May 2010

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May 1, 2010 - continent. We expect this asset class to become increasingly popular in future. Tanzania Kilimanjaro Airport. 2nd largest shareholder. Neotel.


May 2010

The quarterly news magazine of Old Mutual Investment Group (South Africa)

Economic growth surprisingly strong Opportunities in African equities and infrastructure Outlook for global bonds 10 years of blending the best

Performance through Focus

Investment Group

Tim Cumming Acting CEO, Old Mutual Investment Group (SA) (OMIGSA) The first quarter of 2010 ended on a high note with

To add an offshore flavour, Denzil Burger of Macro

a number of funds managed by OMIGSA delivering

Strategy Investments explains why bond markets in

top-quartile performance. The setbacks to equity

the developed world face threats from a number of

price levels during the early part of May were not

different sources — with the major concern being

totally unexpected and leading up to this, our funds

the additional supply. Meanwhile, Richard Hasson

were generally conservatively positioned. I remain

and Neil Brown take a look at China’s insatiable

confident that they are well positioned to meet their

demand for metals and how this has impacted global

long-term investment targets.

metal markets. They then discuss the most appropriate

While I discuss our fund performance in my article on page 13, the focus of this edition of FUNDAMENTALS

long-term method to use when forecasting commodity prices.

is the investment opportunities on the African

I trust you will enjoy the articles in

continent. Godwin Sepeng puts forward a case for

this edition of FUNDAMENTALS and

investing in African equities and explains how he

that they give you additional

mitigates risk in managing the Pan Africa and African

insights into the views and

Frontiers funds. Tom Plaistowe of the Alternative

expertise of the people in OMIGSA

Investments boutique heads up our Africa Infrastructure

— people that remain focused

investments. This team’s extensive experience in

on the job of managing our

identifying and managing infrastructure investments

clients’ assets to the levels

shows in their average return of 20% a year over the

and extent expected by

past 10 years.

their mandates.

On a more local front, Tom’s colleague, Christine

Should you require

Glover, explains how the Housing Impact Fund of SA

additional information,

is helping to alleviate our country’s housing backlog


— of approximately three million housing units!

(contact details below).


May 2010 Insights 3 4 6 7 9

South Africa’s economic growth surprisingly strong — Johann Els Why invest in African equities? — Godwin Sepeng Investing in African infrastructure — Tom Plaistowe China: Key to long-term commodity prices — Richard Hasson and Neil Brown Outlook for global government bonds — Denzil Burger

Inside OMIGSA 13 Old Mutual funds top the ranking tables — Tim Cumming 15 10 years of blending the best of SA — Raymond Berelowitz 17 Government’s R1 billion housing fund — Christine Glover

Contact us Mike van Heerden Senior Executive: Distribution Tel: +27 21 509 5082 Email: [email protected] 1

Wynand Gouws Head: Retail Channel Management Tel: +27 11 217 1664 Email: [email protected]



“The key economic indicators have mostly surprised to the upside, making the local recovery much stronger than previously expected.” Johann Els, pg 3


South Africa’s economic growth surprisingly strong – could reach 4.5% in Q1 2010 Johann Els Senior economist at Old Mutual Investment Group (SA) (OMIGSA)


he South African economy has come through the first quarter of 2010 with surprisingly strong momentum, with GDP growth likely to top the 3.5% quarter-on-quarter (seasonally adjusted annualised rate) posted in the fourth quarter of 2009. The key economic indicators in the past months have mostly surprised on the upside, making the local recovery much stronger than previously expected. As a result, we could see GDP growth for the first quarter of 2010 coming in as high as 4.5% quarter-on-quarter (q/q) (seasonally adjusted annualised rate (saar)). This has been propelled by company restocking after last year’s sharp downturn in demand, as well as a long-awaited revival in consumer demand. I am particularly encouraged by the latest evidence from South African consumers, which indicates steadily rising confidence and a slow recovery in net debt usage. However, this consumer recovery is likely to be slower than previous cycles because of the severity of the decline in real incomes — real disposable income growth has been negative since 2008 and remains so, with after-tax income growth still not keeping pace with inflation. That being said, key indicators pointing to the surprisingly robust state of the economy include1: car and commercial vehicle sales with growth of 100% and 59.3%, respectively; retail sales growth of 15.5%; electricity production growth of 18.1%; mining production at 16.9%; an increase in consumer credit extension of 4.5%. This puts us on track for annual average GDP growth of around 3.5% for the 2010 calendar year. Our forecast is somewhat more optimistic than the current 3.1% median broker forecast. This is because we are placing more importance on the recovering inventory cycle’s impact on the economy over the next few quarters. This has already been a positive influence on the Q4 2009 GDP data. Also adding to the positive picture is the marked improvement in the country’s current account deficit, which now sits at -2.8% of GDP compared to -8.5% of GDP 1


