absolute return investing citiwire events screen (jl 04 december 2012)
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This communication is for investment professionals only and should not be distributed to, or relied upon by retail clients.
December 2012
Absolute return investingCitywire Event
“Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security”
John Allen PaulosProfessor of Mathematics at Temple UniversityPhiladelphia, USA
3
The Global Absolute Return Strategies Fund
Objective:• Cash* +5% per year (gross) performance target over rolling 3
years periods• Expected volatility range of between 4% - 8%
Key Investment Themes:• Time Frame: 3 year investment outlook
• Captures return more consistently from demonstrable market inefficiencies
• Breadth: Broad investment freedom• A diverse array of strategies build a robust portfolio
• Balance: Risk controlled implementation• Portfolio constructed for resilience & to maximise the range of
scenarios that will provide a positive return
* Cash here is defined as 6 month US Libor
A proven track record in delivering the Fund objectives
44
GARS – the theory
GARS portfolio
Time
traditionalapproach
Target return a proxy for long term risk asset returns
Volatility significantly less than equity risk
Path NOT solely dependent on risk markets
Building a less volatile approach to generating positive investment returns
5
Global Absolute Return Strategies SICAV performance
Source: Standard Life Investments, gross performance from 12/06/2006 to 31/10/2012* Source: Standard Life Investments converted $ performance of £, institutional pooled pension portfolio to the 07/06/2011. US$ GARS SICAV portfolio performance from the 08/06/2011. Volatility calculations based on monthly performance data** Source: Thomson Datastream, 6 month US$ LIBOR, MSCI World ($)Standard Life Investments claims compliance with the Global Investment Performance Standards (GIPS®). The fund specific data presented above is supplementary information to the US GARS GIPS® composite report, which is enclosed in the Appendix for your reference
556065707580859095
100105110115120125130135140145150155160165170
Jun/0
6
Dec/06
Jun/0
7
Dec/07
Jun/0
8
Dec/08
Jun/0
9
Dec/09
Jun/1
0
Dec/10
Jun/1
1
Dec/11
Jun/1
2
Volatility
US$ GARS SICAV 6.0%
Global Equities 18.9%
Global Equities** Cash** Target Return (Gross) GARS*
6
GARS – a carefully chosen blend of traditional and advanced strategies
Market Returns
• Dynamic Allocation • Long term risk premia e.g.
Equities, Credit, Listed Real Estate
• Used only when we expect to be rewarded
Relative Value
• Seek pairs of closely related markets or segments
• Our view is that performance will differ over 3 years
• Profit from the difference in performance irrespective of market direction
Directional
• Specific directional investment ideas
• In markets with little or no long term risk premium
• With significant return potential on a 3 year view
Trad
ition
al in
vest
men
tsA
dvan
ced
Security Selection
• Active security selection• Conventional benchmarks• Bottom-up, Focus on Change
process• No extra layer of cost to our
fees
Outcomes• A wider range of investment
strategies• Greater diversification
• Implemented through derivatives• Highly liquid• Efficient risk management
Outcomes• Allocation to a range of asset
classes• Benefit from diversification
• Potential problems• Too constrained• Too highly correlated
Aiming to deliver low risk positive performance in all investment environments
GARS combines traditional and advanced approaches
7
Portfolio Outlook / Themes
• Profit opportunities in areas of growthUS equityUS technology equity vs US small cap equityKorean equity
• Corporate balance sheet strength US large cap equity vs US small cap equity Investment grade and high yield credit
• Fiscal advantages of resource-based economies Mexican government bondsMexican Peso vs Australian Dollar Russian equityUS Dollar vs Canadian Dollar
• Challenging Eurozone resolutionUS Dollar vs Euro European Financials Capital StructureEuropean high dividend-yield equity
Source: Standard Life Investments UK GARS portfolio, 30 September 2012
8
Building a true absolute return portfolio
• Portfolio has to deliver positive and stable performance in a wide range of scenarios
• Range of investment strategies implemented therefore have to reflect Fragile economic recovery Continuing spikes of volatility in the market Surge in commodity prices Collapse in commodity prices Inflation becoming a major problem Deflation fears growing Emerging Markets growing ever faster Emerging Markets bubble popping ….and many more
• Building a portfolio to allow for this range of eventualities is no easy task!
