5966 5406 prmia april 2013 - david_presentation
TRANSCRIPT
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BEYOND 60/40 NAVIGATING THE
ALTERNATIVE INVESTMENT UNIVERSE
David Kaufman, LL.B., CAIA
President, Westcourt Capital Corporation
April, 2013
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STEP-BY-STEP 1. Define Portfolio Objectives
2. Test Objectives Against Current Portfolio
3. Identify Opportunity Set of Asset Classes & Strategies
4. Identify Allocations
5. Identify Managers
6. Test New Portfolio over Adequate Time Period
P a g e 2
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Allocating to Alternatives: Baseline Considerations
LIQUIDITY: There is little likelihood that 100% portfolio liquidity would be required to satisfy liabilities in real-time. However, liquidity is still an important consideration because a lack of liquidity requires “locking in” to a specific strategy for an extended period of time. This applies the most to private equity (5-7 years). (See liquidity table on next slide.)
RECOGNIZABILITY: It may be important that a significant portion of the portfolio be “recognizable” to lay observers. This militates in favour of more liquid, publicly traded investments.
TRANSPARENCY: It is advantageous to have transparency in investment holdings at all times. While most alternative managers provide transparency, it is often backward-looking and this should be considered.
COMPLEXITY: Distinct from transparency in that an investment can be transparent and still be complex. Complexity affects the ability to assess any investment’s position from a portfolio perspective, but is not in itself negative. Complexity does require more of a “trust me” approach to manager review and selection.
PREDICTABILITY: Some investments are liquid, recognizable, transparent, and not complex but are still not necessarily predictable. Many alternative strategies (i.e., private and public real estate and infrastructure) are predictable because of expected periodic cash distributions.
P a g e 3
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Alternative Liquidity & Financial Crisis
P a g e 4
Investment Liquidity Sensitivity Notes
Public Real Estate & Infrastructure
1-30 Days High Majority in instant-liquidity with high volumes
Private Real Estate 30 Days Medium Illiquidity of underlying assets cannot be ignored
Equity & Credit Market Neutral
30 Days Low Agnostic as to market direction
Deep Value Equities 30-90 Days High Must accept volatility and consider long-term
Private Equity 5-7 Years High
(Mark to Market) Must accept volatility and consider long-term
Managed Futures 1-30 Days Inverse Would hold during periods of financial stress
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Risk Management Issues with Alternatives
Understand how lower liquidity creates a smoothing effect.
Rebalancing can be hard or impossible with illiquid investments.
In some cases, difficulty marking certain assets (no public bid).
Have to have more staff or use consultants (increased costs).
Even with staff and consulting, need training – traditional fundamental analysis of little use with certain alternatives. CAIA instead of or in addition to CFA good start for analysts in this space.
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STEP 1:
PORTFOLIO OBJECTIVES
P a g e 6
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Portfolio Objectives: Macro (example)
Capital Preservation
Long-Term Growth of Portfolio
Income Generation to Match Liabilities
Inflation Protection
Adequate Liquidity to Satisfy Collateral Needs
P a g e 7
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Portfolio Objectives: Micro (example) Target Total Return: 6% p.a.
Volatility: Annualized standard deviation ≤ total return
Downside Deviation: Annualized downside deviation ≤ 4%
Excess Beta* (Up Beta – Down Beta): >0.2
Asset Correlation: 85% ≤ 0.65
Liquidity: 80% of portfolio can be liquidated in 30 days or less
Capacity: Recommended strategies have capacity for allocation
P a g e 8
*Measured against Balanced Benchmark
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STEP 2:
TEST OBJECTIVES VS.
