Avbob - Old Mutual

Asset Allocation:
2011 Outlook
PETER BROOKE
Boutique Head,
Macro Strategy Investments

What did we say last time?
Themes help strip out the noise
− Big government
− Cash is trash
− Emerging markets
− Low-return world
− Quest for yield
?
Expectations are unrealistic
− 65% of investors are going to be disappointed in the long-term
Expect a better second half of the year
2

Asset Class Returns
For 12 Months to 31.12.10
SA EQUITIES
RAND
RETURNS
(%)
US DOLLAR
RETURNS
(%)
FTSE/SWIX 20.9 35.4
SA Listed Property 29.6 45.2
SA Bonds 15.2 29.0
SA Cash 6.8 19.6
INTERNATIONAL RETURNS
MSCI AC World 1.0 13.2
Emerging Market 6.4 19.2
Bonds -5.0 6.4
Cash -10.3 0.3
3

Biggest driver of asset prices in 2011 was the rand
Rand was the 3 rd strongest major currency in the world
Japanese Yen
Australian Dollar
South African Rand
Swiss Franc
Taiwanese Dollar
Singapore Dollar
New Zealand Dollar
Swedish Krona
Canadian Dollar
Mexican Peso
Brazilian Real
South Korean Won
Norwegian Krone
British Pound
Euro
Danish Krone
-6.7
-6.9
-3.5
-0.7
2.9
7.3
6.4
6.2
5.9
4.9
14.7
14.0
12.0
10.8
9.7
9.5
-10% -5% 0% 5% 10% 15% 20%
4
Source: Bloomberg 31.12.09 to 31.12.10

Interest rate-sensitive assets gained
Strong rand suppressed inflation, allowing rates to fall
Lower rates meant capital gains for property and bonds
Total
return
(%)
Starting
yield
31.12.09
(%)
Closing
yield
31.12.10
(%)
Change
in yield
(%)
Property 29.6 8.1 7.3 -0.9 Winner
Bonds 15.2 9.1 8.1 -1.0 Winner
Cash 6.8 7.1 5.5 -1.6 Loser
5

SA relative to Emerging Markets
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Strong rand also boosted South Africa’s relative
performance
200
180
160
140
120
10-yr average
100
80
6
Source: MSCI

South Africa best performing major market in US$
12 months to 31.12.10
South Africa
South Korea
Turkey
India
Russia
EM
Pacific
MSCI
S&P 500
FTSE 100
Dax 30
Hang Seng
Brazil
China
Cac 40
Euro Stoxx 50
-6.0
-9.1
9.2
8.5
8.3
6.8
4.8
21.2
20.9
19.4
19.2
16.1
15.6
15.1
27.2
34.2
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
SA was beaten by a handful of smaller markets like Thailand, Chile & Indonesia
7
Source: Datastream, Deutsche Bank, OMIGSA

BOTTOM UP
Valuations / HOLT
Research
Screens
What will happen to the rand in 2011?
THEME & PRICE
“Integrating top down
and bottom up”
TOP DOWN
Macro Environment
Markets
Themes
BAD THEME
Deteriorating
Environment
THEME
Improving
Environment
HIGH
Expensive
LOW
Cheap
8

Philosophy: Theme vs. Price
THEME vs. PRICE
RAND: REAL EFFECTIVE EXCHANGE RATE
Cash is trash
Quest for yield
170
160
140
120
Mean = 114.4
Std. Dev. = 14.7
170
160
140
120
Emerging markets
100
100
90
90
Commodities
80
80
70
70
71 74 77 80 83 86 89 92 95 98 01 04 07 10
9
Source: SARB

2011: Headwinds to the themes
Inflation
− Higher inflation in the emerging world is causing higher interest rates
− South Africa’s interest rate differential is less attractive
US recovery
− An upward “surprise” on growth will focus attention on tighter policy in
2012
Emerging markets
− Remain longer-term bulls, but a well-established theme
− Higher rates create a cyclical headwind
− Create the potential for volatility
Conclusion
− The rand is expensive and is vulnerable to a loss of momentum which is
impossible to time. Reduce exposure and increase offshore
diversification.
10

