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Investment Options: Cornelius SchooneesBusiness Development Actuary, Absolute Return Investments

“How to get downside protection in uncertain markets – without missing the upside”

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If you're not confused, you're not paying attention.

- Tom Peters

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Why uncertainty matters to the private investor

How to deal with uncertainty

An alternative to Money Market Funds

Key messages

Agenda

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Market declines can be unsettling and detract investors from a sound long-term investment strategy

As markets decline, each savings withdrawal becomes a larger slice of the remaining savings

Each withdrawal locks in low fund values

With a smaller pool of savings, the potential for future income is reduced and it takes longer to recover from market downturn

Why uncertainty matters

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Withdrawals become bigger slices of savings

Withdrawal No. of units x Unit price=

R1,000 1.00 x R1,000=

1.11 x R900=

1.25 x R800=

1.43 x R700=

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Taking withdrawals amplifies market losses…

Units redeemed for fixed monthly income

Top40 units:

1.01 1.03 1.02 1.01 0.99 0.99 1.00 0.99

1.21 1.46 1.70 1.71 1.73 1.86 2.17 1.94

Capital Builder units:

Impact of market decline on unit price

-39%

Impact of market decline on number on units

-7%

Capital Builder

TOP40 index

1.00 1.03

1.05 1.19

Impact on unit price

Impact on no. of units

10.1

16.0

Source: OMIGSA

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While all investors face the risk of market declines, investors that make withdrawals are particularly vulnerable

Lock-in of low fund values means it takes longer to recover from a market downturn

Resulting in longer time to recover

Rate of return

Size of bear market downturn

-10% -20% -30% -40% -50%

2% 5 yrs 11 yrs 18 yrs 26 yrs 35 yrs

4% 3 yrs 6 yrs 9 yrs 13 yrs 18 yrs

6% 2 yrs 4 yrs 6 yrs 9 yrs 12 yrs

8% 1 yrs 3 yrs 5 yrs 7 yrs 9 yrs

10% 1 yrs 2 yrs 4 yrs 5 yrs 7 yrsNote: Calculation based on continuous compounding and recovery time rounded to nearest year

Source: OMIGSA

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Understand macro picture

Understand asset-specific picture

Diversify to address asset-specific risk

Protect capital against downside risk through selective use of put options

Build a safety margin (alpha returns) through active management

How to deal with uncertainty

There are 5 key steps...

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Protect capital against downside risk

Relative return strategies do not protect capital and tend to move in the same direction as a benchmark

Absolute return strategies aim to protect capital by pursuing positive returns with less volatility over time

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Historic demand for Absolute Return funds

Strong net inflows and large growth in number of funds prior to market decline

Source: Micropal and Association for Savings and Investment SA (ASISA)

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More recently flows have shifted to Money Market

In 2008 some 81% of unit trust net inflows went into money market funds (up from 29.3% in 2007)

High degree of risk aversion following market decline

Prospects of poor returns as interest rates decline

Source: Association for Savings and Investment SA (ASISA)

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An alternative to Money Market Funds

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RiskRisk

Targets quarterly positive returns

Targets Cash + 3% p.a. (gross) over rolling 3 year period

Capital BuilderFund objectives

ReturnReturn

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EX

PE

CT

ED

R

ET

UR

NS

High

Low

Stable VolatileCONSISTENCY OF QUARTERLY RETURNS

RISK

RETURN

Cash

AbsoluteReturnFunds

VariableIncomeVariableIncome

CapitalBuilder

BalancedFunds

Capital BuilderFund positioning

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Invest in 15-25 large cap shares (generally components of the Top 40 index)

Tracking error to the TOP40 between 2% - 4%

CASH + MONEY MARKET

25%

Capital BuilderProcess - How the fund works

PHYSICAL EQUITY

75%

Base case

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Physical equity is hedged with listed TOP40 put options

Generally 1-year options are used and rolled quarterly to lock in gains

CASH + MONEY MARKET

25%

Capital BuilderProcess - How the fund works (continued)

EFFECTIVE EQUITY

0-40%

Base case

CASH-EQUIVALENT

HEDGED EQUITY

35-75%

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Capital BuilderPerformance history since inception

Notes:Returns until February 2008 are based on the Capital Builder institutional portfolio, while returns from March 2008 onwards are the unit trust returns (gross of unit trust related fees).

