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Responding to the financial crisis

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									              The                         Your clear view on retirement fund management




TRUSTEE
    TIMES



Smooth Talking
                                                                Responding
‘Talk is cheap.
                                                            to the financial
Here are the facts!’                                                   crisis
                                                         Economic
          L
   S PECIA T                                          conditions &
            N
 INV ESTME                                               prospects
      ISSUE

Issue 42 | December 2008 | January 2009
    Contents
    02       Responding to the financial crisis       22         Capital Builder
                                                                 The safe and smart way to grow
                                                                 your wealth




    04       Economic conditions and prospects
                                                      24         Keep the emotion out
                                                                 of investments




    06       Smooth talking
             ‘Talk is cheap. Here are the facts!’     26         Never 2 old 2 b hip




    10       Time to reassess?




    13       Waste not, want not
             Financial Wellbeing Programme



                                                         Our cover photo: The Investment Services
                                                         team, back row: Grant Sass; Monei Pudomo; Roy


    16       Paying high fees for excess returns
             but getting a lot of Beta
                                                         Singh; Dharmesh Dayal. Front row: Debbie Kline;
                                                         Lentswe Gopane; Sydney Sekese; Anita Griessel.


                                                         The Investment Services team recently held a
                                                         series of investment report-back seminars to



    20
                                                         clients throughout the country. Read more about
                                                         this on page 20.
             Investment Report Back Seminar




Stayintouch
Please write to Trustee Times with any suggestions for topics or questions you may have. We value your
feedback. Charlene Murphy - Tel 021 509 4656, Fax 021 509 4330, E-mail cmurphy@oldmutual.com
PO Box 81, Mutualpark 7451


Layout: Greenroom
Foreword
The world markets during the last quarter of 2008
will certainly be one for the history books!


That’s why, in this issue of Trustee Times, we have
a special focus on investments. The feature articles
include a special note to trustees during these turbulent
times, an economic update and we take a look at how
smoothing-enhanced portfolios have performed over
the last couple of months, plus more!


New MD of Old Mutual Corporate

I’ve recently been appointed as the Managing
Director of Old Mutual Corporate. Tim Cumming, my
predecessor, remains within the Group to focus on
Strategic Projects.

                                                                               Seelan Gobalsamy
I have been within the Corporate and employee                                  Managing Director
                                                                               Old Mutual Corporate
benefits business for a number of years and I am
very excited to be taking on this role during these
challenging times. Old Mutual has always stood for
absolute security and peace of mind, which is even
more relevant now during these turbulent times. With        I am a firm proponent of our core values of
one of the strongest balance sheets in the industry         Accountability, Pushing Beyond Boundaries, Integrity
and capital of 3.7 times (as at 30 September 2008)          and Respect, which will continue to guide all that we
the required minimum, we remain well positioned             do. I look forward to engaging with you more into the
to continue delivering value to our clients into the        future.

future.


As I reflect upon the challenges and opportunities          Seelan
that lie ahead for our customers, I am confident that
my skilled and dynamic team will continue to provide
solutions that meet our clients’ needs, and create
value for them, during these times.




                                                                                                                    1
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a note to trustees

                              Responding
                              to the financial
                              crisis
      The primary causes of the recent global financial crisis are known to be the
      slump in the US housing market, the subsequent collapse in the values of debt
      instruments tied to US housing assets, and the general collapse of global interbank
      operations. What still isn’t certain is to what extent this crisis may continue to
      affect global economic prospects, and for how long.




  2
                                                                                                financialcrisis




South Africa has certainly not escaped the turbulence,       In short, now more than ever the trustee or
and has been hit by the dual shock of collapsing             intermediary has a vital role to play in ensuring that
commodity prices and a global flight for safety. The         funds, employers and members do not become so
local currency and market has borne the brunt of             focused on the here and now that they lose sight of
this, and economic prospects as well as the outlook          the fact that retirement investment is, and always will
for consumers, are significantly less rosy as a              be, for the long term.
consequence.
                                                             The Old Mutual benefit
Looking forward
                                                             Whilst the international crisis has undoubtedly led to
While prospects for financial markets remain uncertain       local financial services institutions taking a number
in the short term, aggressive international policy           of knocks in recent months, our country’s financial
stimulation looks set to pull the world out of the current   institutions remain sound and there is no uncertainty
downturn towards the end of 2009. However, in the            surrounding their credit quality.
short term, extreme volatility is likely to continue,
and episodes of panic selling will almost certainly still    As   an   international   company,     there     have   been
occur.                                                       news reports about certain of Old Mutual’s offshore
                                                             subsidiaries having suffered under the financial crisis.
How should we be reacting?                                   However, while this has had a short-term impact
                                                             on the overall share price of the company, the way
The correct response is to stay focused on the bigger        the organisation is structured ensures that financial
picture and the longer term. As is always the case in        difficulties   within   one   subsidiary   are   completely
such situations, the crisis across the globe has been        isolated from the rest of the Group.
driven by the reactions of stakeholders to specific
issues and individual events. Panic, as a result of the      In fact, Old Mutual South Africa currently has the
collapse of individual banks, or the figures contained       strongest balance sheet of all the South African life
in monthly reports, has caused most of the downward          insurers, which means that our customers continue
pressure on markets. With that in mind, the only             to enjoy absolute security. The capital held by the
sensible response, going forward, is to remain calm.         business is 3.7 times (as at 30 Sept 2008)               the
                                                             required statutory minimum – substantially more than
Within the retirement fund industry, it is trustees,         any of our competitors – and sufficient assets are held
advisers, consultants and intermediaries who have the        within policyholders’ funds to more than meet all our
responsibility to ensure such calm, by reminding fund        obligations to our customers. The company also has
members and employers that retirement investment             shareholder assets to provide additional security to
is a long-term plan. Investors or fund members               our policyholders.
must avoid making decisions based on single events
or individual pieces of bad news. Fund investment            Old Mutual has always stood for absolute security
policies must be reviewed regularly, to ensure the           and peace of mind. It’s the assurance we offer all our
same prudent, long-term approach is upheld. Most             customers, including our retirement fund members,
importantly, members whose funds have offshore               and despite the crisis seen around the world we have
investments must be advised of the likely short-term         not wavered from this promise.
drop in value that may occur, and be warned against
the risk of exiting their investments prematurely as a
result.




                                                                                                                            3
    While the worst fears of a complete global financial system collapse have faded, severe
    damage has been done to global economic prospects and the world now faces the longest
    and deepest downturn since the Great Depression of the 1930s. Despite aggressive policy
    stimulation the downturn is expected to last through most of 2009 and will likely result in an
    outright contraction in economic activity in many parts of the world.




    Economic
     conditions
                                                                                prospects
    South Africa did not escape the        for   government’s        accelerating     global    developments         and      will
    global turmoil and was also hit        infrastructure programme.                  provide an ongoing strong boost to
    hard by the dual shocks that                                                      the local economy.
    hit most emerging markets:        a    But it is not all bad
    collapse in commodity prices and       news locally                               Global financial markets behaved
    a flight of capital.   As is to be                                                very     predictably,       initially     in
    expected, the rand bore the brunt      Despite the weaker rand, inflation         response to the panic about the risk
    of the adjustment as it fell sharply   prospects are fast improving as            of a global financial system collapse
    against most major currencies.         the petrol price is set to fall further,   and, more recently, as regards the
                                           food inflation is expected to slow         intensifying gloom about economic
                                           sharply owing to sharp declines            growth      and     company     earnings
    Despite the weaker                     in the prices of key raw foodstuffs        prospects.    The aggressive policy
    rand, inflation                        (like wheat) and weak demand will          actions described earlier appear
    prospects are fast                     limit companies’ pricing power.            to have arrested the fall in global
    improving                                                                         equity markets, although extreme
                                           As a result, interest rates may            volatility still characterises short-
    Local economic prospects have          begin to decline by the end of 2008.       term trading. While prospects for
    consequently bleakened notably.        Moreover, while the weaker rand will       financial markets remain extremely
    As a result growth in 2009 will        increase the cost of imported goods,       uncertain in the short term, the
    likely be around 2%, compared to       it does act as a cushion against           aggressive        policy     stimulation
    ±3½% this year and 5% p.a. over        adverse      global    developments        currently     being        implemented
    the previous five years. Consumers     in providing protection to local           around the world should pull the
    will unfortunately bear the brunt of   export industries and producers            world out of the downturn towards
    the adjustment (mainly via fairly      competing     with    imports.       In    the end of 2009.            As financial
    high interest rates for some time      addition, government’s ambitious           markets      look    ahead,      markets
    to come) as slower consumption         infrastructure programme will not          should    begin      to    recover      well
    growth is required to ‘provide room’   materially be affected by recent           before the turnaround in economic




4
                                                                                     economicconditions
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                           Rian le Roux
                           Chief Economist OMIGSA




activity and earnings. In the short
term, though, extreme volatility is
likely to continue and more bouts
of panic selling could still occur.