as recently as Q1 2008. This has helped underpin the rand, the strength of which has been a notable feature in recent months. The rand has been remarkably strong thanks to our relatively high real interest rates versus many other countries, plus our healthy fundamentals like government debt. The only concern we have on this front is the negative impact on our exports, which could put pressure on the current account again. We do expect the rand to weaken gradually in the second half of 2010, to around R8.00 per US dollar. For now, though, the rand is benefiting from South Africa’s healthy relative fundamentals and this is helping to keep inflation in check. On the inflation front, the strong rand and falling food inflation are helping to push the overall CPI lower, and I expect inflation to dip to around 4.5% year-on-year (y/y) in the short term before drifting gradually higher in the 5.0%-5.5% y/y range in the second half of the year. Consumers should enjoy the lower prices while they can, because we expect pressure from many different administered sources to make themselves felt during the rest of the year. Apart from the well-published Eskom electricity tariff increases, we’ll see hikes in municipal rates and taxes, water, education and medical costs, among others. With CPI set to remain just below the upper limit of the South African Reserve Bank (SARB)’s 3%-6% target range, I expect interest rates to stay put at their current level for the remainder of the year, as long as the rand remains relatively steady and no other unexpected threats emerge. Given that the SARB has lowered interest rates in the past when the rand was very strong, as is the case now, there is still a small chance of another 50 basis point interest rate cut at the next Monetary Policy Committee meeting if the rand remains strong, but this is not our base case scenario. There is also the risk that a weaker rand and higher oil price could combine to raise the inflationary threat towards the end of the year, which could cause the SARB to hike rates, but this is also a low probability. We only expect interest rates to begin rising late in the first quarter of 2011.

Key indicators all measured on a quarter-to-date basis relative to the fourth quarter of last year at an annualised pace.

Investments in Africa looking increasingly attractive Godwin Sepeng Boutique head, Long Term Equity


or those able to take a long-term view, investment



opportunities looking




African GDP growth versus World GDP



across many asset classes including equities, infrastructure and property. A few global and South African institutional investors are already benefiting from this improving trend in

(GDP growth, year-on-year % change) 8


Africa 4



Developed Economies

terms of both strong returns and falling risk, and


investors with a high risk tolerance may also want to


consider Africa as a possible source of diversification and potentially higher returns (along with higher

Emerging Economies


-4 1997








Source: OMIGSA

risk) for their portfolios. Why invest in African equities? Although China, India, Brazil and other Asian countries seem to be attracting the most attention from global investors due to their rapid growth, African countries also deserve to be considered for many different reasons, including: their stronger GDP growth than the global average, falling inflation, improved ease of doing business, rising disposable income per capita and emerging strong middle classes in many countries. In fact, population growth is expected to give Africa a collective population of nearly 1.28 billion by 2015 (according to the IMF), comparable to the populations of China or India.

to expansion by many of our mining, financial and retail companies, who recognise the growth potential of the various markets.

Africa now has over 500 listed companies across 15 different stock exchanges

On top of this, African governments’ external debt

Looking at equity markets around the continent, there

burdens have been reduced dramatically in recent

are now over 500 listed companies across 15 different

years due to debt forgiveness through various multilateral

stock exchanges, making for a significant variety of

initiatives. We’ve also seen improving foreign direct

choice for equity investors. Market capitalisations and

investment (FDI) flows into the continent, particularly

trading volumes have improved markedly since 2002

attracted by the large resource deposits. South Africa

(apart from the 2009 crash), with particularly good

is the largest source of investment into Africa, thanks

growth seen in Egypt, Nigeria, Morocco and Tunisia.


It’s important to note that most African stock markets — with the exceptions of Namibia and Egypt — have a low correlation with the Johannesburg Securities Exchange, making this an additional source of diversification for South African equity investors. These include markets like Ghana, Morocco, Tunisia and Nigeria, and even Mauritius. Sectors that are likely to experience above-average growth over the coming years, and therefore represent good investment cases, include consumer staples, telecommunications, infrastructure, brewing, financial services, and mining and related services. These sectors have strong long-term prospects to outperform the broader market in most countries, so for example banks, telecom companies, miners, cement producers and certain retailers would make the most compelling portfolio investments.

However, tradability of the shares remains a risk, as do other factors. Would-be investors in African equities have to consider the extra risks involved, which can vary widely by country. These include lack of transparency in corporate governance, shifting government policies and low credit ratings, among others. Our approach to mitigating risk includes focusing only on listed companies with the largest market capitalisation (US$200m or more) — around 200 companies in total — with a high free float and widely traded shares, as well as high standards of corporate governance. We also place strict limits on exposure to individual companies, sectors and countries, to ensure a highly diversified portfolio. Finally, our focus is on long-term capital growth, and investors must also be prepared to take at least a five-year view on their African investments.

Old Mutual Pan Africa Funds These two actively managed, listed equity funds provide diverse exposure across a selection of fast-growing and investor-friendly economies in Africa.

Old Mutual Pan Africa Fund — all Africa

Old Mutual African Frontiers Fund — excluding South Africa Investment objective: To deliver long-term capital growth by investing in listed companies that operate predominantly in Africa. Return target: US$ Libor + 4% per annum over a rolling 5-year period. Risk: The nature of the investment is high risk in pursuit of commensurate higher returns in the long term. Investable Universe: Approximately 200 companies, across 19 countries, in 16 bourses. The companies per country will range from 1 to over 50. The investable universe comprises companies that generate more than 50% of their revenue from Africa, excluding South Africa. This universe is subject to unique “size and liquidity” criteria. In addition, the stocks must be listed on a recognised and regulated stock exchange. Diversification is improved and risk mitigated by placing limits on exposure to individual stocks, countries and sectors. The fund may also hold cash, bonds and derivatives. Old Mutual African Frontiers Fund Typical selection of countries

Old Mutual African Frontiers Fund Typical composition by sector

Egypt Nigeria

Morocco Kenya



Telecommunication Services




Consumer Staples




Consumer Discretionary


Investment managers: The funds are managed by Long Term Equity Investments, a boutique within Old Mutual Investment Group (SA) (OMIGSA), with a highly experienced portfolio management team comprising two investment professionals, Godwin Sepeng and Senzo Hlangu. For more information please call Godwin at 011 217 1873.


