CFA Society of South Africa Portfolio construction in the age of digital advice 27 June 2018 OUTvest is an authorised FSP (47234)

How does digital advice influence portfolio construction? An advice algorithm requires a set of investment exposures that: Use a measurement framework in common with the digital advice system Are suitable for the intended client Take into account your investment administration platform Graduated

Theory: Determine your portfolio spectrum Select investment exposures that are suitable for your intended client and map them to your measurement framework Government bonds Pref. shares Corporate bonds Cash Government bonds Property Equities Hedge funds Securitised lending Private equity OUTvest is an authorised FSP (47234)

Theory: Using a common measurement framework What is the measure that links the advice system and the investment exposures Probability Volatility Expected return Qualitative OUTvest is an authorised FSP (47234)

Theory: Determine the graduations in your investment exposures It depends…. The graduations depend on: The graduations in the advice system and the measurement link The portfolio spectrum The investment administration platform (unit trusts / individual investment accounts) OUTvest is an authorised FSP (47234)

Theory: Select your portfolio management methodology Core Satellite Active Rules based Strategic OUTvest is an authorised FSP (47234)

Our story. It’s not purely a science, but we tried to be as evidence-based as possible OUTvest is an authorised FSP (47234)

Our investment spectrum We set out the investment exposures typically suitable for retail clients Cash Equities Government Bonds Listed Property Preference shares OUTvest is an authorised FSP (47234)

Why Equities? A 1 year investment time horizon We went back 115 years South African Bills Probability of less than zero return 13% Mean Annualised Return: 6.1% Volatility 5.5% South African Equities Probability of less than zero return 30% Mean Annualised Return: 14.7% Volatility 23.0% Source: Morningstar, London Business School, Dimson, Staunton and Marsh, 1900 – 2015. Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded. OUTvest is an authorised FSP (47234)

Why Equities? A 3 year investment time horizon South African Bills Probability of less than zero return 10% Mean Annualised Return: 6.1% Volatility 5.4% South African Equities Probability of less than zero return 16% Mean Annualised Return: 13.3% Volatility 13.3% Source: Morningstar, London Business School, Dimson, Staunton and Marsh, 1900 – 2015. Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded. OUTvest is an authorised FSP (47234)

Why Equities? A 10 year investment time horizon South African Bills Probability of less than zero return 3% Mean Annualised Return: 6.2% Volatility 5.2% South African Equities Probability of less than zero return 0% Mean Annualised Return: 13.1% Volatility 6.8% Source: Morningstar, London Business School, Dimson, Staunton and Marsh, 1900 – 2015. Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded. OUTvest is an authorised FSP (47234)

We actively went passive. Hint: it’s not just about cost. 1. Focus 2. Advice system 3. Cost 14.7% 1.5% Equity risk premium Manager alpha RRRR’s Asset allocation 1. Source: Morningstar, London Business School, Dimson, Staunton and Marsh, 1900 – 2015. Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded. 2. Source: Lipper, FTSE/JSE Top 40 compared to the ASISA SA General Equity Index, 31/12/2001 – 31/12/2017 OUTvest is an authorised FSP (47234)

What did we end up doing? We worked with S&P Dow Jones Indices and CoreShares to design a series of four custom risk indices to graduate from cash to equities Unit trusts, rebalanced every 6 months (March and September). TERs 0.33bps OUTvest is an authorised FSP (47234)

Performance tracking the indices Is the theory working? TR Index performance – March 2017 to May 2018 Source: S&P Dow Jones Indices OUTvest is an authorised FSP (47234)

Performance tracking the indices Is the theory working? TR Index performance – September 2012 to May 2018 Source: S&P Dow Jones Indices OUTvest is an authorised FSP (47234)