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5 “New Year” Resolutions
OMAC Breakfast1st Quarter 2010
May your troubles last as long as May your troubles last as long as your New Year resolutions do…your New Year resolutions do…
3
Less Financial Security?
We feel vulnerable to foreign financial We feel vulnerable to foreign financial crisescrises
Even long standing companies don’t seem Even long standing companies don’t seem as strong as they used to beas strong as they used to be
Members’ futures are vulnerable…Members’ futures are vulnerable…
4
More Uncertainty?
There is less predictability and more uncertainty?
“We must do something!”
Circumstances changeCircumstances change
The basics of good financial The basics of good financial management management
don’tdon’t
6
Resolution #1
Don’t underestimate the power of compound Don’t underestimate the power of compound interestinterest
7
Compound InterestHow long does it take to
double your money?
8
Years for an Investment to Double in Value
14.2
11.9
10.29.0
8.07.3
5.03.8
3.1
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
5% 6% 7% 8% 9% 10% 15% 20% 25%
Annual Return
Years
Compound Interest
How long does it take to double your money?
9
Compound InterestValue of R1,000 After 10 Years
1,629 1,791 1,967 2,159 2,367 2,594
4,046
6,192
9,313
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
5% 6% 7% 8% 9% 10% 15% 20% 25%
Annual Return
How much could we earn in 10 years?
10
Compound Interest
Annualised Returns Earned Over 10 Years
-2.9%
4.7%
10.1%12.1%
16.2%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Offshore Equity Offshore Bonds Cash Bonds Equities
Annual Return
How much did we earn in 10 years?
11
Compound Interest
Value of R1,000 After 10 Years
743
1,583
2,613
3,134
4,469
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Offshore Equity Offshore Bonds Cash Bonds Equities
Annual Return
What would R1000 have become in 10 years?
12
Compound Interest
Not bad going for a decade with Not bad going for a decade with
IT bubble and IT bubble and burstburstRand crisis and impactRand crisis and impact
September 11 and global fearsSeptember 11 and global fears2 market “crashes”2 market “crashes”
Global Credit CrunchGlobal Credit CrunchRegime ChangeRegime Change
RecessionRecession
What if this could continue What if this could continue for thefor the
Long term?Long term?
14
Compound InterestProjecting Cash Returns (10.1%)
2,613
6,826
17,834
46,595
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
10 Years 20 Years 30 Years 40 Years
15
Compound InterestProjecting Bond Returns (12.1%)
3,1349,820
30,773
96,433
-
20,000
40,000
60,000
80,000
100,000
120,000
10 Years 20 Years 30 Years 40 Years
16
Compound InterestProjecting Equity Returns (16.2%)
4,46919,970
89,243
398,812
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
10 Years 20 Years 30 Years 40 Years
Don’t Underestimate the Danger of Don’t Underestimate the Danger of InflationInflation
18
Inflation2000
White Bread (700g) R3.12Brown Bread (700g) R2.56Maize Meal (10kg) R25.26Rice (1 kg) R6.63Cooking Oil (750ml) R4.16Full Cream Milk (1l) R2.56Fresh Chicken Whole R11.94Apples (1.5kg) R6.30Onions (per kg) R2.57Potatoes (10kg) R13.55White Sugar (2.5kg) R9.39Ricoffy Coffee (750g) R23.02
Total R111.06
TodayR5.79R4.99R47.00R7.99R8.99R6.29R28.00R16.95R5.99R41.99R15.39R51.99
R241.36
Incr.186%195%186%121%216%246%235%269%233%310%164%226%
217%
p.a.6.4%6.9%6.4%1.9%8.0%9.4%8.9%10.4%8.8%12.0%5.1%8.5%
8.1%
19
Inflation