There is little
concern over the
stability of South
Africa’s financial
system
Much the same goes for the local
markets.


While there is little concern over
the   stability   of   South   Africa’s
financial system, concerns over
the growth and earnings outlook
will remain the dominant driver
                                              Key points
of market behaviour in the short                    The world now faces the longest and deepest downturn since the Great
term. A further complication for the                Depression of the 1930s.
local market is the risk of a further               South Africa was also hit hard by the dual shocks striking most emerging
sell-off of the rand, which will have               markets: a collapse in commodity prices and a flight of capital. The rand
negative inflation implications and                 bore the brunt of the adjustment, falling sharply against most major
could postpone any local interest                   currencies.
rate relief. Looking forward, though,               Growth in 2009 will likely be around 2%, compared to ±3½% this year.
the imminent decline in inflation will              Despite the weaker rand, inflation prospects are fast improving.

lead to lower interest rates in due                 Interest rates may begin to decline before the end of 2008.
                                                    While prospects for financial markets remain extremely uncertain in the
course, while the weaker rand and
                                                    short term, the aggressive policy stimulation currently being implemented
more expansionary fiscal stance will
                                                    around the world should pull the world out of the downturn towards the
also begin to pull the local economy
                                                    end of 2009.
out of the downturn towards the
end of next year. Financial markets
should begin to price improving
prospects earlier.




                                                                                                                         5
                                                                         With global financial
                                                                    sentiment hitting an 80-
                                                                       year low, the benefits
                                                                      of smoothing-enhanced
                                                               portfolios have, as during the
                                                               1987, 1998 and 2003 crashes,
                                                                  been highlighted for all to
                                                                see, leaving retirement fund
                                                                  members invested in these
                                                                           portfolios smiling.




                                                                                             Roger Birt
                                                                                             Product Actuary
                                                                                             Investment Services
                                                                                             (Corporate)




 Smooth Talking
‘Talk is cheap. Here are the facts!’


     Even though the local equity market lost approximately
                                                               How much more pain can your
     25% over the three months to the end of October, all
                                                               members stomach, especially if they
     Old Mutual’s smoothing-enhanced portfolios continued
                                                               are not invested in a smoothing-
     to deliver competitive (and positive) returns over
                                                               enhanced portfolio?
     the same period! With an immediate turnaround in
     investment markets not expected in the next six months,   can your members stomach, especially if they are not
     the question therefore remains, how much more pain        invested in a smoothing-enhanced portfolio?




 6
                                                                                                     smoothtalking


    The table below shows returns over various periods to 31 October 2008.


    Investment Strategy                                1 Month    3 Months      1 Year      3 Years (p.a.) 5 Years (p.a.)
    JSE All Share                                       -11.6%     -23.1%       -30.9%           11.5%             19.9%
    Aggressive Balanced                                  -6.3%     -9.7%        -17.3%           11.8%             18.2%
    Funds (Median)
    Absolute Return Funds                                -2.3%     -3.1%         -4.7%           15.9%             17.5%
    (CPI+5% Average)
    Old Mutual Absolute Smooth Growth                     0.5%     2.0%         19.6%            25.5%             22.5%
    (50% guarantee)*
    Old Mutual CoreGrowth                                 0.4%     2.0%         11.5%            18.3%             15.5%
    (100% guarantee)
    CPI                                                   0.0%     0.9%         12.1%             8.4%              6.3%
    * Backtested returns assumed prior to launch in April 2007.
      Smoothing-enhanced portfolios



                                                                     objectives, which are fundamental for satisfying any
Smoothing-enhanced portfolios
address all three of the typical                                     retirement fund member’s needs.

objectives of any retirement fund
                                                                     Although balanced market-linked funds may provide
Fundamental objectives                                               reasonable inflation-beating returns over the long
                                                                     term, there are extended periods when returns from
The superior value proposition of smoothing-enhanced                 these funds are lagging inflation. While investors opt
portfolios is that they address all three of the typical             for more aggressive balanced funds in search of higher
objectives of any retirement fund:                                   long-term growth, the cost of this choice is greater
                                                                     volatility, increasing the risk that short-term returns
■      Providing inflation-beating returns – to ensure
                                                                     lag inflation or end up being severely negative. More
       sufficient growth on retirement savings to avoid
                                                                     conservative funds reduce this risk, but at the cost
       inflation eroding the purchasing power of members’
                                                                     of giving up returns. The same argument applies
       savings at retirement.
                                                                     to absolute return funds. For both these strategies
                                                                     a reduction in volatility is achieved through a lower
■      Significantly reducing short-term market volatility
                                                                     allocation to growth (volatile) asset classes, which may
       – to protect the interests of members, especially
                                                                     impair long-term returns if inappropriately timed.
       those that exit the fund (by retirement, death,
       retrenchment, or other uncertain events), by
                                                                     In comparison, the Smoothed Portfolios, Old Mutual
       reducing the exposure of their savings to severe
       market volatility, and therefore potential losses on          Absolute Smooth Growth and Old Mutual CoreGrowth,

       those savings if exiting the fund during times of             have delivered longer-term returns in excess of inflation,

       market turmoil.                                               while over shorter periods, delivering bonuses that
                                                                     have deliberately smoothed out the recent downturn
■      Providing explicit capital guarantees – to provide            in equity markets. The smoothing-enhanced portfolios
       a safety net below which members’ investment                  include explicit capital guarantees, and at various
       values cannot fall, regardless of the world or local          levels, presenting an array of risk/return options to
       economy.                                                      cater for different member needs. This means that,
                                                                     in severe market environments, negative returns are
As is clear from the table above, no other investment                a possibility for portfolios with guarantee levels below
strategy offers a combination of the above three                     100%.




