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The news magazine of Old Mutual Investment Group

Quarter 2 2020

FUNDAMENTALS

INVESTMENT GROUP

1

The news magazine of Old Mutual Investment Group

Quarter 1

FUNDAMENTALS

INVESTMENT GROUP

2

BUSINESS UNUSUAL IN THE WAKE OF A PANDEMIC

TEBOGO NALEDI4

THE COVID-19 CRISIS: THERE IS LIGHT AT THE END OF THE ECONOMIC TUNNEL

JOHANN ELS 6

STABLE RETURNS IN AN UNSTABLE ENVIRONMENT

HANNO NIEHAUS & ZIYAAD PARKER 9

ESG INVESTMENT SOLUTIONS OFFER RESILIENCE IN TIMES OF EXTREME MARKET VOLATILITY

ANELISA BALFOUR, FAWAZ FAKIER & BERNISHA LALA

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RESPONSIBLE INVESTING DURING THE COVID 19 CRISIS: SEEKING OPPORTUNITY THROUGH AN ESG LENS

JON DUNCAN

17

IMPACTFUL RENEWABLE ENERGY INVESTMENTS ARE USEFUL PORTFOLIO DIVERSIFIERS

VUYO NTOI 22

UNEARTHING QUALITY INFORMATION WITH ARTIFICIAL INTELLIGENCE

HYWEL GEORGE25

INSIDE THIS ISSUE

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FOREWORD

UNPRECEDENTED MARKET VOLATILITYThe COVID-19 pandemic has resulted in unprecedented

levels of market volatility. Globally, governments have

taken the brave approach of placing the well-being

and lives of citizens ahead of short-term economic

growth which has severely disrupted supply chains and

constrained consumer demand. We applaud the South

African government for the proactive actions taken in

managing the pandemic, however it is important to

remain cognizant of the fact that more than 50% of South

Africans were living off less than R1200 per month1 before

the pandemic. The constrained economy will therefore

have a significant impact on the livelihoods of these

individuals. Initiatives like the Solidarity Fund (launched

by the government) are therefore critical for ensuring

that as a nation we survive this pandemic. Furthermore,

constrained cash flows may over time affect the ability of

companies to contribute to retirement funds on behalf

of employees, which could have lasting effects on the

retirement fund industry.

A MESSAGE FROM THE DIRECTOR OF INSTITUTIONAL BUSINESS

BUSINESS UNUSUAL IN THE WAKE OF A PANDEMIC

TEBOGO NALEDI

1 https://www.saldru.uct.ac.za/income-comparison-tool/

This is therefore a challenging time for all South Africans.

It is important to note that even during these volatile

market conditions, our long-term vision remains consistent.

We will continue to relentlessly pursue investment

excellence by:

• Focusing on delivering market-beating returns for

our clients;

• Being responsible stewards of the assets, we manage;

and

• Benefiting the communities in which we invest.

A RESPONSIBLE BUSINESS AND INVESTOR

As a responsible business, our primary focus areas

during the pandemic have been the well-being of our

staff and our clients. We therefore proactively decided

to implement an internal travel ban in February along

with self-quarantine guidelines for those individuals

who have been travelling. Furthermore, by 16 March, we

implemented the infrastructure and processes which

anabled the majority of our staff to seamlessly work

remotely. This situation required us to be agile, clinical

and innovative, the result being that we have successfully

transitioned to working remotely through the use of

secure technological platforms. We are committed

to ensuring that our clients continue to receive world

class customer service even during these challenging

market conditions.

OUR THEME: THE NEW NORMALIn this edition of Fundamentals, we reflected on the

current economic climate and provided insights into

the future of investing post a COVID-19 world. While

It’s not possible to perfectly predict when the world will

revert back to its new normal, we believe that over the

long-term certain investment truths will persist. The

following is covered in this edition:

• Our Chief Economist addresses the global implications

of the COVID-19 and assesses the possible paths to

economic recovery. This provides insights, not only on

the current state of the economy, but the long-term

implications of the COVID-19 pandemic.

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FOREWORD

IN CONCLUSIONThere is no doubt that the pandemic will test our collective resolve, we are confident that this experience will make South Africa stronger as a nation. Until an end to the pandemic is in sight, we hope that everyone continues to abide to social distancing norms. Stay safe.

• Our Absolute Return Fund portfolio managers illustrate

that over the long-term, market crashes have occurred

more often than one might expect. Absolute Return

investing tends to be cognizant of these market shocks

and therefore tends to outperform traditional multi-

asset class strategies during volatile environments.

• We highlight the investment thesis behind our South

African Responsible Investment offering which is

expected to be launched in the second quarter of

2020. Morningstar have demonstrated that responsible

investment strategies have been more resilient over

this volatile period.

• We discuss the impact of the pandemic on unlisted

Infrastructure investing, with a specific focus on

whether the disruption to supply chains and consumer

demand will have a material impact on investment

outcomes. It is worth noting that our Infrastructure

capability was founded in 1999 and has therefore

experienced multiple economic cycles and continues

to deliver attractive long-term real returns.

• Our Head of Responsible Investments lists the

lessons long-term investors should take-away from

the COVID-19 pandemic. Furthermore, the article

addresses what other environmental, social and

governance externalities could impact global markets

over the long-term.

• Our final article looks to the future and assesses

how artificial intelligence will impact the future of

individuals and the investment industry.

COVID-19: OUR HEROESDuring this pandemic it’s important that we celebrate

the heroes both in terms of health care workers and

individuals providing essential services. These individuals

are putting their lives at risk to ensure that even in this dire

time South Africans are able to receive medical treatment

and are able to meet their basic needs. Furthermore, we

encourage all South Africans who are fortunate enough

to do so, to contribute to the Solidarity Fund. Old Mutual

Limited has pledged R50 million rand to the Solidarity

Fund and R4 billion and worth of cover to healthcare

workers during the pandemic.

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THE COVID-19 CRISIS: THERE IS LIGHT AT THE END OF THE ECONOMIC TUNNELJOHANN ELS | CHIEF ECONOMIST

ABOUT THE AUTHORAs Chief Economist at Old Mutual Investment Group, Johann Els is responsible for all areas of macroeconomic research.

• THE UNPRECEDENTED STOPPAGE IN GLOBAL ACTIVITY AMID THE LOCKDOWNS DUE TO COVID-19 COULD LEAD TO THE SLOWEST GLOBAL GROWTH EVER ON AN ANNUAL AVERAGE BASIS.

• A “V”-SHAPED RECOVERY CYCLE IS CRUCIALLY DEPENDENT ON THE ASSUMPTION THAT VIRUS INFECTION RATES PEAK BY AROUND MID-MAY.

• SHOULD THE RESERVE BANK EMBARK ON A LARGE-SCALE QUANTITATIVE EASING SA’S OPEN ECONOMY, SOPHISTICATED FINANCIAL SYSTEMS, DEVELOPED MARKETS AND WELL-REGARDED INDEPENDENT INSTITUTIONS SHOULD ASSIST IN PREVENTING HYPERINFLATION FROM TAKING ROOT.

KEYTAKEOUTS

ECONOMICS

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an aggressive QE plan to the tune of US$6.5 trillion has been implemented. In the US alone, QE could be US$4trn to US$5trn, although it has been described as “unlimited” in size and duration.