In January 2000 Petrol cost R2.88 per litre and In January 2000 Petrol cost R2.88 per litre and Diesel cost R2.47 per litreDiesel cost R2.47 per litre
At February 2010 Petrol was R7.85 per litre and At February 2010 Petrol was R7.85 per litre and Diesel cost R6.99 per litreDiesel cost R6.99 per litre
An An increaseincrease of 173% (10.5% p.a.) for Petrol and of 173% (10.5% p.a.) for Petrol and 183% (11% p.a.) for Diesel183% (11% p.a.) for Diesel
20
Inflation
TodayToday 10 years10 yearsBread R10 R18
Movie R40 R72
Petrol (l) R8 R14
Education R21k R37.6k
Car R100k R179k
House R950k R1700k
30 Years30 Years 40 Years40 YearsR57 R57 R102R102
R230R230 R411R411
R46R46 R82R82
R120.6kR120.6k R211kR211k
R574kR574k R1028kR1028k
R5545kR5545k R9771kR9771k
21
Inflation Value of R1,000 After 10 Years
743
1,583
2,613
3,134
4,469
1,815
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Offshore Equity Offshore Bonds Cash Bonds Equities InflationAnnual Return
22
InflationAnnualised Returns Earned Over 10 Years
-2.9%
4.7%
10.1%12.1%
16.2%
-8.5%
-1.4%
3.7%5.6%
9.4%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Offshore Equity Offshore Bonds Cash Bonds Equities
Annual Return
Asset Class Returns Real Returns
Time in the Market Time in the Market
Is Still the Most PowerfulIs Still the Most Powerful
Driver of WealthDriver of Wealth
24
Resolution #2Resolution #3
Don’t Over-react to Volatile MarketsDon’t Over-react to Volatile Markets
Refine Fund Strategy First, then Refine Fund Strategy First, then Review Asset ManagerReview Asset Manager
25
Keep the Long-Term View
What tempts us to deviate from our What tempts us to deviate from our long-term strategies…?long-term strategies…?
We are bombarded with daily financial We are bombarded with daily financial information and market informationinformation and market information
Our natural inclination is to avoid loss and Our natural inclination is to avoid loss and uncertaintyuncertainty
We start to think we We start to think we must/canmust/can time the market time the market
26
Information Overload
We are living in the information age…We are living in the information age…
• Market and financial information is reportedMarket and financial information is reported– DailyDaily (Newspapers, TV)(Newspapers, TV)– HourlyHourly (Radio, Internet, Mobile Phone)(Radio, Internet, Mobile Phone)– Real-timeReal-time (Internet, Mobile Phone)(Internet, Mobile Phone)
• Some of the most well known statistics in SA are:Some of the most well known statistics in SA are:– Rand/$ Exchange rateRand/$ Exchange rate– ALSIALSI– Gold and Platinum PriceGold and Platinum Price– Oil PriceOil Price
27
Information Overload
Our focus is pulled to the short term byOur focus is pulled to the short term by
Repetitive reporting of short termRepetitive reporting of short term
““Expert” analysis of short-termExpert” analysis of short-term
Predictions that are short-termPredictions that are short-termAmplification of UncertaintyAmplification of Uncertainty
28
29
Human Nature
Loss AversionLoss AversionSelf Serving BiasSelf Serving Bias
AnchoringAnchoringFramingFraming
30
Market Volatility
What happens next?
31
Market Volatility
What happens next?
32
J SE All Share Price Index
17000
19000
21000
23000
25000
27000
29000
31000
33000
Jan 06
Mar
06
May
06
Jul 06
Sep 0
6
Nov 0
6
Jan 07
Mar
07
May
07
Jul 07
Sep 0
7
Nov 0
7
Jan 08
Mar
08
May
08
Jul 08
Sep 0
8
Nov 0
8
Jan 09
Mar
09
May
09
Jul 09
Sep 0
9
Nov 0
9
Jan 10
Market Volatility To 31 January 2010
33
Human Nature
Which do you prefer?Which do you prefer?
