Transcript ASSET PROTECTION THROUGH DIVERSIFICATION John Mayo, Chartered FCSI – Vice President 26 June 2012

ASSET PROTECTION THROUGH DIVERSIFICATION
John Mayo, Chartered FCSI – Vice President
26 June 2012
WHY INVEST IN A STOCK MARKET PORTFOLIO?

Unattractive inflation-adjusted returns on bank and building society deposit a/c’s

Very high conventional Gilt prices and income yields at extremely low levels

Commercial and Residential Property markets may fall further in the short-term

Equity markets, whilst currently experiencing exceptional volatility, are beginning to
present attractive valuations and offer potential for longer-term capital growth in
addition to income generation
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CENTRAL BANK RATES – WHAT IS PRICED IN?
Now
3 months
6 months
1 year
Bank of England
0.50%
0.50%
0.50%
0.50%
Euro Central Bank
1.00%
0.75%
0.75%
0.75%
US Federal Reserve
0.25%
0.25%
0.25%
0.25%
Source: Bloomberg, based on consensus forecasts at 15 June 2012
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EQUITIES-RELATIVE VALUATION UK GILT YIELD V DIVIDEND YIELD
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EQUITIES - EX FINANCIALS, HISTORIC PRICE TO EARNINGS
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EQUITIES - UK MARKET OUTLOOK
•
Market is pricing continued recession and
earnings contraction
•
Companies and analysts still experiencing
and expecting growth
•
Global policy support and cheap money
•
Strong balance sheets, access to funding
and Emerging Markets exposure key drivers
•
Equity valuation attractive on all but
doomsday scenario
Source: Thomson Reuters DataStream,
5 June 2012
Source:
Source:
Thomson
Thomson
Reuters
Reuters
Datastream
Datastream,
25/10/2011
11/11/2011
Earnings Growth
2011E 2012E 2013E
FTSE 100
FTSE 250
FTSE Small Cap
FTSE All Share
FTSE ex Financial
9.2%
-6.3%
-9.2%
7.4%
8.7%
Net Dividend Growth
2011E 2012E 2013E
5.2%
8.8%
26.4% 15.1%
14.2% 12.5%
7.1%
9.5%
5.9%
8.6%
16.3%
8.3%
-3.8%
15.3%
17.3%
8.3%
8.4%
0.3% 12.0%
7.4% 12.9%
7.6%
8.8%
7.4%
7.8%
Price/Earnings
Net Dividend Yield
2011E 2012E 2013E 2011E 2012E 2013E
10.2x 9.7x
14.3x 11.3x
9.9x 8.7x
10.5x 9.8x
10.6x 10.0x
8.9x
9.8x
7.7x
9.0x
9.2x
4.1%
3.3%
3.1%
4.0%
3.9%
4.4%
3.3%
3.3%
4.3%
4.2%
4.8%
3.7%
3.7%
4.7%
4.5%
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Source: Citi European Portfolio Strategist, 7 June 2012
WHAT IS DIVERSIFICATION

Diversification simply means spreading the risk of investing over a range of
investments – in other words not putting all your eggs in one basket. There are two
main advantages of this:
 minimising the impact of individual losses.
 spreading your investment.

However it is not obvious that the inclusion of certain asset classes that may on
their own be regarded as ‘risky’ can increase the level of diversification and reduce
portfolio risk.

By adding the following ‘Diversifying asset classes’ to a conventional equity and
bond portfolio we are able to reduce the overall level of risk, reduce volatility and
increase the potential returns:1. Emerging market debt
2. Global high yield bonds
3. Property
4. Commodities
5. Hedge funds
6. Private equity
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CORRELATION

Correlation refers to the way in which different investments or stocks react as a
direct result of changes in the market.

Correlation is a statistical measure of the degree to which the movements of two
different stocks, sectors, markets or asset classes are related. A positive correlation
between two investments means they tend to move up and down together. A zero
correlation means the change in the value of one investment has no impact or
bearing on the change in value of the other investment.

A portfolio which consists of several types of assets, all with a different correlation
to each other, should have lower volatility, reducing the risk of an overall fall in
portfolio returns in any one year.

Studies and mathematical models have shown that maintaining a well diversified
portfolio of 25-30 stocks should produce the most cost effective level of risk
reduction.

Modern portfolio theory says the risk in a portfolio of diversely invested stocks, if the
stocks are not truly correlated, will be less than the risk of holding just one single
stock. This is because if one stock falls in value this should be offset by another
lowly correlated stock in the portfolio rising in value.

For Example, during the first part of the credit crunch (Oct 2007 to Feb 2009) whilst
global developed world equities fell circa 43%, global high yield corporate debt
actually rose in value by 5%.

During this period of extreme risk aversion correlations between asset classes did
increase; however, diversification still provided significant benefits relative to equity
only portfolios.
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ASSET ALLOCATION/DIVERSIFICATION

Effective diversification is often achieved by acquiring assets from different market
categories. Spreading capital across different asset categories is referred to as asset
allocation – perhaps the most important determinant of long term investment
returns.

The key to diversification is finding asset classes that have low levels of correlation
with each other. The construction of portfolios by Quilter takes into account
correlation factors and as a result offer investors greater diversification across both
sectors and asset classes. This helps to reduce the risks associated with investing
and at the same time maximise potential returns.