Investing in African Infrastructure Tom Plaistowe Portfolio Manager, Alternative Investments


hile a long-term investment horizon is required for investors in infrastructure, experience has shown that infrastructure investments have provided both strong commercial returns and powerful developmental benefits. Spend on infrastructure in Africa has long been limited mainly to international development and financial institutions, but is becoming increasingly attractive for a broader range of investors, even individuals. Our four funds, with assets under management totalling R5.9bn, are invested in a range of projects. These include the only privately owned toll road in Nigeria, a railway from Beitbridge to the DRC (including the Zambian rail network), Bloemfontein prison, a power station and three toll roads in South Africa. Each of the toll roads created over 4 000 direct jobs, over 500 permanent jobs and spent more than R200m on small and medium enterprises. The Zambian railway has significantly improved the tonnage it moves. On top of this, returns on these funds have averaged just under 20% per year (compounded) in the more than 10 years we have been managing them. In fact, the investors in one of our funds have been repaid all of the R750m in capital originally invested,

and still sit with assets valued at over R2.0bn, yielding approximately 10% per year. This shows just how attractive these types of investments can be. However, investors have to recognise that the investments are made with a very long investment horizon — up to 10 years or more — in illiquid assets.

Returns on our infrastructure funds have averaged 20% p.a. over 10 years For investors whose requirements do fit this timeframe, African infrastructure can be a sound investment option. And we are hoping to develop an investment framework that would be appropriate for retail investors, giving them exposure to a broad range of projects across the continent. We expect this asset class to become increasingly popular in future.

Old Mutual’S AFRICA INFRASTRUCTURE INVESTMENT MANAGERS (AIIM) SAMPLE OF INVESTMENTS Nigeria Toll Road 44% stake in this 50km Lagos toll road

Tanzania Kilimanjaro Airport 2nd largest shareholder

Neotel Minority stake in South Africa's first converged communications network operator Kelvin Power Station 76% of Kelvin Power, a 600 MW power station located in coal-fired p Johannesburg Bakwena Toll Road 25% stake in this 385km toll road

N3 Toll Road 38% stake in this 420km toll road

TRAC Toll Road 67% stake in the Maputo Corridor Toll Road in South Africa and Mozambique


China: Key to long-term commodity price and mining share upside for SA Neil Brown & Richard Hasson Boutique Heads, Select Equity Investments


47.0% 35.2%

42.2% 16.2% 6.0%













2009 45.7%




Back then, the market was reacting to the sudden rejection of the widely-held belief in a sustained commodity boom on the back of insatiable demand from emerging markets, particularly China. However, just as suddenly, and even before the end of recession in most countries, the downward trend reversed and commodity prices began to climb. For example, copper has risen from US150c/lb in December 2008 to US320c/lb currently. At the same time, on the back of this increase, BHP Billiton’s share price has risen to around R230. This increase in commodity prices, which few investors were forecasting at the time (and which



China’s share of world metal demand has grown to around 40%-45%

China’s share of world demand


At the same time, mining companies like BHP Billiton were trading on historically low annualised P/E multiples of around 6 times — pricing in what we believed were unsustainably low expected earnings. With a share price of around R150, we believed BHP Billiton was significantly undervalued and offered a high margin of safety, and so made it one of the largest holdings in our portfolios.

As can be seen from the chart below, China’s share of the world’s metal demand has grown from around 10% - 15% in 2000, to an estimated 40% - 45% in 2009. This increase in Chinese demand in 2009, during the global crisis, totally offset the fall in demand in all the other countries combined, keeping total world demand at a similar level to that of 2008. This demand for metals was driven by China’s introduction of a massive US$700bn fiscal stimulus package, which largely impacted the metals-intensive construction sector. The chart clearly shows how the increase in demand for metals, such as copper, over the last 10 years has mainly been driven by demand from China.


For example, copper was trading around US150c/lb, whereas we believed (and still do) that marginal new copper production enters the market at around US210c/lb.

therefore proves the benefit of normalising long-term commodity prices), was largely due to one factor: Chinese demand.


ack in December 2008, near the height of the global financial crisis, commodity prices had plunged — in most cases they were below the marginal cost of new production, the level at which it ceases to make sense to mine.