Uncertainty is the only certainty there is
9
Investment Grade Corporate Bonds 1.8% US Long Bond Yields (Forward-Start) 2.4% Investment Grade Corporate Bonds 1.9%Long-term European Interest Rates 1.6% Long Equity Variance 1.5% High Yield Credit 1.3%Broad vs Financial Sector Equity 1.3% Broad vs Financial Sector Equity 1.3% Mexican Government Bonds vs Euro 1.1%UK Short-term Interest Rates 1.1% Global Inflation-Linked Bonds 1.1% Broad vs Financial Sector Equity 0.9%Global Equity 1.1% Long Norwegian Krone vs Swiss Franc 0.8% Security Selection 0.7%European Equity 0.9% Australian vs US Short-rates 0.7% US Equity Technology vs US Equity Small Cap 0.6%UK Equity 0.8% Australian vs Japanese Medium Term Interest Rates 0.5% European Equity 0.5%Long US Dollar vs Euro 0.8% Swedish Short-term Interest Rates 0.5% Global Equity 0.3%Australian vs US Short-rates 0.7% Investment Grade Corporate Bonds 0.5% Global Inflation-Linked Bonds 0.3%Medium-term Australian Interest Rates 0.7% US Large vs US Small Cap Equity 0.4% European Bond Yield Steepener 0.3%
GARS return 10.8% GARS return 3.4% GARS return 7.0%
2010 2011 2012
Long-term Japanese Interest Rates 1.8% Long-term Japanese Interest Rates 1.6% Long-term European Interest Rates 2.7% Investment Grade Corporate Bonds 5.4%UK Equity 1.3% Cash 1.4% Medium-term European Interest Rates 2.4% Long Sterling vs Euro 1.9%Security Selection 1.2% European Equity 1.3% German Equity vs UK Equity Relative Volatility 1.8% Global Equity 1.9%Global Equity 1.2% Security Selection 1.0% Cash 1.5% Long Brazilian Real vs Japanese Yen 1.7%European Equity 0.8% UK Large v Mid Cap UK equity 0.9% Long-term Japanese Interest Rates 1.5% Medium-term European Interest Rates 1.6%Investment Grade Corporate Bonds 0.6% UK Equity 0.8% European Short-term Interest Rates 1.4% UK Equity 1.5%Cash 0.5% Global Inflation-Linked Bonds 0.8% UK Short-term Interest Rates 1.2% European Equity 1.5%Global Inflation-Linked Bonds 0.3% UK Short-term Interest Rates 0.6% Financial Sector Credit 1.2% US Equity 1.2%Long Turkish Lira vs Sterling 0.2% Global Equity 0.5% Long US Dollar vs Euro 1.1% Short UK Inflation 1.1%European Equity Volatility 0.2% Investment Grade Corporate Bonds 0.3% Relative Variance Income 1.0% Long-term Japanese Interest Rates 0.9%
GARS return 7.5% GARS return 8.4% GARS return -6.1% GARS return 19.4%
2006 2007 2008 2009
GARS – finding positive strategies in all markets
Top 10 GARS contributors by calendar yearGlobal equities -40%
Global equities -5%
Balance: building the portfolio for positive return in a wide range of different futures
Source: Standard Life Investments, GARS returns in $ gross of fees
1010
2 ways to use Absolute Returns in your portfolio
1. Diversify your Asset Allocation risk
2. A more attractive ‘Alternative’ portfolio
11
Diversify your asset allocation risk
• Standard Life Investments in consultation with external asset modelling consultants
• Economic Scenario Generator stochastically models many economic and market variables, including: Interest rates Risk premium for asset classes Volatility (short and long-term) Exchange rate fluctuations Correlation Short-term market features that may impact long-term risk/reward
• Constraints are applied to avoid “corner solutions”
Case study: Risk-based multi-asset funds
Significant issues in modelling Absolute Return
Solution: Absolute Return to form 20% of the “Growth” portion across all styles
12
Risk-based multi-asset portfolio
UK Equities
Absolute Returns
US Equities
UK direct Property
Emerging Market Equities
European Equities
Asia-Pacific Equities
Japan Equities
Hedged High-yield Bonds
Sterling Corporate Bonds
UK Index-linked Gilts
UK Gilts
Money Markets
Risk-based FundsPortfolio Strategic Weights
Modelled using Barrie & Hibbert’s Baseline Calibration, September 2011Baseline Calibration is used as it does not assume period specific initial conditions and so gives a stable asset allocation model.Expected Volatility is given as one standard deviation of annualised returns.Strategic asset allocations at 31/12/2011; reviewed quarterly