Asset allocation & risk management strategies should be unique to each investor
and depend on many factors including:
1. Financial objectives
2. Risk tolerance
3. Time horizon
4. Portfolio value
5. Ethical parameters

It is therefore essential that portfolios are constructed on an individual bespoke
basis
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QUILTER’S INVESTMENT PROCESS

Top down….
asset allocation
geographic allocation
sector allocation
stock selection
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CORRELATION - MAJOR ASSET CLASSES V FTSE ALL SHARE
Rolling 12-month Correlation of Assets with FTSE All Share
Correlation
Correlation
Increasing
1.00
0.80
0.40
0.20
Decreasing
Negative
Positive
0.60
-0.20
-0.40
-0.60
FT All Gilts
UK Commercial Property (IPD)
HFRI Fund Weighted Composite GBP
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
Dec-97
Dec-96
Dec-95
Dec-94
Dec-93
Dec-92
Dec-91
Dec-90
-0.80
-
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Source: Quilter database, DataStream, HFR, IPD 6 September 2010. Latest data available.
DIVERSIFICATION - CONCLUSION

Diversification is very important as it reduces portfolio risk. No one knows what the
future will bring and thus a careful investment approach that reduces reliance on a
limited number of sources of return and risk is more likely to be robust through an
uncertain future.

A well diversified portfolio is likely to comprise equities, bonds, property and a range
of alternative assets. Different strategies (active and passive) within markets can
bring further risk reducing benefits.

The extent of the risk reduction can be material, possibly allowing a greater
exposure to riskier assets than when a narrow policy is adopted. The relationship
between asset classes does not remain constant and therefore a process to manage
the overall diversified portfolio is necessary for success.

If this latest period of volatility has taught investors anything it is surely that
outcomes are uncertain and therefore it is riskier than ever for investors to put all of
their eggs in one basket.
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QUILTER ESTIMATED LONG-TERM RETURNS (7 YR+ HORIZON)
4.2%
FTSE PI Balanced
4.8%
FTSE PI Growth
5.4%
UK Equities
6.0%
Overseas Equities
6.0%
Emerging Markets
6.6%
UK Property
5.0%
Hedge Funds
4.0%
Gold Bullion
2.1%
UK Private Equity
6.5%
5%
3%
2%
1%
I-L Gilts
Conv Gilts
4%
UK Cash
Estimated Return % p.a.
6%
UK Private Equity
FTSE PI Income
Gold Bullion
2.5%
Hedge Funds
I-L Gilts
7%
UK Property
2.0%
UK Equities
Conv Gilts
% p.a.
FTSE PI Growth
0.1%
FTSE PI Balanced
UK Cash
Emerging Markets
% p.a.
FTSE PI Income
Estimated Long-Term Returns
Overseas Equities
Estimated Returns as at 1 December 2011
0%
Asset Class
Notes
Estimated returns source : Quilter. These represent our estimate of long-term investment returns over a full cycle of seven years or more.
Any data shown is for illustrative purposes only. It does not and cannot constitute a projection of the future which is unknown.
Past performance is no guarantee of future performance and the value of investments and income from them can fall as well as rise.
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QUILTER ESTIMATED LONG-TERM RETURNS (7 YR+ HORIZON)
Estimated Annulaised
Return
Estimated Asset Class Return/Risk
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
0%
5%
10%
15%
20%
25%
30%
35%
Estimated Annualised Volatility
UK Cash
Conventional Gilts
Index-Linked Gilts
UK Equities
Overseas Equities
Hedge Funds
UK Private Equity
PI Balanced
UK Commercial Property
Notes
Estimated returns source: Quilter. These represent our estimate of long-term investment returns over a full cycle of seven years or more.
Any data shown is for illustrative purposes only. It does not and cannot constitute a projection of the future which is unknown.
Past performance is no guarantee of future performance and the value of investments and income from them can fall as well as rise.
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APPENDIX - AWARDS
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DISCLAIMER
This presentation has been prepared only for the recipient and date shown on the front page. It is not
intended for any other persons and should not be relied upon by other persons.
This presentation has been prepared for information purposes only and is not a solicitation or an offer
to buy or sell any security. It does not purport to be a complete description of our investment policy,
markets or any securities referred to in the material. The information on which the presentation is
based is deemed to be reliable, but we have not independently verified such information and we do not
guarantee its accuracy or completeness. All expressions of opinion are subject to change without
notice. Any reference to the Quilter model portfolio, which is used for internal purposes, is purely
illustrative and should not be relied upon. The figures quoted do not include charges.
Investors should remember that the value of investments, and the income from them, can go down as
well as up and that past performance is no guarantee of future return. You may not recover what you
invest. Changes in exchange rates may have an adverse effect on the value, price or income of foreign
currency denominated securities. Levels and bases of taxation can change. Investments or investment
services referred to may not be suitable for all recipients.
Quilter is the trading name of Quilter & Co. Limited, registered in England with number 01923571,
registered office at St Helen’s, 1 Undershaft, London EC3A 8BB. Quilter is a member of the London
Stock Exchange and authorised and regulated by the UK Financial Services Authority.
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