Fiscal policy measures in the US have already been more aggressive than during the GFC. Already, the US fiscal expansion equals 10% of GDP and more fiscal support packages are likely. Fiscal policy measures have been more limited in the Euro area, while emerging markets (EMs) don’t have enough room for huge fiscal support packages.

The US dollar will likely remain strong during the crisis phase due to a flight to safe-haven assets, which also results in US Treasury yields dropping. Later, as the virus infection rates start to roll over and the economy stabilises, expectations of a growth recovery should gain ground. But, similarly to the GFC, policy will remain expansionary for a long time while the economy recovers, as policymakers will want to ensure the recovery remains on track. Very low returns in the US, relative to those available in emerging markets, will likely lead to large capital outflows out of the US and towards emerging markets as investors look for better returns. This means that the US dollar will likely weaken and emerging markets currencies will strengthen.

GLOBAL ECONOMYThe unprecedented stoppage in global activity amid the lockdowns due to COVID-19, could lead to the weakest growth ever. I expect global growth to be around -3.2% in 2020; a contraction greater than the -1.8% we saw in 2009 due to the Global Financial Crisis (GFC) induced recession. While there is enormous uncertainty ahead, the current crisis is less akin to the GFC’s financial shock but more to a natural disaster – where recoveries tend to be quite rapid and include some overshoot, as lost production is recovered. The crisis evolved into a financial crisis as well, but the policy response has been far more aggressive than in the aftermath of the GFC. Therefore, while there will be a very deep recession in the first half of 2020, it will likely be shorter than the GFC recession and the recovery should be stronger in nature.

This sharp “V”-shaped cycle is crucially dependent on the assumption that strong social distancing policies and effective country-wide lockdowns will mostly end by mid-May, and that the virus infection rate will peak by end of May. This should result in activity returning to closer to normal levels by late May into June.

My latest growth forecasts for the main areas are:• US growth likely around -6.5%

(from +2.3% in 2019 and -2.5%

ECONOMICS

in 2009) in 2020 and +4.8% and +2.6% in 2021 and 2022, respectively.

• China +1.2% (from +6.1% in 2019 and +9.4% in 2009) in 2020 and +9.5% and +6.0% in 2021 and 2022, respectively.

• Euro area growth -3.5% (from +1.2% in 2019 and -4.5% in 2009) in 2020 and +4.8% and +1.5% in 2021 and 2022, respectively.

These forecasts include truly shocking negative quarter-on-quarter annualised GDP growth numbers in the first half of 2020. But the end of lockdowns in most economies by end of May, and some returning to normality during June, should aid a strong recovery in the second half of the year. The pace of recovery after the end of lockdown measures will depend on how quickly production and consumption recover. In China, production has recovered to approximately 80% of pre-lockdown levels in about 7 weeks after the peak in new virus cases, while the demand side remains muted.

The policy response across developed and emerging economies has been very quick in most economies – especially in the US. The Federal Reserve’s quick reaction has also created room for emerging market central banks to cut rates – in many cases more than once – since February. Apart from rate cuts, quantitative easing (QE) has also been very aggressive. Across the US, UK, Euro area and Japan

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ECONOMICS

The risks to this base case V-shaped cycle are the virus cycle timeline and the extent and duration of the containment measures. Should the virus infection rate peak later than expected, i.e. not within the next two months or so, the cycle is likely to take on an “L” or a “U” shape.

SA ECONOMYIn line with the impact of COVID-19 on the global economy, the SA economy is also heading

for a severe and sharply deeper recession. After five consecutive years of less than 1% growth on average per year, this will put the SA economy in an even deeper crisis than we’ve been in. The biggest impact, apart from growth, will likely be on the fiscal deficit and therefore, Government’s ability to stabilise the debt to GDP ratio.

2020 GDP growth is likely to be around -5.7%, much worse than during the GFC in 2009, when

GDP growth registered -1.5%. Quarterly annualised growth during the first two quarters of the year will likely be shockingly negative (these numbers could test -30% to -40% on this basis). But given the global V-shaped recovery and some policy measures taken locally, the SA economy should also recover sharply during the second half.

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CUSTOMISED SOLUTIONS

STABLE RETURNS IN AN UNSTABLE ENVIRONMENT HANNO NIEHAUS | PORTFOLIO MANAGER

ZIYAAD PARKER | INVESTMENT ANALYST

ABOUT THE AUTHORSHanno is part of the portfolio management team responsible for the management of retail and institutional assets. His responsibilities include the management of multi-asset class funds, as well as local and international equity portfolios.

Ziyaad is part of the portfolio management team responsible for both retail and institutional Absolute Return mandates. His responsibilities include the management of multi-asset class and derivative-based portfolios, with a strong focus on the research underlying these offerings.

• THE ABSOLUTE RETURN INVESTING APPROACH CAN PRODUCE SUPERIOR RISK-ADJUSTED RETURNS WITH THE ADDED BENEFIT OF A SMOOTHER RETURN PATH.

• WEALTH DEFENDER PORTFOLIO HAS PROVEN TO MEET ITS RETURN AND RISK OBJECTIVES OVER THE LONG-TERM, BY ADDING VALUE THROUGH STRATEGIC ASSET ALLOCATION.

• AN OPTIMAL INVESTMENT STRATEGY IS ONE INVOLVING A MULTI-ASSET SOLUTION WITH IMPLICIT CAPITAL PROTECTION.

KEYTAKEOUTS

The COVID-19 pandemic has resulted in significant losses for South African investors, with local equities1 down 26.6% for the quarter ending 31 March 2020. We therefore assess whether a strategy such as Absolute Return investing would be useful for retirement funds seeking to meet a long-term real return target while requiring a degree of capital protection across different market conditions. The broad premise of Absolute Return investing is as follows:• Long-term positive

performance. It typically is a multi-asset class strategy seeking to outperform a cash or inflation target.

• Active risk management. For many clients, the optimal one-size-fits-all investment strategy is

often a multi-asset portfolio with exposure to diversified growth assets like local and offshore equity. Equity investments, in particular, have the potential to be volatile over the short to medium term and hence capital protection considerations are important in achieving a strategy’s investment objectives, while reducing the extent of suffering large losses.

This approach allows Absolute Return investing to produce superior risk-adjusted returns, with the added benefit of a smoother return path. Furthermore, it is likely to generate a superior outcome in a low-return environment, where the risk of a terminal deficit is pronounced. The Wealth Defender Portfolio has

1 FTSE/JSE Capped SWIX All Share Index (Total Return)

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an Absolute Return investment strategy which has proven to meet its return and risk objectives over the long term, by adding value through strategic asset allocation, actively managed investment building blocks, and its risk management overlay.

GROWTH IS IMPORTANT, BUT SO TOO IS CAPITAL PROTECTION Figure 1 depicts the importance of having equity exposure in order to outperform inflation over the long term. While equity markets have historically been the main driver of real returns, they are also associated with large potential losses as illustrated in Figure 2. It is therefore important to stress that exposure to risk assets is essential for long-term growth, but capital protection is vital in preserving wealth over the short to medium term.

OPTIMAL INVESTMENT STRATEGY BALANCES GROWTH AND CAPITAL PROTECTIONWe believe that the optimal investment strategy for the majority of investors is a multi-asset solution, with some level of implicit capital protection. The Wealth Defender Portfolio is a moderate risk, multi-asset class strategy that aims to preserve capital over any rolling 12-month period, while still participating in upside market growth. As can be seen in Figure 3, the fund has delivered consistent inflation-beating returns since the fund was launched in August 2003.

