Senate Group

The importance of asset allocation in the current low yield environment

René Prinsloo – Portfolio Manager Jeléze Hattingh – Portfolio Manager

14 March 2013

René Prinsloo Portfolio Manager

8 years’ industry experience

B Sc Hons (Act Sci)

Lecturer at Stellenbosch University

Glacier, Investment Analyst

FFA - Actuary

CFA

Joined Element in November 2007

Appointed Portfolio Manager in June 2012

2

Agenda

The Importance of Asset Allocation

Overview of the Current Low Yield Environment

Element Real Income Fund

Impact of Asset Allocation decisions on Performance

Current Asset Allocation

Macro factors affecting portfolio positioning

3

The Importance of Asset Allocation

Asset Allocation: The most important decision?

One way of breaking down the performance of a balanced fund:

Asset classes exposed to over a period (strategic AA)

Switches between asset classes over period (tactical AA)

Instruments held in portfolio

Switches between instruments

Secondary considerations:

Fees, taxes, etc.

5

“Stock Picking”

“Asset Allocation”

Reasons why AA may be most important

1. Law of large numbers

6

Law of large numbers

In layman’s terms:

The more (independent) bets I take, the more certain the

combined outcome

7

Gambling example

Venetian Macao:

Largest Casino in the world

3400 slot machines

800 gambling tables

8

Golden Valley Casino, Worcester

One of the smaller casinos in Sun

International’s stable

220 slot machines

6 gambling tables

Which of these two is a better business?

Gambling example

With 800 gambling tables, this casino is likely to make a steady profit every night

Should experience very little change in profit margin from one night to the next

Lots of independent bets => certain outcome

9

Gambling example

Small casino example:

Some nights the casino will make a large (compared to what was gambled) profit

and on other nights a large loss

Difficult to say if the casino will make or lose money on any given night

10

Insurance example

11

If you had to provide life insurance to one of these two crowds,

which would you choose?

As a life insurer:

The more people you insure, the less your uncertainty

Statistically, this type of outcome has a variance that is proportional to

1 ÷ √n

Investment example

Consider the following examples:

A manager of an equity fund who chooses between 100 stocks:

Assume 60% of his choices are good

He will likely have a steady, consistent outperformance of the

benchmark

A manager of a balanced fund chooses between 6 asset classes

Assume he also makes the right decision 60% of the time

Out or under-performance of benchmark likely to vary much

more

Bottom line: Asset allocation is a choice between few

alternative asset classes, so NB to get choice right

12

Reasons why AA may be most important

1. Law of large numbers

2. Performance between asset classes is more different than

performance within asset classes

13

14

Average Correlation: 6%

0%

-50%

-100%

100%

50%

Correlations between asset classes

SA

Equities

SA

Property

SA

BondsSA Cash

Foreign

Balanced*

SA Equities 100% 28% 2% -19% 38%

SA Property 28% 100% 61% -3% -18%

SA Bonds 2% 61% 100% 13% -30%

SA Cash -19% -3% 13% 100% -16%

Foreign Balanced* 38% -18% -30% -16% 100%

Asset Class Correlations, Monthly, 2000 to 2012

Correlations within equity market

Considered all All Share Index constituents that were listed in

2000 (105 in total)

Correlation with the All Share Index:

Average: 39%, Max: 84%, Min: 4%

15

0%

-50%

-100%

100%

50%

ANGLO 84% IMPERIAL 51% CITYLDG 40% GFIELDS 36% GROWPNT 26%

BHPBILL 78% NASPERS-N- 51% ALTRON 39% FAMBRANDS 35% SHOPRIT 26%

IMPLATS 73% PERGRIN 51% MVELA GRP 39% JDGROUP 34% ADCORP 25%

AMPLATS 73% SANLAM 51% PINNACLE 39% SUPRGRP 34% FPT 24%

SABMILLER 64% ALTRON PP 49% SANTAM 39% PPC 34% SENTULA 23%

LONMIN 64% GRINDROD 49% TFG 38% BELL 34% RAINBOW 23%

OLDMUTUAL 61% AECI 48% LIBHOLD 38% DISCOVERY 33% SA CORP 23%

ARI 60% ILLOVO 47% ASSORE 38% WBHO 32% CERAMIC 23%

BARWORLD 60% MMI-HLDGS 46% NEDBANK 38% ALTECH 32% PETMIN 22%

NORTHAM 60% CAPSHOP 45% AFROX 37% OMNIA 31% SYCOM 20%

SASOL 60% WOOLIES 44% AVI 37% MR PRICE 31% CAPITAL 20%

SAPPI 58% ABSA 44% M&RHLD 37% MEDCLIN 30% EOH 20%

INVPLC 57% MTNGROUP 44% AFGRI 37% SPURCORP 29% CASHBIL 17%

STEINHOFF 56% SUNINT 43% HUDACO 37% PICKNPAY 29% KGMEDIA 16%

DATATEC 55% ANGGOLD 43% NAMPAK 37% TRUWTHS 28% HYPROP 16%

INVLTD 55% AVENG 42% PSG 37% ASPEN 28% PREMIUM 14%

MERAFE 55% REUNERT 41% GROUP5 36% BASREAD 27% OCTODEC 14%

BIDVEST 54% BRAIT 41% TRENCOR 36% METAIR 27% HCI 14%

STANBANK 52% CLICKS 41% HARMONY 36% DAWN 27% OCEANA 12%

RMBH 52% ADVTECH 40% ABIL 36% DRDGOLD 27% KAP 11%

FIRSTRAND 51% PALAMIN 40% NETCARE 36% INVICTA 26% BRIMSTN-N- 4%

Correlation with Alsi, 2000 to 2012

Performance between asset classes is more different than performance within asset classes

16

In bull markets:

Most equities should rise

Not immediately obvious how other

asset classes will perform

Decision to be in equities is more

important than which equities to

be in

In bear markets:

Most equities should fall

Not immediately obvious how other

asset classes will perform

Decision to avoid equities is more

important than which equities to

avoid

Reasons why AA may be most important

1. Law of large numbers

2. Performance between asset classes is more different than

performance within asset classes

3. Conforms with intuition

17

The intuitive reason

18

Over some periods asset classes give very similar returns

Here stock picking will be of greater importance

Over other periods asset classes give very different returns

Here asset allocation will be more important

The intuitive reason

19

Asset classes, however, rarely have the same volatility

So if you are looking at both risk and returns at the same

time, different asset classes almost always deliver different

outcomes

Reasons why AA may be most important

1. Law of large numbers

2. Performance between asset classes is more different than

performance within asset classes

3. Conforms with intuition

4. Impact of asset allocation decisions can be material

20

Value of R100 invested in 1960 in 2012

21

What impact could asset allocation have had?

22

Asset Allocation: Margin for error is small

23

Reasons why AA may be most important

1. Law of large numbers

2. Performance between asset classes is more different than

performance within asset classes

3. Conforms with intuition

4. Impact of asset allocation decisions can be material

5. Illustration by way of a simple example

24

By way of an example

Here we look at the period between June 2002 and June 2012

We consider the return and risk of a standard balanced fund over that time,

invested as follows:

50% SA Equities

10% SA Property

15% SA Bonds

10% SA Cash

10% Offshore Equities

2.5% Offshore Bonds

2.5% Offshore Cash

We use standard benchmarks (e.g. FTSE/JSE All Share Index) to calculate

returns

We compare this standard balanced fund with what would have been achieved

by:

Altering the asset allocation

Having been able to choose the best manager for a specific asset class

25

By way of an example

SA Equities: 50% -> 60%

26

SA Equities: ALSI -> Best Manager SA Equities: 50% -> 40% SA Equities: ALSI -> Worst Manager

SA Property: 10% -> 20% SA Property: 10% -> 0% SA Property: Index -> Best Manager SA Property: Index -> Worst Manager