CURRENT PORTFOLIO &
CURRENT OUTLOOK
P a g e 9
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Current Portfolio (example)
60%
40%
Asset Allocation
Equity
Fixed Income
P a g e 1 0
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-45%
-35%
-25%
-15%
-5%
5%
15%
25%
Sep-0
7
No
v-07
Jan-0
8
Mar-0
8
May-0
8
Jul-0
8
Sep-0
8
No
v-08
Jan-0
9
Mar-0
9
May-0
9
Jul-0
9
Sep-0
9
No
v-09
Jan-1
0
Mar-1
0
May-1
0
Jul-1
0
Sep-1
0
No
v-10
Jan-1
1
Mar-1
1
May-1
1
Jul-1
1
Sep-1
1
No
v-11
Jan-1
2
Mar-1
2
May-1
2
Jul-1
2
Sep-1
2
Fund 1
Fund 2
Fund 3
Fund 4
Fund 5
Fund 6
Fund 7
Fund 8
Fund 9
Fund 10
Fund 11
Current Portfolio
Balanced Benchmark
Current Portfolio: 5yr Historical Performance (example)
Balanced Benchmark AR: 3.09% SD: 10.71% SHP: 0.29 Current Portfolio AR: 3.01% SD: 8.77% SHP: 0.34
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Current Portfolio (example) Tested Against Micro Objectives (previous 60 months)
P a g e 1 2
*Measured against Balanced Benchmark
Objectives (Annualized) Target Example Portfolio
Target Total Return 6% p.a. X : 3.01%
Volatility (StDev) ≤ total return X : 8.77%
Downside Deviation ≤ 4% X : 7.92%
Excess Beta (Up Beta – Down Beta)* ≥ 0.2 X: -0.19
Asset Correlation 85% ≤ 0.65 X : 73% ≤ 0.65
Liquidity 80% (≤ 30 days) : 100%
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P a g e 1 3
Challenges Moving Forward
Likelihood that equity returns will continue to be in rage of 0-8% with volatility > 10% (higher deployment takes further away from micro objectives). (risk-adjusted return risk)
30-year bond run is at an end. We don’t know when, but we’re not market timers. (duration risk)
30-year total returns of stocks/bonds (any mix) of 8%+ is impossible to repeat. (stagnation risk)
On a relative scale, institutional investors not allocating to alternatives are falling further behind every year. (job risk)
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STEP 3:
IDENTIFY OPPORTUNITY SET
P a g e 1 4
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P a g e 1 5
Degrees of Freedom
“Pure” Approach to Portfolio Construction
No “Sacred Cows”
Assumes Every Asset Class/Strategy Starts at 0%
Inclusion of any Asset Class/Strategy Must be Defended
Requires Cross-Platform Scoring System as Guide: i.e. Heat Map
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P a g e 1 6
Asset Classes vs. Investment Strategies Asset Classes: Cash, Equities, Debt, Real Assets
Can Be Accessed Cheaply (ETFs) or Through Active Management
Typically Long-Only, No Leverage
Investment Strategies: Use of Asset Classes, Active Management
Often Absolute Return Focused
Long/Short, Leverage, Derivatives (Enhance Returns/Manage Risk)
Rules-Based or Free Active Management
Higher Management Fees, More Risk Management
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STEP 4:
DETERMINE ALLOCATIONS:
HEAT MAP
P a g e 1 7
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P a g e 1 8
Methodology of Heat Map 1. Identify Objectives:
A. Capital Preservation (Low Volatility, Insurance, Hedge)
B. Long-Term Growth
C. Income Generation (Expected Periodic Predictable Yield)
D. Inflation Protection
E. Liquidity (Adequate to Satisfy Liabilities)
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P a g e 1 9
Methodology of Heat Map (Cont’d)
High Yield Debt (Long/Short) Fixed Income
High Yield Debt Fixed Income
International Long Bond Fixed Income
Canadian Real Return Bond Fixed Income
Hedge Fund - Credit Strats Alternative-HF
Hedge Fund - Market Neutral Alternative-HF
Hedge Fund - Long /Short Alternative-HF
Managed Futures * Alternative-MF
Private Equity LBO - FoF Alternative-PE
Global Infra ( Public) Equity
Real Estate Public Equity
International Long Equity (Div.) Equity
International Long Equity (Growth) Equity
Emerging Long Equity Equity
Real Estate Private Real Assets
Farmland - leased, no leverage Real Assets
Long Commodities Real Assets
Gold Real Assets
Timberland Real Assets
Equity
Alternative
Fixed Income
Real Assets
2. Identify Asset Categories:
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P a g e 2 0
Methodology of Heat Map (Cont’d) 3. Score from 0-5 Attributes of Investments vs. Objectives
Assets Asset Category .
Capital Preservation
Long Term Growth
Income Generation
Inflation Protection
Liquidity
Global Infra ( Public) Equity 3 3 4 4 5
High Yield Debt (Long/Short) Fixed Income 4 1 5 4 4
Real Estate Private Real Assets 4 1 5 4 3
Real Estate Public Equity 3 2 4 4 5
Hedge Fund - Credit Strats Alternative-HF 4 3 2 3 3
Managed Futures * Alternative-MF 4 3 0 4 5
High Yield Debt Fixed Income 2 2 5 2 5
Hedge Fund - Market Neutral Alternative-HF 4 3 1 2 4
Farmland - leased, no leverage Real Assets 4 3 2 4 0
Private Equity LBO - FoF Alternative-PE 4 5 0 3 0
Long Commodities Real Assets 2 5 0 4 5
Hedge Fund - Long /Short Alternative-HF 3 3 2 2 4
International Long Equity (Div) Equity 2 3 2 3 5
International Long Equity (Growth) Equity 2 5 0 2 5
Gold Real Assets 2 4 0 4 5
Emerging Long Equity Equity 1 4 2 2 5
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Capital Preservation
Long Term Growth
Income Generation
Inflation Protection
Liquidity
Objective Weights
40% 15% 25% 5% 15%
35% 20% 25% 5% 15%
35% 25% 20% 10% 10%
30% 30% 20% 10% 10%
Economic Scenarios
Recession; With
debt
Recession; No
debt
Near Stall Speed
New Normal
34% 34% 22% 10%
P a g e 2 1
Methodology of Heat Map (Cont’d) 4. Identify Four Possible Economic Scenarios:
A. New Normal; Near Stall Speed; Recession; Financial Crisis
5. Apply Weights to Objectives for each Economic Scenario
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Assets Asset Category .