                                                                                                                                  7
                                                                                       1-year rolling returns to 31 October 2008


       50%                              CPI +3%                                                                             Old Mutual Absolute Smooth Growth (50% guarantee) ***
                                        Old Mutual CoreGrowth (100% guarantee)                                              Aggressive Balanced Funds (Median)*
                                        Absolute Return Funds (CPI +5% Average)**
       40%



       30%



       20%



       10%



        0%



      -10%



      -20%
             Nov 99

                      Mar 00

                               Jul 00

                                          Nov 00

                                                   Mar 01

                                                            Jul 01

                                                                     Nov 01

                                                                              Mar 02

                                                                                        Jul 02

                                                                                                 Nov 02

                                                                                                          Mar 03

                                                                                                                   Jul 03

                                                                                                                            Nov 03

                                                                                                                                     Mar 04

                                                                                                                                               Jul 04

                                                                                                                                                        Nov 04

                                                                                                                                                                 Mar 05

                                                                                                                                                                          Jul 05

                                                                                                                                                                                   Nov 05

                                                                                                                                                                                            Mar 06

                                                                                                                                                                                                     Jul 06

                                                                                                                                                                                                              Nov 06

                                                                                                                                                                                                                       Mar 07

                                                                                                                                                                                                                                Jul 07

                                                                                                                                                                                                                                         Nov 07

                                                                                                                                                                                                                                                  Mar 08

                                                                                                                                                                                                                                                           Jul 08
                                Source: *   Alexander Forbes Large Manager Watch survey for the period ending 31 October 2008.
                                        ** Alexander Forbes Absolute Return Manager Watch surveys for periods ending 31 October 2008.
                                        *** Backtested returns assumed prior to launch in April 2007




    Balanced and absolute return funds from asset                                                                                             reserves fall below minus 15%) would still show that
    managers do not offer any type of capital guarantees.                                                                                     Old Mutual Absolute Smooth Growth outperforms the
    Absolute return funds aim to minimise capital losses,                                                                                     Median Aggressive Balanced Fund by more than 15%
    but this remains only an aim, as many have delivered                                                                                      over the past year.
    negative returns over the last year. Smoothing-
    enhanced portfolios, in contrast, deliver more stable                                                                                     Recent enhancements
    and consistent inflation-beating performance, not just
    in bull markets, while also significantly reducing the                                                                                    The principle of smoothing-enhanced portfolios has
    risk of extreme underperformance at the date of exit                                                                                      existed in South Africa since 1967, with the launch
    through smoothing and by providing explicit capital                                                                                       of the Old Mutual Guaranteed Fund. In the last ten
    protection.                                                                                                                               years, various enhancements have been made to the
                                                                                                                                              way these portfolios are managed as the needs of
    It should be noted that, while Old Mutual Absolute                                                                                        retirement fund investors have rapidly changed.
    Smooth Growth’s performance exceeds that of the
    Median Aggressive Balanced Fund by more than 36%                                                                                          Absolute Growth Portfolios have a
    over the last year, the recent market falls have placed                                                                                   dynamic and aggressive investment
    significant pressure on products’ underlying bonus                                                                                        philosophy that is well diversified
    smoothing reserves. This means that, should the
    market continue to fall further, a negative bonus could
    be declared. However, even a negative bonus of 15%                                                                                        Last year, Old Mutual launched the Absolute Growth
    (as per the bonus formula should bonus smoothing                                                                                          Portfolios, which have revolutionised the retirement




8
fund industry yet again. These portfolios start with a       bonuses are possible on these versions in particularly
dynamic and aggressive investment philosophy that is         severe investment environments (as their guarantee
well diversified (refer the article ‘Finding Alternatives’   levels are below 100%), but with a consequent higher
in the September 2008 Trustee Times issue), and then         long-term return expectation.
deliver the returns to investors so that the volatility
(and therefore risk) thereof is even lower than for          Benefits of smoothing-enhanced portfolios
conservative funds. The returns are delivered based
on an explicit CPI inflation target, like absolute return    ■   Exposure to the most efficient, dynamic and
funds, but are declared before the start of each month.          diversified    underlying       investment     mandates
Wrapped around this are various guarantee levels,                available, including exposure to direct property,
which are supported by Old Mutual’s balance sheet.               private equity, infrastructure and international
                                                                 alternative assets – all managed across a range of
The combination of features ensures that the portfolios          investment boutiques and diverse expertise.
deliver superior performance as well as providing the
peace of mind that members’ retirement savings               ■   Explicit inflation-targeting on a monthly basis.
are protected, at various levels, from severe market
downturns.                                                   ■   Significantly reduced short-term volatility, by way
                                                                 of smoothed monthly bonuses, reducing the risk

These new era smoothing-enhanced portfolios also                 on members being forced to exit their fund in a

offer complete transparency (in terms of underlying              severely negative market.

returns, their formula-driven bonus philosophy and
                                                             ■   Formula-driven bonuses providing the facility
disclosing of reserve levels).
                                                                 to forecast future bonuses under future market
                                                                 environments.
Choice of smoothing-enhanced portfolios
                                                             ■   Full transparency of bonus mechanism, underlying
The years of one size fits all are long gone, and
                                                                 portfolio performance, reserve levels and costs
the same applies to retirement savings. Old Mutual
                                                                 and charges.
therefore offers a range of smoothing-enhanced
portfolios to cater for different client needs. For
                                                             ■   A choice of explicit protection levels, backed by
example, CoreGrowth and Absolute Secure Growth
                                                                 Old Mutual South Africa’s balance sheet which
offer   100%   capital   protection   (guaranteeing    no
                                                                 remains one of the strongest in the South African
negative returns) for risk-averse members, such as
                                                                 Financial Services Industry.
those close to retirement. These portfolios differ in
that CoreGrowth invests in a conservative underlying
                                                             ■   Unitised      daily   returns     for   easy     benefit
asset mandate and Absolute Secure Growth in a more               administration.
aggressive underlying mandate.

                                                             ■   The experience of 41 years of efficiently managing
Also available, and becoming increasingly popular,               smoothing-enhanced returns, in an array of
are low cost portfolios with high return objectives              investment environments.
but still low volatility. Absolute Smooth Growth offers
higher prospects for returns (CPI+6%), for clients
valuing the smoothing benefits, but not necessarily a
high guarantee level. Finally, to complete the range,
Absolute Stable Growth offers a respectable blend of
growth and protection, with an 80% guarantee while
still aiming to deliver returns of CPI+5.5%. Negative




                                                                                                                            9
 There’s nothing like hindsight to highlight the importance of being proactive.
 And in the midst of the world’s first truly global financial crisis, some trustees
 are assessing whether the strategies of the quiet past are adequate for the
 stormy future.




 Time to reassess?
 Craig Aitchison, Head of Old Mutual         not necessarily the best match to              invested in the safest portfolio.
 Actuaries and Consultants (OMAC),           every member’s needs.
 however, warns against trustees                                                            What about members about
 making        impulsive        decisions.                                                  to retire?
 Trustees need to recognise the              Optimising the balance                         Certain      lifestaging     products
 need for long-term planning and             between investment                             offer portfolios for pensioners as
 strategising    and     work     towards    growth and capital                             well and provide for a seamless
 these long-term goals. In the mean
                                             protection                                     transition from active member to
 time, if funds did not manage                                                              pensioner.
 investment      risks      appropriately
 there is a fair amount of disaster          The   lifestage    approach        creates     An   important     aspect     of    the
 management that may need to be              several   different        portfolios    of    investment strategy is the portfolio
 done first.                                 descending    levels       of     risk   for   that the member is invested in
                                             members. That means members’                   immediately prior to retirement.
 Lifestage     investment       strategies   funds are invested in the portfolio            This is referred to as portfolio
 may provide an appropriate long-            that offers them the best mix of risk          targeting.
 term solution for funds wanting             and returns, given their proximity
 to find a better balance between            to retirement.
 investment      growth     and    capital
 protection.                                 Younger members are placed in a
                                                                                            A single investment
                                             more aggressive portfolio, which               portfolio may not meet
 Lifestage      investing     could    be    has little or no capital protection,           every member’s needs
 the solution for certain funds,             while members closer to retirement
 particularly during these troubled          are placed in a portfolio that has
 times. Modelling by OMAC has                substantial      capital        protection.    ‘The choice of target portfolio can
 shown that a simple lifestage model         Members with a middling time to                determine the success or failure
 could have improved the after-              retirement would find themselves               of the lifestage strategy,’ says
 retirement income of a member               in a moderate portfolio that has               Aitchison.
 retiring in October 2008 by up to           some protection but is still fairly
 30% compared to investing in a              aggressive.                                    The target portfolio should be as
 balanced fund only.                                                                        close a match as possible to how
                                             As members age, they will be                   the money will be invested post-
 The basics of lifestaging                   switched from the more aggressive              retirement. Many members, even
 Lifestage investing is an investment        portfolios to the safer portfolios.            those in funds with member level
 approach which recognises that              When members are very close                    investment     choice,     give    little
 a single investment portfolio is            to retirement, they will be fully              thought to how their money is




10
                                                                                                        lifestage
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                   Craig Aitchison
                   Head of Old Mutual
                   Actuaries and Consultants
                   (OMAC)




invested for the 20 or more years       and should be made in conjunction        the match, the lower the chance
that they are pensioners and may        with   an       accredited   financial   of    the   member’s   savings    and
only think about their retirement       adviser.                                 annuity prices moving in opposite
options in the year before they                                                  directions,    resulting   in    lower
retire. However, the choice of post-    ‘Matching closely is very important’     income levels for members.’
retirement investment is critical       advises Aitchison ‘as the closer


In brief, members have a choice between a mix of investment types:

 Post-retirement income         What it is                                   Closest pre-retirement investment


 Cash                           Cash                                         Cash


 Level Annuity                  An annuity that pays a fixed                 Bond Fund
                                monthly income


 Increasing Annuity             An annuity that increases at                 Inflation-Linked Bond Fund
                                a predetermined rate,
                                e.g. 80% of inflation


	 With-Profit	Annuity           An annuity that increases in                 100% Guaranteed Smoothed Bonus
                                line with smoothed investment                Product
                                performance.