SA Bonds: 15% -> 25% SA Bonds: 15% -> 5% SA Bonds: Index -> Best Manager SA Bonds: Index -> Worst Manager SA Cash: 10% -> 20% SA Cash: 10% -> 0% SA Cash: Index -> Best Manager SA Cash: Index -> Worst Manager Foreign Equities: 10% -> 20% Foreign Equities: 10% -> 0% Foreign Equities: Index -> Best Manager Foreign Equities: Index -> Worst Manager

Foreign Bonds: 2.5% -> 12.5% Foreign Bonds: 2.5% -> 0% Foreign Bonds: Index -> Best Manager Foreign Bonds: Index -> Worst Manager

Foreign Cash: 2.5% -> 12.5% Foreign Cash: 2.5% -> 0% Foreign Cash: Index -> Best Manager Foreign Cash: Index -> Worst Manager

Reasons why AA may be most important

1. Law of large numbers

2. Performance between asset classes is more different than

performance within asset classes

3. Conforms with intuition

4. Impact of asset allocation decisions can be material

5. Illustration by way of a simple example

6. Academic studies generally suggest that this is the case

27

Academic studies on the topic

“Determinants of Portfolio Performance” (& follow up), Brinson, Randolph

and Beebower, 1986

Effectively concluded that Strategic AA explains 94% of all

“Total Return Variation”, i.e. short-term performance

movements

“Does asset allocation policy explain 40, 90 or 100 percent of

performance?”, Ibbotson and Kaplan, 2000

Findings:

Explains 90% of short-term price movements

About 40% of the differences of fund performance over

long periods of time can be explained by this

It also explains about 100% of the level of fund

performance

28

Bottom line

When you control the asset allocation:

The choice of how much you invest in equities and

bonds is more important than choosing a equity

manager and a bond manager

Make the choice carefully as the outcome can be either very

good or bad

When your fund manager makes the asset allocation decision:

It is important that he gets it right, as it is likely the most

important investment decision!

So choose balanced fund managers carefully

29

Overview of the current low

yield environment

Jeleze Hattingh Portfolio Manager

M Sc (Cum Laude), CFA, CMT

Business Mathematics and Information

Quantitative Risk Management

8 years’ experience in financial services

Allan Gray Ltd – Fixed Interest

Credit Suisse and Deloitte Consulting (UK) – Risk Management

Standard Bank (SA) – Risk Management

Joined Element in May 2010

Appointed Portfolio Manager in June 2012

31

SA’s nominal yields back to the 1970s lows

32 Source: Element Investment Managers Research, I-Net, 8 March 2013

FRA Market no longer expecting rate cut

33 Source: I-Net, Element Investment Managers Research, 8 March 2013

6.50

6.70

6.90

7.10

7.30

7.50

7.70

7.90

8.10

8.30

8.50

-20,000

-10,000

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

01Jan12

16Jan12

31Jan12

15Feb12

01M

ar1

2

16M

ar1

2

31M

ar1

2

15Apr1

2

30Apr1

2

15M

ay12

30M

ay12

14Jun12

29Jun12

14Jul1

2

29Jul1

2

13Aug12

28Aug12

12Sep12

27Sep12

12O

ct1

2

27O

ct1

2

11N

ov12

26N

ov12

11D

ec12

26D

ec12

10Jan13

25Jan13

09Feb13

24Feb13

Cumulative Foreign Flows since Jan 2012 (R'm) vs ALBI YTM

Cumulative Foreign Bond Flows Cumulative Foreign Equity Flows ALBI YTM

Foreign Flows – can they continue?