Capital Preservation
Long Term Growth
Income Generation
Inflation Protection
Liquidity .
New Normal
Near Stall Speed Economy
Recession; No debt deflation
/crisis
Recession; With debt deflation /
crisis
Final Score
.
Allocation
Global Infra ( Public) Equity 3 3 4 4 5 70 70 72 72 71 7.86%
High Yield Debt (Long/Short) Fixed Income 4 1 5 4 4 66 69 73 76 70 7.74%
Real Estate Private Real Assets 4 1 5 4 3 64 67 70 73 67 7.48%
Real Estate Public Equity 3 2 4 4 5 64 65 68 69 66 7.31%
Hedge Fund - Credit Strats Alternative-HF 4 3 2 3 3 62 63 62 63 62 6.94%
Managed Futures * Alternative-MF 4 3 0 4 5 60 61 59 60 60 6.69%
High Yield Debt Fixed Income 2 2 5 2 5 58 58 64 64 60 6.66%
P a g e 2 2
Methodology of Heat Map (Cont’d) 6. Score Each Investment with Objective Weights (x20)
7. Score Each Investment with Scenario Weights: Final Score
8. Choose Top 15 Final Scores
9. Allocate Based on Top 15 Final Scores
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P a g e 2 3
Using the Results to Allocate MATH IS OUR SERVANT, NOT OUR MASTER
Heat Map Approach is NOT Mathematical Optimizer
Apply Subjective Review & Correlation Study
Using Heat Map as Guide, Create Ranges
Consider Variables (Such as Recognizability & Liquidity)
Within Ranges, Select “Day-1” Allocations
Begin Manager Selection Process
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STEP 5:
IDENTIFY MANAGERS
P a g e 2 4
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Manager Selection Checklist
1. Assets Under Management: Must be in scale with prospective allocation.
2. Capacity: Must be appropriate for prospective allocation.
3. Manager Experience: Whether at a large institution or managing fund, adequate experience.
4. Manager Expertise: Clear best-in-class academic and practical training.
5. Risk-Adjusted Performance: In line with investment objectives within defined constraints.
6. Risk-Adjusted Performance vs. Peer Group: Quantitative evidence of quality of manager.
7. Operations/Infrastructure: Solid core; front and back office.
8. Best in Class Service Providers: Auditors, dealers, lawyers, counterparties.
9. Subjective Competence: Reference checks, interviews, character evaluation.
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Manager Selection Process
Identify Universe of Potential Managers
(Not All Managers, But Adequate Representative List)
Apply Quantitative Filters
(Too Small, Too New, Poor Performance etc.)
Detailed Quantitative/Qualitative Analysis
Deep Dive
Due Diligence
Recommendations
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STEP 6:
TEST NEW PORTFOLIO
P a g e 2 7
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Current vs. Recommended Portfolio
P a g e 2 8
60%
40%
Current Portfolio
Equity Fixed Income
44%
28%
12% 6% 10%
Recommended Portfolio
Alternatives Equity Fixed Income Real Assets Opportunistic
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-25%
-15%
-5%
5%
15%
25%
35%
45%
55%
Au
g-07
Oct-0
7
De
c-07
Feb
-08
Ap
r-08
Jun
-08
Au
g-08
Oct-0
8
De
c-08
Feb
-09
Ap
r-09
Jun
-09
Au
g-09
Oct-0
9
De
c-09