% of total world use


0% Aluminium





Crude steel

Source: CISA, China Metals, Macquarie Research, January 2010

So, why does China have this insatiable appetite for metals? The answer lies partly in China’s large rural community, which has been urbanising at a rate of approximately

20 million people a year. In 2006 this produced an overall urbanisation rate of only 40%, but is now estimated at 48% (source: Chinese Academy of Social Sciences). .... and China is not alone in this urbanisation trend. Approximately 500 million people are forecast to urbanise globally over the next 10 years, mainly in developing economies. Rising urbanisation in developing countries Increase 2009-19 (millions)

Urban population (million)

2 344 1 911 China


Developed world


1 145






1 420






Developing world

2 877



Source: Global Insight

As urbanisation rates increase, so does per-capita consumption of metals. Urbanisation requires new infrastructure, such as buildings, railways and power plants, all of which are metal intensive. Given that China still substantially lags other more developed countries like Japan and Korea, China still can increase its per-capita consumption significantly in the years ahead. Considering it currently accounts for 40% of global copper demand, this bodes well for the long-term prospects of copper (and other metals). China currently invests around 40% of its gross domestic product (GDP) in fixed asset investments, and this ratio is forecast to grow over the next decade. However, even if it remains at around 40%, then fixed asset investment growth, and hence Chinese metal demand growth, will still rise in line with its GDP — thus reinforcing the long-term structural demand growth trend for metals. (Global Insight forecasts a compound annual growth rate in China’s GDP of 7% - 8% to 2025.) Fixed asset investment as a share of GDP 50% 45% 40%



35% 25%


20% 15% 10%











Therefore, we continue to believe that the most appropriate method of forecasting commodity prices over the longer term is to use a price level where marginal new production enters the market. This should be the best indicator of sustainable long-term price levels.

China invests around 40% of its GDP in fixed asset investment Currently, the spot prices of various metals are well above these long-term prices we use in our resourcecompany valuation models. This is the reverse of the situation in December 2008, indicating that commodity prices probably have some room to fall. The key here is that many resource companies are making superprofits at these high commodity price levels, and the longer prices remain high, the more super-profits they make. Commodity prices may fall, but we still see upside in the shares even at those lower commodity prices. So for example, if you look at Anglo American, the share price as at the time of writing is R300, and we have bought it all the way down to R155 at the height of the crisis last year. However, our valuation using long-term sustainable commodity prices indicates a share price of around R360. This means we know that we have built in some margin of safety in our valuation, and hence in owning this high-quality asset in our portfolios. Select Equity Investments manages a range of top performing funds:




We do, however, acknowledge that forecasting commodity prices in the short term is impossible. Cyclical downturns can even exist in a structural uptrend — and maybe we are about to enter a cyclical downturn, as China is currently tightening its monetary policy by directing its banks to slow down their lending rates and, more recently, by increasing bank reserve requirement ratios.

Source: Global Insight



Select Equity Multi-Cap Portfolio

Old Mutual Top Companies Fund

Select Equity GARP Portfolio

Old Mutual Growth Fund

Select Equity Capital Growth Portfolio

Nedgroup Investments Growth Fund

Select Equity Market Neutral Hedge Fund (pooled only) Select Equity 130/30 Portfolio (pooled only)


Global government bonds – outlook not pretty Denzil Burger Senior Portfolio Manager for Macro Strategy Investments


he current debt crisis in Greece1 has highlighted

Developed world sinking further into debt, emerging

the extent to which some governments have

markets better off

been forced to take action in the wake of

Even before the global financial crisis, the government

the global financial market meltdown and subsequent

debt levels of most developed countries around the

economic recession.

globe were in an uptrend. Importantly, there is a

Countries with high government debt levels have been less able to absorb the impact of the recession, during which time governments typically experience a reduction in revenues while not wanting to exacerbate the economic slump by cutting spending. With most developed economies having been forced to assume even higher government debt levels to stimulate growth and emerge from recession, the next few years will be payback time. But, expectations of a slow, painful recovery in many of these countries mean governments will be borrowing more for longer. This has negative implications for global government bonds: yields are expected to rise and prices to fall in response to higher supply. As an asset class they are likely to remain unattractive for investors over

significant difference between the longer-term trends of developed and emerging markets. Japan has specifically experienced rising debt levels as a percentage of gross domestic product (GDP) over an extended period, but other developed markets have also seen this measure rising to very high levels. As shown by the graph below, emerging economies are in a far healthier position. Their higher economic growth rates help them to fill their revenue coffers, leading to lower budget deficits and therefore relatively lower debt levels. Also, the recent recession impacted emerging economies far less than developed economies, enabling them to keep their budget deficits contained. By contrast, developed nations were forced to expand their deficits significantly to support their economies,

the medium term.

Public debt* % of GDP (baseline)

Extended government borrowing will have a negative impact on global government bonds

140 Developed markets


Emerging markets

100 80 60 40 20

* GDP-weighted

1996 1998 2000 2002 2004 2006 2008

2010 2012 2014 2016 2018 2020

Source: DB Research 1


Greece has been a member of the European Union (EU) since 1981, and in 2001 became the 12th EU member to adopt the euro as its official currency.

which raised debt levels even further. The graph below

This implies that bond markets in the developed world

is an excellent illustration of the dramatic worsening

face threats from a number of different sources. The

of deficits of key countries.

biggest concern is that the additional supply of bonds could eventually drive yields higher. The higher yields