FIGURE 1

FIGURE 2

FIGURE 3

15.5% p.a

7.9% p.a

60

300

187 500

37 500

7 500

1 500

937 500

Jan

-60

Oct

-61

Jul-

63A

pr-6

5Ja

n-6

7O

ct-6

8Ju

l-70

Apr

-72

Jan

-74

Oct

-75

Jul-

77A

pr-7

9Ja

n-8

1O

ct-8

2Ju

l-84

Apr

-86

Jan

-88

Oct

-89

Jul-

91A

pr-9

3Ja

n-9

5O

ct-9

6Ju

l-98

Apr

-00

Jan

-02

Oct

-03

Jul-

05

Apr

-07

Jan

-09

Oct

-10

Jul-

12A

pr-1

4Ja

n-1

6O

ct-1

7Ju

l-19

FTSE/JSE All Share Index (Total Return )SA Inflation

The average return for the JSE i.r.o. all 5-year periods since1930 has been 8% real; since 1998 it has been 9.6%.

156200

500

1 000

2 000

5 000

10 000

20 000

50 000

156200

500

1 000

2 000

5 000

10 000

20 000

50 000

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

-47%

-45%

25 months

Decline in gold price

State of emergency

Elections

Sowetoriots

PW Botha’s rubicon speech

Foreign activity

61 months

23 months

-44%

-42%

Finrandabolition

SA ratesfall sharply

Interest rate cutsRecovery fromcheap levels

S-E AsianCrisis

Mexican crisis

11 September 2001

Russian crisis/SA rates surge

Emerging market jitters

US Sub-prime crisis

TARP stimulus recovery

Low inflation/Interest rates

30 months

27 months

-33%

-39%

18 months

Trumpelection win

BREXIT

International correction (overpriced markets; geopolitical tension)

Global Pandemic

+140.9%-36%

634590

237

439

50100

150200

250300

350400

450500

550600

650700

Jul-

03

Dec

-03

May

-04

Oct

-04

Mar

-05

Aug

-05

Jan

-06

Jun

-06

Nov

-06

Apr

-07

Sep-

07

Feb-

08Ju

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8D

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Feb-

13Ju

l-13

Dec

-13

May

-14

Oct

-14

Mar

-15

Aug

-15

Jan

-16

Jun

-16

Nov

-16

Apr

-17

Sep-

17Fe

b-18

Jul-

18D

ec-1

8M

ay-1

9O

ct-1

9

Wealth Defender (Composite)Floor - 12 Months ForwardCPICPI + 4%

Source: Old Mutual Investment Group | Returns to end of March 2020

Source: I-Net | Updated: 28.01.2020 | FTSE/JSE All Share Index


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RISK MANAGEMENT PROCESS Key to the strategy’s design is that the fund is sheltered from downside risk by blending assets appropriately to reduce risk, looking at their return interactions and by dynamically managing the asset allocation, as determined by our proprietary risk management process. For example, the model will reduce effective exposure to riskier assets such as equities in the event that there is a downturn in the equity market and the portfolio starts to lose value.In order to maximise returns, great emphasis is placed on minimising the costs of downside protection. In addition, the protection level of the fund increases as the fund gains in value, referred to as return lock-in. We use derivatives for downside protection, as well as dynamically adjusting fund exposures. Importantly, derivatives are not used for speculation and are not employed with leverage, but are actively employed within a strictly defined risk management framework.

PROVEN TRACK RECORD ON CAPITAL PROTECTIONThere is no explicit guarantee on the Wealth Defender Portfolio, but the implicit protection level has been achieved consistently over time. This demonstrates that there is a very a low to moderate level of risk. Further, there is no additional charge for the risk

FIGURE 4

FIGURE 5

FIGURE 6

-20%

-10%

0%

10%

20%

30%

40%

50%

Jun

04

Oct

04

Feb

05

Jun

05

Oct

05

Feb

06

Jun

06

Oct

06

Feb

07

Jun

07

Oct

07

Feb

08

Jun

08

Oct

08

Feb

09

Jun

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Oct

09

Feb

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n 10

Oct

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Jun

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Feb

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Oct

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Jun

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Feb

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Oct

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Jun

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Feb

16Ju

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b 17

Jun

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Feb

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n 18

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Jun

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20

Wealth Defender (Composite) 90% of Capital

55

60

65

70

75

80

85

90

95

100

105

May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Wealth Defender

Average Balanced Fund *

FTSE/JSE All Share Index

-4%

-22%

-40%

RiskManagementBenefit:18%

DiversificationBenefit:18%

281

227

256

50

100

150

200

250

300

May

-08

Aug

-08

Nov

-08

Feb

-09

May

-09

Aug

-09

Nov

-09

Feb

-10

May

-10

Aug

-10

Nov

-10

Feb

-11

May

-11

Aug

-11

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

May

-17

Aug

-17

Nov

-17

Feb

-18

May

-18

Aug

-18

Nov

-18

Feb

-19

May

-19

Aug

-19

Nov

-19

Feb

-20

Wealth Defender (Composite)

Average Balanced Fund *

FTSE/JSE All Share Index


Sources: Old Mutual Investment Group | *Alexander Forbes Global Large Manager Watch Average

Sources: Old Mutual Investment Group | * Alexander Forbes Global Large Manager Watch Average (Median of the Morningstar South African MA High Equity category from appended for March 2020) | Returns to end of March 2020

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management – it is inherent in the investment strategy.

The risk objective of the portfolio is to minimise negative returns, aiming to protect at least 90% of capital over any rolling 12-month period, and thereby generating absolute or positive returns on a consistent basis. Figure 4 illustrates the ability of the strategy to meet its risk objective.

In addition to meeting its return objectives, the portfolio has provided comfort and security to investors in times of extreme volatility. This includes the Global Financial Crisis, when the FTSE/JSE All Share Index dropped by 43% at its worst. During this period (01 June 2008 – 28 Feb 2009), the Wealth Defender Portfolio’s loss was limited to a mere 4.1%. This is

clearly demonstrated in Figure 5. The Wealth Defender Portfolio successfully protected capital in relation to the average balanced fund, i.e. the Alexander Forbes Large Manager Watch Average, as well as relative to the FTSE/JSE All Share Index.

The age-old adage of the benefit of compounding off a higher base is evidenced by the performance of the Wealth Defender Portfolio since the onset of the 2008/2009 Global Financial Crisis to present, relative to the average balanced fund, as well as compared to SA equity market performance. One can see from Figure 6 that limiting losses during periods of severe market downturns preserves capital over the long term.

CONCLUSIONWe believe that:• Absolute Return investing is

an essential investment tool for retirement funds.

• Our proprietary risk management framework has successfully protected the capital of investors, particularly during times of extreme market turbulence.

• Our Wealth Defender Portfolio has consistently demonstrated its ability to generate superior risk-adjusted returns in volatile market conditions.

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ESG INVESTMENT SOLUTIONS OFFER RESILIENCE IN TIMES OF EXTREME MARKET VOLATILITY ANELISA BALFOUR | INVESTMENT ANALYSTFAWAZ FAKIER | PORTFOLIO MANAGERBERNISHA LALA | INDEXATION PORTFOLIO MANAGER

ABOUT THE AUTHORSAnelisa is responsible for domestic and international indexation portfolio management and contributes to various research projects, such as the launch of the Responsible Investment Equity Index Fund.