Feb
-10
Ap
r-10
Jun
-10
Au
g-10
Oct-1
0
De
c-10
Feb
-11
Ap
r-11
Jun
-11
Au
g-11
Oct-1
1
De
c-11
Feb
-12
Ap
r-12
Jun
-12
Au
g-12
Oct-1
2
De
c-12
Current
Recommended
Total Portfolio Returns
Current Portfolio AR: 3.01% SD: 8.77% SHP: 0.34 Recommended AR: 8.18% SD: 3.74% SHP: 2.29
5 Year Return History
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5-Year Annual Return History
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2007 2008 2009 2010 2011 2012
RecommendedPortfolio
Current Portfolio
*Sept 2007-Dec 2007
2007* 2008 2009 2010 2011 2012
Recommended 1.23% - 5.57% 19.59% 13.93% 5.80% 10.37%
Current 0.66% - 18.89% 19.10% 11.51% 0.08% 7.93%
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5-Year Drawdown Analysis
Max Drawdown Recovery
Current - 26.08% 21 Months
Recommended - 7.71% 8 Months
-30%
-25%
-20%
-15%
-10%
-5%
0%
Current Recommended
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Fixe
d In
com
e 1
Fixe
d In
com
e 2
Fixe
d In
com
e 3
Fixe
d In
com
e 4
Fixe
d In
com
e 5
Fixe
d In
com
e 6
Fixe
d In
com
e 7
Fixe
d In
com
e 8
Fixe
d In
com
e 9
Smal
l Cap
1
Smal
l Cap
2
Smal
l Cap
3
Smal
l Cap
4
Gro
wth
1
Gro
wth
2
Gro
wth
3
Gro
wth
4
Gro
wth
5
Gro
wth
6
Gro
wth
7
Gro
wth
8
Gro
wth
9
Val
ue 1
Val
ue 2
Val
ue 3
Val
ue 4
Val
ue 5
Val
ue 6
Val
ue 7
Val
ue 8
Val
ue 9
Val
ue 1
0
Alt
erna
tive
1
Alt
erna
tive
2
Alt
erna
tive
3
Alt
erna
tive
4
Alt
erna
tive
5
Alt
erna
tive
6
Alt
erna
tive
7
Fixed Income 1 1.00
Fixed Income 2 1.00 1.00
Fixed Income 3 1.00 1.00 1.00
Fixed Income 4 0.52 0.52 0.52 1.00
Fixed Income 5 0.88 0.88 0.88 0.79 1.00 Total Crosses 741
Fixed Income 6 0.33 0.33 0.33 0.36 0.38 1.00 >0.65 202
Fixed Income 7 0.27 0.27 0.27 -0.04 0.17 0.24 1.00 0.3 to 0.65 223
Fixed Income 8 0.17 0.17 0.17 0.52 0.37 0.41 -0.20 1.00 -0.3 to 0.3 288
Fixed Income 9 0.12 0.12 0.12 0.51 0.34 0.35 0.02 0.55 1.00
Small Cap 1 0.00 0.00 0.00 0.61 0.29 0.27 -0.24 0.71 0.68 1.00
Small Cap 2 -0.16 -0.16 -0.16 0.47 0.15 0.18 -0.20 0.36 0.42 0.60 1.00
Small Cap 3 -0.03 -0.03 -0.03 0.54 0.28 0.18 -0.12 0.56 0.46 0.70 0.63 1.00
Small Cap 4 -0.03 -0.03 -0.03 0.64 0.28 0.33 -0.26 0.76 0.62 0.91 0.68 0.67 1.00
Growth 1 -0.09 -0.09 -0.09 0.57 0.24 0.25 -0.34 0.81 0.61 0.84 0.65 0.72 0.92 1.00
Growth 2 0.02 0.02 0.02 0.42 0.25 0.32 0.14 0.42 0.43 0.54 0.49 0.85 0.48 0.54 1.00
Growth 3 -0.09 -0.09 -0.09 0.57 0.24 0.25 -0.34 0.81 0.61 0.84 0.65 0.72 0.92 1.00 0.54 1.00
Growth 4 -0.22 -0.22 -0.22 0.51 0.15 0.18 -0.25 0.59 0.58 0.77 0.73 0.79 0.81 0.90 0.68 0.90 1.00
Growth 5 -0.04 -0.04 -0.04 0.38 0.22 0.36 0.06 0.53 0.45 0.61 0.51 0.86 0.57 0.65 0.93 0.65 0.74 1.00
Growth 6 0.02 0.02 0.02 0.42 0.25 0.32 0.14 0.42 0.43 0.54 0.49 0.85 0.48 0.54 1.00 0.54 0.68 0.93 1.00
Growth 7 -0.17 -0.17 -0.17 0.37 0.10 0.27 -0.11 0.54 0.45 0.68 0.52 0.87 0.65 0.69 0.84 0.69 0.73 0.90 0.84 1.00
Growth 8 0.11 0.11 0.11 0.61 0.36 0.46 -0.07 0.62 0.63 0.72 0.60 0.74 0.73 0.72 0.76 0.72 0.74 0.77 0.76 0.71 1.00
Growth 9 0.04 0.04 0.04 0.47 0.27 0.20 -0.33 0.66 0.52 0.74 0.55 0.70 0.66 0.74 0.61 0.74 0.70 0.69 0.61 0.73 0.73 1.00
