Thematic Investing

Can thematic investments deliver consistent returns?

FT Investment Management Summit, 17 September 2014 Luca Paolini , Chief Strategist, Pictet Asset Management Pictet Asset Management | For professional investors only |

Very low returns in traditional asset classes in the years ahead …

Expected annual return over the next 5 years (p.a.)

EM Asia equities EM equities JP equities EM local (GBI) Latam equities EM Corporate EM hard (EMBI) DM equities UK equities US equities EMU equities Swiss equities Eur Corp.HY

10Y US bonds Eur Corp. IG SBI JPM EMU 10Y Ger Bunds -3,0% -0,1% -1,0% -1,1% 10,2% 6,3% 5,2% 6,1% 1,3% 0,8% 0,3% 3,9% 3,5% 2,9% 2,7% 2,6% 2,5% 5 Y returns in USD, p.a.

14,0% Pictet Asset Management | For professional investors only | Source: Pictet Asset Management, as of June 2014 2

… force investors to look for sources of additional return …

TACTICAL (<6 months) STRATEGIC ASSET CLASS INVESTMENT STYLE PRODUCTS EM EM Opportunistic Valuation anomalies Market Neutral Absolute Return Smart Beta SECULAR (>5 years) EM, Alternatives Structural growth Mega and macro trends Thematic investing

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… and to overcome the traditional allocation straightjacket

Traditional Investing Thematic Investing

•

Benchmark driven

•

Market Cap constraints : focus on past winners

•

Regions easy to invest (e.g. developed)

•

Non-benchmark view : focus on future winners

•

Exposure to secular pockets of growth

•

No geographical constraints

•

No market cap constraints

•

No sector constraints : Thematic investing is a cross-sector, is looking for thematic purity

•

Broaden diversification

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From Megatrends to Investment Themes

Network Economy Demographic Development Sustainability Focus on Health Knowledge & Production Society Polarization Generics Biotech Globalization Premium Brands Commercialization Security Water Timber Immaterialization Digital Communication Democratization Agriculture Clean Energy Acceleration & Complexity Individualization Economic Growth Technology Development

Source: Copenhagen Institute for Futures Studies Pictet Asset Management | For professional investors only | 5

Premium Brands - From Megatrends to Investment Themes

Polarization

Spending is growing fastest at the two extremes of the consumer spectrum: cheap and luxury brands are thriving.

Globalization

Demand for branded goods has spread far beyond the developed world: emerging markets now account for over 40% of premium brands demand; Chinese consumers will account for almost half of global luxury goods spending by 2025.

Demographic Development

Rapid growth of the middle class in emerging-

market consumers, keen to adopt western

lifestyle standards; consumption also fuelled by both the growth and the ageing of the world’s population as over 50s will be wealthier and more leisure oriented than ever.

Immaterialization

The evolution from the traditional to “new luxury”brand, which is more diversified, creative and aspirational and targets a broader consumer base.

Premium Brands opportunity Individualization

Growing sophistication of local consumers and emergence of new heavy spender segments (empowered women, entrepreneurs, celebrities).

Pictet Asset Management | For professional investors only |

Economic Growth

Demand for luxury goods is expected to rise by c6-8% CAGR 2011-2015, boosted by the economic growth across emerging markets. Source: Copenhagen Institute for Futures Studies 6

Water - From Megatrends to Investment Themes

Urbanisation

As the world’s population grows, so too will the number of and size of its urban areas.

Currently, just under half of the world’s population lives in cities; by 2030, the UN predicts that 53% of us will be living in cities – that’s close to 4 billion people

Focus on Health

Poor water quality as a result of lack of sanitation infrastructure and waste water treatment facility is a major health threat to humans

Sustainability

Of the world’s total water supply, only 3% is fresh water. And of that 3%, only a quarter is useable – or unpolluted – water.

The supply could be further reduced by changes in the world’s climate. Shifts in rainfall patterns, the steady disappearance of glaciers and changing river flows will each have a negative effect on the availability of fresh water, the UN says.