Risk-based portfolio: 8.5%-12.0% volatility range
Return-seeking asset classes 65.50% 100.0%
26.3%
20.0%
16.5%
12.2%
7.9%
5.5%
4.3%
3.7%
3.7% Defensive asset classes 34.50% 100.0%
69.6%14.5%
13.0%2.9% Money Markets
High Yield bonds
Sterling Corporate Bonds UK Index-linked Gilts
UK Gilts
Emerging Market Equities
European Equities
Asia Pacific Equities
Japan Equities
UK Equities
Absolute Returns
US Equities
UK direct property
13
A more attractive ‘Alternative’ portfolioComparison of conventional multi-asset v hedge funds
Investment benefits of Hedge funds offset by considerable negatives
CharacteristicConventional
Multi-assetHedge Funds
Typical featuresInvestment Objective • Peer group / Strategic
benchmark related• Absolute Return
Breadth of strategies • Benchmark constituents • Large
Risk Analysis • Limited • Comprehensive risk metrics
Economic leverage • No • Yes
Regulatory oversight • High • Low
Accessible for investment • Excellent • Limitations
Liquidity for disinvestment • Good • Limitations
Portfolio Transparency • High • Low
Fees • Modest • High
14
CharacteristicConventional
Multi-assetHedge Funds
Typical featuresGARS
Investment Objective • Peer group / Strategic benchmark related
• Absolute Return • Absolute Return
Breadth of strategies • Benchmark constituents
• Large • Large
Risk Analysis • Limited • Comprehensive risk metrics
• Comprehensive risk metrics
Economic leverage • No • Yes • Yes
Regulatory oversight • High • Low • High
Accessible for investment
• Excellent • Limitations • Excellent
Liquidity for disinvestment
• Good • Limitations • Good
Portfolio Transparency • High • Low • High
Fees • Modest • High • Modest
GARS Best Of Conventional And Hedge Funds
15
GARS – an alternative to hedge funds
‐20
‐15
‐10
‐5
0
5
10
15
20
2007 2008 2009 2010 2011 2012*
Year
% return US$
Standard Life GARS Fund of Hedge Fund Universe Median
Source: Mercer MPA, $ performance net of fees* Performance to 30 September 2012
16
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Libor+5% GARS (gross) Global Equities
3 year annualised return range
Source: Standard Life Investments, 31/10/2012Return ranges based on 3 years of monthly observations of rolling 3 year data
Best outcome
Worst outcome
Last 3 years to 31/10/2012
17
Progressive thinking of absolute return investing
• Absolute return investing places full accountability on the fund manager for positive return
• GARS produces a lower risk more consistent performance experience for investors
• GARS is a fund with multiple applications in clients’ portfolios
Increase the likelihood of ‘good’ outcomes for your portfolio and your clients
“Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security”
John Allen PaulosProfessor of Mathematics at Temple UniversityPhiladelphia, USA
Appendices
20
Philosophy
• Active managers Inefficient markets – ability to add value
• Focus on change Changes in micro/macro expectations drive pricing changes
• A team approach to investing Analysis, communicate, respond more effectively and quickly than the competition
• Global process Structured global micro and macro input (based on Focus on Change)
• Discipline Consistent portfolio structure, clear controls
Objective: consistent outperformance
21
95
100
105
110
115
120
125
130
135
140
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an
01-F
eb
04-M
ar
04-A
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05-M
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05-J
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06-J
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06-A
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06-S
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07-O
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07-N
ov
08-D
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08-J
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08-F
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11-M
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11-A
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12-M