 Living Annuity                 Pensioner selects income level               Balanced Fund, i.e. mix of equities
                                each year, expressed as a percentage         and bonds
                                of their accumulated savings




                                                                                                                      11
 Historically, lifestaging strategies used    members exposed to higher risk              impact of these costs on investment
 cash as a target portfolio. However,         investments too close to retirement.        returns and members’ benefits
 this was inappropriate for members           A way to manage this is to have the         would have to be calculated and
 who were not going to spend all of           administrator report on switches            modelled when the lifestage model is
 their retirement savings shortly after       and to ensure there is a high level         designed.
 retirement.                                  of automation in the administrator’s
                                              systems.                                    Deciding if lifestage investing
 The     current     thinking   around                                                    is right for your fund
 lifestaging is for trustees to choose        For funds that are currently in             The lifestage approach allows trustees
 a target portfolio based on where            aggressive investments, members             to tailor the fund’s investments to
 they think members are going to              near retirement may find themselves         better suit members’ investment
 be invested after retirement or              transferred into more conservative          needs.     Trustees    can    manage
 for members to choose the target             investments. However, this could            investment risk more effectively and
 portfolios for themselves.                   serve to lock in losses experienced as      may be able to increase the overall
                                              a result of recent market turbulence.       level of returns earned by members
 The good news is that members                As members who are far away from            over their working lifetime.
 will need to make the decision at            retirement are placed into more
 most eight years before retirement.          aggressive investments, they can            Lifestaging is suitable for a fund
 This means that younger members,             be exposed to market risk. Should           where trustees are prepared to invest
 who often have limited interest in           the member leave the fund, their            the time and resources required in
 retirement matters, can defer this           benefits will be disinvested and paid       managing the fund’s investments.
 decision until retirement becomes            to them in cash. There is a risk that a     It is also a good stepping stone for
 more pressing without jeopardising           member would leave just as markets          a fund considering offering member
 their financial future.                      (and the value of his investment in         level investment choice.
                                              the fund) have dropped. Members
 Possible pitfalls                            who are retrenched are particularly         Small funds with few members or low
 While lifestage investing should             vulnerable as they have little choice       assets may struggle to implement a
 improve the risk profile of the fund, it     over the date when they exit the            full lifestage approach, as they may
 is not for everyone. Trustees need to        fund.                                       not have sufficient membership or
 satisfy themselves that each lifestage                                                   assets in a particular category.
 portfolio is appropriate. Further, the       The member’s best way of mitigating
 performance of each portfolio has            this risk is to immediately invest his      ‘Being forewarned is being forearmed,’
 to be monitored to ensure proper             withdrawal benefit into a similarly         says Aitchison. This is particularly true
 management.                                  invested preservation vehicle.              for planning an investment strategy.
                                                                                          It may be too late to avoid some of
 A further risk is that the administrator     There is also the risk that higher          the fallout resulting from the credit
 may      not       switch    members’        expenses    may    erode    higher          crisis, but ‘now’ is always a good time
 investments on time. This could leave        investment returns. The overall             to plan for the future.


     Lifestaging in short

     ■   An investment approach that recognises that a single investment portfolio is not necessarily the best match to every
         member’s needs.
     ■   Younger members are placed in a more aggressive portfolio, with little capital protection.
     ■   Members closer to retirement are placed in a portfolio that has substantial capital protection.
     ■   Members with a middling time to retirement are placed in a moderate portfolio that has some protection but is still
         fairly aggressive.
     ■   As members age, they will be switched from the more aggressive portfolios to the safer portfolios.
     ■   When members are very close to retirement, they will be fully invested in the safest portfolio.
     ■   For post-retirement, current thinking is around target portfolios – the trustees target an investment portfolio that
         closely matches how the money will be invested post-retirement, or else for members to choose the target portfolios
         for themselves. This ensures a smoother transition into retirement.




12
                                                                                              financialwellbeing




Waste not,
want not
It has been estimated that less than 6% of South
Africans are in a financial position to be able
to retire comfortably. While a lack of adequate
provision is primarily to blame, a failure by many
employees to carefully preserve their retirement
funds is also contributing to the problem. And it’s
going to take a concerted effort by all stakeholders                                                     Haddon de Waal
                                                                                                         Head: Financial
to correct this trend.                                                                                   Wellbeing Programme




In     contrast        to   many        other    retirement fund members realise          to make preservation an integral
countries,         legislation     in   South    that, quite apart from the onerous       part of retirement planning for its
Africa allows employees to receive               tax implications of taking their         fund members – and encourage
their accumulated retirement funds               retirement savings in cash, failing to   trustees and employers to do the
when changing jobs. And while                    preserve those savings represents        same.
having access to their retirement                a massive step backwards in their
money may be something of a                      preparations for retirement. In fact,
                                                                                          What can you do?
lifeline for some individuals who                no matter how long they will still
have no income while trying to                   be employed prior to retirement,
                                                                                          Essentially,     there    are      three
obtain        new      employment,        the    few, if any such employees are
temptation to spend the money                    likely to be in a position to be able    ways in which retirement funds

unnecessarily is simply too great                to restore their retirement savings      preservation can be encouraged
for those who don’t understand the               to the levels they would have            amongst    members.        These     are
dire consequences of such action.                achieved had the funds simply            through:
                                                 been preserved during their job
This fact is evidenced by research               transition.                              1. the provision of effective
done by Old Mutual Corporate                                                                 financial education to ensure
into its umbrella funds, which                   With that in mind, it is clear that         that employees and members
showed that more than two-thirds                 the industry players, trustees and          make informed and correct
of members resigning from their                  retirement fund managers have a
                                                                                             decisions;
jobs prior to retirement age took                responsibility, not only to educate
                                                                                          2. access to personal, expert
their retirement benefits in cash,               members about the importance of
                                                                                             advice and assistance around
rather        than     transferring     them     preservation, but also to enable
                                                                                             preservation decisions; and
to   a    retirement        annuity     fund,    them to effectively preserve their
preservation fund or their new                   retirement savings in the long           3. well structured incentives

employer’s retirement fund.                      term.                                       designed to encourage
                                                                                             members to avoid the
This     is    a     frightening    statistic,   This fact has prompted Old Mutual           temptation of cashing in their
because it shows just how few                    Corporate to take action in an effort       retirement savings.