Value 1 -0.09 -0.09 -0.09 0.57 0.24 0.25 -0.34 0.81 0.61 0.84 0.65 0.72 0.92 1.00 0.54 1.00 0.90 0.65 0.54 0.69 0.72 0.74 1.00
Value 2 0.12 0.12 0.12 0.73 0.45 0.20 -0.34 0.73 0.49 0.77 0.62 0.73 0.82 0.90 0.57 0.90 0.82 0.63 0.57 0.65 0.70 0.76 0.90 1.00
Value 3 -0.03 -0.03 -0.03 0.60 0.29 0.18 -0.39 0.76 0.50 0.75 0.64 0.76 0.81 0.93 0.58 0.93 0.86 0.68 0.58 0.71 0.71 0.77 0.93 0.92 1.00
Value 4 0.02 0.02 0.02 0.42 0.25 0.32 0.14 0.42 0.43 0.54 0.49 0.85 0.48 0.54 1.00 0.54 0.68 0.93 1.00 0.84 0.76 0.61 0.54 0.57 0.58 1.00
Value 5 0.17 0.17 0.17 0.52 0.37 0.41 -0.20 1.00 0.55 0.71 0.36 0.56 0.76 0.81 0.42 0.81 0.59 0.53 0.42 0.54 0.62 0.66 0.81 0.73 0.76 0.42 1.00
Value 6 0.02 0.02 0.02 0.42 0.25 0.32 0.14 0.42 0.43 0.54 0.49 0.85 0.48 0.54 1.00 0.54 0.68 0.93 1.00 0.84 0.76 0.61 0.54 0.57 0.58 1.00 0.42 1.00
Value 7 0.02 0.02 0.02 0.42 0.25 0.32 0.14 0.42 0.43 0.54 0.49 0.85 0.48 0.54 1.00 0.54 0.68 0.93 1.00 0.84 0.76 0.61 0.54 0.57 0.58 1.00 0.42 1.00 1.00
Value 8 0.08 0.08 0.08 0.58 0.35 0.47 -0.01 0.56 0.63 0.69 0.64 0.74 0.71 0.73 0.78 0.73 0.78 0.81 0.78 0.72 0.95 0.72 0.73 0.70 0.70 0.78 0.56 0.78 0.78 1.00
Value 9 0.06 0.06 0.06 0.54 0.32 0.46 -0.01 0.55 0.58 0.68 0.63 0.82 0.68 0.70 0.89 0.70 0.77 0.88 0.89 0.81 0.94 0.75 0.70 0.68 0.70 0.89 0.55 0.89 0.89 0.94 1.00
Value 10 0.17 0.17 0.17 0.62 0.43 0.18 -0.27 0.65 0.60 0.79 0.53 0.71 0.74 0.81 0.61 0.81 0.77 0.66 0.61 0.66 0.77 0.82 0.81 0.84 0.82 0.61 0.65 0.61 0.61 0.77 0.77 1.00
Alternative 1 -0.22 -0.22 -0.22 0.04 -0.01 0.03 -0.12 0.13 0.10 0.22 0.15 0.26 0.17 0.27 0.24 0.27 0.31 0.32 0.24 0.38 0.10 0.20 0.27 0.16 0.23 0.24 0.13 0.24 0.24 0.18 0.21 0.18 1.00
Alternative 2 0.34 0.34 0.34 0.72 0.54 0.38 -0.22 0.67 0.59 0.67 0.51 0.49 0.73 0.65 0.35 0.65 0.49 0.36 0.35 0.37 0.71 0.55 0.65 0.68 0.60 0.35 0.67 0.35 0.35 0.65 0.59 0.66 0.03 1.00
Alternative 3 0.22 0.22 0.22 -0.01 0.10 -0.03 0.05 0.10 0.03 -0.05 -0.20 -0.27 -0.02 -0.01 -0.25 -0.01 -0.15 -0.22 -0.25 -0.23 -0.09 0.11 -0.01 -0.06 -0.04 -0.25 0.10 -0.25 -0.25 -0.09 -0.13 0.02 -0.14 -0.01 1.00
Alternative 4 -0.01 -0.01 -0.01 0.73 0.35 0.17 -0.35 0.57 0.43 0.69 0.67 0.64 0.78 0.75 0.39 0.75 0.68 0.42 0.39 0.49 0.60 0.51 0.75 0.75 0.73 0.39 0.57 0.39 0.39 0.56 0.55 0.61 0.17 0.67 -0.12 1.00
Alternative 5 1.00 1.00 1.00 0.52 0.88 0.33 0.27 0.17 0.12 0.00 -0.16 -0.03 -0.03 -0.09 0.02 -0.09 -0.22 -0.04 0.02 -0.17 0.11 0.04 -0.09 0.12 -0.03 0.02 0.17 0.02 0.02 0.08 0.06 0.17 -0.22 0.34 0.22 -0.01 1.00
Alternative 6 -0.07 -0.07 -0.07 0.07 -0.10 -0.05 -0.23 0.06 -0.32 0.04 -0.19 0.14 0.06 0.11 0.15 0.11 0.10 0.12 0.15 0.15 0.08 0.09 0.11 0.19 0.17 0.15 0.06 0.15 0.15 0.04 0.09 0.16 -0.03 -0.04 0.10 0.04 -0.07 1.00
Alternative 7 0.25 0.25 0.25 0.29 0.27 0.26 -0.26 0.72 0.38 0.47 0.14 0.09 0.54 0.52 -0.09 0.52 0.19 0.00 -0.09 0.06 0.28 0.37 0.52 0.38 0.39 -0.09 0.72 -0.09 -0.09 0.23 0.14 0.36 -0.02 0.61 0.30 0.31 0.25 -0.08 1.00
Gro
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Current Portfolio CorrelationsFixed Income Small Cap Equity Growth Equity Value Equity Alternative Investments