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12-J
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13-J
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13-A
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13-S
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14-O
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14-N
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15-F
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17-M
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17-A
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18-M
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19-J
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GARS – stable performance in challenging times
* Standard Life Investments converted € performance of £ Fund to the 26/01/2011, GARS SICAV Fund performance from the 27/01/2011** Source: Thomson Datastream, MSCI World €Source: Standard Life Investments, gross € performance GARS Fund vs. MSCI € from 01/01/2010 to 31/10/2012
Greek election
US debt loses AAA
Greek debt problems
US Jackson Hole speech US QE 2
Mubarak resigns Japan Tsunami
Portugal seeks bailoutEFSF
leverage
2010 2011
MSCI World** € GARS*
2012
Bankiabailout
22
1 year cumulative performance attribution
Source: Standard Life Investments GARS SICAV portfolio, 30 September 2012
-1.0% 0.0% 1.0% 2.0% 3.0%Quarter Q4 11 Q1 12 Q2 12 Q3 12
Number of strategies
Security Selection 0.5% 0.2% 0.2% 0.1% 1.1%Investment Grade Corporate Bonds 0.3% 0.9% 0.1% 0.8% 2.1%High Yield Credit 0.6% 0.6% 0.0% 0.5% 1.7%US Equity 0.6% 0.4% -0.2% 0.1% 0.8%Global Equity 0.3% 0.7% -0.4% 0.1% 0.7%Global Inflation-Linked Bonds 0.3% 0.2% -0.2% 0.3% 0.6%Russian Equity 0.2% 0.4% -0.3% 0.2% 0.6%European Equity 0.1% 0.4% -0.2% 0.1% 0.5%Cash 0.1% 0.1% 0.1% 0.1% 0.3%UK Equity 0.0% 0.1% 0.0% 0.0% 0.0%Korean Equity 0.0% -0.4% 0.2% -0.3%Mexican Government Bonds vs Euro 0.3% 0.5% 0.3% 0.3% 1.4%Long US Dollar vs Euro 0.3% -0.3% 0.4% -0.1% 0.3%European Bond Yield Steepener 0.1% 0.1% 0.0% 0.1% 0.3%Long Norwegian Krone vs Euro 0.1% 0.1% 0.2%Long US Dollar vs Japanese Yen 0.0% 0.4% -0.2% -0.1% 0.2%Australian Short-term Interest Rates 0.0% 0.1% 0.1%US Long Bond Yields (Forward-Start) 0.1% -0.2% -0.2% 0.4% 0.1%Australian yield curve flattener 0.0% 0.0%Long Mexican Peso vs Australian Dollar 0.0% 0.0%UK Inflation Real Yield -0.1% 0.0% 0.0%Other FX 0.0% 0.0% 0.0% 0.0% 0.0%Long Equity Variance -0.1% -0.1%Long Equity Volatility 0.1% -0.1% -0.1% -0.2%Long Brazilian Real vs Czech Koruna -0.3% 0.0% -0.4%Long Brazilian Real vs Australian Dollar -0.4% 0.0% -0.5%Long US Dollar vs Canadian Dollar -0.1% -0.1% 0.1% -0.4% -0.5%Broad vs Financial Sector Equity 0.3% 0.0% 0.8% 1.2%Relative Variance Income 0.3% 0.3% -0.4% 0.2% 0.4%Financial Sector vs Broad Credit 0.0% 0.9% -0.5% 0.3%Australian vs US Short-rates 0.2% 0.2%UK Inflation vs Long Gilts 0.2% 0.2%European Financials Capital Structure -0.3% 0.4% 0.1%UK vs European Forward-Start Duration 0.1% 0.0% 0.1%US Equity Technology vs US Equity Small Cap -0.4% 0.7% -0.2% 0.1% 0.1%German vs French duration 0.0% 0.0%Chinese Yuan volatility vs Japanese Yen volatility 0.0% 0.0%China Equity vs UK Equity Volatility 0.1% -0.1% 0.0% 0.0% 0.0%Hang Seng vs S&P volatility -0.2% 0.1% -0.1%Swedish vs German Short-rates -0.2% 0.0% -0.2%US Large vs US Small Cap Equity -0.3% 0.0% 0.0% 0.1% -0.3%Korean Equity vs European Equity -0.1% -0.5% -0.5%
Cumulative contribution over 1
year
2323
Multi-Asset Investment Team
Idea Implementation
Risk Investigation
Idea Generation
MAI Team Members Staff Area Average years in industry Average years at Standard Life Investments
5 Global & EM Strategy 22 14
5 Risk & Structuring 9 6
18 Portfolio Management 17 9
Tenure
Critical combination of skills and experience
Size
* Roger Sadewsky is included in the Portfolio Management TeamStrategic Investment Group members in bold Source Standard Life Investments, 06 November 2012
Strength
Euan Munro FIAHead of Multi - Asset Investing and Fixed Income
Global Investment Specialist Team
Global StrategyAndrew Milligan