Fiscal balance as % of GDP

will make deficits worse owing to the higher levels of interest payable on the new bonds issued, as well as


on maturing bonds being rolled over. Yields could also 5

come under pressure should the global economic recovery gather momentum. While faster growth will


be good for government revenues and drive deficits


UK Japan South Africa USA Greece


-15 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: OMIGSA

As a consequence, prospects for these two groups are likely to diverge even more over the next few years. As emerging economies like Brazil, Russia, India and China (the BRICs) continue to experience faster growth rates than their developed counterparts, their better revenue growth will help keep deficits in check. Also, given that the accepted measure for government debt is expressed as a percentage of GDP, the higher GDP denominator will allow greater expansion of debt levels. These governments will also have more room to borrow (by issuing government bonds) without necessarily driving up the cost of borrowing. The extent of the debt problems in the developed world is most pronounced in a number of European countries (notably Greece, Italy, Portugal, Ireland and Spain), but the UK and US are not much better off. The UK has moved from a relatively contained budget deficit of -4.3% of GDP to an astonishing -12.9% of GDP (or –US$280bn) in 2010, which is forecast to decline to -10% of GDP in 2011. In the US, the deficit rose from -4.7% of GDP in 2008 to -9.3% of GDP (or a whopping –US$1 378bn!) in 2010. This is expected to improve to -6.3% of GDP in 2011, but the absolute level will remain relatively high.

Bond markets in the developed world face a number of threats

lower, faster growth may also spell higher short-term interest rates, which will most likely also drive up yields on longer-term government bonds. Should a recovery coincide with signs of higher inflation too, yields could potentially spike sharply higher as fears of aggressive tightening by central banks gather momentum. One positive factor supporting the outlook for global bond markets is the argument that more subdued growth and surplus capacity within most of the developed economies are likely to put a lid on inflationary pressures, at least in the shorter term, and keep short-term interest rates low for quite some time still. Low short rates will “anchor” longer-term yields and so prevent a blow-out. While this argument does indeed have merit in the short term, it can only hold in the longer term if the major developed countries were to flop into a lengthy Japanese-style bout of deflation. We think such an outcome is unlikely, so over a medium-term horizon we see substantial upside risk to longer-term government bond yields in the developed world. Implications for SA investor portfolios When constructing a portfolio for South African clients, there is a strong argument for including global assets for diversification purposes, with the aim of achieving superior risk-adjusted returns. Much of the diversification is effectively gained through the translation of offshore asset returns into rands, although the benefit is clearer through including asset classes which do not have a high correlation with the preferred growth asset class in South Africa — equities. Global bonds are generally regarded as the best diversifier of local equity risk, given their low correlation with SA equities. Our analysis of longer-term trends


points to global cash, through a basket of major

third, the sustainability of the premium credit ratings

currencies, providing similar diversification benefits

of government paper is already coming into question

over time. The graph below illustrates the similarity

for even serious economies such as the UK. China has

in the behaviour of global government bonds and

also raised concerns about the growing US fiscal deficit

global cash, as measured by the volatility of returns

and what it means for the value of their holdings of

in rand terms. Clearly, most of the volatility over

US treasuries. What seems clear is that the long-term

recent years has been due to movements in the rand

downtrend in the yield on government bonds (as shown

exchange rate.

in the graph below), supported by lower inflation, may well have reached a major turning point.

Volatility of global government bonds and cash (in rands)

USA government 30-year bond (close)

Rolling 3-year volatility of real returns

Monthly 31/01/1965 - 31/03/2010



Government bonds 25%





USA GOVT 30-YEAR BOND [Close] (4.73)










































2.0 1969










Source: I-Net

Source: OMIGSA

The shorter-term argument for investing in government

This is clearly a risk for investors looking to take

bonds rather than cash is that there is a yield pick-up

advantage of the diversification benefits of offshore

on these holdings, while cash is broadly paying close

investments. For this reason, at MSI we have strategically

to zero interest. Bond funds in the US continue to

positioned our multi-asset class portfolios to hold

experience inflows from investors searching for yield

little or no global government bond exposure, depending

and comforted by the apparent low risk associated

on the mandate and risk profile of the funds. Our

with government bonds. China and other countries

preference has been to increase exposure to equities

have also continued to invest in US treasuries as part

and higher yielding assets such as corporate bonds

of their reserve holdings. These factors are no doubt

and other spread products, as well as some global

playing a part in keeping a lid on the potential for

cash as the primary diversifier. After the dramatic

government bond yields to rise. (Rising yields are

widening in corporate bond yields versus government

associated with declining capital values, i.e. a lower

bonds in 2008-2009 (during the global credit crisis)

overall investment return.)

there is still scope for corporate yield spreads to

China continues to invest in US treasuries

narrow further. There is even the potential for highquality multi-national company debt to trade at a premium to government bonds within the not-toodistant future. This represents an opportunity for healthy returns from these types of income-producing offshore assets, while returns from government bonds are not likely to compensate investors adequately for

Pressure for higher yields is building However, there are pressures for higher yields building on three fronts: first, cash yields cannot stay this low forever; second, the pace of government bond issuance is rising rapidly in order to finance large deficits; and

the prospective risk involved. We are still projecting a 2.0% annual real return from offshore bonds over the next five years. For more information on our asset class outlook, refer to our newsletters at Article written in March 2010



“Within an industry comprising 913 funds, three of the Top 10 funds are managed by OMIGSA…” Tim Cumming, pg 13


Old Mutual funds top the ranking tables Tim Cumming Acting CEO, Old Mutual Investment Group (SA) (OMIGSA)


ntil the last few trading days of early May, which were driven by the “Greek crisis”, the local

equity market continued to surprise on the upside — driven by signs of a local and global economic recovery. Local stocks were boosted by an unexpected rate cut (taking our prime rate to an all-time low of 10%) as well as the ongoing net inflows from foreign investors hunting for higher yields. The FTSE/JSE All Share Index (ALSI) gained 44% in the 12 months to the end of March 2010. While the funds managed by OMIGSA have generally been conservatively