Fawaz is responsible for managing portfolios driven by active quantitative strategies across a range of funds such as local and international equity, balanced and long-short hedge funds.

Bernisha is responsible for indexation portfolio management, optimisation and implementation.

• ESG INTEGRATION INTO FUND MANAGEMENT WILL ENHANCE THE RISK AND RETURN PROFILE AND AID INVESTORS IN REACHING BOTH THE SOCIAL AND FINANCIAL OBJECTIVES OVER THE LONG TERM.

• RESILIENT COMPANIES WITH STRONG ESG PROFILES ARE MORE COMPETITIVE THAN THEIR PEERS.

• OUR DEDICATED PROXY VOTING AND ENGAGEMENT ENSURES THAT MATERIAL GOVERNANCE ISSUES ARE ADDRESSED THROUGH OUR LISTED EQUITY HOLDINGS.

KEYTAKEOUTS

ANELISA BALFOUR FAWAZ FAKIER BERNISHA LALA

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We find ourselves in the midst

of a global pandemic and South

African markets have not been

spared. The announcement by

President Cyril Ramaphosa of

a nationwide lockdown from

midnight on 27 March made

many South Africans realise the

severity of the situation at hand,

along with the rest of the world.

No investment manager or

economist could have predicted

that we would be dealing

with the challenges currently

confronting the global economy.

This, naturally, has left us all with

a heightened level of uncertainty

in our daily lives – professionally

and personally – and with many

questions about what the future

holds.

While COVID-19 is not the most

lethal in terms of viruses of the

last few decades, such as SARS,

MERS and Ebola, it’s certainly

proving to be the most disruptive

to the global economy. The origin

and rapid spread of COVID-19 into

all corners of the globe is what we

see as a “black swan” event: an

event that’s unpredictable, rare

and often severe in its impact. It

continues to dominate headlines,

with investors piling money into

safe-haven assets such as cash,

in trying to mitigate volatility.

Businesses across the board are

faced with serious challenges, as

COVID-19 has a direct impact on

demand, the entire supply chain

and consumer confidence. This,

in turn, has a direct impact on

company profits and cash flows,

adversely affecting companies

with relatively higher gearing

and debt levels. We may very

well see structural changes in

our economy, as we are forced

to put measures in place to

ensure normal continuity in our

daily lives, which will likely shape

the way we live and work in the

future.

During economic shocks,

investors face challenges due

to extreme market volatilities,

and low confidence levels. It

has been observed that times

of market crisis have led to

investors’ attention moving

towards more resilient, ethical,

regulatory compliant, and

responsible investments. These

uncertain times thus pose an

ideal opportunity to make a case

for investing in sustainably run

businesses.

Investing in sustainable

companies is no longer reserved

for environmental, social and

governance (ESG) matters or

green investing mandates. In

the 2016 edition of the Harvard

Business Review, Whelan

and Fink made a strong case

supporting the notion that

investing in more sustainable

companies not only put our

consciences at ease, but

presented sound investment

decisions – because companies

that incorporate stakeholder

inclusivity at the core of their

business strategies often reap

the benefits of doing so, in their

bottom line.

WHAT IS THE FUTURE FOR INVESTING?Sustainable investing is set to

feature strongly in the future,

where various investment

approaches will be employed

to help investors reach their

objectives. With a values-based

investing approach, investors

seek to align their portfolios with

their norms and beliefs, while

investors can also apply an impact

investing approach, in which they

use their capital to trigger change

for social or environmental

purposes – for example, to

accelerate the decarbonisation of

the economy.

Our hypothesis is that

ESG integration into fund

management will enhance both

the fund’s risk and return profile

and aid investors in reaching both

the social (ESG) and financial

objectives over the long term. We

have delved into several academic

studies based on historical data

that show companies with

positive ESG characteristics have a

positive correlation with financial

performance. In a review by

Arabesque and Oxford University,

it was found that of the 200

studies considered, 80% of them

conclude that there is a positive

correlation between stock price

performance and how sustainable

the business’s practices are.

To reverberate this, in the 2011

Project ROI report, Bliss et al.

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found that during times of crisis,

firms with good corporate social

responsibility reputations fare

better than their industry peers

and experience insignificant

share price fluctuations.

These findings support our

hypothesis, but are based on

historical data. Therefore, it’s

important that we unequivocally

establish that the relationship

between ESG characteristics and

financial performance is well

founded and rooted in sound

economic rationale.

ESG INTEGRATION IMPACT ON RETURNIn the context of ESG investing,

there are both financial and non-

financial sources of sustainability.

Companies with strong ESG

profiles are considered more

resilient than their peers, and

some of the key characteristics

shared by them are their strong

balance sheets, their ability to

generate higher cash flow, deploy

working capital efficiently, as well

as having lower debt to capital

levels. Resilient companies with

strong ESG profiles are more

competitive than their peers.

This competitive advantage can

be due to the more efficient

use of resources, better human

capital development, or better

innovation. In addition to this,

high ESG-rated companies are

typically better at developing

long-term business plans,

have a disciplined approach to

managing assets and liabilities,

and can fortify their balance

sheets with greater capital

reserves that can help ride out

a downturn and withstand

market crises like the Global

Financial Crisis of 2008/9 and,

more recently, the novel COVID19

pandemic. When companies

are competitive they can

generate abnormal returns,

which ultimately leads to higher

profitability.

ESG INTEGRATION IMPACT ON RISKResilient companies have

above-average risk control and

compliance standards across the

company. With better risk control

standards, these companies

suffer less frequently from events

such as fraud, embezzlement,

corruption, or litigation cases that

can seriously impact the value of

the company and therefore the

company’s stock price.

In a recent study[1] carried out

by risklab, a subsidiary of Allianz

Global Investors, they found

that sustainable investment

strategies improve the risk

profile of portfolios and believe

that ESG criteria should be an

integral part of the investment-

making decision process to

minimise tail risks. In fact, they

found that average tail risk,

which is measured according to

conditional value at risk (CVaR

95%), which compared ESG-

optimised portfolios with their

parent index, can be reduced

significantly. We carried out a

similar analysis and had similar

findings to the study1, shown in

the table below:

OUR INVESTMENT APPROACH At Old Mutual Investment Group

we see environmental, social

and governance issues as key to

managing investment risks. We

drive a responsible stewardship

agenda and don’t only invest in

companies that have the best

ESG profiles. Our dedicated

proxy voting and engagement

specialists ensure that material

governance issues are addressed

through our listed equity

holdings.

We continuously apply our

customised approach to business

in the way we manage money

on behalf of our clients, which

CVAR[2] (95%) ESG-OPTIMISED BENCHMARK[3]

World[4] -25.70% -38.10%

Emerging Markets[5] -38.80% -64.50%

South Africa -7.82% -10.20%

[1] https://www.risklab.com/media/portfoliopractice_11_-responsibleinvestingreloaded.pdf[2] CVaR 95% (1 year) = Conditional Value at Risk at a confidence level of 95% and a time horizon of one year[3] South Africa benchmark: Capped SWIX[4] [5] Source: risklab GmbH

16


has led to the development

of the Old Mutual ESG Equity

capability which will be launched

in the second quarter of 2020.