Jason Hepner CFAFrances Hudson
Douglas Roberts
CFA PRM
Dr Anne Friel PRM
Multi Asset RiskDr Brian Fleming
Dr Robert de Roeck
Dr Jens Kroeske
Gwilym Satchell PRM
Guy Stern CFA
Neil RichardsonColette Conboy
David KirkpatrickScott Smith
Ian Pizer
Multi Asset Management
Audrey Simpson
Harry SmithThad Quinn
Julia MikhniakCraig Hoyda
Alex Berry
Multi Asset Implementation
Murray Forbes
Malin Nairn James EslandMulti Asset Business Management
Portfolio Management
Neil Matheson
Global Economics
Alex GrassinoSLI Canada
Stan Pearson
Andrew Sutherland
Roger Sadewsky*
Richard House
Strategic Investment GroupMembers from out-with the
MAIT
Adam Rudd
Jennifer Catlow
24
GARS process
Integrated with full skill set across Standard Life Investments
Fundamental economic
analysis
Asset class team views
and strategies
Quantitative modelling
Valuation modelling
Multi Asset Risk and StructuringPre-trade risk Diversification measurement Scenario
Analysis
Strategic Investment Group• Review • Debate • Ratify / Reject
ConvictionDiversityLiquidity
Idea Generation
Selection
ImplementationMulti Asset Management
Strategy implementation Final position sizing Execution
Investment Governance &
Oversight
• Independent Risk Analysis
• Counterparty Risk Management
• Investment governance
25
Strategy activity in prior quartersQ4 2011 Q3 2012
Added Australian Yield Curve Flattener, - 10 year rates historically steep
Added German vs French 10 year interest rates- worsening fundamentals in France v Germany leading to wider spreads
Added Chinese Renminbi vs Japanese Yen currency volatility- Chinese currency to become more volatile as it internationalises
Amended Long Brazilian Real vs Australian Dollar to be long Mexican Peso vs Australian Dollar
Source: Standard Life Investments UK GARS portfolio, 30 September 2012
Altered Forward Starting US Duration – sold receiver swaptionat 2.4%
Altered Korean vs European equity relative value position by implementing Korean and German equity index call options
Altered Australian vs US short term duration by closing US short leg
Added US Dollar v Canadian Dollar
Closed Swedish v German short term rates strategy
Q1 2012 Added US Large Cap volatility
via VIX index
Closed UK 5Y inflation
Closed Long Norwegian Krone vs Euro
Added Long Brazilian Real vs Czech Koruna
Altered Financial vs Broad credit to take additional protection on the Broad credit position
Closed Australian Short Term Rates position
Assumed market exposure to Korean equities by closing the European side of Korean vs European equity relative value strategy
Added interest rate protection to Global Inflation-Linked bonds position
Q2 2012 Amended financials strategy to
create new European financials capital structure strategy to take account of anticipated changes to creditor preference on a bank failure
Closed Financial v Broad credit
Closed Broad v Financial equity
Added long UK vs Europe forward start duration strategy– European curve pricing in Japan style recession
Added relative value volatility strategy – Hang Seng vs S&P equity volatility through put options
Amended long Brazilian Real position to be versus Australian Dollar from Czech Koruna
26
Risk management
• Three stages of risk management:
• (1) Independent risk modelling using APT system (ex-ante risk) Daily risk reporting Basis for pre-trade risk analysis
• (2) Scenario analysis Historical extreme events using RiskMetrics Future extreme events modelled internally
• (3) Realised volatility based on performance (ex-post risk)
27
GARS Strategy Implementation
VIX index optionsDirectionalLong Equity Volatility
Nominal bonds, FX forwardsDirectionalMexican Government Bonds vs Euro
Bond futures, interest rate swapsDirectionalAustralian interest rate flattener
Equity optionsRelative valueHang Seng v S&P volatility
Variance swapsRelative valueRelative Variance Equity; China Equity vs UK Equity Volatility
Interest rate swapsRelative valueUK v European forward start duration
Duration
Currency call and put optionsRelative valueChinese vs. Japanese currency volatility
Volatility
