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Collins Stewart Select FundsUse of Alternative Investment Vehicles in Fund of Funds

Mark Piper & Justin OliverInvestment Directors

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Who we are

The use of Alternatives in Fund of Fund investing

Importance of Blending

Agenda

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London listed, independent financial services group

Assets under management and administration of £5bn

Established multi-manager and multi-asset approach

£1.1bn in discretionary Multi-manager assets

£200m in multi-manager funds (Select Funds)

Pioneers in multi-manager investing

Multi-manager fund track records since March 2000

Long standing use of alternatives, thanks to our offshore heritage

Collins Stewart

Long-standing Multi-Manager with Alternatives Expertise

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The Use of Alternatives in FoF Investing

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Historically, the Fund of Fund investment world has concentrated exclusively on:

Fund selection

Blending

…of only two asset classes

Equities

Bonds

Fund of Funds

Fund of Funds: the complete outsourced investment solution

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Historically, Alternatives not available to UK investors in regulated vehicles

Hedge Fund-like returns now available to Fund of Fund managers

IMA sector: Absolute Return

Daily liquidity

Greater transparency

Increased opportunity set

Regulated, UCITS III

An additional blending tool for managers

A new Asset Class

Fund of Funds need to keep pace with the industry

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Alternative asset classes within UCITS III scope

Total Return Bond Funds

Equity long-short Funds

Managed Futures Funds

Global Macro

Natural Resources Funds

The most sophisticated of products now available to FoF managers

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Caveat Emptor

Broadening the range of investments categories requires broader experience:

Alternatives not an homogenous asset class

Marketing hype vs. investment ability

Longevity – historic track record and survivability

Different analytical skill set required to evaluate this specialist asset class

A new level of fund analysis is required

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Not all Alternative Funds are the same

Wide range of returns available

2009 YTD difference between best and worst performing funds in IMA Absolute Return Sector = 42.17%

Know what you are buying

Some funds are relative (market) return ….not absolute return

Need to do your due diligence

0.3%

1.9%

Nov

8.9%

5.1%

Dec

-16.0%

-9.2%

Oct

2.8%

-1.6%

Aug

-18.2%

-9.8%

Sep

-11.0%

-12.1%

Jul

-2.8%

-1.4%

Jun

6.6%

3.0%

May

-28.9%

-22.9%

YTDCumulative

Enhanced Natural Resources Fund 2008

Jan

Feb

Mar

Apr

50% MCSI All Countries Materials / 50% MCSI All Countries Energy

Description

0.3%

1.9%

Nov

8.9%

5.1%

Dec

-16.0%

-9.2%

Oct

2.8%

-1.6%

Aug

-18.2%

-9.8%

Sep

-11.0%

-12.1%

Jul

-2.8%

-1.4%

Jun

6.6%

3.0%

May

-28.9%

-22.9%

YTDCumulative

Enhanced Natural Resources Fund 2008

Jan

Feb

Mar

Apr

50% MCSI All Countries Materials / 50% MCSI All Countries Energy

Description

Nov DecOctAug SepJulJun

7.1%

5.7%

May

11.3%

33.1%

YTDCumulative

8.1%7.6%0.1%8.1%Enhanced Natural Resources Fund 2009

-5.6%

Jan

-6.1%

Feb

8.9%

Mar

7.6%

Apr

50% MCSI All Countries Materials / 50% MCSI All Countries Energy

Description Nov DecOctAug SepJulJun

7.1%

5.7%

May

11.3%

33.1%

YTDCumulative

8.1%7.6%0.1%8.1%Enhanced Natural Resources Fund 2009

-5.6%

Jan

-6.1%

Feb

8.9%

Mar

7.6%

Apr

50% MCSI All Countries Materials / 50% MCSI All Countries Energy

Description

2008

2009

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Total Return Bond Funds

Manager Selection remains vitally

important

Not every fund has been a success

There is a need to know where

your manager is positioned and

fully understand the risks they are

taking

85

90

95

100

105

110

115

Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09

Fund A Euro Cash Fund B

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Track records – a good long-only manager……

80

100

120

140

160

180

200

220

Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Manager A - long only Equity market

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…..does not always make a good long-short manager

80

85

90

95

100

105

110

Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Manager A - long/short Cash

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Introducing Alternatives requires extra due diligence

Track records of UCITS III Alternative Funds are usually short or non-existent

To avoid the disasters extensive due diligence needs to be conducted

CSFM can leverage off our hedge fund expertise and manager knowledge

Implement the same operational due diligence for sophisticated Alternative Investment Funds

as we do for hedge funds

Superior due diligence processes are essential

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Where do Alternative Investment funds fit?

