Investment strategy in a fast changing environment
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Introduction
1. Initial lessons from the credit crises
a. Inflation or disinflation
b. Are we still in a low growth environment?
2. Applying the lessons learnt
a. How have the fund strategies changed in the wake of the
crisis?
b. How does asset allocation protect against disasters?
c. How do funds avoid negative return years?
d. What should is the correct time horizon for investments?
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Initial lessons
Post crises
Regulation
Light regulation does not
work
Volcker Rule limits prop
trading & exposure to hedge
funds
Frank-Dodd regulates banks,
rating agencies, buyout firms
& hedge fund
Financial market regulation on the increase
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Initial lessonsInitial lessons
Post crises (continued)
Lessons for monetary policy Macro financial stability
An open capital account reduces effectiveness
Lessons for fiscal policy Counter cyclical policy to mitigate booms
Save for rainy days
Wider remit for monetary policy
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Source: OECD
Fed Balance Sheet vs. US CPI growth
2003 2005 2007 2009 2011 20130
500000
1000000
1500000
2000000
2500000
3000000
3500000
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Fed Balance Sheet ($ Millions) US CPI % annual change
“Inflation is always and everywhere a monetary phenomenon” Milton Freidman
More money ≠ inflation
Banks can create 10X more money than central banks through fractional reserving
Weighing in on the inflation, deflation or disinflation debate
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1949 1956 1963 1970 1977 1984 1991 1998 2005 20120.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
Total Credit Market Debt Owed GDP ($ Billions)
Source: OECD
US Credit Market Debt vs. US GDP
Rate of growth will slow as the supply of credit is restricted
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Applying the lessons learned from the financial crisis
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How has fund strategy changed inthe wake of the crisis?
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Source: ICI, Deutsche Bank Research
How has fund strategy changed in the wake of the crisis?
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Source: Haver Analytics, Deutsche Bank
How has fund strategy changed in the wake of the crisis?
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Domestic Vs. International equity
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How asset allocation protects against disasters?
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Barclays US Aggregate Total Return Un-hedged USD versus S&P 500
Source: Bloomberg
Bonds versus Equities
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1937
/12
1940
/02
1942
/04
1944
/06
1946
/08
1948
/10
1950
/12
1953
/02
1955
/04
1957
/06
1959
/08
1961
/10
1963
/12
1966
/02
1968
/04
1970
/06
1972
/08
1974
/10
1976
/12
1979
/02
1981
/04
1983
/06
1985
/08
1987
/10
1989
/12
1992
/02
1994
/04
1996
/06
1998
/08
2000
/10
2002
/12
2005
/02
2007
/04
2009
/06
2011
/08-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0S&P 500 Rolling 10 Year Return
Equity returns were very poor between 2000 & 2008
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Source: BlackRock
Do trustees and members have the correct time horizon for investments?
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Questions
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Global Interest Rates at Historical Lows
17
9192
1010
611
018
1193
312
844
1375
914
671
1558
516
497
1741
118
323
1923
820
149
2106
421
976
2289
023
802
2471
625
628
2654
327
454
2836
929
281
3019
531
107
3202
132
933
3384
834
759
3567
436
586
3750
038
412
3932
640
238
4115
30
5
10
15
20%
10-year US Treasury Bond Yield
3-Month US Treasury Bill Rate
Fed Funds Rate
The G
reat
Infla
tion The Great Deflation
Source: Bloomberg, Futuregrowth
The Developed WorldMonetary versus fiscal policy, unemployment headwinds to growth
18
BrazilToo much government & consumption
ChinaToo much investment & not enough
consumption
IndiaLarge infrastructure and private sector
backlog to overcome
USAFed steps back – can Treasury play its part?
EUStructural impediments remain
JapanStructural impediments remain
The Emerging WorldRe-calibration for the BRICs (18% of global GDP)
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EM Twin Deficits
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-8 -4 0 4 8
-8
-4
0
4
8
2.14
-0.26
-4.5
4.58
-1.140
-2.3
0.06
-2.03
0
-2.87
-4.4
-1.43
-3.34-3.87
-1.78
-5.88-5.45Cu
rren
t acc
ount
as
% o
f GDP
Budget deficit as % of GDP Source: Bloomberg, Futuregrowth
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A weakening rand trendThe Rand has depreciated between 25% & 50% against its major trading partners since Jan 2011
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Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-1380
90
100
110
120
130
140
150
160
US Dollar Euro Japanese Yen Chinese Renminbi
% Exports % ImportsAsia 35% 46%USA 11% 12%Europe 25% 32% 48.3%
37.2%
25.2%
48.3%
Source: Bloomberg, Futuregrowth
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Implications for investment
• JSE All Share Index at record levels
• Central Bank Policy rate at record low• Bond yields at multi-decade lows
Capital preservation as an investment strategy?
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Questions
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