34

WGBI announcement

Foreigners buy R64bn bonds

Marikana

Q2 CA Deficit disappoints

Moody’s downgrade

WGBI Inclusion

S&P Downgrade

Fitch Downgrade

3 downgrades, still net inflows

Source: Element Investment Managers Research, I-Net, 28 February 2013

0

5

10

15

20

25

30

35

40

45

50

55

60

65

Deb

t as a

% o

f G

DP

South Africa: Debt as a % of GDP

Net debt as % of GDP Total debt (net debt + provisions + contingent liabilities) as % of GDP

SA Debt-to-GDP deteriorating…

35

0

5

10

15

20

25

30

35

40

45

50

55

60

65

Deb

t as a

% o

f G

DP

South Africa: Debt as a % of GDP

Net debt as % of GDP Total debt (net debt + provisions + contingent liabilities) as % of GDP

Source: National Treasury, RenCap, Element Investment Managers. Updated 27 February 2013

And SA also deteriorates against peers

36

Source: National Treasury, 2013 Budget Review. Updated 27 February 2013

“downgrade South Africa and upgrade Malaysia…(SA) appears to

have lost its safe haven status, as the mining crisis and weak consumer

credit threaten the pace of economic growth. Furthermore, the ZAR is

under pressure from twin deficits. The South African market is fully

valued …we do not think it is too late to sell the market.”

~ UBS Global EM Strategy Team – 12 March 2013

SA bonds relatively unattractive post FX hedge

37

Source: UBS Research, 6 March 2013

Majority of foreign bond inflows at stronger ZAR

38

Source: UBS Research, 6 March 2013

Is a repeat of 2012’s performance possible?

39 Source: Standard Bank Research, March 2013

Higher yields = negative capital growth

40 Source: Element Investment Managers, February 2013

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Mar-

01

Jul-

01

Nov-0

1

Mar-

02

Jul-

02

Nov-0

2

Mar-

03

Jul-

03

Nov-0

3

Mar-

04

Jul-

04

Nov-0

4

Mar-

05

Jul-

05

Nov-0

5

Mar-

06

Jul-

06

Nov-0

6

Mar-

07

Jul-

07

Nov-0

7

Mar-

08

Jul-

08

Nov-0

8

Mar-

09

Jul-

09

Nov-0

9

Mar-

10

Jul-

10

Nov-1

0

Mar-

11

Jul-

11

Nov-1

1

Mar-

12

Jul-

12

Nov-1

2

Rolling 12m ALBI TR Decomposition

Income Return Capital Growth Total Return

41 Source: I-Net, Element Investment Managers Research, 8 March 2013.

13y avg real yield = 3.4%

Real yields are at record lows in SA

ILBs: Further potential re-rating limited

42 Source: Element Investment Managers, March 2013

Real GDP expectations: 2013: 2.7% 2014: 3.5% 2015: 3.8%

R189

R211

R212R197

I2025R210

R202

ABLI03

FRS46

IV019ABLSI1IV030

DIAFFA

HPA

SGA

AWA

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

0 2 4 6 8 10 12 14 16 18

Re

al Y

ield

Modified Duration

Real Yields: ILBs vs Property Dual Listed A-Shares

Gov ILBs Element ILB Property A-units

Difficult to beat CPI + 3%-7% targets

43 Source: Element Investment Managers Research, 8 March 2013.

CPI + 3%-7% will be a difficult target to beat in the short to medium-term with conventional inflation protection ILBs.

Dual Listed Property Shares:

• A-listed shares with “guaranteed” max 5%

or CPI distribution growth

• Income protection via preferred pay out structure

• Real spread pick-up between 5.5% - 7% above gov ILBs

“New” CPI + targets

Real yields are abnormally low due to global QE and loose monetary policies

This means that the domestic historical real risk free rate of 2% - 2.5% has

reduced to below 1%

Equities have also re-rated as a result of QE

Similarly, projected real returns are around a percentage point

lower than long-term averages

Implications:

A portfolio of assets that returned CPI + x% over the long term is more

likely to return CPI + x% - 1% going forward

I.e. to get CPI + x% you would now need to take more risk

44

Nominal expected return for equities

45

Currently 9.5% p.a. for 5y in nominal terms I.e. inflation + 3.5% assuming 6% inflation

Source: Element Investment Managers Research, February 2013

Element Real Income Fund

Inception (30 November 2002) to 28 February 2013 Benchmark CPI + 3% Current Fund Size R309,2m