At the very outset, it is important to establish why any Alternative fund is being held

an asset allocation decisions

part of a blended fund exposure (i.e. fund selection)

There are advantages and drawbacks to each of underlying reason for investment

Alternatives can be used for a variety of reasons

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Importance of Asset Allocation

Source: Bloomberg based in GBP except for HFR index (USD). From 31/12/89 to 30/09/08

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Global EquitiesFixed IncomeGlobal EquitiesPropertyCommodityCommodityGlobal EquitiesGlobal EquitiesCommodityCommodityPropertyCommodityGlobal EquitiesPropertyCommodityPropertyCommodityFixed Income

Fixed IncomeCommodityPropertyGBP CashFixed IncomeHedge FundsPropertyFixed IncomeGlobal EquitiesFixed IncomeGBP CashPropertyPropertyCommodityGlobal EquitiesHedge FundsFixed IncomeCommodity

GBP CashGlobal EquitiesHedge FundsCommodityGlobal EquitiesPropertyHedge FundsPropertyHedge FundsPropertyHedge FundsFixed IncomeCommodityHedge FundsPropertyGBP CashHedge FundsGBP Cash

Hedge FundsGBP CashFixed IncomeHedge FundsHedge FundsGBP CashGBP CashGBP CashPropertyGBP CashFixed IncomeGBP CashHedge FundsGlobal EquitiesHedge FundsGlobal EquitiesGBP CashHedge Funds

PropertyHedge FundsGBP CashGlobal EquitiesGBP CashGlobal EquitiesFixed IncomeHedge FundsGBP CashHedge FundsGlobal EquitiesHedge FundsGBP CashGBP CashGBP CashFixed IncomeGlobal EquitiesProperty

CommodityPropertyCommodityFixed IncomePropertyFixed IncomeCommodityCommodityFixed IncomeGlobal EquitiesCommodityGlobal EquitiesFixed IncomeFixed IncomeFixed IncomeCommodityPropertyGlobal Equities

Best

Wor

stPe

rform

ance

GBP CashGBP Cash PropertyUK Commercial Property Hedge FundsHedge FundsFixed IncomeFixed Income Global EquitiesGlobal Equities CommodityCommodity

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Did this UK equity UCITS III fund perform well over the second half of last year?

Held as part of UK equity fund holdings?

Held to deliver positive returns/beat cash? X

Importance of portfolio construction – Where do Alternative Investment funds fit?

65

70

75

80

85

90

95

100

105

Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

UK Equity UCITS III FTSE All Share Cash

Significant Outperformance

of UK equity market but failure to deliver

positive returns during a "once in

a lifetime “shorting opportunity

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Has this UK equity Absolute Return fund done a good job since the “rally” began?

Held to deliver positive returns/beat cash?

Held as part of UK equity fund holdings? ?

Have no doubt that fund groups will be extolling the different virtues of the fund depending on the market environment!

Importance of portfolio construction – Where do Alternative Investment funds fit?

90

95

100

105

110

115

120

Feb-09 Mar-09 Apr-09 May-09

UK Equity UCITS III FTSE All Share Cash

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The Importance of Blending

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Superior risk adjusted returns

This example combines three long-only UK equity funds (all held)

within Collins Stewart Select Funds and one UK Absolute Return

fund

25% Macro-driven defensive fund

25% Rotational manager

25% Focused, bottom-up stock-picker

25% Absolute Return

The result:

Superior performance

Alpha

Sharpe Ratio

Maximum Drawdown

Why blend different funds and styles?

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The blend (taken from the earliest date

when all were running) consistently

outperformed the UK equity market

during the “bull market”

This encompassed a period where

equity returns were boosted by

significant private equity investment,

strong performance from the mining

sector and outperformance of small

and mid cap stocks (happy days!)

A strong blend can still outperform

100

110

120

130

140

150

160

170

Apr-05 Oct-05 Apr-06 Oct-06 Apr-07

UK Funds FTSE All Share

A strong blend can outperform in the good times….

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…..and when the trend changes

Small and mid cap stocks

underperformed

Private equity investment vanished

Miners and basic material stocks

were hit extremely hard

Yet still the blend still outperforms

40

50

60

70

80

90

100

110

May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09

UK Funds FTSE All Share

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Analysing Hedge Funds / Alternatives since 1996

Understand sophisticated investment structures

Understand liquidity issues

Manage a Fund of Hedge Funds

Pioneers in multi-manager, multi-asset investing

Long standing use of Alternatives in client portfolios

Multi-manager investing at the core of our business

£1.1billion AUM via multi-manager approach

£200m in Select Funds

Restructured existing funds to make available to UK investors

Collins Stewart Alternative Fund Selection

World Class FoF investing requires long-term Alternatives expertise

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Collins Stewart Select Funds

Range of funds with specific risk limits, available on:

Select Income Fund

Select Diversity Fund

Select Affinity Fund

Select Opportunity Fund

IMA Cautious Managed

IMA Cautious Managed

IMA Balanced Managed

IMA Active Managed

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Collins Stewart Select Funds

Multi-manager investing is at the heart of our business

Select Diversity Fund

IMA Cautious Managed Sector

Restricted to max equity limit of 60%

2nd Quartile over 1, 3, 5 years and Since Inception

Select Opportunity Fund

IMA Active Managed Sector

Purest form of our multi-manager skills

Unconstrained version – no max equity limit

1st Quartile over 1, 3, 5 years and Since Inception

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The Fund of Funds industry has evolved

UCITS III Alternative Investment funds universe expanding

Successful blending with traditional asset classes can enhance returns

Alternative Fund selection requires specific expertise to select and blend these funds

Collins Stewart’s expertise borne out of offshore heritage

Alternative, multi-manager investing since 1996

Summary

Multi-manager investing is at the heart of our business

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This is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This has no regard for the specific investment objectives, financial situation or needs of any specific entity.

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