We currently manage R20

billion in ESG index funds, and

this capability bolsters our

existing ESG offerings and is the

result of a collaborative effort

between Old Mutual Customised

Solutions and the ESG Research

and Engagement Team. In

constructing the Old Mutual

ESG Equity capability we have

integrated the learnings from

the current ESG index strategies

and quantitative investing. The

capability has the following

objectives:

1. To identify and invest

in companies with ESG

opportunities;

2. to reduce the carbon profile

of the capability relative the

parent universe (benchmark);

and

3. having a Value-based

investment strategy.

Our Investment process is

systematic, with the intention to

enhance long-term risk adjusted

returns. The capability’s parent

universe is the FTSE/JSE Capped

SWIX Index which is widely

used in the asset management

industry as the benchmark for

South African equity. We are

cognizant of sector neutrality and

tracking error (ex-ante) in our

portfolio construction process.

Over the long-term we believe

that this approach would

allow us to identify both

unpriced externalities and ESG

opportunities.

CONCLUSIONWe believe that investing in

resilient companies with strong

ESG profiles will continue to lead

to positive externality creation for

society, and the environment. It

also means greater competitive

advantage, which will drive

innovation and lead to greater

financial rewards.

17

At the time of writing, the COVID-19 crisis is wreaking havoc across global markets, interrupting global supply chains, drying up demand and, of course, taking a massive personal toll on affected families. Given the scale of the devastation, some investors might ask, why worry about Responsible Investing or Environmental, Social and Governance (ESG) issues at this stage? Surely it makes sense to just focus on the “important” investment numbers and rather leave the soft ESG stuff for after the crisis?

STRENGTHENING THE CASE FOR RESPONSIBLE INVESTING – LESSONS FROM COVID-19LESSON 1 – WE’RE ALL INTERCONNECTED One of the founding principles

of Responsible Investing (RI) is

the interconnected nature of

RESPONSIBLE INVESTING

JON DUNCAN | HEAD OF RESPONSIBLE INVESTMENT, OLD MUTUAL INVESTMENT GROUP

RESPONSIBLE INVESTING DURING THE COVID-19 CRISIS: SEEKING OPPORTUNITY THROUGH AN ESG LENS

• THE CURRENT COVID-19 CRISIS HAS MANY IMPORTANT LESSONS THAT STRENGHTHENS THE CASE FOR RESPONSIBLE INVESTING

• THE CURRENT DOWNTURN PROVIDES EARLY BUT COMPELLING EVIDENCE THAT ESG IS NOT JUST A NICE-TO-HAVE BUT IT IS ALSO GOOD TO HAVE; AND

• ASSET MANAGERS THAT CAN CAPTURE “GREEN ECONOMY” OPPORTUNITIES WILL BE BEST PLACED TO WEATHER THIS STORM IN THE LONG TERM.

KEYTAKEOUTS

our social, biophysical and market

ecosystems. Importantly RI

recognises the impact of unpriced

externalities on the safe operation

of the market, society and

environment. Examples include

the social and environmental

costs from burning fossil fuels or

societal health impacts of high-

calorie foods. By considering

ABOUT THE AUTHORJon Duncan leads the Responsible Investment division at Old Mutual. The Programme is focused on driving the systematic integration of material environmental, social and corporate governance (ESG) issues across the Old Mutual Investment Group.

18

externalities in its approach,

the RI field essentially asks all

participants in the investment

value chain to consider the

wisdom of pursuing short-term

returns at the expense of long-

term resilience of social and

environmental systems.

The COVID-19 crisis has laid bare the very real interconnectivity between our social, environmental and market systems. The lesson here is - don’t neglect interconnectivity and long-term system resilience.

LESSON 2 – SHARED VALUEProfessors Kramer and Porter of Harvard Business School penned their famous article on shared value in the early 2000s. In it they argued that the best business strategy to adopt in a world with increasing social and environmental pressures was one that generated profits while solving for long-term social and environmental resilience. They proposed a stakeholder inclusive model for capitalism which encourages value to be shared across participating stakeholder groups. In effect, this type of strategy requires company management to carefully consider a broad range of stakeholders and the associated business “impacts”. For some management teams, this is a sharp departure from the age-old adage that the business of business is business.

COVID-19 puts a sharp focus on management approaches to

human capital management, corporate culture, and the treatment of customers. Corporate responses around these issues can potentially have lasting impacts for all company stakeholders. For investors that are ESG literate, it’s no news that workforce management, employee satisfaction and corporate culture have a long-term impact on productivity, share price performance and returns. Similarly, that companies’ treatment of customers is an important driver of brand equity and improved customer relationships over time. How management teams respond in this time of crisis will be telling for their long-term profitability. Aside from management practices, the COVID-19 crisis also exposes the underlying business model, specifically what goods and services the company provide. As we are collectively finding out, essential services means something very specific. It redefines what we can and can’t do without, and what we are prepared to pay for. Business models that solve for food security, connectivity, online education, entertainment, sustainable mobility, finance, water, energy, sewage, waste, healthcare, etc have prospects for growth.

Those investment teams with deeply integrated ESG processes will no doubt be attuned to these issues. They will have a view of which business models and management teams are therefore

best placed to retain value through the cycle.

COVID-19 has been indiscriminate in whom it infects, and doing so it has become everyone’s problem. Those with the best chance of fighting it are doing so collaboratively across a broad range of stakeholders. The COVID-19 crisis reminds us of the power of working proactively with all stakeholders to achieve shared value outcomes.

LESSON 3 – UNDERSTANDING THE SCIENCE As a consequence of its focus on ESG issues, the field of Responsible Investing relies on much scientific data to make the business case for sustainability. Most asset managers with a focus of RI will thus have a clear understanding of the science behind climate change and the attendant risks and opportunities. Notwithstanding this, in the current age of populist politics, the role of science has increasingly taken a back seat.

Despite being one of the most scientifically peer reviewed publications produced by humanity, the Intergovernmental Panel on Climate Change assessment reports failed to inspire political leadership. Although the COVID-19 crisis is more near term compared to climate change, it is instructive to see how rapidly political leaders, despite their differing views, have fallen in line with prevailing medical and scientific consensus.


19

The lesson of COVID-19 is – don’t forget the science. Importantly, asset managers with these specialist skills will be well placed to look ahead.

As tough as the lessons from the COVID-19 crisis are, we expect that they will strengthen RI as an approach to investments.

ESG IS NOT JUST A NICE-TO-HAVE BUT IT IS ALSO GOOD TO HAVEOld Mutual Investment Group has long maintained that analysis of ESG issues can, and does, drive long-term investment performance. It not just a nice-to-have, it is a good-to-have. We see sustainability as a macro thematic trend that is fundamentally reshaping the competitive landscape across all sectors. Companies that respond to this trend early enjoy stronger social licence to operate, lower staff turnover, better resource efficiency, lower cost of capital, better innovation and stronger access to market.

As a group, we have invested in building out our product offering to capture this theme through a series of ESG indices. These funds have attracted inflows in a manner that is consistent with the growing global trend. Sustainable investing has grown exponentially in the past five years. For example in the US, the net flows into sustainable funds reached US$20.6 billion in 2019, more than four times the previous annual record that was set in 2018.