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EH PE
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Fixed Income 1 1.00
Fixed Income 2 0.66 1.00
Credit 1 -0.11 0.03 1.00
Credit 2 0.92 0.70 -0.19 1.00
Credit 3 -0.07 0.10 0.70 -0.07 1.00 Total Crosses 300
Credit 4 0.04 -0.11 0.40 -0.05 0.23 1.00 >0.65 12
Credit 5 -0.15 -0.06 0.77 -0.23 0.51 0.46 1.00 0.3 to 0.65 64
Credit 6 -0.16 0.09 0.71 -0.21 0.57 0.51 0.72 1.00 -0.3 to 0.3 222
Equity 1 0.47 0.42 0.20 0.40 0.14 0.21 0.25 0.26 1.00
Equity 2 -0.08 0.07 0.55 -0.16 0.42 0.31 0.59 0.71 0.32 1.00
Equity 3 -0.13 -0.17 0.48 -0.23 0.21 0.54 0.65 0.68 0.34 0.56 1.00
Equity 4 -0.20 -0.08 0.49 -0.24 0.29 0.33 0.48 0.60 0.25 0.56 0.71 1.00
EH Equity Hedge 1 -0.19 0.01 0.21 -0.22 0.22 0.28 0.16 0.36 0.01 0.15 0.22 0.17 1.00
PE
Private Equity -0.17 -0.21 0.59 -0.24 0.43 0.42 0.57 0.60 0.15 0.33 0.57 0.57 0.23 1.00
Managed Futures 1 0.19 0.15 -0.19 0.22 -0.19 -0.09 -0.10 -0.14 0.00 -0.20 -0.13 -0.15 -0.14 -0.13 1.00
Managed Futures 2 0.12 0.11 -0.22 0.23 -0.23 0.02 -0.18 -0.14 0.04 -0.12 -0.21 -0.15 0.00 -0.12 0.46 1.00
Private Real Estate 1 0.06 -0.04 -0.10 0.16 -0.13 -0.15 -0.16 -0.23 -0.04 -0.24 -0.25 -0.21 -0.02 0.05 -0.08 0.24 1.00
Private Real Estate 2 -0.03 0.14 0.15 0.04 0.09 -0.06 0.15 0.09 0.10 0.22 0.02 0.10 0.07 -0.06 0.04 0.02 -0.33 1.00
Private Real Estate 3 -0.03 -0.32 -0.05 -0.07 -0.08 0.12 0.04 -0.15 -0.07 -0.19 0.12 0.15 -0.03 0.51 0.10 0.05 0.22 -0.23 1.00
Real Estate Hedge 1 -0.19 -0.05 0.54 -0.21 0.39 0.18 0.57 0.58 0.10 0.62 0.44 0.54 0.23 0.44 -0.19 -0.09 -0.14 0.16 0.03 1.00
Real Estate Hedge 2 0.11 0.06 0.48 0.07 0.49 0.36 0.47 0.59 0.56 0.63 0.57 0.56 0.19 0.46 -0.13 -0.08 -0.18 0.08 0.14 0.59 1.00
Market Neutral 1 -0.21 0.00 0.17 -0.16 0.18 0.10 0.09 0.27 -0.35 -0.03 0.00 0.13 0.10 0.33 0.00 0.10 0.14 -0.27 0.06 0.02 -0.23 1.00
Market Neutral 2 -0.25 -0.26 -0.04 -0.31 -0.08 -0.01 0.02 -0.02 -0.17 -0.02 0.03 -0.07 -0.10 -0.02 -0.02 0.06 -0.13 0.14 0.16 -0.15 -0.25 0.11 1.00
Market Neutral 3 -0.01 0.01 0.14 -0.03 -0.02 0.21 0.28 0.20 0.10 0.12 0.09 0.16 0.00 0.37 0.27 0.24 0.11 -0.08 0.37 0.20 0.10 0.30 0.11 1.00
Market Neutral 4 0.05 0.17 0.30 -0.03 0.12 0.19 0.42 0.50 0.35 0.68 0.54 0.41 0.07 0.09 -0.14 -0.08 -0.25 0.20 -0.32 0.37 0.45 -0.21 0.06 -0.14 1.00
RE
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Recommended Portfolio Correlations
%
4.00%
21.33%
74.00%
F.I Credit Equity MF Private RE RE Hedge Market Neutral
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Portfolio Correlations
TSX Balanced
Correlation 0.93 0.92
Beta 0.48 0.76
Up Capture 39.7% 68.8%
Down Capture
58.8% 82.0%
Excess Capture
-19.1% -13.2%
TSX Balanced
Correlation 0.83 0.85
Beta 0.19 0.30
Up Capture 23.8% 44.5%
Down Capture
5.8% 9.2%
Excess Capture
18.0% 35.3%
Current Portfolio Recommended Portfolio
The current portfolio is highly sensitive to the equity markets and is not efficient when
measured against an equity or balanced benchmark. The recommended portfolio focuses
on smoother returns and limiting the possibility of large drawdowns.
