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