Like all funds, sustainable equity funds suffered large and sudden losses of value in the first quarter of 2020 due to the

FIGURE 1 SUSTAINABLE EQUITY FUNDSQ1 2020 Return Rank % by Morningstar Category Quartile

FIGURE 2 AN ESG OVERLAY CAN PROVIDE ‘SAFER’ EM EXPOSURE

0

Top

Bottom

Quartile

2nd

3rd

10 20 30 40

44

26

19

11

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

-5.35%

45.13%

MSCI EM ESG 3.02%

MSCI EM -0.44%

Tracking Error 3.45%

Since Inception Returns (Annualised)

Source: Morningstar Direct. Data as of 3/31/2020. Note: Oldest shareclass used for mutual funds. N=206

Source: MSCI (Net Total Returns as at March 2020)

global coronavirus pandemic. However, Morningstar reports that sustainable investment funds held up better than conventional funds during this period. They report that seven out of 10 sustainable equity funds finished in the top halves of their Morningstar categories, and 24 of 26 environmental, social and governance-tilted index funds outperformed their closest conventional counterparts.

This is also evidenced by the MSCI ESG index tracker funds that Old

Mutual offers, which have shown resilient performance over the past quarter. Figure 2 shows the cumulative returns of the MSCI Emerging Market ESG Index to the end of March 2020.

An additional point to consider in the “good to have” bucket is that ESG fund flows remain intact. Research from Band of America Securities indicates that while there has been record ETF selling over the last few weeks (Chart 1), ESG funds have seen inflows for ten straight weeks (Chart 2).


20

Even after the market sell-off, ESG ETF assets under management (AUM) are still up nearly 5% year to date, while S&P 500 ETFs have seen AUM decline by over 30%. In Europe, ESG funds have seen persistent inflows including recent weeks, even amid EU stock

outflows.

PERUSING GREEN GROWTH As society seeks to rebuild in a

post-COVID-19 world, we expect

the idea of green growth to

continue to gain traction. The

notion of green growth emerged

after the last financial crisis

and envisages an alternative

growth path guided by climate

awareness, resource efficiency

and social inclusion. At a global

level, green growth features

in national growth strategies

and the EU is putting in place

legislation to drive and incentivise

CHART 1: RECORD ETF SELLING…BofA Securities clients’ rolling 4-wk ETF flows ($mn, Jan 2008-3/20/2020)

CHART 2: …EXCEPT IN ESG FUNDSWeekly and rolling 12-wk flows into ESG funds ($mn, 1/2014-3/18/2020)

(3 000)

(1 500)

0

1 500

3 000

08 09 10 11 12 13 14 15 16 17 18 19 20

-1 500

0

1 500

3 000

4 500

6 000

-1 000

0

1 000

2 000

3 000

4 000

14 15 16 17 18 19 20

12-WK ROLLING FLOWS WEEKLY FLOWS

Source: BofA Securities, BofA Global Research Sources: BofA US Equity & Quant Strategy, SimFund


21


these kinds of outcomes. At the local level, work is being undertaken to develop a green economy taxonomy for South Africa as a basis for supporting our growth agenda. As the South African government struggles with an increasing debt burden, we can expect a resurgence of the prescribed assets debate and increasing pressure for all actors in the financial markets to align with green economy outcomes.

Old Mutual Investment Group has specialist green economy investment capabilities, managing some R131 billion of client assets in the green economy. It is important to note that given the structure of the South African economy, accessing green growth assets has required that investors look to unlisted markets via Private Equity and Infrastructure type funds. Accessing these investments has traditionally been the domain of institutional investment funds.

Green growth is not only a scientifically bounded economic idea but is also a set of globally consistent consumer preferences, as more and more consumers align with the sustainability agenda. Doing more with less has always been a good idea, as has caring for the environment along with being a good neighbour. As such, we expect demand for “green” assets to grow beyond the institutional market to the retail market as well. Asset managers that have green growth capabilities and assets, will have an advantage over their peers as the world seeks to re-normalise in a post-COVID-19 environment.

WHAT NEXT? It is not clear what’s next. The COVID-19 pandemic is unprecedented in modern times. There is much we don’t know about how this will play out. However, what we do know is that the world will be much changed. Our sense of interconnectivity will

be enhanced, we’ll have learnt that it’s not just returns that matter, and that businesses that focused on long-term outcomes will be remembered. Sustainable investing is about delivering competitive financial returns by leveraging ESG insights. It is also about shifting the global economy to a path that is low carbon, resource efficient and socially inclusive. Now, in the midst of this crisis, is the perfect moment for all actors in the financial services sector, whether they be advisers, consultants, asset owners or asset managers, to realign their understanding of RI and ESG issues. It is critical that decision-makers should be clear on how ESG issues affect long-term risk and returns, and additionally how the growing trend towards sustainable investing impacts the ability to attract and retain client capital.

22

RENEWABLE ENERGY

VUYO NTOI | INVESTMENT DIRECTOR, AFRICAN INFRASTRUCTURE INVESTMENT MANAGERS (AIIM)

IMPACTFUL RENEWABLE ENERGY INVESTMENTS ARE USEFUL PORTFOLIO DIVERSIFIERS

ABOUT THE AUTHORVuyo is the co-portfolio manager of the IDEAS Managed Fund, which invests in infrastructure and development assets in the SADC region. In this role, he is primarily responsible for the post-acquisition management of the fund’s more than 30 investments.

The covid-19 pandemic and the resulting social and market turmoil have brought renewed attention to the need for portfolio diversification. Unlisted renewable energy investments are a unique diversification tool that can also have positive societal and environmental benefits.

It is common cause that diversified investment portfolios deliver superior risk-adjusted returns. There is also a growing acceptance that unlisted infrastructure investments offer uncorrelated, income-driven returns with built in inflation protection. Unlisted investments in renewable energy – a subset of the unlisted infrastructure sector – are in the unique position to offer a combination

• RENEWABLE ENERGY – A SUBSET OF THE UNLISTED INFRASTRUCTURE SECTOR – OFFERS A COMBINATION OF DIVERSIFICATION BENEFITS, WHILST CREATING A POSITIVE IMPACT ON SOCIETY AND THE ENVIRONMENT.

• THE IDEAS MANAGED FUND AS WELL AS ITS RENEWABLE ENERGY SUB-FUND HAS BEEN A KEY PARTICIPANT IN THE RENEWABLE ENERGY INDEPENDENT PRODUCERS PROGRAMME SINCE THE FIRST BID ROUND, AND IS ONE OF THE LARGEST HOLDERS OF PROJECT EQUITY IN THE PROGRAMME.

KEYTAKEOUTS

of diversification benefits, whilst creating a positive impact on society and the environment.

THE CASE FOR UNLISTED INFRASTRUCTURE Unlisted infrastructure has special characteristics that make it attractive to investors. These include: (1) the benefits of diversification due to low correlation with traditional listed asset classes, as it is not traded on exchanges and valuations are not subject to daily price fluctuations; (2) reliable cash flows, typically underpinned by long-term contracts; (3) high barriers to entry, due to the scale of investment required; (4) inflation protection is usually structured into the revenue arrangements of projects; and (5) attractive risk-adjusted returns, with the opportunity to invest across the risk spectrum, from regulated

23

RENEWABLE ENERGY

utilities to assets with greater

exposure to macroeconomic

cycles.