Performance – Real Income Fund

As at 28 February 2013 Element Real Income Fund

Benchmark CPI + 3%

Relative

Annualised since Inception 11.7% 8.6% 3.1%

Annualised 10 Year 12.0% 8.6% 3.4%

Annualised 7 Year 8.2% 9.3% -1.1%

Annualised 5 Year 7.1% 8.9% -1.8%

Annualised 3 Year 10.0% 8.2% 1.8%

1 Year 15.1% 8.7% 6.4%

YTD 3.1% 1.6% 1.5%

Real Income: Performance & Risk

Performance Ranking* Ranking Quartile

Over 10 years 3/5 3rd

Over 7 years 6/7 4th

Over 5 years 15/17 4th

Over 3 years 11/22 2nd

Over 1 year 7/28 1st

Risk Stats over 3 years* Ranking Quartile

Sortino 8/22 2nd

Sharpe 12/22 3rd

Maximum drawdown 2/22 1st

*Comparing Real Income Fund to the Multi Asset - Low Equity Funds with a track record for the history under review (excludes Fund of Funds)

At 28 February 2013

Prudential Inflation Plus

Coronation Balanced Defensive

Nedgroup Investments Stable

Personal Trust Conservative Managed

STANLIB Balanced Cautious JM Busha MET Real Return PortfolioOld Mutual Real IncomeAbsa Absolute

Old Mutual Stable Growth

Momentum ConservativeElement Real IncomeGrindrod EnduranceLion of Africa MET Real Return CPI Plus

5 MiPlan IP Inflation Plus 3Absa Inflation BeaterAtlantic Real Income

Investec Cautious Managed

Allan Gray StableContego B2 MET Protected Income

Prescient Income Provider1

Old Mutual Capital Builder

Allan Gray Optimal

BM: CPI+3%

4%

6%

8%

10%

12%

14%

16%

1 2 3 4 5 6

An

nu

alised

Retu

rn

Risk(Annualised Standard Deviation)

Risk-Return for Multi-Asset Low Equity Peer GroupData for the 3 years ending February 2013

- Bubble size represents relative current Fund size

- Includes all funds in ASISA Multi-Asset Low Equity Group (excl. FoF).

- Benchmark = CPI+3%. Bubble size is the average Fund size of the Peer Group, with the average Annualised Standard Deviation.

*Comparing Element Real Income Fund to the Multi Asset - Low Equity Funds (excluding FoF)

Benchmark: CPI+3% = 8.2%

3 Year Performance to Feb’13: AA Low Equity

Source: Morningstar Research, Element Investment Managers, March 2013.

Source: Alexander Forbes Asset Consultants, January 2013

Value/Contrarian style out of favour

50

3 Year Performance to Jan’13: Active Managers

51

Value/Contrarian style in favour

*Note: In August 2009 the company name was changed from Fraters Asset Management to Element Investment Managers.

3 Year Performance to Feb’09: Active Managers

Source: Alexander Forbes Asset Consultants, February 2009

Asset Allocation Funds Investment Process

Balanced Funds

Equity Income Foreign

Bonds ILBs FRNs/ Cash Property

Credit Duration Curve Shape Liquidity

Asset Allocation

Income Allocation

Security Selection

Prefs

Implementation

52

Asset Allocation – Real Income Fund

At 28 February 2013

Retailers’ bull run looks unsustainable

54 Source: Reuters, 8 March 2013

Sun International & Shoprite: Earnings per Share

55

June Year ends: 2011: SUI (504cps)*, SHP (508cps) 2012: SUI (606cps)*, SHP (607cps) 1H13: SUI (720cps)*, SHP (642cps) => both companies earned exactly the same the previous 2 years, with SUI earning 12% more in the last 6 months.

* Adjusted HEPS < HEPS in graph

Source: I-Net, 12 March 2013

56

Yet Shoprite’s share price is 67% higher than Sun International’s - despite both companies earning the same for the previous 2

years, and SUI earning more in the last 6months!

