LONG TERM LESSONS

July 2015

John Orford

INFLATION IS PUBLIC ENEMY #1

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”

Ronald Reagan

INFLATION IS PUBLIC ENEMY #1

Source: Old Mutual Investment Group, MacroSolutions

0.7% REAL RETURNS OVER THE LAST 95 YEARSCash is trash

IT’S EQUITY FOR REAL WEALTH CREATIONAnnualised real return December 1929 – December 2014

Source: Old Mutual Investment Group, MacroSolutions

THE SANDTON SKYLINE FOR SA EQUITY

Source: Old Mutual Investment Group, MacroSolutions

December 1924 – December 2014

IT’S TIME IN THE MARKET NOT TIMING THE MARKET

THE VIRTUE OF PATIENCE

Source: Old Mutual Investment Group, MacroSolutions

1 day and 1 week: Rolling total returns, June 1995 to current

1 month to 10 years: Rolling total returns, January 1925 to current

Holding period

IT’S MAINLY ABOUT COMPOUNDINGR100 in the JSE 90 years ago = R21 million

DO YOU HAVE ENOUGH BASKETS?

DIVERSIFICATION HELPS50 Years 30 Years 20 Years 10 Years 5 Years

SA Equities17.7%

SA Equities18.0%

SA Property17.1%

SA Property21.5%

SA Property21.4%

MacroSolutions Balanced Index 15.9%

MacroSolutions Balanced Index 17.0%

SA Equities15.1%

Gold18.3%

Global Equities21.1%

Global Equities15.5%

Global Equities17.0%

MacroSolutions Balanced Index 14.7%

SA Equities18.0%

SA Equities15.8%

Gold13.5%

SA Property14.5%

Global Equities14.1%

MacroSolutions Balanced Index 15.7%

MacroSolutions Balanced Index 15.2%

Global Bonds13.1%

SA Bonds14.4%

SA Bonds13.3%

Global Equities14.5%

Global Bonds11.6%

SA Cash10.9%

Global Bonds14.1%

Gold12.6%

Global Bonds11.0%

Gold10.6%

SA Bonds10.5%

SA Cash12.0%

Global Bonds11.9%

SA Bonds8.5%

SA Bonds10.0%

SA CPI8.8%

Gold11.3%

SA Cash10.3%

SA Cash7.4%

SA Cash5.9%

SA CPI8.6%

SA CPI6.1%

SA CPI6.0%

SA CPI5.2%

8.9% 9.4% 11.0 15.4 16.2

Highest Return

Lowest Return

Range between highest and lowest return

Source: Morningstar

ACTIVE ASSET ALLOCATION CAN ADD VALUE2010 2011 2012 2013 2014

SA Property29.6%

Gold 34.8%

SA Property35.9%

Global Equities59.6%

SA Property26.6%

SA Equities19.0%

Global Bonds30.7%

SA Equities26.7%

MacroSolutions Balanced Index 22.8%

Global Equities15.8%

SA Bonds15.0%

Global Equities15.8%

Global Equities21.3%

SA Equities21.4%

MacroSolutions Balanced Index 11.3%

Gold 14.6%

SA Property8.9%

MacroSolutions Balanced Index 20.4%

Global Bonds19.6%

SA Equities10.9%

MacroSolutions Balanced Index 13.2%

MacroSolutions Balanced Index 8.9%

SA Bonds16.0%

SA Property8.4%

Global Bonds10.2%

SA Cash6.9%

SA Bonds8.8%

Gold 10.8%

SA CPI5.4%

SA Bonds10.1%

SA CPI3.5%

SA CPI6.1%

SA CPI5.7%

SA Cash5.2%

Gold 8.9%

Global Equities0.5%

SA Cash5.7%

SA Cash5.5%

SA Bonds0.6%

SA Cash5.9%

Global Bonds-4.8%

SA Equities2.6%

Global Bonds5.4%

Gold -11.2%

SA CPI5.3%

34.4% 32.2% 30.5 70.7 21.3

Highest Return

Lowest Return

Range between highest and lowest return

Source: Morningstar

RISK/RETURN PLOT: ANNUALISED RETURNS VS VOLATILITY OVER 20 YEARS

Source: Old Mutual Investment Group, MacroSolutions

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%10%

11%

12%

13%

14%

15%

16%

17%

18%

Risk

Retu

rn

Balanced Index

Profile Capital

Profile Stable Growth

Profile Balanced

Profile Pinnacle

Money Market

SA Bonds

Global Equity

SA Equity

BUT WHAT IS THE OUTLOOK VS THE PAST?

Source: Old Mutual Investment Group | NB: These are long-term, real returns expected over the next five years, as at 15 January 2015* The international return expectations above are in US Dollar terms; any rand depreciation will add to returns in rands.

SA

Equity

Property

Bonds

Cash

Global*

Equity

Bonds

Cash

Expected 5 Year Real Return

View

5.0%

4.5%

2.5%

0.5%

5.0%

-1.0%

-1.0%

Neutral

Neutral

–

Neutral

+

–

–

Neutral

+

Historic Real Return (since 1929)

7.8%

4.7%

1.5%

0.7%

7.0%

3.3%

-0.3%

Neutral p.a.

MacroSolutions Balanced Index 3.8%5.9%

CONCLUSION

• Inflation is the enemy

• Longer term cash is trash not king

• You need equities to beat inflation

• “Time in the market” not “timing the market”

• Diversify to reduce risk

• Active Asset Allocation can add value

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