                                                                                                                                 13
 Waste not, want not          cont.
                                                             Old Mutual Corporate
                                                             recently announced that
 Working together for the good of members
                                                             it has eliminated upfront
 Obviously,   implementing      these   approaches,   and
                                                             administration fees for
 achieving success amongst members in terms of
                                                             anyone who is currently a
 their willingness to preserve their retirement savings,     client of Old Mutual or who
 requires collaborative efforts.                             is employed by an organisation invested in Old
                                                             Mutual, and who chooses to preserve his or her
 Old Mutual has made the process a little easier with        investment in our Protektor Preservation Fund.
 the   implementation    of   its   Financial Wellbeing
 Programme, which provides employers and trustees            The move effectively makes the Protektor
 with access to experienced trainers who can be called       Preservation Fund one of the most economical
 on to offer educational seminars to members on              preservation funds on the market and the lower
 various aspects of financial planning – including the       fees incentivise preservation by translating into a
                                                             higher fund value at retirement
 reasons and methods for effective preservation.

                                                             So, with the necessary education, assistance and
 As part of the programme, trustees and employers also
                                                             incentives in place, it is now possible to begin
 have the ability to put individual members in contact
                                                             reversing the disturbing trend by fund members to
 with Old Mutual financial advisers, who are qualified       cash in their retirement provision when switching
 to guide them regarding their retirement funding            jobs.
 decisions when changing employers.




 Upcoming events
                                                            Old Mutual Actuaries & Consultants
                                                            (OMAC) Breakfast Seminars 2009

                                                            OMAC    has   a   series   of   thought-provoking   and
                                                            interesting seminars lined up for 2009. During the
                                                            first quarter, the topic will be around preservation
                                                            of	 fund	 benefits	 prior	 to	 retirement. Recent
                                                            legislative changes have made preserving withdrawal
                                                            benefits easier and from 1 January 2009, the
                                                            regulations around payment of death benefits will
                                                            change – making it big news for members and
                                                            trustees.




                                                            To	 find	 out	 more,	 please	 contact	 Rian	 Piek	 at	
                                                            011 217 1091 or rpiek2@oldmutual.com




14
Are you on course for financial
independence?
    Help your employees take a step towards achieving financial independence,
    thanks to the Old Mutual Financial Wellbeing Programme.


Most people believe that their retirement fund will pay
out enough money to retire one day. While the average
retiree needs a retirement payout of around 13 times their
final year’s annual salary to be able to retire relatively
comfortably, research reveals that most retirement fund
members can expect their payout to be less than a quarter
of that amount.


Old Mutual developed the Financial Wellbeing Programme to
help guide members of retirement funds through the process
of successful, ongoing retirement planning.


How it works
Fund assessment
Old Mutual Corporate does a thorough assessment of the
financial status of the entire retirement fund and its individual
members. The results show precisely the level of financial
preparedness of fund members as individuals and as a whole.
This allows trustees to choose the appropriate workshop             In addition, the programme also provides you with a range of

from the Old Mutual Financial Wellbeing Programme, based            easy-to-use financial planning and decision-making tools

on the needs of their fund.                                         and calculators, as well as access to ongoing consultation
                                                                    and advice from accredited Old Mutual financial planning

Member workshops                                                    professionals.

The programme offers one to two-hour workshops with topics
that range from general information about your retirement           The programme has been designed to fit seamlessly into
fund and the importance of proper retirement planning, to           any organisation’s overall Human Resources Strategy or
insights and training around essential financial, risk and          Employee Wellness Programme. The services and workshops
investment management principles and techniques.                    are tailored according to income levels, financial literacy
                                                                    levels, language preferences, and geographical spread.
The programme also offers the ‘On The Money’ behaviour
change workshop, which is 7 hours in length. This workshop          Old Mutual would like to partner with you to deliver the range
can be customised into a number of shorter sessions spread          of products available under this programme, through the
over a period of time.                                              establishment of a joint steering committee.



For more details on the Old Mutual Financial Wellbeing Programme, speak to your Corporate Consultant or contact
Haddon de Waal (Head: Financial Wellbeing Programme) at 011 217 1104 or hdewaal@oldmutual.com
 Paying high fees
                                                for              excess returns
                                      but getting a lot of Beta

      Unlike the rest of the globe, where between 20% and 30% of all retirement plans utilise
      some type of index-tracking core, active managers in South Africa often argue that
      our local market is structurally different and does not lend itself to core and satellite-
      wtype portfolio construction.


 However, the facts of our market                   Currently, a blended portfolio of three       these are the only ones they like –
 would suggest the opposite – that the              or four large active equity managers          investment constraints are being
 SA market has investment constraints               in South Africa would be invested in          forced upon them. Typically they
 that make it more difficult for fund               130 to 135 shares. This may sound             need a stock to have average monthly
 aggregators to create an active-only               like a lot, but relative to the Dow           trade of over R100m per month, and
 portfolio blend that will not result in            Jones Wilshire 5000 Index it is a very        there are approximately 80 stocks
 a de facto passive core portfolio. This            limited universe. In fact, the largest        on the JSE that currently meet this
 suggests that for a pension fund to                80 stocks within this blend account           criterion. This is only R5m in trade per
 pay high active fees on ALL its assets             for over 96% of the aggregated                day. To avoid trade impact costs it is
 is a waste of money – given that a                 portfolio.                                    advisable to not participate in more
 component of the fund’s aggregated                                                               than 20% of the daily volume – this
 equity return is purely derived from               Managers do not decide to invest              further restricts an active manger
 the passive investable universe.                   in just 80 shares simply because              to only R1m in available daily trade




                        A Tiny Universe                                                      Aggregated Top 11 Managers
                                                                                                  Equity Holdings


               Dow Jones Wilshire 5000 Index        5000
                                                                                                                        Next 10 Shares
                                                                                                                              1%
                                                                                                                          Other Shares
                                                                                 Top 80 Shares
                                                                                                                              3%
                                                                                     96%




                                    S&P 500          500

     Alexander Forbes SA Large Manager Watch         131

                                               Number of shares

                                                 Source: Riscura, OMIGSA, Inet




16
                                                                                                                    investments




                                                                                                        Craig Chambers
                                                                                                        Deputy MD
                                                                                                        Umbono Fund Managers




volume. It can therefore take weeks to execute even a
1% switch in house-view funds.


So what does this
unavoidable de facto passive core look like?

Since the advent of the Shareholder Weighted Index
(SWIX) almost seven years ago, the majority of active
managers have adopted it as their benchmark. (Inevitably,
even if they don’t utilise the SWIX, they will be utilising
some kind of Regulation 28-compliant, resource down-
weighted index.) So, when fund aggregators construct                  Top 11 manager blend vs SWIX composite
a blend of three or four active managers, one manager
                                                                35%     Largest 11 Managers Aggregated Equity Pot (net of fees)
may have a slight overweight position in Sasol relative                 Composite: 70% manager blend, 30% SWIX (net of fees)


to the SWIX, another will have a slight underweight, but        30%                                                29.06%         28.87%


in aggregation they look very similar to the SWIX. This
                                                                25%
is especially true for the largest 80 stocks. Remember                       22.07%         22.29%

                                                                20%
the SWIX index is faced with the same investability
constraints – so 80 stocks also make up a very large            15%

proportion of this index.
                                                                10%


The returns confirm this – if we look at the five-year           5%

annualised equity carve-out return of the largest 11
                                                                 0%
                                                                                      3 Years                               5 Years
managers (after a typical active fee) versus the identical
blend but with 30% of the composite invested in a SWIX
tracker (net of typical tracker fees), the two composites’
returns are very similar. In fact, the average realised
tracking error of the aggregated equity carve-out blend
versus the SWIX has been less than 2.5% a year over
the last six years – this is typically the active risk range
we use for an enhanced tracker.


So no matter how fund aggregators try to slice and dice
active managers in the SA context (deep value, growth,
GARP, etc.), the aggregated blend will always have a
portion of the portfolio that is 100% passive. This portion    For more information on tracker and enhanced
should be costing investors 70% less than typical active       tracker	portfolios,	contact	Craig	Chambers	at	
fees.                                                          011 562 6039.




                                                                                                                                           17
                                                                             A handful of
                                                                          disability cases

Old Mutual Group Assurance provides income benefits to thousands of disabled people
each month, and each claimant has their own compelling story. The following few cases
illustrate how Old Mutual works with all parties to achieve a fair outcome, whether the
claimant receives a long-term benefit or returns to work.