Source: I-Net, 12 March 2013

Sun International & Shoprite: Share Prices

Material relative valuation differentials = opportunity

Further drill down into non-equity holdings

57

Non-Equity Asset Class % of Non-Equity % of Fund

Preference Shares 6 4

MMkt incl. Cash 10 6

Floating Rate Notes 36 24

Total Bonds 22 14

Nominal Bonds 8 5

Hedged Foreign Bonds 2 1

Net Long Foreign Bonds 13 8

ILBs 10 6

Listed Property 17 11

Total 100 66

At 28 February 2013 Holdings for Element Real Income Fund

Active management of Foreign Cash

Active management of foreign income is a material differentiator

Leverage internal knowledge of domestic companies that issue

in foreign currencies to enhance yield.

Have the option to hedge out currency risk depending on the

underlying exposure

58

Code Issuer % of

foreign income

Currency Exposure Currency

TRR* TRR* of

ALBI YTM Maturity

ABLSJ6 African Bank 7% USD USD 48% 21% 5.3% Jun 16

OLDMUT5 Old Mutual 35% EUR USD 28% 15% 7.8% Perpetual

AQPAU15 Aquarius Platinum

17% USD USD 54% 4% 11.2% Dec 15

EDCONF614 Edcon

Holdings 18% EUR USD 13% 4% 3.9% Jun 14

EDC615 Edcon

Holdings 9% EUR USD 16% 4% 10.9% Jun 15

RIN Redefine

International 14% GBP GBP 27% 3% DY: 10% N/A

100%

* TRR in ZAR, since date of first purchase (not annualised). At 28 February 2013

The cyclicality of investor emotions…

59

Richemont SABMiller

Platinum/Gold shares Resources

Retailers

… as applied to the S&P 500 index

60 Source: Advisor Perspectives Inc., 15 February 2013

US markets: The illusion of improvement Macro Statistic October 2007 March 2013

Dow Jones Industrial Average 14164.5 14164.5

Regular Gas Price $2.75 $3.73

GDP Growth +2.5% +1.6%

Americans Unemployed (in Labour Force) 6.7m 13.2m

Americans on Food Stamps 26.9 million 47.69 million

Size of Fed’s Balance Sheet $0.89 trillion $3.01 trillion

US Debt as a Percentage of GDP ~38% 74.2%

US Deficit (LTM) $97 billion $975 billion

Total US Debt Outstanding $9.008 trillion $16.43 trillion

US Household Debt $13.5 trillion $12.87 trillion

Labour Force Participation Rate 65.8% 63.6%

Consumer Confidence 99.5 69.6

S&P Rating of the US AAA AA+

VIX 17.5% 14%

10 Year Treasury Yield 4.64% 1.89%

USD JPY 117 93

EUR USD 1.4145 1.3050

Gold $748 $1583

NYSE Average LTM Volume (per day) 1.3 billion shares 545 million shares

Source: Morgan Stanley, 7 March 2013

SA Asset classes - 15 year bull markets!

Source: I-Net, 8 March 2013

62

Bond yields down 67%!

ALSI up 13 times!

Conclusion

Asset allocation is probably the most important investment decision

Despite poor equity performance (stock selection) over the last 3 years, the Element Real

Income Fund still outperformed due to our Asset Allocation decisions.

Global and local equity markets do not look cheap

Propped up by low interest rates, fiscal deficits and high asset prices – a combination unlikely

to be sustainable

We remain cautiously positioned

Both within asset allocation and within equities

Historical underperformers are trading at levels from where they usually outperform

significantly

Material relative valuation differentials = opportunity

Risks to the downside have increased and are not yet reflected in prices

63

“Probably the biggest unknown is what happens when interest

rates normalize… bond markets are so finely priced that the fallout

could be very violent for equities.” ~ Ian MacFarlane – BCA Global Asset Allocation – CFA Institute – March 2013

Disclaimer

Element Investment Managers claims compliance with the Global

Investment Performance Standards (GIPS®). The firm includes all

portfolios managed by Element Investment Managers. Element

Investment Managers is an independent, owner-managed company. It

provides discretionary investment management services to retail and

institutional clients.

Element Investment Managers has been verified for the period:

1 January 2003 to 31 December 2011

Copies of our verification reports are available on request.

