Forty years is a long time to wait

for a rabbit not too appear

A “true” story about Ben & Jerry

Steven Nathan, 10X Investments

Twin brothers at retirement: Ben & Jerry

Identical savings & salary from 1973 to 2013, final salary R55K pm. Different company retirement fund

Final pension value R14 million R6,8 million

Living Annuity: 5% draw-down R58K pm R28K pm

Income replacement ratio 105% 50%

• High Equity Tracker Fund with low fees

• One fund & provider through-out

• Many investment choices offered

• Changed providers & funds several times

Two different approaches delivered two dramatically different results

A lot happens in 40 years: Should I upgrade my portfolio like my phone?

2010s2000s1990s1980s1970s

• Surely I must regularly change my portfolio to adapt to the changing economy?

A brief history of the last 40 years of investing

1970’s Oil Crises, high inflation

1976 Soweto riots, 1985 Rubicon speech, debt moratorium

1987 Market crash: 23% fall in one day!

1990 Madiba released, ANC, PAC unbanned

But then…..

1990’s New Economy: “Business cycle is dead”

Some “minor” hiccups along the way

Asian crises 1998 LTCM bailout 1999Russian default 1998

Dow Jones tripled to 12 000 in under 6 years to 1999

But then…..

Sadly, the business cycle returned. Dot.com Nasdaq crash 2000

9 September 2001: The world will never be the same

But then…..

2000’s Credit binge: Easy monetary policy (cheap money)

What do these highly regarded organisations have in common?Which of these highly regarded institutions predicted the 2008 GCF?Here’s the full list!

What do these highly regarded organisations have in common?No local fund manager/advisor predicted the GCF either

Don’t worry, there’s always at least one “hero” when you have

thousands of commentators

Dr Nouriel Roubini “Dr Doom”

Roubini’s other forecasts pre and post 2008 were hopeless

Another batch of “after the fact” experts

But then…..

Life carried on as it has done for decades….the economy grew…

Your investing time horizon is likely to

outlive most investment funds

Unit trusts 1998: 30 Funds in total

16 years later 2014: 24 Funds no longer exist. 80% attrition

• 2014 Over 1 000 unit trusts, attrition rate approx.

50% within 5 years

Companies and Funds no longer around

Syfrets

What if you never followed financial

markets for 40 years?

After-inflation value of R1 invested: 1973 - 2013

R23

R11

R2.5 R2.2

Shares Int Shares Bonds Cash

Source: Morningstar, 10X Investments

Value after-inflation of R1 invested 1973 - 2013

23

2.5

2.2

11

0

5

10

15

20

25

197

2

197

3

197

4

197

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197

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197

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197

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198

0

198

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199

0

199

1

199

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199

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199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Shares Bonds Cash Int Shares

10 Major financial events (ex. Wars!) in 40 years: 1 every 4 yrs

23

2.52.2

11

0

5

10

15

20

25

197

2

197

3

197

4

197

5

197

6

197

7

197

8

197

9

198

0

198

1

198

2

198

3

198

4

198

5

198

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198

7

198

8

198

9

199

0

199

1

199

2

199

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199

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199

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199

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199

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199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

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200

7

200

8

200

9

201

0

201

1

201

2

201

3

Shares Bonds Cash Int Shares

Oil crises

1976 Soweto

riots

“Death of

Equities”

2000’s

credit

binge

TMT New

economy

boom

1987

market

crash

SA debt

moratorium/

Rubicon

speech

ANC

unbanned/

1994

Democratic

election

Dotcom

crash,

9/11

2008 Global

Financial

Crises

Asia,

Russia,

LTCM

Why did Ben succeed and Jerry Fail?

Measuring what matters: Net return 1973 - 2013

Return after inflation % pa Ben Jerry

High equity Portfolio return 7% 7%

Measuring what matters: Net return 1973 - 2013

Return after inflation % pa Ben Jerry

High equity Portfolio return 7% 7%

Consultant recommendations &

active manager under-performance 0% -1%

Portfolio switches 0% -1%

Investment consultant recommendations underperform by 1% pa

“Pension funds and other large investors were shown to be throwing away

billions of dollars a year on worthless advice from investment

consultants. Consultant recommendations underperform by 1.1% pa

Underperformance against the fund due to investment switches

• US 2.5% pa per Morningstar

• SA 4% pa. per Allan Gray Balanced Fund

John Bogle & US investors: Structural move to index funds

How does the industry respond to these facts?

Measuring what matters: Net return 1973 - 2013

Return after inflation % pa Ben Jerry

High equity Portfolio return 7% 7%

Consultant recommendations &

active manager under-performance 0% -1%

Portfolio switches 0% -1%

Fees -1% -2%

Net return pa. 6% 3% Extra 3% pa return

“Yes, but it doesn’t work in SA”

Actually it works everywhere, including SA

215

204

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c-0

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-09

Ap

r-0

9

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n-0

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Au

g-0

9

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09

De

c-0

9

Feb-1

0

Ap

r-1

0

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n-1

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g-1

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10

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c-1

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Feb

-11

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r-1

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n-1

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g-1

1

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11

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c-1

1

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-12

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r-1

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12

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c-1

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-14

Ap

r-1

4

10X High Equity Manager Ave. Mngr ave. less 1% Fee

10X value-add since inception Jan’08

10X Excess return 1% pa

10X Fee saving 1% pa

Value add 2% pa*

*Assuming no investment switching

Source: Alex. Forbes Global Manager Watch Best Investment View (BIV), 10X Investments

Measuring what matters: Net return 1973 - 2013

Return after inflation % pa Ben Jerry

Net return pa. 6% 3%

Final pension value R14 million R6,8 million

Living Annuity: 5% draw-down R58 000 pm R28 000 pm

Income replacement ratio 105% 50%

Extra R7 million

100% more retirement income

Saving 15% of salary, to

company retirement fund,

final salary R55Kpm

What lesson have we learned?

The secret of investing is there is no secret!

Optimal investing principles unchanged in over 50 years

• Basis for optimal portfolio construction developed in 1960’s

• No investment “innovation” has improved risk-adjusted returns in decades

• The best way to invest for next 40 years is same as last 40 years

2010s2000s1990s1980s1970s

Optimal portfolio construction developed in 1960s. No meaningful improvements since!

Everything you need to know in one sentence

Save 15% of your salary for 40 years in a High Equity Tracker Fund with total fees of 1% or less

Will any other strategy do better?

• Anything is possible but ….

• Too many choices and thus different outcomes

• Unlikely you will stay the course for 40 years

• Probable you will earn between 2% and 3% pa less

The one question every trustee, employer, advisor and investor must ask

Retirement income

% salary105% 50%

1. Would I rather have one low risk plan to probable success or multiple high risk paths to

probable failure?

• What outcome do you expect for your members after 40 years?

Warren Buffett’s long-term investment advice

Thank you