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Recommended & Current Portfolio
Objectives (Annualized) Target Current Portfolio Recommended Portfolio
Target Total Return 6% p.a. X : 3.01% : 8.18%
Volatility (StDev) ≤ tot. return X : 8.77% : 3.74%
Downside Deviation ≤ 4% X : 7.92% : 2.41%
Excess Beta (Up Beta – Down Beta)* ≥ 0.2 X : -0.19 : 0.30
Asset Correlation 85% ≤ 0.65 X : 73% ≤ 0.65 : 96% ≤ 0.65
Liquidity 80% (≤30 Days) : 100% : >90%
Tested Against Micro Objectives (previous 60 months)
P a g e 3 5
*Measured against Balanced Benchmark
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ADDITIONAL ANALYSIS
3 6
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P a g e 3 7
Efficient Frontier Ex
pec
ted
Ret
urn
Risk
High
Low High
Same Return, Less Risk
Same Risk, More Return
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Efficient Frontier
P a g e 3 8
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Ret
urn
Standard Deviation
Current Funds Current + Long Only + Alternatives Current Portfolio
Target Portfolio R: 6.0% SD: 6.0%
Current Portfolio Ex. R: 5.14% SD: 10.07%
“Optimal” Portfolio Ex. R: 7.56% SD: 2.22%
“Target Return on EF” Portfolio Ex. R: 6.0% SD: 1.26%
Recommended Funds
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“Optimal” Portfolio
P a g e 3 9
Investment Optimal Portfolio on Blue Frontier
Fixed Income Fund 1 Fixed Income Fund 2 Fixed Income Fund 3 Equity Index Fund 1 Equity Fund 1 Equity Index Fund 2 Equity Index Fund 3 Equity Index Fund 4 Equity Fund 2 Equity Fund 3 Credit Fund 1 Credit Fund 2 Equity Fund 4 Equity Fund 5 0.60% Credit Fund 3 55.27% Market Neutral Fund 1 Market Neutral Fund 2 Market Neutral Fund 3 5.39% Long/Short Fund 1 Managed Futures Fund 1 1.64% Private Equity Fund 1 10.48% Infrastructure Fund 1 Public Real Estate Fund 1 Private Real Estate Fund 1 26.62%
1%
55%
5% 2%
10%
27%
Equity Fund 5 Credit Fund 3
Market Neutral Fund 3 Managed Futures Fund 1
Private Equity Fund 1 Private Real Estate Fund 1
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“Target Return on EF” Portfolio
P a g e 4 0
Investment Optimal Portfolio on Blue Frontier
Fixed Income Fund 1 2.50% Fixed Income Fund 2 10.05% Fixed Income Fund 3
Equity Index Fund 1 Equity Fund 1
Equity Index Fund 2 Equity Index Fund 3
Equity Index Fund 4
Equity Fund 2 Equity Fund 3 Credit Fund 1
Credit Fund 2 Equity Fund 4
Equity Fund 5 Credit Fund 3 29.94% Market Neutral Fund 1
Market Neutral Fund 2 0.83% Market Neutral Fund 3 5.52%
Long/Short Fund 1 2.79%
Managed Futures Fund 1 1.85% Private Equity Fund 1 30.03%
Infrastructure Fund 1 3.53% Public Real Estate Fund 1 3.28% Private Real Estate Fund 1 9.68%
2% 10%
30%
1% 5% 3% 2%
30%
4% 3% 10%
Fixed Income Fund 1 Fixed Income Fund 2
Credit Fund 3 Market Neutral Fund 2
Market Neutral Fund 3 Long/Short Fund 1
Managed Futures Fund 1 Private Equity Fund 1
Infrastructure Fund 1 Public Real Estate Fund 1
Private Real Estate Fund 1
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Monte Carlo (Current Portfolio) All Portfolio Statistics Annualized Return
Annualized Standard Deviation Annualized Sharpe (RF)