OMIGSA Boutique

Oneyear Returns

Rank (out of 80)

Old Mutual High Yield Opportunity Fund A

Value Equity Investments



Old Mutual Growth Fund R

Select Equity Investments



Old Mutual RAFI 40 Tracker Fund A

Dibanisa Fund Managers



Old Mutual Top Companies Fund R

Select Equity Investments



Old Mutual Investors’ Fund R

Core Equity Investments



positioned, given concerns over valuations, they still

The Old Mutual High Yield Opportunity Fund aims to

benefited from this rise in share prices. Our multi-

deliver a dividend yield of 1.5 times that of the ALSI’s

award* winning Old Mutual Mining & Resources Fund

yield. Investing in companies with a low debt/strong

remained the top performing fund in the industry over

earnings culture that show the potential to grow their

five years and is ranked as the top mining fund over

income over time, this fund has consistently delivered

one, three, five and seven years.

on its mandate and currently has a cumulative dividend

Within a unit trust industry comprising 913 funds, three of the Top 10 funds are managed by OMIGSA’s boutiques — and of the nine unit trusts we manage in the Domestic-General-Equity sector, five were top-


Domestic-GeneralEquity sector

yield (since November 1998) of 26.2%. If an investor had invested R10 000 at the start of the fund, in November 1998, the investment would now be providing them with a tax-free dividend of R2 619 per year.

quartile performers over the past year. We are

Our asset allocation boutique, Macro Strategy

particularly proud of the Value Equity Investments

Investments, also had a good 12 months, with three

boutique’s achievements. They manage the Old Mutual

of the unit trusts they manage delivering top-quartile

High Yield Opportunity Fund, which was ranked first

performance. These are the Old Mutual Flexible Fund,

in a sector that comprises a total of 80 funds. This

the Old Mutual Balanced Fund and the Old Mutual

boutique also manages the Old Mutual Value Fund.

Stable Growth Fund. These funds all benefited from

The fund’s 12-month return of 59.7% took it to the

their exposure to listed property, which was the best

top of value sector rankings (data to the end of March

performing asset class over the quarter, with a return


of 9.9%.

While the stock market continued its path of recovery

Fundamentals newsletter that I was brought in to take

during the first quarter of this year, many analysts,

on this role, not only because I was the previous CEO

OMIGSA’s included, question the sustainability of prices

of OMAM between 1998 and 2004 and know this business

at these levels. Accordingly, the setbacks to equity

intimately, but also because of my experience (from

price levels during the early part of May were not

my OMAM (US) days) in multi-boutique asset management.

totally unexpected (even if the cause for the decline

This has allowed Kuseni Dlamini, CEO of Old Mutual

might not have been precisely predicted). On the

(SA), the time to find the very best person for the job

back of what’s anticipated to be a moderate economic

in the long run. I’m pleased to say that there is a

recovery, many companies are predicting muted

shortlist of candidates and they are now in the process

earnings in the year ahead — however, several share

of doing final assessments. We look forward to making

prices are still factoring in robust earnings growth.

further announcements in due course.

We think markets are being overly optimistic and, should earnings growth not materialise, local share prices can remain vulnerable.

In the meantime, what is important for our clients is that the key personnel within the investment boutiques remain intact and focused on the job of managing our

As a result of this increased risk, some of our equity-

clients’ assets to the levels and extent expected by

biased boutiques are now fairly defensively positioned

their mandates. The OMIGSA CEO’s role is to provide

and I am confident that our funds remain well positioned

and oversee the “enabling environment” that contains

to meet their long-term investment targets.

our many boutiques, as well as to oversee the shared services that support them — thus allowing our boutiques

An update on the role of CEO for OMIGSA

to thrive and prosper to the benefit of our clients.

As you will be aware, I am in this position on an interim

That governance and attention continues, as before,

basis. I mentioned in the previous edition of

under my stewardship.

Old Mutual High Yield Opportunity Fund cumulative dividend yield (Since inception: 04 November 1998 to 31 December 2009)

35% 30%

R10 000 invested at inception has already paid out R16 829, and is yielding R2 619 a year (tax free). The capital-only investment is worth R60 197,49.



20% 15% 10% 5% 0% June 99

June 00

June 01

June 02

June 03

June 04

June 05

June 06

June 07

June 08

June 09 Source: Morningstar

* Old Mutual Mining and Resources Fund R: Award for Top Outright Performance calculated on straight performance basis for the three-year period ending 31 December 2009. Calculated on a NAV-NAV basis, with income distributions reinvested at the ex-dividend date. Calculated by ProfileData. Best performing fund over five years. Source: Morningstar as at 31/12/2009


10 years of innovation, performance and blending the best of SA Raymond Berelowitz SYm|mETRY CEO

SYm|mETRY Multi-Manager celebrates its 10th anniversary this year. With its excellent track record of delivering performance, SYm|mETRY has established itself as one of South Africa’s top fund-of-funds specialists. SYm|mETRY has a rich and an eventful 10-year history, beginning with us spearheading the launch of multimanaged absolute return funds. We also opened up specialist asset class building blocks and introduced a life-staging model, ForLife, which is still widely rated as the best in the market. Since 2004 we have won eight Standard & Poor’s/Financial Mail awards and are the first and only multi-manager to win a Raging Bull award (based on its 2009 risk-adjusted performance).


