Fixed income and cash investing were to be discussed. The agenda included introductions to fixed income markets and cash investing, as well as broad asset allocations. Fixed income includes government, agency, corporate and municipal bonds. Cash investing provides capital preservation but returns are typically lower than inflation over time. Relative valuations of fixed income versus equities were to also be reviewed.

1. Agenda
Fixed Income and Cash Investing
Introduction
Fixed Income Markets
Cash Investing
Broad Asset Allocations

2. Introduction

3. Fixed Income - Introduction
• An issuing authority (Government – Agency – Corporate – Municipality) issues a Bond
(aka Gilt) where they promise to pay a certain % interest rate (mostly fixed) every six
months for a certain number of years (duration) and the capital at the end of the period.
There are also Inflation Linked Bonds and the so called zero coupon bonds.
• The valuation is based on the ruling interest rates in the market, the duration of the
bond and the credit rating of the issuer
• Simplistically if 30 year interest rates are 10% and the issuer is issuing a 8% bond of
R1m over 30 years, the issuer will be able to “sell” the bond at R1m / 10 * 8 = R0.800m
• The purchased will “make” money if rates fall and “loose” money if rates rise. I.e. if you
bought at an 8% yield and rates go to 9%, your investment is worth less.
• The capital value at the end of a 30 year bond has very little value in the calculation
• This is the same for ALL duration bonds (only overdraft has no duration)
• You (normally) pay TAX on interest received
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4. Fixed Income Markets

5. Fixed Income – South African Bonds
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6. Risk assets within Fixed Income give most of Aug gains back
Source: INET
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7. Risk assets still ahead for the year, strong base effects ahead
Source: INET
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8. Market uncertain as to how risks play out
Source: Bloomberg
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9. EM local currency debt vulnerable to global risk appetite
Cumulative Foreign Bond flows per calendar year
80
2000
60 2001
2002
40
2003
2004
20
R Bn
2005
2006
0
2007
2008
-20
2009
2010
-40
2011
-60
Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Source: INET
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9

10. Fixed Income – Inflation Rate
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11. Fixed Income – Real Return on Bonds
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12. Inflation expected to breach the upper 6%
target by Q4 2011
Headline CPI (%) year-on-year
Headline CPI (% yoy)
10
9
8
7
6
5
4
3
2
1
0
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Source: I-Net, Momentum Asset Management, (August 2011)
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13. Source: StatsSA
-30
-15
-10
-25
-20
5
0
-5
20
25
10
15
Telecommunication (equip)
Hotels
Recreational equipment
Furnishings
Appliances
Vehicles
upside price risks
Postal & telecom services
Footwear
the 3% lower target band
27% of the basket is below
Personal care
Clothing
Medical products
Maintenance & repairs
Financial services
Other (funeral costs)
Owner's equivalent rent
Percentage change in CPI categories for 2011
Recreational services
Insurance
Tobacco
34% of the basket is
within the target band
Non-alcoholic beverages
Actual rentals for housing
Domestic worker wages
Alcoholic beverages
Food, fuel and administered prices remain
Restaurants
% y/y change in CPI categories for June 2011
Medical services
Public transport
Food
Tertiary education
Primary and secondary education
Water & services
the 6% upper target band
Stationery, books
39% of the basket exceeds
Private transport
Electricity and fuels
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14. Traditional valuation metrics not very effective at present
-’ve Output +’ve Output
Global gap / gap / Current
Deflation Reflation
G4 Inflation
Protected 0.50% 2.00% 0.00%
Securities
SA risk premium 2.00% 1.00% 2.43%
Inflation exp (1 yr
4.00% 6.00% 5.50%
fwd)
Supply premium /
0.50% 0.00% 0.50%
discount
Fair Value 7.00% 9.00% 8.43%
Source: Bloomberg, Momentum Asset Management
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15. Cash – An investment opportunity?
• Cash (for an individual or a tax paying entity) is actually only a good investment when
everything else is falling
• Scenario
• Real yields (i.e. above inflation) will most likely average abut 3% over time
• Inflation (optimistically) will probably average 5% over time
• Therefore cash should give you 8% BEFORE TAX
• Therefore if you are an individual at marginal tax rate – you will earn (after tax) LESS
than the inflation rate.
• You will at best stand still over time
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16. Fixed Income – USA Government Bonds
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17. Fixed Income – USA Real Return
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18. The US of AA+
US government debt as % of GDP
US government debt is near 100% of GDP.
Not AAA credit rating stuff.
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19. Barack Obama – 08 August 2011
“Markets will rise and fall, but this is the United States of America.
No matter what some agency say, we’ve always been and always will be
a AAA country.”
Source: Bloomberg
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20. Asset Allocation

21. Investment clock
Source: Momentum Asset Management
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22. Fixed Income – Relative Valuation against Equity
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