A complete list and description of our composites is available by

contacting Ian Jones at:

+27 21 426 1313 or at ian@elementim.co.za

64

Thank you

www.elementim.co.za

Contacts: Mandates: ian@elementim.co.za Portfolio Management: rene@elementim.co.za jeleze@elementim.co.za CC: vanessa@elementim.co.za

But can the DM’s negative shift be sustained?

66

Source: Carmen Reinhart, January 2013

Globally is the same negative real yield story

67 Source: Inet, Element Investment Managers Research, March 2013

Global debt problems have not gone away!

Reinhart & Rogoff

Greece target for 2020! Current risk

Next big risk

68

Debt-to-GDP world map - 2011

69

Source: Wikipedia, CIA Fact book. Data till end 2011.

Dark green shows very low levels of debt, dark red / black shows very high levels of debt.

Asia / EM’s improving

Our own study Defining the problem:

If I am investing my money for some future period (e.g. 5

years)

And I am concerned with both the total return of my

investment as well as short term movements (i.e. volatility

of my investment)

Should I focus more time and energy on “stock picking” or

“asset allocation”?

70

Our own study Details:

Looked at 10 balanced funds between 1998 and 2012

These funds were all managed by 10 different asset management

houses

Asset allocation data came from ASISA’s quarterly fund category

statistics

Performance data came from MoneyMate

For every balanced fund:

We calculated an “shadow fund”

This is a fund with identical asset class exposure

But where each asset class is invested in the asset class benchmark

E.g. if the balanced fund was 60% invested in its own equities and

40% in its own bonds

The shadow fund would be 60% in the Alsi and 40% in the Albi

71

Our own study

72

Details (continued):

Every shadow fund:

Has completely different stock picking than the balanced

fund it tracks

But the exact same asset allocation

By looking at the similarity of outcomes we can judge how

important asset allocation was

We can compare that to the similarity between the

manager’s balanced fund and other funds

This will show how important stock picking was

Our own study – 1st example

73

Our own study – 2nd example

74

Our own study Findings:

In 10/10 cases the shadow-fund predicted the risk

and return better than the manager’s instrument

selection

I.e. in 10 out of 10 cases asset allocation was “more

important” than “stock picking”

If you focus on both the return as well as the risk of the

investment outcome

75

Bottom line

It is important to remember that something that happened in the

past is not guaranteed to happen in future

However we think it is highly likely that asset allocation will

continue to be the most important investment decision investors

face

76

SA now 52nd (144) in Global Competitiveness The positives? Rank

Auditing standards (1)

Efficacy of corporate boards (1)

Protection of minorities (2)

Regulation of securities exchange (1)

Legal rights index (1)

Largely driven by private sector efforts

The negatives?

Corruption (110)

Burden of government regulation (123)

Business costs: Crime and violence (134)

Health: Tuberculosis (143)

Life expectancy (133)

Co-operation: Labour-employer (144)

Hiring & firing (143)

Pay and productivity (134)

77

Highlights long-term structural trends in SA that will impact SA’s ability to

compete globally.

Education: Quality of primary education SA: 132/144, ZIM: 63/144 Quality of education system SA:140/144, ZIM: 30/144 Quality of Maths/Science SA: 143/144, ZIM: 50/144

Source: World Economic Forum Global Competitiveness Report 2012-2013 (Sept 2012)

Primary responsibility lies with government

ESG research incorporated into investment process since 2001 As per UN PRI (2006), CRISA (2012)

Environmental Carbon Disclosure Project (CDP)

Signatory investor since 2007

Water research in Mining sector

Social Mining Industry

Skills, Safety, HIV/AIDS & Silicosis

Governance Voting record disclosed since 2001*

Voting & Proxy Policy available since 2001*

Material board engagements

(e.g. Nampak, AngloGold, Gold Fields, Lonmin, Freeworld)

We have an independent Advisory Board to guide Responsible

Investment

* First in SA - www.elementim.co.za/responsible-investment 78

Environmental, Social & Governance (ESG)