As CEO I oversee a team of 35 staff (15 of whom are investment professionals). We are split into two investment teams. The first concentrates on product development, setting strategic asset allocation aimed at meeting specific risk-return targets. Once those are defined, they’re handed over to the second team, who decides on the most appropriate asset manager blend within each asset class. SYm|mETRY’s strong research and asset allocation teams help provide the insight to ensure the best underlying managers are chosen to meet the risk and return objectives of a particular fund. We spend around 20 000 hours a year analysing, monitoring and evaluating the underlying asset managers to ensure that they are performing as expected and meeting client

Establishing ourselves as one of the 16 Old Mutual Investment Group SA (OMIGSA) boutiques, our business offers investors the security of investing in a multimanager backed by Africa’s largest and most established financial institution, while offering the flexibility and close relationships of a small, nimble business.

needs. We also regularly monitor the wider universe of

With just under R40 billion in assets under management, we currently offer more than 20 different funds across the retail and institutional spaces. Manager selection, manager monitoring, investment consulting and portfolio construction form the basis of our investment offering to clients.

valuable time on research and monitoring.

At SYm|mETRY we aim to find the best combination of asset managers on which to build optimal multi-manager solutions based on our clients’ needs. Our team of experienced investment professionals conducts in-depth analysis and, based on these findings, blends South Africa’s top asset managers in a range of funds that aim to achieve specific investment objectives. These managers include Coronation, Investec, Prudential, SIM and Prescient, amongst others.

to meeting these.

South Africa’s asset management industry, to ensure we are not overlooking emerging candidates. It’s our vigilance that means SYm|mETRY’s clients can be assured that they are benefiting from the best fund management skills South Africa has to offer, without using their own

Another of SYm|mETRY’s compelling strengths lies in our close client relationships. We pride ourselves on our thorough understanding of all of the challenges and investment requirements of our clients, gained through much one-on-one interaction, and we are committed

And through our relationship with OMIGSA, SYm|mETRY is also backed by advanced technology, state-of-the-art back-end systems, and effective compliance and legal processes. At the same time, scale benefits allow us to provide professionally researched and constructed solutions at a cost that compares favourably to those offered by single-manager funds.

Our success lies in the funds we manage An indicator of our success over the years is the performance of our funds, particularly the SYm|mETRY Balanced Fund of Funds, which has been a top-quartile performer in its category over two and three years (to 31 March 2010). The SYm|mETRY Balanced Fund of Funds is a moderate risk asset allocation fund that targets CPI + 7% over rolling three-year periods, while at the same time aiming to avoid negative returns over any 18-month period. This flexible asset allocation fund of funds offers investors exposure to a combination of some of South Africa’s top-performing asset managers that results in actively managed diversification across the full spread of local and international assets. Since its inception in June 2001 through to 31 March 2010, it has been the third best performer in its category (Domestic - Asset Allocation - Prudential Variable Equity) out of 14 funds, returning 16.25% a year and outpacing its target of CPI + 7% over rolling three years by 68.57%. It is also ranked second in its category in terms of risk (8.7% annualised volatility) — only outdone by the SYm|mETRY Defensive Fund of Funds. This flexible asset allocation fund of funds offers investors exposure to a combination of some of South Africa’s top-performing asset managers that results in actively managed diversification across the full spread of local and international assets. Underlying managers include

Coronation Fund Managers, Investec Asset Management, Prudential Portfolio Managers and RE:CM. While still maintaining a balanced spread across the various asset classes, the fund is currently cautiously positioned to benefit from further strength in the equity market by increasing its exposure to income-generating and defensive shares within its current equity allocation. It is available directly from Old Mutual Unit Trusts and via Fairbairn Capital and Max Investments. After seven years at the helm of SYm|mETRY Multimanager, CEO Raymond Berelowitz has been appointed as Executive General Manager of Product Solutions at Old Mutual. He takes up this new position on 1 July 2010 and will primarily be involved with designing and maintaining risk and investment solutions for both corporate and retail clients. Raymond will hand over the reins to Trevor Pascoe. Trevor has been with Old Mutual since 1989 and was, most recently, General Manager of Product Management. He was responsible for the Investment Services Corporate and Group Assurance businesses. He was also responsible for building a strong Mandate Management and Asset Liability Management capability for OMLACSA. Both the Investment Services and Group Assurance businesses were rated number one in a recent PWC survey of senior executives in the life assurance industry.

SYm|mETRY Balanced Fund of Funds RELATIVE TO Domestic - Asset Allocation Prudential Variable Equity sector (Since inception: 30 June 2001 - 31 March 2010)

125 120

SYm|mETRY Balanced FoF A Domestic — Asset Allocation — Prudential Variable Equity

Price Indexed

115 110 105 100 95 90 June 01

June 02

June 03

June 04

June 05

June 06

June 07

June 08

June 09 Source: Morningstar


Government’s R1 billion housing fund is a welcome innovation Christine Glover Head of the Housing Impact Fund of South Africa


he recently announced R1 billion housing fund by government is an essential catalyst and a welcome innovation to stimulate new housing finance products for those who cannot access housing finance.