A.A. Return of 5% for the yearReturn of 5% for the yearB.B. One third chance of 15% return and two One third chance of 15% return and two
third chance of 0% return for the yearthird chance of 0% return for the year
C.C. Loss of 10% for the yearLoss of 10% for the yearD.D. One third chance of 0% return and two One third chance of 0% return and two
third chance of 15% loss for the yearthird chance of 15% loss for the year
34
Human Nature
Loss AversionLoss Aversion
Losses hurt more than gains
Prefer to avoid losing R1000 than gain R1000
Self Serving BiasSelf Serving Bias
We take personal credit for success, but blame failures on others
Poor performance means a bad manager
AnchoringAnchoring
Focus on a reference point which becomes the norm
Extended bull run becomes normal
FramingFraming
Investment choices and opinion changes depending on context of
situation
Answer to same question can change
35
J SE All Share Price Index
17000
19000
21000
23000
25000
27000
29000
31000
33000
Jan 0
6
Mar
06
May
06
Jul 0
6
Sep 0
6
Nov 0
6
Jan 0
7
Mar
07
May
07
Jul 0
7
Sep 0
7
Nov 0
7
Jan 0
8
Mar
08
May
08
Jul 0
8
Sep 0
8
Nov 0
8
Jan 0
9
Mar
09
May
09
Jul 0
9
Sep 0
9
Nov 0
9
Jan 1
0
Market Volatility
13%
-36%
-9%
18%
24%
-20%
21%
8%
-20%-13%29%
-20%
30%
To 31 January 2010
20%
-8%
-4%
12%
-5%
36
Human Nature
Loss Aversion
Self-serving Bias
Anchoring
Framing
Losses really hurt! We must avoid further losses…
Move to Cash
By moving out of equity, we avoid others’ incompetence and do
something useful…
Move to Cash
Compared to the Bull market, all performance seems sub-
standard. Equities lose their charm…
Move to Cash
The uncertainty of the market and potential losses make certainty,
at any return attractive…
Move to Cash
Fire Manager
Fire Manager
Fire Manager
Fire Manager
37
Long Term ViewAsset Class Performance
-50%
0%
50%
100%
150%
200%
250%
300%
Dec-99
Apr-00
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Index JSE - Africa All Share - Total return Real Index JSE - Africa All Share - Total return Real Mean
Mean Reversion
38
Timing the MarketI mpact of Switching to Cash
178%
77%
161%
-50%
0%
50%
100%
150%
200%
250%
300%
Dec
-99
Jun-
00
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Index JSE - Africa All Share - Total return Real Timing 12 Month Delay Timing 6 Month Delay
39
Timing the Market
If your fund offers investment choice…If your fund offers investment choice…
How well do you think your members How well do you think your members are doing in timing the market?are doing in timing the market?
40
Timing the Market
How well do you think your How well do you think your asset asset managersmanagers are doing in timing the are doing in timing the
market?market?
41
Long Term ViewBalanced Fund Performance
314%331%
295%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
Dec
-99
Jun-
00
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Passive Balanced (65% Eq;35% FI) Index AF Global Manager Watch - Large Passive Global Balanced (75% Eq;25% FI)
42
Long Term ViewSample of Global Balanced Funds
272%
399%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Dec
-99
Jun-
00
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
43
Market TimingSample of Global Balanced Funds (Less 4 Best Months)
170%
252%
-50%
0%
50%
100%
150%
200%
250%
300%
Dec
-99
Jun-
00
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
44
Resolution #4
Take On An Appropriate Level of RiskTake On An Appropriate Level of Risk
45
J SE All Share Price Index
17000
19000
21000
23000
25000
27000
29000
31000
33000
Jan 0
6
Mar
06
May
06
Jul 0
6
Sep 0
6
Nov 0
6
Jan 0
7
Mar
07
May
07
Jul 0
7
Sep 0
7
Nov 0
7
Jan 0
8
Mar
08
May
08
Jul 0
8
Sep 0
8
Nov 0
8
Jan 0
9
Mar
09
May
09
Jul 0
9
Sep 0
9
Nov 0
9
Jan 1
0
Market Volatility
13%
-36%
-9%
18%
24%
-20%
21%
8%
-20%-13%29%
-20%
30%
To 31 January 2010
20%
-8%
-4%
12%
-5%
46
Investment Risk
Feeling nervous about equities?Feeling nervous about equities?
