Investment strategy in a fast changing environment

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Introduction

1. Initial lessons from the credit crises

a. Inflation or disinflation

b. Are we still in a low growth environment?

2. Applying the lessons learnt

a. How have the fund strategies changed in the wake of the

crisis?

b. How does asset allocation protect against disasters?

c. How do funds avoid negative return years?

d. What should is the correct time horizon for investments?

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Initial lessons

Post crises

Regulation

Light regulation does not

work

Volcker Rule limits prop

trading & exposure to hedge

funds

Frank-Dodd regulates banks,

rating agencies, buyout firms

& hedge fund

Financial market regulation on the increase

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Initial lessonsInitial lessons

Post crises (continued)

Lessons for monetary policy Macro financial stability

An open capital account reduces effectiveness

Lessons for fiscal policy Counter cyclical policy to mitigate booms

Save for rainy days

Wider remit for monetary policy

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Source: OECD

Fed Balance Sheet vs. US CPI growth

2003 2005 2007 2009 2011 20130

500000

1000000

1500000

2000000

2500000

3000000

3500000

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Fed Balance Sheet ($ Millions) US CPI % annual change

“Inflation is always and everywhere a monetary phenomenon” Milton Freidman

More money ≠ inflation

Banks can create 10X more money than central banks through fractional reserving

Weighing in on the inflation, deflation or disinflation debate

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1949 1956 1963 1970 1977 1984 1991 1998 2005 20120.00

10000.00

20000.00

30000.00

40000.00

50000.00

60000.00

Total Credit Market Debt Owed GDP ($ Billions)

Source: OECD

US Credit Market Debt vs. US GDP

Rate of growth will slow as the supply of credit is restricted

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Applying the lessons learned from the financial crisis

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How has fund strategy changed inthe wake of the crisis?

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Source: ICI, Deutsche Bank Research

How has fund strategy changed in the wake of the crisis?

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Source: Haver Analytics, Deutsche Bank

How has fund strategy changed in the wake of the crisis?

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Domestic Vs. International equity

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How asset allocation protects against disasters?

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Barclays US Aggregate Total Return Un-hedged USD versus S&P 500

Source: Bloomberg

Bonds versus Equities

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1937

/12

1940

/02

1942

/04

1944

/06

1946

/08

1948

/10

1950

/12

1953

/02

1955

/04

1957

/06

1959

/08

1961

/10

1963

/12

1966

/02

1968

/04

1970

/06

1972

/08

1974

/10

1976

/12

1979

/02

1981

/04

1983

/06

1985

/08

1987

/10

1989

/12

1992

/02

1994

/04

1996

/06

1998

/08

2000

/10

2002

/12

2005

/02

2007

/04

2009

/06

2011

/08-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0S&P 500 Rolling 10 Year Return

Equity returns were very poor between 2000 & 2008

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Source: BlackRock

Do trustees and members have the correct time horizon for investments?

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Questions

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Global Interest Rates at Historical Lows

17

9192

1010

611

018

1193

312

844

1375

914

671

1558

516

497

1741

118

323

1923

820

149

2106

421

976

2289

023

802

2471

625

628

2654

327

454

2836

929

281

3019

531

107

3202

132

933

3384

834

759

3567

436

586

3750

038

412

3932

640

238

4115

30

5

10

15

20%

10-year US Treasury Bond Yield

3-Month US Treasury Bill Rate

Fed Funds Rate

The G

reat

Infla

tion The Great Deflation

Source: Bloomberg, Futuregrowth

The Developed WorldMonetary versus fiscal policy, unemployment headwinds to growth

18

BrazilToo much government & consumption

ChinaToo much investment & not enough

consumption

IndiaLarge infrastructure and private sector

backlog to overcome

USAFed steps back – can Treasury play its part?

EUStructural impediments remain

JapanStructural impediments remain

The Emerging WorldRe-calibration for the BRICs (18% of global GDP)

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EM Twin Deficits

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-8 -4 0 4 8

-8

-4

0

4

8

2.14

-0.26

-4.5

4.58

-1.140

-2.3

0.06

-2.03

0

-2.87

-4.4

-1.43

-3.34-3.87

-1.78

-5.88-5.45Cu

rren

t acc

ount

as

% o

f GDP

Budget deficit as % of GDP Source: Bloomberg, Futuregrowth

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A weakening rand trendThe Rand has depreciated between 25% & 50% against its major trading partners since Jan 2011

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Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-1380

90

100

110

120

130

140

150

160

US Dollar Euro Japanese Yen Chinese Renminbi

% Exports % ImportsAsia 35% 46%USA 11% 12%Europe 25% 32% 48.3%

37.2%

25.2%

48.3%

Source: Bloomberg, Futuregrowth

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Implications for investment

• JSE All Share Index at record levels

• Central Bank Policy rate at record low• Bond yields at multi-decade lows

Capital preservation as an investment strategy?

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Questions