  A normal life like anyone else

  The 31-year-old man was at university when his eyesight          While he received a monthly disability benefit, his
  began to deteriorate. Though unable to pursue his                rehabilitation and training began. Given his potential,
  studies, he was determined to work and found a job at a          Old Mutual paid for all his training. He first learned to walk
  supermarket.                                                     about independently and with confidence, despite his poor
                                                                   vision. He then mastered adapted call centre technology,
                                                                   which enabled him to return to his previous employer
  When his vision got worse, his manager adjusted the work
                                                                   as a Personal Helpdesk Practitioner. He now has a much
  to accommodate his limitations. Later, working as a packer,
                                                                   better income than when he worked as a packer in the
  he began to miss some of the items the clients had bought        supermarket.
  – clearly an unsatisfactory situation for all stakeholders.
  Interaction with the employer and employee indicated that        His employer wrote: “I would like to say thank you to
  he was a motivated and ambitious young man. Yet he felt          Optima (the training facility) and Old Mutual for giving
  that he had reached a dead end, as he was not aware of           him an opportunity to explore and to gain his life and self-
  the rehabilitation services that are available to people with    esteem back… He can now socialise and lead a normal
  poor vision.                                                     life like anyone else. Thank you for opening doors of
                                                                   employment for him.”



  Member of a lift club

  The 50-year-old man had been struggling with the blood          and gradually increased the work requirements until he
  supply to his legs for a number of years. He continued          became fully productive again. During this time Old Mutual
  to perform his administrative job for as long as he could       continued to pay a partial benefit to top up the salary that
  cope.                                                           he earned.


  He was already receiving a disability benefit when the          Transport to work proved to be the final stumbling block.
  doctors decided it was time to amputate both legs due to        Though it would have been possible to adapt his car so that
  his chronic condition. Over time the wounds healed well and     he could drive it with hand controls, the car was considered
  he adapted to the loss of his legs.                             too old to make this a viable option.


  He now wanted to return to work and his employer was            For the time being he is a member of a lift club with his
  willing to accommodate him, once they understood the            colleagues – this green solution might well be all he needs
  situation. They agreed to begin with a part-time commitment     even in the long term.
   At death’s door no more

   There are many stories like his – people who have been           Another two years went by. He was alive and well – and
   very ill before they began treatment for their chronic           eager to work. The company doctor and management
   health problem. This 42-year-old man already had major           wanted some evidence that he was really better before
   complications such as tuberculosis, dementia, paralysis          giving him an opportunity to return to work. Fortunately
   and bedsores, and death seemed certain.                          his remarkable recovery was supported by up-to-date
                                                                    medical information and he was able to return to work full
   After two years on treatment, the medication was making          time.
   a difference and some of the complications were being
   addressed. He began to wonder about returning to work,           A few months later he wrote: “I want to thank the assessor
   but the doctor believed that he would never be able to           very much for the excellent service in the last four years.
   work again.                                                      She made me believe in myself and gave a lot of information
                                                                    I needed at the time. She was also ready to listen to me
                                                                    and she returned my call every time I called. I am back at
                                                                    work now and enjoy every minute of it.”
   Inappropriate enthusiasm for work

   During a relapse of her psychiatric condition, one of the       gain better insight into her condition so that they can
   claimants wanted to return to work. Though this is usually      support her more effectively. The doctor was also able to
   encouraged, a claims assessor must always consider the          stabilise the psychiatric condition during the three weeks
   situation from all angles.                                      that she spent in hospital.


   Given her condition and      history, she is not expected to    Though she will not be able to return to work, her caregivers
   be able to work again.      To ensure that all stakeholders     are now in a much better position to understand and
   understand the situation,   a thorough psychiatric evaluation   meet her needs. In this way the quality of her life has
   was arranged. It helped     her family and close friends to     improved.



   Unfortunately some fake disability

   The specialist medical examination and x-rays found              There was no sign of the disability that he had demonstrated
   nothing wrong – only the usual wear and tear associated          to the assessor less than an hour before!
   with his age group. Yet when he attended the Old Mutual
   assessment he could hardly walk through the door, was            Given the challenges of real disability, those who fake
   bent over and very dependent on his crutches.                    it should not make it as far as disability benefits are
                                                                    concerned. Any discrepancy between the medical facts and
   He did not know that Old Mutual asked a private investigator     their impact on the person’s ability will be investigated to
   to follow him home. He tucked both crutches under his            ensure fair play.
   arm and quickly walked into the house.


For more information go to www.oldmutual.co.za/groupassurance
 Investment                                                                                  Client update!



 Report Back
 Seminars                                   Old Mutual Corporate held its annual
                                            Investment Report Back Seminars throughout
                                            the country during the last quarter of 2008.
                                            The main objective of these sessions was to
                                            provide existing clients in the Old Mutual
                                            Smoothed Bonus Portfolios and the Absolute
                                            Growth Portfolios with an update of the
                                            investment performance of these funds.
     Here’s what some clients had
     to say about the seminar:

     “Seminar was informative and
     has assisted me in understanding
     the current state of affairs in the
     retirement industry.”


     “Leon Louw was precise and brilliant
     and addressed our fears.”


     “…reassured in these troubled
     times”


     “Speakers appeared very
     professional and knowledgeable on                         Anita Griessel (Old Mutual Corporate)
     the current topics and have made it                       and guest speaker Leon Louw
     easier for clients to understand the
     current economic scenario and fund
                                            The guest speaker for the event was internationally
     investment, e.g. Smoothed Bonus.”
                                            recognised economic, political and environmental analyst,
                                            and director of the Free Market Foundation, Leon Louw, who
                                            presented some interesting views on the global financial
                                            crisis and the future for South Africa.


                                            Old Mutual Investment Consultants Anita Griesel and
                                            Dharmash Dayal provided a comprehensive overview of the
                                            current economic climate and how the Smoothed Bonus
                                            and Absolute Growth Portfolios have delivered favourably
                                            despite the rollercoaster ride of the markets.




20
                                                                                                  groupnews




News                                   from Old Mutual
Trustee Times brings you some
of the latest news from our
business via recent media
releases. For the full articles
and more, please visit the media
section on Old Mutual’s website:
www.oldmutual.co.za

5 Nov 2008                                                                        25 Nov 2008

Hospital staff set to benefit from onsite
financial advice
                                                                                  OM’s massive
Charlotte Maxeke Johannesburg Academic Hospital and Old Mutual (South
                                                                                  volunteer
Africa) today announced a partnership aimed at making the lives of its
dedicated healthcare professionals easier through the revamping of the
                                                                                  project to uplift
relaxation area and the opening of a client self-service terminal and onsite
access to financial advice.
                                                                                  communities
                                                                                  More than 2 780 civic-minded
                                                                                  Old   Mutual     (South    Africa)
6 Nov 2008
                                                                                  employees have stepped out of
Q3 Interim Management Statement 2008                                              their comfort zones in one of the
                                                                                  country’s   largest   volunteerism
“We have delivered a resilient performance in what have been extremely            campaigns – Care and Share.
challenging market conditions with our South African and Nordic businesses
continuing to deliver excellent results,” says Chief Executive, Julian Roberts.   In the first week of the campaign
                                                                                  (3 to 7 November), 12 houses were
“Despite the fall in equity markets and movement in exchange rates we             built in Cape Town, Johannesburg
remain well capitalised and we have liquidity that is in excess of our needs      and Durban as part of Care & Share
for the foreseeable future.”                                                      Habitat for Humanity Builds.




13 Nov 2008

Old Mutual collects two customer excellence accolades
Old Mutual has been voted the best customer service organisation in the long-term insurance sector and claimed
the top position in the After-Sales Service category in the 2008 Ask Afrika Orange Index TM survey.


In total, 15 737 customers were interviewed with a minimum of 250 being interviewed per brand.