The housing backlog is acknowledged to be approximately three million housing units and current housing delivery is around 265 000 housing units a year. At this rate, it will take many years to clear the backlog, excluding new entrants into the housing market. Clearly, this is a recipe for social instability and increases concerns about South Africa’s economic stability. Already, some sections of the population are impatient with the slow pace of service delivery. This has been evidenced by the widespread protests against a lack of delivery of basic services, of which housing is a vital part. According to our figures, people earning less than R15 000 a month (82.7% of South Africans) struggle to access decent housing and appropriate end-user finance. Constraints include finance providers’ risk when financing developers for bulk infrastructure and construction finance during uncertain economic times. In addition, the banks, as the main providers of home mortgages for individuals, have an inflexible product offering. Furthermore, the costs of land, infrastructure and construction have risen rapidly in recent years, making the price of providing affordable housing (now between R225 000 and R425 000) unrealistic for developers and prohibitive for potential home owners. The government’s housing fund is expected to mitigate some of the risks associated with this segment of the housing market. Only 17.3% of South Africans enjoy relatively easy access to housing and appropriate end-user finance. Consequently, it is incumbent on all parties, both government and the private sector, to increase the percentage of the population with easy access to appropriate housing products.


As one of the measures to alleviate the housing challenge, Alternative Investments, a boutique in Old Mutual Investment Group SA (OMIGSA), last year launched the Housing Impact Fund of South Africa (HIFSA). The fund targets households earning less than R15 000 a month. This is the same group of individuals identified for the government’s R1 billion housing initiative. The fund has now raised investments totalling R10 billion from Old Mutual and other like-minded institutions, and will close in mid-2010. Through this fund, OMIGSA and its financial partners have overcome many of the risks associated with providing housing for this “gap” market. The fund finances the land acquisition and infrastructure to create serviced sites and construct affordable homes for sale and rent. It also provides housing loans to qualifying South Africans earning too much to access government housing subsidies and too little to qualify for bank mortgage loans. HIFSA invests in inner city rental developments, rental property, student rental accommodation and many others. Importantly, the fund seeks to invest in development projects that promote environmentally-friendly communities where “greening” is a feature of urban planning. The fund invests in those projects that aim to provide associated services to the community, such as schools, clinics, retail centres and others. We will continue to engage government and other interested parties to bring about a collaborative effort in tackling the housing challenge in South Africa.

Our Housing Impact Fund of South Africa targets the critical gap between those who qualify for fully-subsidised housing and those who can access private sector mortgages. This “gap” is made up of individuals earning between R3 500 and R8 500 a month.

Market Indicators as at 30 April 2010 DY %

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MSCI World Index ($)



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Gold Price (R)




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Interest Rates Prime Overdraft




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R157 Long-bond Yield







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Manufacturing Production (y-o-y)

Balance of Payments Trade Balance (cumulative 12-month) Current Account (% of GDP) Forex Reserves (incl. gold)







DISCLAIMER Unit trust figures are based on lump sum investments to the end of March 2010. Charges excluded (NAV-NAV prices) and distributions reinvested (unless otherwise stated). Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. The fund’s TER reflects the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees related to the management of the portfolio. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs. A schedule of fees and charges and maximum commissions is available from the company/intermediary. Unit trusts are generally medium- to long-term investments. Unit trusts can engage in borrowing and scrip lending. The daily price is based on the current value of the fund’s assets plus income (minus expenses) divided by the number of units in issue. The Old Mutual Money Market Fund unit price aims to be static but investment capital is not guaranteed. The total return is primarily made up of interest (declared daily at 13h00), but may also include any gain/loss on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the fund. You can easily sell your investment at the ruling price of the day (calculated at 15h00 on a forward pricing basis). Old Mutual is a member of the Association for Savings and Investment SA. Old Mutual Investment Group (South Africa) (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers ( to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group is a wholly owned subsidiary of Old Mutual (South Africa) Limited. Reg No 1993/003023/07. The investment policies are market linked. Products are either policy based or unitised in collective investment schemes. Investors’ rights and obligations are set out in the relevant contracts. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuate, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price-sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of Old Mutual Investment Group are remunerated with salaries and standard short-term and long-term incentives. No commission or incentives are paid by Old Mutual Investment Group to any person. All inter-group transactions are done on an arm’s length basis. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Limited, who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Old Mutual Investment Group has comprehensive crime and professional indemnity insurance, as part of the Old Mutual Group cover. For more detail, as well as for information on how to contact us and on how to access information, please visit Old Mutual Global Index Trackers (Pty) Ltd, trading as Dibanisa Fund Managers in South Africa, is a licensed financial services provider, FSP721, approved by the Registrar of Financial Services Providers ( to provide intermediary services and advice. Old Mutual Investment Group Property Investments (Pty) Ltd is a licensed financial services provider, FSP 817, approved by the Registrar of Financial Services Providers ( to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group Property Investments (Pty) Ltd is a wholly owned subsidiary of Old Mutual (South Africa) Limited. Reg No 1993/003023/07. Old Mutual Investment Group (South Africa) (Pty) Limited. Physical Address: Mutualpark, Jan Smuts Drive, Pinelands 7405. Telephone number: +27 21 509 5022



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