In addition, it is possible to gear

projects significantly due to their

consistent revenues and stable

costs. As a result, equity investors

in projects can boost their returns

by introducing cheaper debt

capital into the projects’ capital

structures. Leverage is then

introduced on a basis where there

is no recourse to the shareholders

beyond their invested capital,

which is called project finance.

RENEWABLE ENERGY TICKS ALL THE INFRASTRUCTURE BOXES Renewable energy, as a subset of unlisted infrastructure, is gaining traction as a credible portfolio diversifier, with significant pension capital entering the market. Renewable energy projects focus on the generation of power from sources such as wind (onshore and offshore), solar, biomass and hydropower, amongst others. Solar and wind energy projects are where the

bulk of investment interest from private investors has been focused. Hydropower projects tend to be challenging due to their large scale, as well as the environmental and social dislocation that can be caused by dams being built on major waterways. Renewable energy investments in wind and solar power tend to be smaller and the projects relatively quick to construct, when compared to other infrastructure projects. They have in some instances been referred to as “infrastructure-lite”.

24

RENEWABLE ENERGY

They do, nonetheless, provide the

same investment characteristics

as other unlisted infrastructure

investments.

Renewable energy investment in

South Africa kicked off in earnest

in 2011, when the Department

of Energy sought bids from

the private sector for the

development of renewable energy

projects to supply power into the

national grid. The Renewable

Energy Independent Producers

Programme (REIPPP) has been

a great success to date, with

102 projects procured from four

bidding rounds and over R200

billion invested. Over the four

rounds, wind power bid prices

have fallen from 151c/kWh to 68c/

kWh, while solar photovoltaic

prices have decreased from 329c/

kWh to 82c/kWh. The significantly

lower pricing is now at a level that

is lower than Eskom’s customer

tariff, and is also cheaper than

the all-in cost of Eskom’s most

recently constructed coal power

stations.

THE IDEAS FUND GENERATING SOCIETAL BENEFITSThe IDEAS Managed fund, as well

as its renewable energy sub-fund,

has been a key participant in the

REIPPP since the first bid round,

and is one of the largest holders of

project equity in the Programme.

The funds have collectively

invested over R7 billion in

26 projects, consisting of 15 utility-

scale solar photovoltaic plants, 10

wind power plants and a hydro

plant. In addition, the funds have

an interest in a rooftop solar

development platform company

and are piloting a distributed

power model for informal

settlements. The renewable

energy projects in the portfolio

collectively generated 3,151 GWh

of clean power in 2019, equivalent

to the power requirement of

one million households. In

addition, the funds’ renewable

energy portfolio helped to offset

approximately 3 million tons

of carbon dioxide (CO2) in 2019,

equating to taking around

650 000 cars (5% of SA’s traffic) off

the road.

REVENUE RESILIENCE IN RENEWABLE PROJECTS South Africa has been suffering

from significant power shortfalls

since 2014, owing to the

accelerated decline of Eskom’s

coal-fired power station fleet,

and poor performance and cost

overruns from its most recent

additions. The presence of the

renewable energy independent

power producers has been a

significant mitigator to the

blackouts that have affected

the economy, by significantly

reducing the intensity of the

power cuts.

During the current period of

market turmoil, we have seen

significant resilience from

the funds’ renewable energy

investments. The resilience is

borne out of the contractual

structure upon which the projects

are based, which is a take-and-

pay structure, where the offtaker

is obliged to accept and pay

for all the power generated by

the projects. The revenues are

guaranteed by Government.

Furthermore, during the national

lockdown which began in South

Africa on 27 March 2020, the

plants were classified as essential

services, allowing operations

to continue and for electricity

and revenue to be generated,

notwithstanding some limited

curtailment to balance the power

grid. Most companies listed on

the stock exchange would have

had to significantly curtail their

operations during the period.

The recent Integrated Resource

Plan 2019, which is South Africa’s

energy road map, incorporates

an additional 20,000MW of

solar and wind generation

before 2030. This allocation is

likely to be delivered primarily

through independent power

producers. There is therefore a

significant opportunity to invest

in renewables over the next

decade, and take advantage of

the diversification power, while

effecting positive change.

25

UNEARTHING QUALITY INFORMATION WITH ARTIFICIAL INTELLIGENCE HYWEL GEORGE | DIRECTOR OF INVESTMENTS

ABOUT THE AUTHORAs Director of Investments, Hywel George, oversees Old Mutual Investment Group’s specialist boutiques and the delivery of investment outcomes.

ARTIFICIAL INTELLIGENCE

• AT OMIG, WE ARE ENCOURAGING INVESTMENT PROFESSIONALS TO ACTIVELY WORK WITH MACHINES, TO BE MORE INNOVATIVE, SAVE TIME AND TO BETTER UNDERSTAND CLIENT NEEDS.

• AN OPTIMAL SOLUTION LIES IN THE RESOURCES AVAILABLE – HUMANS PLUS AI – IN EXTRACTING QUALITY INFORMATION FROM RAW DATA.

• THE THEORY OF MIND AI IS THE NEXT LEVEL OF AI SYSTEMS FOR INNOVATION THAT THE ASSET MANAGEMENT INDUSTRY CAN APPLY.

KEYTAKEOUTS

26


The rise of artificial intelligence

(AI) has the potential to be

one of the most significant

developments in human history.

Today’s machines are already

getting better at interpreting

data, recognising patterns, and

finding more efficient ways to

carry out tasks. And leading tech

companies are hard at work on

new breakthroughs that could

dwarf what’s been accomplished

so far. AI involves the use of

algorithms that guide machine

behaviour to solve problems in a

way that is smart or humanlike.

Within the broader category

of AI, there are also a range

of specialised sub-categories,

namely machine learning, neural

networks and deep learning.

This begs the question, how big

is the opportunity? While there’s

no universally standardised

means of measuring the value

of the AI market or its potential,

there are estimates that

suggest significant value will be

created directly and indirectly

with the technology. A report

from PricewaterhouseCoopers

(PwC) estimates that artificial

intelligence technology will

lead to improvements in labour

productivity, product value, and

consumption that go on to create

US$15.7 trillion in global annual

gross domestic product (GDP)

by 2030. There is no shortage of

businesses that stand to benefit

from the advancement of AI

technology. However, developing

AI technology is capital and

resource intensive, and the

evolution of advanced deep-

learning systems hinges on access

to large amounts of clean data.

Nearly all industries are analysing

the potential of artificial

intelligence and machine

learning, with many seeking to

identify AI experts to help lead the

way. At Old Mutual Investment

Group (OMIG) we have been busy

evaluating and implementing AI

within our investment business

over the past two years.

AI SOLUTIONS AND INVESTMENT PROFESSIONALS AT OMIGWhat we do as investment

professionals is constantly

rearrange and interrogate data

in order to find actionable and

profitable insights on behalf

of our clients. Even though

machine-based learning is often

associated with quantitative

managers, it has become a big

part of investing for fundamental

active managers as well. It is a

competitive advantage where

managers and analysts could not

possibly pay optimal attention to

all the news that would impact

their decision-making about a

share. Machines free up time

for investment professionals to

understand the bigger picture

and those profitable insights

we are looking for, and thereby

drawing deeper insights.

Many investment houses are now

exploring and implementing

AI technologies, investigating a

variety of digital services to extract

insights from raw data. Billions

of images and documents are

now available online for training

computers to spot patterns.

Advances in graphical processing

units make it easier to sift through

vast data sets quickly and

accurately.