                                                                                                                   21
     Capital Builder
                                                                                          the safe and smart
                                                                                     way to grow your wealth
 Absolute Return Investments, a boutique within Old Mutual Investment Group
 SA (OMIGSA), has developed a fund that can perform well in these volatile
 times. It combines the safety of quarterly capital protection with the smart
 investment in tax-efficient, long-term equity growth.

 The Old Mutual Capital Builder Fund aims for quarterly                                                          effectively minimised losses to provide stable returns.
 capital protection while generating stable growth in                                                            While the fund is structured to guard against falling
 excess of inflation. The fund targets a return of CPI                                                           markets, it is also designed to benefit from rising
 + 5% per year, over rolling three-year periods. It is                                                           markets. The bar chart below shows the portion of
 aimed at investors who want to achieve tax-efficient,                                                           the market’s performance that the fund experienced
 inflation-beating returns through most market cycles.                                                           under different conditions – emphasising its strong
                                                                                                                 positive correlation when the market rises and lower
 Active risk management                                                                                          correlation when the market falls.
 Risk management is a key feature of this fund — both
 in terms of short-term losses and long-term inflation                                                           To entirely eliminate market risk would adversely
 erosion. The graph illustrates how, during periods                                                              affect the growth potential of the fund. So while it is
 when the FTSE/ JSE All Share Index delivered negative                                                           highly unlikely that the fund will experience negative
 returns, the fund’s risk management techniques                                                                  returns over a 12-month period, under certain market


                                   Reacting to market drawdowns                                                                      Capturing upside, minimising downside
                                                                                                                    Average monthly returns from 1 December 2005 to 30 November 2008
                        FTSE/JSE TOP 40 Index                     Old Mutual Capital Builder

     115                                                                                                                          Portion of the market performance experienced by fund
                              JULY 2007                                               JANUARY 2008

                                                                                                                                           FTSE/JSE TOP 40 Index        Capital Builder
     110

                                                                                                                                    TIMES OF                            TIMES OF
     105                                                                                                                         NEGATIVE MARKET                     POSITIVE MARKET
                                                                                                                                    RETURNS                             RETURNS
                                                                                                                                                                       42%
     100
                                                                                                                                                                                 4.2%
                                                                                                                                                                       1.8%
     95
                                                                                                                                  -0.4%                             Stronger correlation to
                                                                                                                                                                    market outperformance
     90                                                                                                                             9%
                                                                                                                                             -5.2%


     85

                                                                                                                     Lower correlation to market underperformance
      May-07   May-07     May-07     May-07     May-07   May-07       Nov-07      Dec-07       Jan-08   Feb-08                                                                                Source: OMIGSA




22
                                                                                                                investmentproduct


conditions             investors    could      experience          negative        their risk characteristics, both at a share and portfolio
quarters.                                                                          level. The fund management team favours shares
                                                                                   that are highly liquid and capable of hedging cost-
For those investors unable to tolerate any short-term                              effectively.
risk in the value of their investments, a 100% capital
                                                                                   Performance
guaranteed option can be selected. This protects the
quarterly returns from falling below zero.                                          Month              2005       2006       2007        2008



The table on your right shows Capital Builder’s monthly,
                                                                                    Jan                           5.1%        1.8%       -0.3%
quarterly (based on tax year quarters) and annual
                                                                                    Feb                           5.1%        1.8%       -0.3%
returns since its inception in December 2005.
                                                                                    QUARTER	1	           	       5.1%	       1.8%	       -0.3%

                                                                                    Mar                           3.6%        2.9%        1.6%
Attractive after-tax returns                                                        Apr                           1.2%        1.8%        2.7%
Returns are predominantly generated from capital
                                                                                    May                          -0.7%        0.7%       -0.6%
gains and dividends, which are more tax efficient than
                                                                                    QUARTER	2	           	       4.1%	       4.0%	       3.8%
interest bearing assets. The example below looks at the
                                                                                    Jun                           2.0%        0.5%       -0.1%
effective tax implications based on the Capital Builder
                                                                                    Jul                          -1.0%        0.8%       -2.8%
Fund’s returns since inception. This is compared to a
                                                                                    Aug                           2.0%        0.9%        1.9%
portfolio fully exposed to interest-bearing investments
                                                                                    QUARTER	3	           	       3.0%	       2.2%	       -1.0%
(with a tax rate of 28%).
                                                                                    Sep                           1.5%        1.7%       -2.2%

                                                                                    Oct                           1.9%        2.2%        0.6%

Example of potential tax rate for companies:                                        Nov                           0.5%        1.0%        1.1%

                                                                                    QUARTER	4	           	       2.9%	       2.8%	       -0.4%

 SOURCE	OF	RETURNS            RETURNS	GENERATED	(as	a	%	of	the	whole)               Dec                3.8%       1.3%       -1.8%

                                                                                    Annual                       16.8%       11.2%
                                Capital Builder         Interest-bearing
                              Institutional Fund           investment
                                  (tax rate)                (tax rate)
                                                                                    Return	in	excess	of	cash	    9.4%	       1.8%

 Interest income                   19% (28%)               100% (28%)
                                                                                   The Capital Builder’s returns (gross of fees) are used since its
 Dividends                         17% (0%)                  0% (0%)
                                                                                   inception to February 2008, thereafter the Old Mutual Capital
 Capital gains                     64% (14%)                0% (14%)               Builder Fund Class B returns are used (in the green block).
 TOTAL                              100%                      100%

 Potential total tax
 rate (ex deferral)                  14%                       28%


Note: This example does not take any interest income tax exemption into account.   Highly experienced investment team
                                                                                   Capital Builder is managed by an experienced portfolio
Investment strategy                                                                management team — with specialist derivative and
The fund can invest across most asset classes, including                           risk management skills. With its need for constant
cash, fixed income, listed property and equities. The                              monitoring and adjustment, the fund is overseen
equity holding of the fund (between 65% and 75% of the                             by a team of three managers so that it can always
portfolio) is invested primarily in select large capitalisation                    be positioned appropriately given changing market
shares of the FTSE/JSE Top 40 Index, with the balance                              conditions. The team has regular contact with a large
generally held in cash and money market instruments.                               number of banks and derivative brokers and focuses
Downside protection (put options) on the direct equity                             on securing the best prices in the market in order to
holding is purchased to reduce the portfolio’s equity                              minimise trading costs for the fund.
market exposure to between 0% and 40%.
                                                                                   For more information on Capital Builder please
Shares are selected quantitatively, based primarily on                             call Cornelius Schoonees at +27 21 509 3740.




                                                                                                                                                  23
     The response by
     investors to the current
     volatility in global stock
     markets highlights the
     dangerous tendency
     for investors to make
     decisions based on
     emotion, rather than
     reason.




 Keep the emotion
                                         out of investments
 Globally, $487bn moved into money       emotion driven and is not a good
 market funds in the first quarter       strategy for investors, particularly
 of 2008 compared to the $250bn          those with a long-term investment
 in the last three months of 2007.       horizon,’ says Megan Butler, head
 The majority of this came out of        of research at Old Mutual Actuaries
 equity funds. In South Africa, the      and Consultants (OMAC). ‘This is
 Association of Collective Investments   due to the fact that when markets
 (ACI) reported at the end of the June   recover, cautious investors miss out
 2008 quarter that money-market          on the often substantial recoveries
 accounts gained popularity with net     in share prices.’
 quarterly sales of R10.2bn.
                                         She adds that similarly, rocketing
                                         share   prices      not   supported     by
                                         fundamentals are caused by herd
 Rocketing share                         mentality, when investors derive
 prices not supported                    comfort from investing with the
 by fundamentals                         herd.   ‘Unfortunately,      these     so-
 are caused by herd                      called bubbles can have devastating
 mentality                               consequences for investors when
                                         sanity prevails.’


