Performance through Focus

Quarterly Press Conference

27 January 2009

2009 OUTLOOK:INVESTING IN ASLOW-GROWTH WORLD

2

Investment Options: Craig ChambersDeputy MD, Umbono Fund Managers

“Low-cost solutions for a low-growth world”

3

Fees of increasing importance

• Most equity analysts expecting single-digit real returns fromthe JSE over next 2-3 years

• A reasonable forecast is for the market to revert to its long-termrolling average return of 8% p.a. before the 2003-2007 bull run

• Therefore, costs will have a far greater impact on fund performanceover the next few years

4

Impact of Costs on Investors’ Returns

• Active fund management fees plus estimated trading costs* as apercentage of the expected 8% real return (on a R100m fund)…− 14% pa

• Tracker fee plus estimated trading costs as a percentage of the8% real return (on a R100m fund)…− 2.8% pa

• On the previous real returns of 20% p.a., investors were payingapproximately 6% in fees for active management as a percentage of the real return

* Please Note: Rob Rusconi’s research showed that the cost of neutralised trades (active managers buying and selling to each other) can be as much as 2.20% pa. (Source: Who’s Money is it anyway?). However, given the lack of published data regarding hidden trading costs, we have been extremely conservative in our estimate thus utilising only 25% of the 2.20% i.e. 0.55%.

5

Other Costs

• There are many other costs levied on pension funds that we have not included in this analysis (Many of these costs will be higher if only active funds are used), these costs include :

− Investment Fund Expenses:• Bank charges, audit fees, booking fees, Strate fees, Besa fees, levies

− Administration fees− Governance fees

• FSB fees, trustee fees− Guarantee fees− Other fees:

• Consultancy fees, actuarial fees, principal officer fees,fidelity cover fees etc

• In aggregation, these sum to the fund’s “All-in” Costs (In Chile, a fund’s typical “All-in” cost is 0.63% (Source: Old Mutual) - we would estimate that a typical SA fund’s “All-in” cost is at least 100% higher than this)

6

Discount Relative to Average Active Fees

Core Equity Tracker (Full Replication)

Average Active Fees*

Tracker Discount

R50m 0.20% 0.69% 71%

R100m 0.15% 0.59% 75%

R200m 0.13% 0.57% 77%

R300m 0.12% 0.53% 77%

R500m 0.11% 0.50% 78%

RAFI Tracker (Full Replication)

Average Active Fees*

RAFIDiscount

R50m 0.34% 0.69% 51%

R100m 0.29% 0.59% 51%

R200m 0.27% 0.57% 53%

R300m 0.26% 0.53% 51%

R500m 0.25% 0.50% 50%

* Manager Watch Survey of Retirement Fund Investment Managers, Dec 2007

Rule of Thumb: From the 2007 Alexander Forbes Retirement Fund Survey our Tracker Fees are between 71% & 78% lower than average

active fees (Min Segregated Mandate of R30m)

7

Index Tracking Funds as a low-cost portfolio core

• Overseas, low-cost solutions like index tracking funds are increasinglypopular − Used as a low-cost “core” of portfolios (typically 30% of an aggregated

portfolio) by 20-30% of retirement funds overseas− Combined with actively managed “satellite” funds charging higher fees− Best of both worlds: Lower fees for a portion of portfolio plus potential for

outperformance of benchmark

8

SA investors paying higher fees than necessary

• In SA, index tracking funds are not yet popular, as investors are toldthe local equity market is not suitable for index tracking solutions asa portfolio core

• We would suggest the facts are the opposite: the JSE is subject toinvestability constraints that do not allow investors to create a fullyactive portfolio when blending actively managed funds

• In fact, SA investors inevitably end up with a portion of their portfolioacting as a passive core

• As a result, they end up paying higher (active) fees on part of theirinvestments than they should

9Umbono template

The South African EquityInvestment Universe

10

Aggregated Top 11 Managers No. of Equity Holdings

130

0

20

40

60

80

100

120

140

Number of Shares

Source: Riscura, OMIGSA, Inet

11

A Tiny Universe

5000

130500

0

1000

2000

3000

4000

5000

6000

Number of Shares

Wilshire 5000

S&P 500

Aggregated Top11 Managers

Source: Riscura, OMIGSA, Inet

12

Investability Constraints?

• Our definition of investability is based on practical first hand active quant management experience of managing (in this case) a R500m active quant equity fund− Typically, we require liquidity of >R100m per month or some R5m per day

(Only 75 of these counters have this liquidity) • Assuming a manager is responsible & does not want to incur significant trade

impact costs, he should not want to trade more than 20% of daily trade – this means that he can only trade R1m of the stock each day.

• WE USE THE LARGEST TRADING DESK IN SA

• In reality these investability issues apply to funds much smaller than R500m – given that many fully discretionary house view portfolios are treated in the same way i.e. trading decisions are implemented across many 3rd party funds

13

Aggregated Top 11 Managers Equity Holdings

Other Shares, 3%

Top 80 Shares, 96%

Next 10 Shares, 1%

Source: Riscura, OMIGSA, Inet

14

Shareholder Weighted Index (SWIX)

Other Shares, 4%

Top 80 Shares, 94%

Next 10 Shares, 2%

Source: Riscura, OMIGSA, Inet

15

The Current Environment

• Most active managers are now using the SWIX/CAPI as their starting point (or a very similar internal Reg 28 benchmark)− A vicious cycle?