AI is sometimes seen as a threat.

However, it’s a disruptor that

pushes us to do things better

and more efficiently. Investment

professionals whose jobs are

said will be replaced by AI, need

not fear, in my view. Their jobs

will not disappear but evolve

for those who embrace the

change by training for future skill

sets. At OMIG, we are actively

working with machines, freeing

investment professionals up to be

more innovative and have more

time to clearly understand client

needs.

WILL AI REPLACE HUMAN CAPITAL ALTOGETHER?The answer is not as simple as

people sometimes think. While

many types of AI are being

researched, the Theory of Mind

AI is the next level of AI systems

for innovation that the asset

management industry can apply.

A theory of mind level AI will be

able to better understand the

entities it’s interacting with by

discerning needs, emotions,

27


beliefs and thought processes.

While artificial emotional

intelligence is already a budding

industry and an area of interest

for leading AI researchers,

achieving theory of mind level

of AI will require development in

other branches of AI as well. This

is because to truly understand

human needs, AI machines will

have to perceive humans as

individuals whose minds can

be shaped by multiple factors,

essentially “understanding”

humans.

Considering investment research

– a field that requires both expert

comprehension from humans

from a variety of data sources, as

well as quantitative analysis and

risk management techniques

to execute comprehensive fund

strategies – this is a field primed

to capitalise on AI technology. The

answer would lie in an optimal

utilisation of the resources

available – humans plus AI – in

extracting quality information

from raw data.

UNEARTHING QUALITY INFORMATION FROM RAW DATA A quantitative investor has

access to real-time information,

but organised data is not always

readily available, and it needs to be

analysed for intelligent tradeable

ideas. The availability of new data

sets, methods of analysis and more

sophisticated computing has led

to the growth in big data and the

growth in machine learning.

The changes to the investment

landscape will be profound. Big

data can give an edge to quant

managers who are willing to

adapt and learn about new data

and analysis methods. Machines

can help quickly analyse news

feeds, tweets; process earnings

statements and websites; and

trade on these instantaneously.

Big data and machine-learning

strategies are already eroding

some of the advantage of

fundamental analysts, equity

long-short managers and

macro investors, and systematic

strategies will increasingly adopt

machine-learning tools and

methods.

28

DY % P/E Ratio 1 Month %* 12 Months %*FTSE/JSE All Share Index 4.8 12.6 -12.1 -18.4FTSE/JSE Resources Index 5.8 9.9 -12.4 -18.5FTSE/JSE Industrial Index 5.5 8.2 -3.1 -7.2FTSE/JSE Financial Index 9.3 8.0 -29.4 -38.8FTSE/JSE SA Quoted Property Index 19.1 5.2 -36.6 -47.9ALBI BEASSA Bond Index -9.7 -3.0STeFI Money Market Index 0.6 7.2MSCI World Index (R) -1.4 11.6MSCI World Index ($) -13.2 -9.9

Economic Indicators Latest Data Previous YearExchange Rates Rand/US$ March-20 17.85 14.49 Rand/UK Pound March-20 22.15 18.90 Rand/Euro March-20 19.71 16.26 Rand/Aus$ March-20 10.97 10.28 Commodity Prices Gold Price ($) March-20 1615.3 1291.9 Gold Price (R) March-20 28723.6 18772.0 Oil Price ($) March-20 26.4 67.6Interest Rates Prime Overdraft March-20 8.8% 10.3% 3-Month NCD Rate March-20 6.1% 7.1% R186 Long-bond Yield March-20 9.9% 8.6%Inflation CPI (y-o-y) February-20 4.6% 4.1%Real Economy GDP Growth (y-o-y) December-19 -0.6% 0.2%

HCE Growth (y-o-y) December-19 0.8% 1.2% Household Consumption Expenditure (HCE) Growth (y-o-y) December-19 -1.2% -4.1% Gross Fixed Capital Formation (GFCF) Growth (y-o-y) January-20 -2.1% 0.5% Manufacturing Production (y-o-y) (seasonally adjusted)Balance of Payments Trade Balance (cumulative 12-month) February-20 $14.2 $3.9 Current Account (% of GDP) December-19 -1.3% -2.2% Forex Reserves (incl. gold) February-20 $850.5 $709.5

MARKET INDICATORS

Sources: JSE, Iris, I-Net

AS AT 31 MARCH 2020

DISCLAIMER: The content of this document does not constitute advice as defined in FAIS.The following entities are licensed Financial Services Providers (FSPs) within the Old Mutual Investment Group, approved by the Financial Sector Conduct Authority (www.fsca.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS). These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are members of the Old Mutual Investment Group:• Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No 604• Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No 45255• Futuregrowth Asset Management (Pty) Ltd (Futuregrowth) (Reg No 1996/18222/07), FSP No 520• Old Mutual Customised Solutions (Pty) Ltd (Reg No 2000/028675/07), FSP No 721• African Infrastructure Investment Managers (Pty) Ltd (Reg No 2000/001435/07), FSP No 4307• Marriott Asset Management (Pty) Ltd (Reg No 1987/03316/07), FSP No 592.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. The investment portfolios may be market-linked or policy based. Investors’ rights and obligations are set out in the relevant contracts. Unlisted investments have short-term to long-term liquidity risks and there are no guarantees on the investment capital nor on performance. It should be noted that investments within the fund may not be readily marketable. It may therefore be difficult for an investor to withdraw from the fund or to obtain reliable information about its value and the extent of the risks to which it is exposed. The value of the investment may fluctuate as the values of the underlying investments change. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Ltd, who may elect to exercise any votes on these underlying assets independently of the 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. Disclosures: 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 the Old Mutual Investment Group are remunerated with salaries and standard incentives. Unless disclosed to the client, no commission or incentives are paid by the Old Mutual Investment Group to any persons other than its representatives. All inter-group transactions are done on an arm’s length basis. We outsource investment administration of our local funds to Curo Fund Services (Pty) Ltd, 35% of which is owned by Old Mutual Investment Group Holdings (Pty) Ltd.Disclaimer: The contents of this document and, to the extent applicable, the comments by presenters do not constitute advice and are provided to you at your request. Although due care has been taken in compiling this document, the Old Mutual Investment Group does not warrant the accuracy of the information contained herein and therefore does not accept any liability in respect of any loss you may suffer as a result of your reliance thereon. The processes, policies and business practices described may change from time to time and the Old Mutual Investment Group specifically excludes any obligation to communicate such changes to the recipient of this document. This document is not an advertisement and it is not intended for general public distribution. The information herein does not constitute an offer to sell or a solicitation of an offer to buy any securities or use any of the Old Mutual Investment Group’s services, in particular where such an offer or invitation is not lawful, nor has it been prepared in connection with any such offer or invitation. Old Mutual Unit Trust Managers (RF) (Pty) Ltd is a registered manager in terms of the Collective Investment Schemes Control Act 45 of 2002. The fund fees and costs that we charge for managing your investment are set out in the relevant fund's Minimum Disclosure Document (MDD) or table of fees and charges, both available on our public website, or from our contact centre. Old Mutual is a member of the Association for Savings & Investment South Africa (ASISA).The Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information, please visit www.oldmutualinvest.comOld Mutual Investment Group (Pty) Ltd. Physical address: Mutualpark, Jan Smuts Drive, Pinelands 7405. Telephone number: +27 21 509 5022

* Total return index percentage change.

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