                                         Gary Hartwig, an actuary at OMAC,             Megan Butler
                                                                                       Head of Research (OMAC)
 ‘Unfortunately,   the   decision   to   says a study of behavioural finance
 move from high equity products to       shows us investors are often driven
 very conservative investments is        by   emotion,       rather   than    facts,




24
                                                                                                           investments




Gary Hartwig
Actuary (OMAC)




        allowing for irrational behaviour         ‘For example, judging a particular      They will make short-term or tactical
        when making investment decisions.         asset manager over a short-term         calls on exposure to equity markets
                                                  time period will not necessarily give   in order to lock in returns when
        ‘To illustrate the point, with children   you an accurate picture of ability      markets do poorly, and to maximise
        in your home, would you consider          over the long term, which may lead      returns when markets recover.’
        a swimming pool or gun more               to serious errors when allocating
        dangerous? In fact swimming pool          assets.’                                Investors   should        spend   time
        drownings are 100 times more likely                                               focusing    on    their     investment
        than gun-related accidents. In the                                                strategy, taking a view appropriate
        same way, markets are more likely                                                 to their investment time horizon
                                                  Investors should avoid
        to rise than fall on any given day                                                and not making decisions based on
        although sadly not in the ratio of 100
                                                  looking at short-term
                                                                                          the last 2 or 3 years of performance.
        to 1! Hartwig says. ‘Unfortunately,
                                                  performance to make                     ‘Investors should not be influenced
        shocking negative events tend to
                                                  long-term decisions                     by the fear of regret, but strip out
        receive far higher volumes of media                                               emotions to provide an objective
        coverage    and   stick   in   people’s                                           viewpoint based on common sense,’
        minds.’                                                                           Hartwig concludes.
                                                  ‘Heat-of-the-moment’        decisions
        ‘In an investment context, investors      can   have   far-reaching   negative
        should avoid looking at short-term        consequences for investors,’ says
        performance to make long-term             Butler. ‘Investment decisions are
        decisions as they are more likely         complex and should be thoroughly
        to see unusual events and may not         examined.    I encourage investors
        get a true reflection of the actual       to consult an expert in the field who
        performance,’ Hartwig comments.           is able to view markets objectively.




                                                                                                                               25
 Never 2 old
                                                              short for ‘be right back’, by the way (the abbreviation
                                                              for which is ‘btw’).




     2 b hip
                                                              Don’t be alarmed by their clothes. Torn and tattered
                                                              jeans that hang well below the waist do not mean your
                                                              kids need new pants or are not eating enough.

 As an adult (or anyone born before the                       The more expensive and fashionable the label, the
 conception of the internet, for that matter)                 more derelict they often appear. Buying them a belt,
 you may have noticed that kids these days                    or threatening to staple their jeans to their waists will
 seem to be expressing themselves in a whole                  undoubtedly be frowned upon. Shoes are no longer
 new way – from clothes to shoes, hair and                    shoes. They’re trainers, sneakers or kicks - and if they
 language. Especially language.
                                                              even have laces, these are certainly never tied.


 To keep up with youth nowadays, you need to be hip.
 No, not the kind in your body... the kind that means
 to be ‘cool’, or ‘in the know’. So, here is a crash course
 on how to communicate with, and understand, any
 teenagers with whom you come into contact.


 If your kids greet you with something that sounds like
 ‘Whassup G-diddy, droppin’ it fo real in da hi-zouse!’
 do not panic or call a psychiatrist. Loosely translated,
 this means the equivalent of ‘Hello. It’s great to see
 you! How are you?’ The best response is to calmly nod
 and say, ‘Fine, thanks.’


 Alternatively, throw them off kilter with a cool:
 ‘Whassup homie. Fo shnizzle mah nizzle.’ You don’t need
 to understand it. Just practise it until you sound
 fluent.


 On another note, ‘sweet’ is not something that gives         If your daughter comes waltzing into the room dressed
 them cavities. It means ‘excellent’. ‘Jam’ is no longer a    in too tight black clothing, two shades of purple lipstick
 preservative that goes on toast; it means ‘party’. ‘Sick’    and black nail polish, she is probably not a Satanist.
 is not an indication of poor health. Ironically, it refers   Makeup is as much a form of expression for adolescents
 to anything that’s amazing.                                  these days as music, speech and lying upside down on
                                                              the lounge chair. Give her a hug (she probably still
 You may even hear your kids say ‘bee are bee’. This is       likes that, even though she’ll never admit it) and tell
 not an indication of the grammatical standards taught        her she looks very ‘emo’ (short for ‘emotional’ – the
 at schools these days. Nor is it some kind of new age        style of music linked to that look).
 Zen mantra. It’s simply evidence that in the age of
 cellphone-speak, youngsters no longer use full words.        Chances are good that hauling out the boardgames
 So, be on the lookout for abbreviations. Oh, and BRB is      to amuse the kids will result in a sudden clearance of




26
                                                                                                       lighterside

                                                             ON SALE
                                                              NOW…
the room. The playing board has been swapped for
the keyboard and console. The playground has given
way to the playstation. And when they tell you they’re
‘chilling’ with their ‘homies’ in their ‘crib’, it doesn’t
mean you need to give them a cardigan, or something.
It just means they’re relaxing in their room with their
                                                                EQUITY EXPOSURE
friends. The best response is to leave them alone.
                                                                 THAT COSTS YOU
They’re plugged in, logged on,
uploading, downloading, instant                                     70% LESS
messaging and e-mailing.                                     Over the last 6 years active managers have
                                                             performed in line with the SWIX.                     Now you can
                                                             invest in a SWIX tracker fund and get similar
If there’s something they don’t know, they don’t look it
                                                             exposure to equities at considerably lower fees.
up in a dictionary or encyclopaedia. They ‘Google’ it on
                                                             In addition, tracker funds avoid market timing by
the internet. They’re plugged in, logged on, uploading,      remaining fully invested at all times.
downloading, instant messaging and e-mailing. All
from the same cellphone. And if you thought Walkmans         The 2007 Alexander Forbes Retirement Fund
were fancy back in the day, think again. These days          Survey shows that Umbono equity tracker fund

ice creams in the park have been replaced with iPods         annual fees are between 61% and 74% lower
                                                             than the average active manager’s fees.                              By
in the mall. And, unfortunate as it may seem, the
                                                             using a SWIX tracker fund as the foundation of
importance of ‘Nana’ now pales in comparison to the
                                                             a diversified portfolio, investors can benefit from
essential accessory known as Nano.
                                                             paying lower fees while still getting full market
                                                             exposure.


                                                             Umbono Fund Managers provides cost-effective
                                                             access to investment markets via index tracking
                                                             and enhanced tracker solutions. These solutions
                                                             are designed for clients seeking low cost, low risk
                                                             ‘core’ holdings to complement a larger investment
                                                             portfolio.


                                                             For more information on Umbono’s tracker
                                                             and	 enhanced	 tracker	 portfolios,	 contact	
                                                             Craig Chambers at 011 562 6000.
Ultimately, though, the new generation is not too
different from what it was when you were a teenager.
Your grandparents probably didn’t understand you
either. And if all else fails, you can always give them
a taste of their own medicine. Hit them with a few
age-old expressions like ‘gee willikers’, ‘shucks’,
‘gadzooks’ or ‘criminy’. It may not catch on, but
it might just give you some extra room to manoeuvre
when it comes to reaching a mutual understanding
that bridges the generation gap. Oh, and good luck,          Umbono Fund Managers is licensed as an approved financial service provider
                                                             (No. 721) in terms of section 8 of the Financial Advisory and Intermediary
btw.                                                         Services Act 37 of 2002. Reg. No. 2000/028675/07. Investors should note
                                                             that share price fluctuations, exchange rates and other economic factors
                                                             may have an effect on the value of investments. Performance is further
                                                             affected by uncertainties in government policy, taxation, foreign exchange
                                                             controls and other legal or regulatory developments. Past performance is
                                                             not necessarily a guide to future investment performance.
                                                                                                                                 27

								
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