Water Opportunity Commercialization

The process of increasing the efficiency of a sector by transforming it into a commercial business. For Water this megatrend is referring to the team up of private companies and public bodies (called Public private partnerships) to provide water services to households and businesses. Pictet Asset Management | For professional investors only |

Economic Growth

Demand for water is expected to rise by over 50% as population growth increases water use among farmers, industry and households. In the period 2000 to 2050, consumption of water among both farmers and municipalities is expected to have risen threefold; in industry water use is set to double. Water availability is a necessary condition for economic growth.

Source: Copenhagen Institute for Futures Studies 7

Performance of Investment Themes

Performance of MSCI World Versus Pictet Theme Strategies since September 2009 (in USD, gross of fees)

250.00

200.00

150.00

100.00

50.00

0.00

09.2009

GMS Timber 09.2010

Clean Energy Water 09.2011

Biotech Generics Digicom 09.2012

Premium Brands Security 09.2013

Agriculture Index MSCI World Pictet Asset Management | For professional investors only | Source: Pictet, as of September 8 th , 2014, in USD, gross of fees 8

Benefits from including themes in a portfolio

Individual risk / return profiles compared to MSCI World since inceptions Volatility

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Return

Source: Pictet Asset Management, GIPS, MSCI, Bloomberg, as at 31 July 2014

9

Investment Themes in a Global Portfolio

Thematic overlay

(higher active weights in core portfolio)

Core-satellite approach (thematic baskets)

•

Variable weights – themes and sub themes

•

Fixed weights

Multi-asset

thematics (equities, fixed income, alternatives) • • • • • • •

Advantages

Simple No change in portfolio construction Longer investment horizon Stronger focus Reduced biases Bigger pool of available securities More refined risk/return profile • •

Constraints

Unwanted biases Inconsistency of investment horizon • • Requires thorough knowledge of themes Requires dedicated teams • • Complexity Requires sophisticated asset allocation capabilities Pictet Asset Management | For professional investors only | 10

Check list for theme assessment

Liquidity & Thematic purity Criteria

Pure and liquid portfolio

Diversification Expected outcome Materiality

Low overlap with traditional indices Robust & attractive risk return profile Measurable thematic drivers with material impact on value drivers Pictet Asset Management | For professional investors only |

Definition

Feasible investment portfolio with assets > USD bn 1 @ thematic purity > 20% where 50% of the assets can be liquidated in five trading days @ 20% of average trading volumes Overlap with MSCI World < 20% Expected risk return profile beats MSCI World (Sharpe ratio) Theme withstands stress test through different scenarios Materially accretive and measureable megatrend related impact to value drivers (growth, margins, risk premium) 11

Investment Themes in a Global Portfolio – Passive or Active?

› Megatrends known but … › Megatrends are not per se value-creating (e.g. democratization) › Long investment horizon = low turnover = low transaction costs › Exposure to themes (“Thematic Purity”) and shifts between sub-themes are key › Megatrends often implies disruptive technologies: pick winners and losers (e.g

Apple vs. Nokia)

… Active portfolio management is required!

Pictet Asset Management | For professional investors only | 12

Evolution of portfolio – Clean Energy

Thematic breakdown by fund 57% 20% 18% 31.12.2007

9% 27% 46% 52% 68% 36% 23% 19% 17% 25% 29% 12% 31.12.2008

31.12.2009

Energy Efficiency 31.12.2010

Low Carbon (incl. Natural gas) 35% 31.12.2011

Renewables 32% 57% Cash 31.12.2012

Pictet Asset Management | For professional investors only |

11% 24% 64% 31.12.2013

Source: Pictet Asset Management 13

Conclusions

›

Intersection of megatrends define thematic investment strategies

›

Exposure to a scarce resource: secular growth

›

Thematic investing improves risk/return profile

›

Core-satellite approach preferred

›

Active management required: shifts between themes and identification of thematic purity

Pictet Asset Management | For professional investors only | 14

Biography

Luca Paolini Chief Strategist Strategy team Luca Paolini joined Pictet Asset Management in 2012 as Chief Strategist. Before joining Pictet, Luca worked as an Equity Strategist at Credit Suisse Securities, responsible for asset, regional and sector allocation. From 2005 to 2007, he was Investment Strategist at Union Investment. Luca started his career in 2001 at Allianz Dresdner Asset Management as a trainee then assistant vice president, covering asset allocation and investment strategy.