Why increase offshore exposure?
Diversification
− Basic argument of don’t put all your eggs in one basket
Relative value
− Expected real returns
Currency
− Will REAL currency movement impact returns
11

Diversification
Theory
− Diversification improves portfolio efficient frontier
− Reduces country-specific risk
Optimisation
− Our detailed analysis shows optimal portfolios hold more than 35%
internationally
− SA equity volatility 30% higher than international equity volatility
Opportunity set
− Exposure to faster growth economies in other countries
− Exposure to industries not well represented in South Africa (excluding
resources)
− Exposure to many more companies and instruments
12

Valuation: SA no longer so cheap
South Africa’s Dividend Yield – Japan’s Dividend yield (%)
CHEAP
13
Source: OMIGSA

Expected Return vs Currency Movement
50
40
30
20
SA Cash minus US Cash
SA Bonds minus US Bonds
SA CPI minus US CPI
Rand/US$ Percentage change
STRONG RAND
50
40
30
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
-45
WEAK RAND
1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
-40
-45
Over time we expect rand depreciation to boost returns
14

Increase International Exposure
Diversification, relative value and the strong rand are all
supportive of increased international equity exposure
Remember that multi-asset class solutions can move to 25% so
for many investors this is already happening
Japan
− Contrarian trading opportunity
Africa
− Longer-term opportunity for higher returns
15

Japan
Nikkei 225 in real terms
Massive underperfomer, back at levels 30 years ago
Un-loved, under-owned, Price Sales 0.6x
16
Source: Macro Strategy Investments (OMIGSA)

Africa: The Last Frontier
Population
− More than 1 billion people, youngest workforce in the world,
40% urbanised, 52 cities of more than 1m
Natural resources
− It’s a big place!
− Resource-rich with mining and agriculture dominating most
economies = leveraged play on Chinese consumer
Improving opportunity
− Increased FDI, stronger GDP growth, debt and inflation better
controlled
17

OMIGSA’s International Capabilities
18 distinct asset management firms
globally to choose from within the
OM group with AUM of $262bn
Exposure to 160 different strategies
covering global equities, fixed
income, property and alternatives
FUND OF HEDGE
FUNDS
LARCH LANE
AFRICAN
EQUITY
LONG TERM EQUITY
INVESTMENTS
Brought together within simple
solutions by the asset allocation skills
of MSI
18

Expected Returns: Equities
SA equities are fully priced on an absolute basis, but are still
attractive relative to other asset classes
Last year’s return was primarily delivered through earnings growth,
and multiples stayed at high levels of 17.2x
Therefore, earnings growth will be crucial to delivering this year’s
returns
We expect earnings growth of 25%, led by resources
Internationally, we also expect another strong year of corporate
profits as the economy recovers
Excellent corporate balance sheets will also provide plenty of
firepower for corporate action: takeovers, buybacks, dividends
19

Expected Returns: Interest-Bearing Assets
Inflation will increase from low levels, while local rates will
probably remain flat = lower real returns on cash
Local bonds will provide an attractive carry relative to cash,
but are unlikely to re-rate
Local property has been the best performing asset class again,
and as a result we downgrade future real returns
Offshore bonds remain an asset class to avoid
20

Long-Term Asset Allocation View
Real Return View Comment
SA
Equity
6.0%
Property 5.5%
Bonds 2.5%
Cash 1.5%
International
N
N
N
N
N
Rand is becoming overvalued
Full value on an absolute basis but still
attractive. Grind higher.
Expected return continues to fall
Limited potential for capital gains but
attractive carry vs. cash
Lower rates for longer means lower returns
Diversification is valuable
Equity
6.5%
Preferred asset class for 2011
Bonds 1.0%
Cash 0.0%
Longer-term bearish
Cash is still unattractive
21
NB: These are long-term, real returns expected over the next five years
1 January 2011

Conclusion
Lower returns from interest-bearing assets
Lack of alternatives and strong earnings growth should result
in another year of equity outperformance
Increase offshore diversification
Overall returns will be lower looking forward – save more
22

Old Mutual Balanced Fund
Asset Allocation as at 31.12.10
International
17.9%
Cash
16.2%
SA Equities
51.5%
Bonds
7.4%
Commodities
0.6%
Property
6.4%
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