• Equity AUM of the smaller managers within the Large Manager Watch has increased significantly over the last 6 yrs

• The increase in equity AUM in the last 6 years has not been matched by an increase in JSE investability

− Listed market capitalisation has increased but actual SISS and large new listings have not added much to the 80 or so investable stocks

16Umbono template

Proving that a substantial component of South Africa’s active manager’s returns can be directly attributed to the FTSE JSE SWIX Index

17

Aggregate Manager Portfolio vs SWIX

Aggregate Aggregate manager manager portfolioportfolio

SWIX

The Shareholder Weighted Index (or SWIX Index) has the same investment constraints as the active managers - only 80 stocks make up almost the entire investment universe.

Tracking Error* of 2.5%

*Tracking Error or TE is a statistical measure that shows how differenta fund’s share weights are relative to the benchmark’s weights.(In the US, an active manager will have a TE of 5% or higher.A 2.5% TE fund would be defined as an Enhanced Index Fund)

18

1/3rd Aggregate Manager Portfolio vs 1/3rd SWIX

AggregateAggregatemanagermanagerportfolioportfolio

SWIX

Tracking Error of 0.48%

One-third of the aggregated managers portfolio very closely resembles the SWIX- a 0.50% TE fund would be defined as a full-replication Index Fund. OMIGSA’s attribution analysis confirms this – for the month of Dec’08, 86% of the aggregated managers’ Performance can be attributed to the SWIX Index.

19

1/3rd Aggregate Manager Portfolio vs 1/3rd RAFI®

AggregateAggregatemanagermanagerportfolioportfolio

RAFI®

Tracking Error of 0.90%

One third of the aggregated managers portfolio still closely resembles the RAFI® Index- a 1.0% TE fund would be defined as a optimised Index Fund.

20

SWIX Relative to the General Equity Units Trusts

Source: OMIGSA, Morningstar

21

SWIX versus General Equity Unit Trusts Average (Net of Fees)

Source: OMIGSA, Morningstar

22

Average Manager Returns (Gross) Vs. SWIX (Gross)5 Years to 30 November 2008

Source: OMIGSA, Morningstar

23

Implications of Only Utilising Active Managers

• Conservatively, at least one-third of a South African investor’s equity investments are needlessly incurring the following costs:− Active fund management fees

• On average – for a R100m pension fund – active fees are 390% more expensive, relative to equivalent tracker fees (See our Fee Table Attached) (Source: Alexander Forbes Retirement Fund Survey)

− High churn or portfolio trading costs• On average – an active portfolio (which includes the de-facto passive SWIX

core) will have a turnover rate of at least 200% more than a tracker fund (15% for a tracker versus approximately 50% for a buy-and-hold active manager).So, for the one third passive portion, the investor is needlessly paying away 200% more in brokerage, custodial and tax costs. (Source: OMIGSA)

• Over-and-above that, brokerage costs are typically at least 100% higher for active managers

• Please note that these are hidden costs as performance is quoted after these costs (Even the ACI definition of TER does not include these costs – they are well and truly hidden)

24

Other Factors that Impact the Active/Passive Decision

• Global best practice as well as SA research recently done by Afrifocus Securities, prove that there are other factors that clearly show that a 100% fund allocation to active is not optimal

− Investors’ relative risk aversion levels:

• Active management relative performance has been proven to be very cyclical (Investors who are risk averse to periods of active managers under-performing should not invest 100% in active)

− Benchmark Hugging:

• Research has shown that during periods when managers under perform their benchmarks, they resort to benchmark hugging i.e. they take less active bets

25

So, Why the “Active-Only” Infatuation?

• The IRONY from this research is that the rationale for utilising indexation within the overall investment blend has little to do with active vs passive performance

• This is completely contrary to what investors are being told i.e. active out-performs passive and therefore a 100% expensive active allocation should be implemented

• Given our market’s liquidity issues, whether one-third of the fund is invested in a low-cost SWIX tracker or whether one-third is an expensive de-facto passive SWIX core – the future total GROSS return will be very similar

• But, on a NET basis, the fund with the intentional low-cost SWIX tracker will have superior long-term returns

26

Everyone is Fighting over the Same 80 Stocks

Apart, the active managers are different, together a de-facto passive core is created. Together they resemble the 80 stock investable universe – they are the market, so the argument that tracker is bad because it buys into the top of markets and visa versa makes no sense if you are aggregating managers...

27Umbono template

Disclosing Our PooledTracker Fees

28

FEE Schedule: Pooled (ex VAT)

RAFI ® Pooled Tracker (Full Replication)

ALBI Pooled Tracker (Full Replication)

Balanced Domestic

Pooled Tracker*

Balanced Global Pooled

Tracker**

R5m to R49m 0.35% 0.22% 0.30% 0.406%

Over R50m 0.25% 0.20% 0.23% 0.348%

29

Regulatory Information

Umbono Fund Managers (Pty) Limited

Physical address: 1st Floor, Block A, Grayston Ridge Office Park, 144 Katherine Street, Sandton 2196.Telephone number: +27 11 562 6000 Facsimile number: +27 11 262 0331

Umbono Fund Managers (Pty) Limited is a licensed financial services provider, FSP 721, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002.

Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.

Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares.

All employees are remunerated with salaries and standard short-term and long-term incentives. No commission or incentives are paid by Umbono to any persons. All inter-group transactions are done on an arms length basis.

Umbono has comprehensive crime and professional indemnity insurance. For more details, as well as for information on how to contact us and how to access information please visit www.umbonofundmanagers.com.