Luca holds a Master degree in International Economics and Management from SDA Bocconi School of Management in Milan, and a Laurea Magistrale in Political Sciences from the University of Bologna.

Pictet Asset Management | For professional investors only | 15

For more information, please contact

Pictet Asset Management

www.pictet.com

www.pictetfunds.com

This marketing material is issued by Pictet Funds (Europe) S.A. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on www.pictetfunds.com or at Pictet Funds (Europe) S.A., 15, avenue J. F. Kennedy L-1855 Luxembourg.

The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Funds (Europe) S.A. has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.

The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.

Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.

Pictet Asset Management | For professional investors only | 16

APPENDICES

Pictet Asset Management | For professional investors only |

The Development of Thematic Investing at Pictet Asset Management

Leading thematic investor with over USD 20bn in assets under management

Pictet-Biotech

The world’s first biotech-focused fund Repositioned

Pictet Telecom Pictet-Global Megatrend Selection

Exposure to all of our thematic equity strategies

Pictet-Timber

Investments span across the full timber value chain, a scarcely researched resource of major relevance for the world

Pictet-Digital Communication

Interactivity as a key driver in communication, explores opportunities of the digital world for business and individuals

2008 2007 2009

Repositioned

Pictet-Leisure 1998 Pictet-Water

The first fund to invest in the value chain of the world’s most critical resource, Water

2000 Pictet-Premium Brands

Focuses on the strong consumption trend of luxury and aspirational goods and services

2005 2004 Pictet-Generics

A pioneering fund focusing on low cost drug makers

2006 Pictet Security

Invests in companies in the physical and IT security business (excludes weapons and nuclear energy)

2010 Pictet-Env. Megatrend Selection

- Strategic exposure to Water, Clean Energy, Timber & Agriculture

Pictet-Agriculture

Focuses on the world’s food value chain

Pictet-Clean Energy

Invests in the global energy transition, favoring carbon-free or low-carbon energy sources and energy efficiency

1997 1995

Source: Pictet Asset Management, (includes AUM from Japanese utility funds, but excludes thematic mandates) Pictet Asset Management | For professional investors only | 18

Decision parameter: Risk return profiles

Fund Start date

Biotech Water Generics Premium Brands Security Clean Energy Digicom Timber Agriculture Nov-95 Jan-00 Jun-04 Jun-05 Jan-06 May-07 Jun-08 Nov-08 Jun-09

Annualised return Volatility Fund MSCI Fund MSCI

14.53

9.5

10.69

10.36

8.91

-0.07

13.51

14.58

12.7

6.63

3.7

7.08

6.77

4.54

3.34

6.25

14.42

12.61

29.42

15.62

16.77

22.18

16.84

25.91

18.14

25.16

17.96

15.6

16.01

15.9

16.47

17.6

18.18

18.78

16.53

14.53

Pictet Asset Management | For professional investors only |

rf

1.9

1.6

1.5

1.5

3.7

3.1

2.6

2.5

2.1

Sharpe ratio Fund MSCI

0.49

0.61

0.63

0.46

0.53

0 0.74

0.57

0.7

0.19

0.04

0.28

0.26

0.14

0.08

0.25

0.78

0.77

Source: Pictet, as of September 8 th , 2014, in USD 19

Themes sales exposure

No Geographical constraints Funds Europe Premium Brands Security Digital Communication Clean energy Agriculture Timber Water Biotech Generics

30% 25% 15% 14% 17% 15% 32% 24% 10% Pictet Asset Management | For professional investors only |

North America Emerging Markets

30% 48% 60% 52% 43% 50% 38% 65% 40% 40% 15% 20% 34% 30% 30% 26% 8% 40%

RoW*

0% 8% 5% 0% 10% 5% 3% 3% 10%

Source: PAM, May 2014, * mainly Japan

20