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

2. 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

3. 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)

4. 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)

5. 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)

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

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

8. 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)

9. 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 – Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded.
OUTvest is an authorised FSP (47234)

10. 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 – Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded.
OUTvest is an authorised FSP (47234)

11. 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 – Equity risk premium based on a 1 year investment time horizon, fees and taxes excluded.
OUTvest is an authorised FSP (47234)

12. 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 – 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)

13. 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)

14. 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)

15. 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)