case-Schiller Home Price Indices
What happens when the Fed stops buying?
70% ???
See the share of global foreign-
exchangetransactions
involving the dollar, and the
dollar's share of official global
foreign-exchange reserves.
The Dollar's reignis coming to an end.
S&P 500
Nikkei 225
Human Behaviour
Required Return to Retire
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,0002
0
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68 70
72
74
76
78
80
82
84
Savings growing at inflation + 4%Savings growing at inflation after 55
Must Hold Equity to Build Real Return
Source: Prescient, FTSE/JSE, BESA
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Equities 9.07% 9.17% 8.76% 8.13% 10.13% 13.02%
Bonds 1.10% 2.25% 2.89% 6.99% 6.12% 1.60%
Cash 2.17% 2.30% 3.16% 4.91% 3.27% 2.19%
Real from 1960 - 2011
Real from 1975 - 2011
Real from 1980 - 2011
Real from 1990 - 2011
Real from 2000 - 2011
Real from 2005 - 2012
51 yrs
21 yrs
11 yrs
31 yrs
7 yrs
36 yrs
Source: Prescient, FTSE/JSE, BESA
But … Protect Against Equity Volatility
-40%
-20%
0%
20%
40%
60%
80%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Equity real return
Ave real
Credit Crunch
IT Bubble
Emerging Markets CrisisEarly 90’s
Recession
90’s Bull Market
IT Bubble
2000’s Bull Market
Rolling ReturnsRolling One Year Returns
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Jun-0
4
Jun-0
5
Jun-0
6
Jun-0
7
Jun-0
8
Jun-0
9
Jun-1
0
Prescient Balanced FundCashFTSE/ J SE All Share I ndex
What is Risk?
Pleasure
Pain
Loss Profit
What is Risk?
Pleasure
Pain
Loss Profit
Maybe there is a
better way?
Risk Benchmark
Minimum Return =
No risk of capital loss over 12 months
Performance Target
CPI + 4% pa
Maximise performance subject to minimum return requirement
Fund Benchmarks
Consider the risk adjusted pricing of
different assets
Income
Volatility
Look at different strategies payoff profiles
to determine optimal allocation
Asset Allocation: Asset Pricing
Asset Allocation: Pricing
Scenario 1
2004
Scenario 2
2008
Current Scenario
Equity Div Yield 5% 1.9% 2.0%
Interest Rates 7% 13% 5.5%
Option cost 8% 20% 10%
Inflation 5% 12% 3.7%
Asset Allocation
Equity 75% 0% 50%
Fixed Interest 25% 100% 50%
ConsistencyConsistency
100
200
300
400
500
600
700
800
Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10
Ind
ex =
10
0 @
31
Dec 9
8
Balanced (65% Equity, 20% Bonds, 15% Cash)
Positive Return Composite
CPI + 6%
To end February 2011
Balanced QuantPlus® Asset Allocation
January 2011
Underlying equity exposure = 57% (Net effective 51%)
International; 20.00%
Interest Bearing; 23.00%
SA Equities; 57.00%
Balanced FundPerformance Sensitivity
Performance Sensitivity
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-30% -20% -10% 0% 10% 20% 30%
Equity Market Move From Current Levels
Perf
orm
ace
fro
m J
an
2011
to S
ep
2011
Benchmark
YTD
Balanced Fund
Sensitivity Analysis Positive Return Fund
Performance Sensitivity
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-30% -20% -10% 0% 10% 20% 30%
Equity Market Move From Current Levels
Perf
orm
ace f
rom
Jan
20
11
to M
arc
h 2
01
2
Benchmark
YTD
Positive Return
Value of Downside Protection in a Balanced Mandate
Long Term Performance
9.75%
12.90%
15.18%14.09%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Cash 0% Min, FullyProtected Equity
- 5% Min,Protected Equity
Balanced Fund,65% Equity 35%
Cash
Annualised R
etu
rn
Meeting Expectations(Rolling 12 Month Returns)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Dec-99 Nov-00 Oct-01 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10
Prescient Positive Return Composite
Meeting Expectations(Rolling 12 Month Returns)
-10%
0%
10%
20%
30%
40%
50%
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Prescient Balanced Composite
Asset Allocation Global Balanced Fund
Equity, 60.0%
Fixed Interest, 20.0%
Global Positive Return (Euro) Fund, 20.0%
Performance: Balanced QuantPlus®
Period Performances to end February 2011. Inception = January 2001
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Prescient Balanced Composite InflationInflation+3%
Prescient Balanced Composite 13.44% 10.02% 13.64% 16.93% 17.66%
Inflation 3.45% 6.40% 6.70% 6.25% 6.29%
Inflation+3% 6.55% 9.60% 9.90% 9.43% 9.48%
1 Yr 3 yrs (p.a.) 5 yrs (p.a.) 10 Yrs (p.a.) Incep
Decide on your investment objectives
See what asset classes can deliver
Decide on the volatility you can live with
Look at your long term asset allocation
Select the fund with that long term asset allocation
Let the professionals manage it
Balanced Funds
Taking the Emotion
out of Investing
Taking the Emotion
out of Investing
Quantitative
investment style
Quantitative analysis relies on mathematical and
statistical methods to develop and test theories against
real-life streams of security price information.
The purpose behind quantitative analysis is to create a
mathematical model of market behaviour. That model
is then used for designing portfolios and investment
strategies. As markets become more efficient, through
faster dissemination of market information and improved
assimilation of market news into the market places, the
more amenable they become to quantitative analysis.
