Transcript Slide 1

Back to basics for multi-managers
- How can they get back in touch with advisors and
their clients?
Jonathan Ramsay - March 2011
About van Eyk
• van Eyk commenced operation in 1989
• We have over 20 years experience providing quality investment
research to financial advisers and investment professionals
• van Eyk has grown to be one of Australia’s most influential
providers of investment research
• Our areas of specialty include:
– Investment research
– Asset consulting
– Investment management
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What do you expect from your multi-manager?
• A diversified portfolio of investments that gives investors
exposure to a wide range of asset classes and investment
strate gies while maximising the trade-off between expected
risk and return?
Or
• An expensive index fund?
Advisors are absolutely right to question what they are getting
from fund of funds and need to understand the underlying risks
and sources of value in order to be able to communicate this to
clients. This is a good time to be thinking about these issues.
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Agenda
• What should you expect from a multi-manager solution?
• Forming risk and return expectations and communicating
them to clients
• The multi-manager’s role within a client portfolio
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Fundamentally, what makes a multi-manager different?
• Manager selection
• Diversification
– Many asset classes
– Esoteric asset classes
• Active asset allocation
• Communication
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Different approaches to managing a multi-manager portfolio
Traditional asset
class premiums
Manager
selection
Passive
Balanced
Outsourced
Retail
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Active
Retail
Industry
Funds
Implemented
Consultant
‘New age’
balanced
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Illiquid/alternati
ve return
premiums
Active asset
allocation
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Asset allocation starts with classification
“Knowledge ends where miscellany starts”
David Weinberger (and Aristotle)
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However, the Aristotlian view is getting a bit messy
8
Turns out classifying things is also a good way to create bubbles
Convertible arbitrage funds – 1998-2008
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So how else can we communicate product attributes?
• Valuation? Eg S&P 500 yield vs realised returns annual?
60%
50%
Current
Dividends
+GDP
S&P 500 – 12
month price
return
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
• It’s a mess!
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Forecasting equity risk/return is actually pretty easy
S&P 500 ‘expected’ and realised returns (next ten years, % pa)
20%
12 month trailing earnings
S&P 500 (following 10 years)
15%
Inflation
10%
5%
0%
-5%
1930
1940
1950
1960
1970
Bar the odd unexpected mishap.......
1980
1990
2000
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So how did we ignore the elephant in the room......?
.......pssst, he’s still there.........
20%
S&P 500 Current Earnings
10%
0%
1930
1940
1950
1960
1970
1980
1990
2000
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Some of this is behaviourial
Source:
Solomon Asch,
Opinions and
Social Pressure
(1955)
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We are all behavioural economists now - do try this at home
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And many asset classes are difficult to value
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So how have multi-managers done
- a post GFC score card
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Or in simpler terms?
Return Generated in last 5 Years
18.0%
16.0%
5 yr Return to September 2010
(%)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
Amount lost during GFC (Oct 07 – Feb 09)
0.0%
20%
25%
30%
35%
40%
45%
Maximum Drawdown (within period Sep 2005 to Sep 2010) (%)
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How did multi-managers do compared to other diversified
structures throughout the GFC?
60 month risk/return as at 31 December 2010
Growth (61-80%)
7.0
6.0
5.0
Net Return (% p.a.)
Model
portfolios
4.0
3.0
Multimanagers
Singlemanagers
2.0
1.0
0.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
Volatility (% p.a.)
van Eyk Blueprint Balanced Fund
Model Portfolios
Multi-managers
Single-managers
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So who should use a multi-manager?
• Horses for courses
– Not just size of client
– How close does the client want or need to be to the underlying?
• Models/Hybrid structures eg:
– Direct equity exposure
– Single manager allocations
– Diversified sector exposure via a multi-manager
• Alternatives
• Fixed income?
• Core/satelite?
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The challenge for multi-managers and advisors
• To lift the veil on the underlying risk/return drivers
– Use less acronyms
– Provide more useful intuitive information
– Find better ways of communicating and engaging clients
• To use multi-manager structures in a way that
– Suits the needs of individual clients
– Makes the best use of the multi-manager’s comparitive advantage
• Diversified
• Pro-active asset allocation
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Disclaimer
• This presentation is given by representatives of van Eyk
Research Pty Ltd (ABN 99 010 664 632 AFSL 237917) to
wholesale clients only (within the meaning of section 761G of
the Corporations Act 2001 (Cth)). By attending this
presentation, you are representing that you are a wholesale
client.
• This presentation has been prepared without taking account
of the investment objectives, financial situation or needs of
any individual. Before making any investment decisions,
investors should read the relevant product disclosure
statement(s) and obtain advice from an appropriate financial
adviser.
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Macro economic update and outlook
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Medium term outlook and positioning
Current
Situation/Scenario
Outcome
Current Tactical
Positioning
Developed
governments highly
indebted, quantitative
easing (QE) policies
likely to remain in
place in the near term
Little upside in
sovereign bonds
Underweight sovereign
bonds, overweight
credit
Equity valuations
appear attractive,
potential inflation
scenario due to QE
policies
Inflation scenario
supportive for equities
Overweight equities
Volatile, sideways
trending markets
Need exposure to
pockets of growth and
absolute type holdings
in portfolio
Emerging markets,
absolute return equity
products, alternatives
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Short term outlook – key themes for 2011
• Theme 1: Snow White Economics
• Theme 2: Food Price Inflation
• Theme 3: Political Risk
• Theme 4: Inflation and Bond Prices
• Theme 5: A divided Europe
• Theme 6: An Out of Work US
• Theme 7: Volatile Currencies
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Tactical Positioning
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van Eyk’s Tactical Positioning
• Overweight equities,
underweight property,
fixed interest,
alternatives and cash
• Defensively positioned
towards large
cap/developed equities
• Within fixed interest
overweight credit,
underweight sovereign
Current Positioning
10%
5%
0%
-5%
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
Relative Valuation Model
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In practice, we have been positioned relatively
defensively
Markets rise,
Blueprint
underperforms
Markets fall,
Blueprint
preserves value
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TAA – International Equities
50%
•
Local currency returns in 2010
were 10.4%.
Current Positioning
40%
30%
20%
10%
•
Projected global growth of 4% in
2011.
0%
-10%
-20%
•
-30%
Continued trend towards
internationalisation of earnings
from large brands/financials.
-40%
Large Cap
Small Cap
EM
Cash
1.5
Relative Valuation Model
1
•
Continued overweight to these
markets.
0.5
0
-0.5
-1
Large Cap
Small Cap
EM
Cash
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Summary
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What does all this mean?
– Uncertain times mean being
• responsive to client needs
• responsive to market signals
• open minded
– Product innovation
• Absolute returns
• Risk management and communication
• Multi-manager solutions that fit client requirements
– Diversified
– Integrated with model portfolios
– On SMA /UMA platforms
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A final word
•
Do you really want to be overweight fixed interest in an environment where
Central banks are pouring money into the global economy on an unprecedented
scale?
– Over $5 trillion in bailouts, quantitative easing and fiscal stimulus during and since
the GFC
– The long-term risk profile for defensive assets such as Treasuries appears negatively
skewed
– Traditional notions of ‘growth’ and ‘defensive’ are being challenged
•
We are in uncharted territory
– Fundamentals and economic theories have not been consistent with market
behaviour
– Government responses have been just as unconventional
– We need to be wary but opportunistic at the same time
– That doesn’t mean being anti-growth in the traditional sense but may point to less
dogmatic approaches to portfolio construction
– This is a good time to be managing asset allocation actively and using active
managers