managing a balanced mandate herman steyn - executive chairman prescient investment management march...

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

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


IBCR, 8.0%


Cash), 12.2%

ALBI , 7.1%


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



Cash), 6.7%

IBCR, 7.8%

ALBI , 9.8%


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

managing a balanced mandate herman steyn - executive chairman prescient investment management march...

Documents