Quantitative Analysis
1. Developing accounting based models using databases
and forecasts
2. Using the models to rank the stocks
3. Identifying attractive stocks
4. Applying fundamental analysis to determine which stocks
to buy or sell
There is no emphasis on risk. Qualitative portfolio managers believe that
they add value by means of their judgement and forecasting ability. The
qualitative approach uses models to provide quantitative input to the
judgement process, as well as to understand what is happening in the
companies and generate ideas.
Qualitative Management Involves:
Realised and Implied Volatility
Equity Allocation: Risk Adjusted Pricing
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jul-
95
Jul-
96
Jul-
97
Jul-
98
Jul-
99
Jul-
00
Jul-
01
Jul-
02
Jul-
03
Jul-
04
Jul-
05
Jul-
06
Jul-
07
Jul-
08
Jul-
09
Jul-
10
Capped Beven % Uncapped Beven %
Source: PIM, FTSE/JSE
Dynamic Process
6,000
7,500
9,000
10,500
12,000
13,500
15,000
16,500
18,000
19,500
21,000
22,500
24,000
25,500
27,000
28,500
30,000
31,500
33,000
34,500
Jan
-01
Jul-
01
Feb-0
2
Sep-0
2
Apr-
03
Nov-0
3
Jun
-04
Jan
-05
Aug-0
5
Mar-
06
Nov-0
6
Jun
-07
Jan
-08
Aug-0
8
Mar-
09
Oct
-09
May-1
0
Dec-
10
Top 40
Floor
Cap
Prescient Positive Return
Gross returns to end February 2011. Inception = Jan 1999
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0% Prescient Positive Return Composite
Inflation
Inflation+3%
Prescient Positive Return Composite 0.89% 7.99% 9.85% 12.02% 13.97% 15.72%
Inflation 0.89% 3.45% 6.40% 6.70% 6.25% 6.45%
Inflation+3% 1.39% 6.55% 9.60% 9.90% 9.43% 9.64%
YTD 1 Yr 3 yrs (p.a.) 5 yrs (p.a.)10 Yrs (p.a.)
Incep
Risk/Return
Inception of Fund January 1999 to February 2011
Prescient Positive Return Vs Benchmarks Risk/ Return - Since Inc of PR Fund to 28 February 2011
FTSE/J SE All Share Index, 19.9%
Balanced (65% Equity, 20% Bonds, 15%
Cash), 17.4%
Positive Return Composite , 15.7%
ALBI , 13.2%
IBCR, 8.9%
8%
10%
12%
14%
16%
18%
20%
22%
0% 5% 10% 15% 20% 25%Annual Volatility
Perf
orm
an
ce (
p.a
.)
Risk/Return
Inception of Fund January 1999
Prescient Positive Return Vs Benchmarks Risk/ Return - Five Years to 31 J anuary 2011
Positive Return Composite , 12.0%
IBCR, 8.0%
Balanced (65% Equity, 20% Bonds, 15%
Cash), 12.2%
ALBI , 7.1%
FTSE/J SE All Share Index, 14.1%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0% 5% 10% 15% 20%Annual Volatility
Perf
orm
an
ce (
p.a
.)
Risk/Return
Inception of Fund January 1999
Prescient Positive Return Vs Benchmarks Risk/ Return - Three Years to 28 February 2011
Positive Return Composite , 9.8%
Balanced (65% Equity, 20% Bonds, 15%
Cash), 6.7%
IBCR, 7.8%
ALBI , 9.8%
FTSE/J SE All Share Index, 4.6%
4%
5%
6%
7%
8%
9%
10%
11%
0% 5% 10% 15% 20% 25%Annual Volatility
Perf
orm
an
ce (
p.a
.)
Effect on Total Portfolio Return with Different Downside Constraints
Equity ExposureUncapped -30% -20% -10% 0 10% 20% 30%
5% 9% 5% 5% 5% 5% 6% 7% 8%
2.5% 33% 2.5% 2.5% 2.5% 2.5% 6% 9% 12%
0 56% 0% 0% 0% 0% 5% 11% 17%
-2.5% 82% -2.5% -2.5% -2.5% -2.5% 5% 13% 21%
-5% 100% -5% -5% -5% -5% 6% 16% 26%
65% -16% -9% -3% 3% 10% 16% 23%
Sensitivity to Equity Market
Min
imu
m R
etu
rn
Balanced
Performance TAA vs. Asset Classes
TAA Vs Market I ndices J an 2007 [Inception of TAA Fund] to 28 February 2011
ALBI , 7.6%
ALL Share SWI X, 9.0%
Tactical Asset Allocation, 11.4%
65% SWI X : 35% Cash, 9.5%
STeFi Composite, 9.1%
FTSE/ J SE Alsi 40, 8.9%
7%
8%
9%
10%
11%
12%
0% 5% 10% 15% 20% 25%Annual Std Deviation [Volatility]
Perf
orm
an
ce (
p.a
.)
Global Positive Return (Euro) Fund
Returns to end February 2011.
Global Positive Return (Euro) Fund
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Global Positive Return(Euro) Fund
0.57% 0.72% 6.38% 9.34%
Composite CPI benchmark - 0.27% 1.32% 3.22% 2.15%
EU Harmonised CPI + 1 - 0.3% 1.3% 3.2% 2.2%
YTD 6 Month 1 Year Since EURPR strat
(31 Dec 08)
Asset Allocation:Global Positive Return (Euro) Fund
Equity Up Market
Bonds, 36%
Cash, 38%
Protected Equity, 27%
Equity Down Market
Bonds, 38%
Equity , 2%
Cash, 60%
Asset Allocation:Global Growth
Equity, 67.7%
Cash, 32.3%
Equity Carve-Out Performance
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
EAQ Global 17.0% 18.0% -1.1% 3.0% 7.9%
MSCI World 16.3% 16.8% -3.7% -0.1% 3.5%
6 Months 1 Year 3 Year 5 Year Full Period