Annualized Downside Deviation (0%) Annualized Sortino (0%) Maximum Drawdown
Number Simulations 10,000 10,000 10,000 9,993 9,993 9,993
Mean 2.70% 5.57% 0.493 3.41% 4.446 4.25%
Median 2.31% 5.32% 0.461 3.25% 0.718 3.69%
Standard Deviation 5.92% 1.80% 1.094 1.49% 221.953 2.53%
Maximum 39.71% 23.79% 9.116 18.36% 21610.657 22.04%
Minimum -19.37% 1.67% -4.86 0.00% -2.87 0.00%
99th Percentile 18.48% 11.35% 3.342 7.84% 16.844 12.36%
95th Percentile 13.02% 8.81% 2.335 6.03% 6.908 9.09%
90th Percentile 10.24% 7.77% 1.842 5.28% 4.563 7.59%
80th Percentile 7.29% 6.82% 1.341 4.51% 2.778 6.07%
75th Percentile 6.31% 6.48% 1.151 4.21% 2.248 5.49%
70th Percentile 5.31% 6.18% 0.999 3.98% 1.866 5.03%
60th Percentile 3.70% 5.72% 0.715 3.60% 1.216 4.30%
50th Percentile 2.31% 5.32% 0.461 3.25% 0.718 3.69%
40th Percentile 1.02% 4.92% 0.216 2.92% 0.296 3.18%
30th Percentile -0.46% 4.53% -0.059 2.57% -0.126 2.67%
25th Percentile -1.21% 4.33% -0.206 2.38% -0.326 2.44%
20th Percentile -2.08% 4.11% -0.372 2.18% -0.536 2.19%
10th Percentile -4.43% 3.61% -0.836 1.71% -1.049 1.63%
5th Percentile -6.37% 3.23% -1.239 1.35% -1.414 1.25%
1st Percentile -10.25% 2.63% -2.112 0.65% -1.991 0.59%
Simulation Method: GARCH
Simulation Data Start: Sep-07 Portfolio: Current Portfolio
Simulation Data End: Dec-12
Number of Periods: 64
Simulation Period: Monthly
Number of Years: 1
Number of Simulations: 10000
Re-balancing: (None)
Risk Free Return: 0.00%
Minimal Acceptable Return: 0.00%
Fixed Random Sequence: Yes
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Monte Carlo (Recommended Portfolio) All Portfolio Statistics Annualized Return
Annualized Standard Deviation Annualized Sharpe (RF)
Annualized Downside Deviation (0%) Annualized Sortino (0%) Maximum Drawdown
Number Simulations 10,000 10,000 10,000 9,883 9,883 9,883
Mean 7.84% 4.54% 1.821 2.00% 11.446 2.20%
Median 7.69% 4.32% 1.732 1.83% 4.024 1.82%
Standard Deviation 5.11% 1.48% 1.231 1.19% 126.788 1.65%
Maximum 48.03% 38.39% 8.567 26.93% 10086.274 24.36%
Minimum -17.16% 1.31% -2.314 0.00% -2.215 0.00%
99th Percentile 20.96% 9.30% 5.224 5.67% 88.952 8.21%
95th Percentile 16.18% 7.15% 3.974 4.06% 26.552 5.36%
90th Percentile 14.12% 6.32% 3.36 3.48% 15.765 4.20%
80th Percentile 11.80% 5.51% 2.767 2.84% 9.685 3.14%
75th Percentile 10.95% 5.23% 2.548 2.61% 8.061 2.82%
70th Percentile 10.24% 5.02% 2.35 2.41% 6.85 2.56%
60th Percentile 8.91% 4.65% 2.012 2.11% 5.26 2.14%
50th Percentile 7.69% 4.32% 1.732 1.83% 4.024 1.82%
40th Percentile 6.53% 4.01% 1.455 1.56% 3.063 1.52%
30th Percentile 5.32% 3.70% 1.164 1.31% 2.262 1.25%
25th Percentile 4.60% 3.55% 1.01 1.18% 1.881 1.11%
20th Percentile 3.77% 3.38% 0.841 1.03% 1.469 0.97%
10th Percentile 1.63% 2.97% 0.363 0.68% 0.544 0.63%
5th Percentile -0.18% 2.67% -0.015 0.44% -0.066 0.41%
1st Percentile -4.00% 2.14% -0.804 0.15% -1.014 0.15%
Simulation Method: GARCH
Simulation Data Start: Sep-07 Portfolio: Recommended Portfolio
Simulation Data End: Dec-12
Number of Periods: 64
Simulation Period: Monthly
Number of Years: 1
Number of Simulations: 10000
Re-balancing: (None)
Risk Free Return: 0.00%
Minimal Acceptable Return: 0.00%
Fixed Random Sequence: Yes