Exchange Traded Funds Presentation 20 April, 2011

Disclaimer I am NOT a registered financial advisor. I am not paid any commissions to sell ETFs. I am paid to write an ETF column by Investors Monthly. I am paid to write a quarterly ETF Review for Itransact. This presentation should NOT be construed as advice or a recommendation of any kind. In case you prefer to shoot and ask questions later

Warren Dick Degree in economics and finance from UNISA 7 years at Investec Private Bank Financial journalist writing for Investors Monthly Financial analyst for Investorcentre Called the financial crisis of ‘07/08 Blah blah blah Some call me slim....

The most important slide you’ll ever see Stock markets generally tend to go up.... JSE All Share Index Source: Profile media

Exchange Traded Funds A basket of shares, bonds or commodities. Put together in a methodical way. Listed on an exchange. Use indices as their building blocks. What are they?

Some famous indices: All Share index: Tracks the performance of 161 shares on JSE. Consumer Price index: tracks the change in the prices of a basket of goods. Dow Jones Industrial Average – NYSE. Pick one you like

Indices are everywhere And ETFs aim to mimic them!

ETF Structure ETF Issuer: eg RMB Regulated by: JSE as a listed entity FSB as a collective investment scheme Man company usually a Pty Ltd. Appoints: Trustees (Bank) to administer company Asset manager to track the index being followed Market Maker to provide liquidity Investors purchase and sell debentures/PI’s through JSE Issuer creates Management Company Issues : Debentures or participatory interests Market Maker ensures shares trade at NAV

How are they constituted? Market Cap Methodology Include shares in the index based on their Market capitalisation= No of shares x share price

Anglo American Market Capitalisation Closing share price 19 April: R No of shares: 1,342m Market cap = R x 1,342m Market cap = R460.2bn

Top 40 index: ranks companies on size

The Top 40 by Industry A little skewed to resources… Source: Satrix, Investorcentre

So then its a process of natural selection? Companies enter and exit the Top 40 when portfolio is rebalanced Only the strongest survive This is a process of ‘natural selection’ Don’t buy the needle buy the hastack. We’ve heard this before!

And has been replicated on indices around the world: Locally: industrial companies “Indi”, resource companies “Resi”, financial companies “fini” Overseas: FTSE 100 (Footsie) S&P 500, Nikkei

Then they got smart… Instead of picking on size, you pick on value (fundamentals) Research Affiliates Fundamental Indexation (RAFI) Enhanced Research Affiliates Fundamental Indexation (eRAFI)

eRAFI vs RAFI RAFI (Satrix)eRAFI (ABSA Capital) 1.A company’s Book Value 2.A company’s Sales 3.A company’s Dividend 4.A company’s Cash flow Applies a further two SA specific criteria: Net Operating Assets ratio Debt Coverage ratio Is rebalanced annually Screens all companies on the JSE Is rebalanced quarterly Only selects companies from the Top 100. Charges a performance fee when it beats index

On this team, we fight for that inch. On this team, we tear ourselves, and everyone around us to pieces for that inch. We CLAW with our finger nails for that inch. Cause we know when we add up all those inches that's going to make the f%$*ing difference between WINNING and LOSING between LIVING and DYING.

Performance: Making rands and sense of it… Equity Funds Ranked TER ( ) FundsAverage TERTotal Return (%) 5 Most Expensive Funds2,9710,88 10 Most Expensive Funds2,6515,67 Overall Average1,5914,89 10 cheapest Funds0,9219,19 5 Cheapest Funds0,7221,35 Source: DRW Investment Research (November 2010) “Investors will do well to avoid the most expensive funds; simply because their actual performances do not justify the higher fees. Investors should rather, all else being equal, invest in low-cost funds and therefore stand a better chance of improving their returns.”

Equity Unit Trusts versus the Benchmarks Equity Funds1-Year3-Year5-Year 7-Year 10-Year Number of funds Best performing fund 26,0%14,5%18,5% 24,5% 29,9% Worst performing fund 1,0%-11,7%8,0% 14,7% 13,3% Top quartile20,6%6,8%14,5% 20,7% 20,2% Median18,3%5,1%12,9% 19,5% 17,8% Bottom quartile16,5%3,1%11,4% 17,9% 15,8% Average18,2%4,8%12,9% 19,5% 18,4% Benchmark: ALSI19,0%6,5%15,2% 21,0% 18,1% % Funds outperforming ALSI 37%33%15% 26% 49% Benchmark: SWIX20,9%7,1%15,1% 21,6% % Funds outperforming SWIX 22%16%12% 15% 1.Equity unit trusts in categories: General, Growth and Value Funds 2.Total Returns Annualised 3.Source: DRW Investment Research

Fees (TER) as at 31 December 2010

But don’t take my word for it The Oracle of Omaha says so…. "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.“ - Warren Buffett in letter to shareholders, 1996

Your guide to the universe…

As at 31 December 2010

ETPs - a big deal overseas (US$ bn) ETFs ETPs Equity ETFs Fixed Income ETFs Commodity ETFs Source: Bloomberg, Blackrock

But still small locally (R’bn) Source: Bloomberg

Summary: Market cap indices are based on the size of the companies. Fundamental indices introduce different ways of picking the shares. You can get exposure to all asset classes locally. ETFs are cheaper than unit trust funds

Getting some more of the good stuff Now that you’re sold: ETF column in Investors Monthly (Business Day) Factsheets of product providers. ETF Quarterly Review – sign up for the . ETFSA website

THANK YOU