Equities have historically outperformed other asset classes in the long term
Prices do deviate from true value from time to time
Bubbles and corrections
47
Investment RiskAsset Class Performance
-50%
0%
50%
100%
150%
200%
250%
300%
Dec-99
Apr-00
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Index JSE - Africa All Share - Total return Real
48
Investment Risk
One can lose money
OR
One can lose out on money
49
Investment Risk
Cash
Gilts
Smooth BonusProperty
Derivatives
Equity
Volatility
Return
Volatility Risk (Exit Risk)
50
Investment Risk
Cash
Gilts
Smooth BonusProperty
Derivatives Equity
Volatility
Return
Inflation Risk (Growth Risk)ILG
51
Investment Risk
Cash
GiltsSmooth Bonus
Property
Derivatives
Equity
Volatility
Return
Capital Loss Risk (Loss Risk)
Derivatives
52
Managing Risk
Lose MoneyLose Money
Lose Out on Lose Out on MoneyMoney
DiversificationConservative Asset Allocation
GuaranteesSmoothingDerivatives
Absolute Return Strategies
DiversificationAggressive Asset Allocation
Passive InvestingLife Stage Investing
53
Investment Risk
Take the level of risk that members can afford
Not more, or less…
54
Resolution #5
Use Good Governance as a Tool for Use Good Governance as a Tool for ProtectionProtection
55
Good Governance
HEURISTICHEURISTIC(noun) A common sense rule (or set of rules) intended
to increase the probability of solving a problem
56
Good Governance
ReputationReputation
AgeAge
SizeSize
NationalityNationality
(A large, 150 year plus old, American bank with a great reputation and household name should be very safe:
AAA+ )
57
Governance Failures
EnronEnronWorldcomWorldcomEishkomEishkomFidentiaFidentia
SA AirlinkSA AirlinkBarings BankBarings Bank
ExxonExxonTycoTyco
American AirlinesAmerican Airlines
Valujet AirlinesValujet AirlinesLehmann BrothersLehmann Brothers
Beare SternsBeare SternsBulkingBulking
Deutsche BankDeutsche BankPension StrippingPension Stripping
ParmalatParmalatMadoffMadoff
Societe GeneraleSociete Generale
58
Governance Failures
59
Governance Failures
60
Protect Members’ benefits fromProtect Members’ benefits from
Good Governance
Good Governance
Good Governance
Bad Bad ManagementManagement
Poor Poor Service Service
ProvidersProviders
EnvironmentEnvironmentRisksRisks
IgnoranceIgnorance
61
Good Governance
► Understand and mitigate the risks the Understand and mitigate the risks the Fund is facingFund is facing
► Communicate transparently and Communicate transparently and regularly to membersregularly to members
► Understand your service providers’ Understand your service providers’ strengths and weaknessesstrengths and weaknesses
► Improve your knowledge as a TrusteeImprove your knowledge as a Trustee► Manage the members’ money wellManage the members’ money well► Ensure your Insurance covers Ensure your Insurance covers
everything you needeverything you need
62
Governance Failures
63
Investment Risk
True governance protects members’ best interests
Ticking boxes protects Trustees from scrutiny only
64
5 New Year Resolutions
1. Don’t underestimate the power of compound interest
2. Don’t Over-react to Volatile Markets3. Refine Fund Strategy First, then Review Asset
Manager4. Take On An Appropriate Level of Risk5. Use Good Governance as a Tool for Protection
65
THANK YOU