Targets gross return of Cash + 3% over rolling 3 year period

100

110

120

130

140

150

Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

Cash (9.2%)

Cash + 3%

Capital Builder (11.7%)

Source: OMIGSA

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Capital BuilderPerformance history since inception

TAX QUARTERSTAX QUARTERS(Dec 05, Jan, Feb 06)(Dec 05, Jan, Feb 06) (Dec, Jan, Feb 09)(Dec, Jan, Feb 09)

Aims for quarterly capital protection

Note: Returns until February 2008 are based on the Capital Builder institutional portfolio, while returns from March 2008 onwards are the unit trust returns (gross of unit trust related fees).

8.5

4.1

3.0 2.9

4.9

4.0

2.22.8

0.7

4.0

-0.8-0.4

1.01.5 1.5 1.7 1.9 2.1 2.1 2.2 2.4 2.6 2.7 2.9 2.9 2.7

-2%

0%

2%

4%

6%

8%

10%

Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09

GR

OS

S R

ET

UR

N P

ER

QU

AR

TE

R Quarterly Returns

Cash

Source: OMIGSA

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-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

TOP40 TR (monthly) Capital Builder (monthly)

Capital BuilderPerformance history since inception

Avg negative monthly returns Avg positive monthly returns

7.6% participation

41.7% participation

Attractive non-linear

pay-off profile

Note: Split determined by equity market performance (-ve or +ve)

Annualised Nominal Return

Return in Excess of Cash

TOP40 TR 5.3% -3.9%Capital Builder 11.7% 2.5%Cash 9.2% 0.0%

Out-performed both cash & equities

Participate more in equity upside, and less in equity downside

Source: OMIGSA

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EX

PE

CT

ED

R

ET

UR

NS

High

Low

Stable VolatileCONSISTENCY OF QUARTERLY RETURNS

RISK

RETURN

Cash

AbsoluteReturnFunds

VariableIncomeVariableIncome

CapitalBuilder

BalancedFunds

Capital BuilderTax efficiency

tax

tax

tax

tax

tax

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Capital BuilderExample of effective tax rate for individuals

COMPONENTS OF TOTAL RETURN

100% 40%19%

17%

64%

40%

0%

10%

1. Interest

2. Dividends

3. Capital Gains

Effective tax rate(ignoring tax deferral)

Applicabletax rate

EFFECTIVE TAX RATE ON CAPITAL BUILDER

Applicabletax rate

Proportion of total return

Proportion of total return

EFFECTIVE TAX RATE ON CASH DEPOSIT

100% 100%

40%14%

Source: OMIGSA

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Capital BuilderIllustration of returns net of fees and net of tax

Notes:1. Cash return + 2.5% pa (based on Capital Builder Institutional Fund returns from 1 Dec 05 to 28 Feb 08, and the Unit Trust class B returns

thereafter until 31 Mar 09)2. Cash returns from Standard Bank Call deposit 3. Fees calculated as 0.9% + (15% of benchmark outperformance) + VAT

11.7% pa1

9.2% pa2

Capital Builder Call deposit

40% taxedinvestor

Fees = 1.4%3

Tax = 3.7%(tax rate = 40%)

Tax = 1.4%(tax rate = 14.0%)

8.9% pa

5.5% pa

1.1%

untaxedinvestor

3.4%

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Capital BuilderSummary

Very low risk, stable returns

Aims for quarterly capital protection

Targets gross return of cash + 3%pa over 3 year rolling period

Tax efficient return compared to cash and money market

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Consistent returns are important to keep financial plans on track

Diversification alone does not protect capital

Cost-effective hedging of downside risk is available through selective use of put options

Money market investors should consider the enhanced returns and greater tax efficiency available from a protected equity solution

Capital protection is important

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Regulatory Information

Old Mutual Investment Group (South Africa) (Pty) Limited Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405 Telephone number: +27 21 509 5022

Old Mutual Investment Group (South Africa) (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) 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 portfolios may be market-linked or policy based. 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 fluctuates, 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 persons. All inter-group transactions are done on an arms lengths 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.

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