Index-linked bonds and swaptionsMarket returnsGlobal Inflation-Linked BondsInflation
FX forwards and swapsDirectionalMexican Peso vs Australian Dollar
FX forwards and swapsDirectionalLong US Dollar; vs Euro, vs Canadian Dollar, vs Japanese YenFX
Equity futuresRelative valueUS Equity Large vs Small CapUS Tech vs Small Cap
Equity options Relative valueKorean Equity
Equity (GDRs)Market returnsRussian Equity
Equity, equity futures, equity optionsMarket returnsUS Equity
Equity, equity futuresMarket returnsEuropean Equity; Global Equity; UK Equity
Equities
Bond futuresRelative valueGerman vs. French interest rates
Bond futures, interest rate swaps and swaptionsDirectionalUS Long Bond Yields (forward start)
Interest rte swaptionsDirectionalEuropean Bond yield curve steepener
Nominal bonds, Credit default index swapsMarket returnsHigh Yield Credit
Credit default index swaps, equity futuresRelative valueEuropean Financials Capital Structure
Nominal bonds Market returnsEuropean Investment Grade Credit; UK Investment Grade Credit
Credit
ImplementationJigsawStrategyGroup
Source: Standard Life Investments, GARS UT, GARS SICAV and GARS offshore funds, 30 September 2012
28
• The portfolio is exposed to multiple diversified market risks
• 16.5% is total stand-alone investment risk chasing returns
• Equivalent equity volatility is 15.1%
• Independent risk analysis shows the benefits of investment diversification
• Each investment strategy measured on a like for like basis
Risk profile of multi-market return strategyStand-alone investment risks
Tota
l sta
nd-a
lone
risk
Source: Standard Life Investments GARS SICAV portfolio, 30 September 2012
European Equity position has stand-alone risk of 0.9 %
12.8%
3.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Diversification benefits
Expected volatility
16.5%
Market returns
Directional
Relative value
Security selection
29
Balanced blend of investment risks
Market ReturnsEuropean EquityHigh Yield CreditKorean EquityRussian EquityGlobal EquityUK Investment Grade CreditGlobal Inflation-Linked BondsUK EquityUS Equity European Investment Grade Credit
DirectionalLong US Dollar vs Canadian DollarLong US Dollar vs EuroUS Long Bond Yields (Forward Start)Mexican Government Bonds vs EuroLong Mexican Peso vs Australian DollarLong US Dollar vs Japanese YenLong Equity VolatilityFX HedgingAustralian interest rate flattenerEuropean Bond Yield Steepener
Relative ValueUS Equity Technology Sector vs US Equity Small CapUS Equity Large vs US Equity Small CapEuropean Financials Capital StructureRelative Variance IncomeUK vs European Forward-Start DurationHang Seng vs S&P VolatilityGerman vs. French interest ratesChina Equity vs UK Equity VolatilityChinese vs. Japanese currency volatility
Security SelectionRegional Equity and bond portfolios’ tracking error
A portfolio built to deliver stable performance in a wide variety of outcomes
Share of market risk exposure
Source: Standard Life Investments GARS SICAV portfolio, 30 September 2012
30
Diverse pool of return-seeking positions
A more informative view
Share of physical allocation
Source: Standard Life Investments GARS SICAV portfolio, 30 September 2012
Share of market risk exposure
US Equity 1.4%.Russian Equity 2.4%
Global Equity 3.2%
Mexican Government Bonds 4.1%
UK Equity 6.0%
EU Investment Grade Credit
7.0%
UK Investment
Grade Credit 7.1%
European Equity 7.4%
High YieldCredit 7.7%
Global Inflation-Linked
Bonds 10.1%
Cash & Other43.6%
Chinese vs. Japanese currency volatility
Security Selection
China Equity vs UK Equity Volatility
Long Equity Volatility
Australian interest rate flattener
German vs. French interest ratesHang Seng vs S&P Volatility
UK vs European Forward-Start Duration
Relative Variance Income
European Financials Capital Structure
US Equity Large vs USEquity Small Cap
European Bond Yield Steepener
US Equity TechnologySector vs
US Equity Small Cap
FX Hedging
Long US Dollar vs Japanese Yen
Long Mexican Peso vs Australian Dollar
Mexican Government Bonds vs Euro
US Long Bond Yields (Forward Start)
Long US Dollar vs Euro
Long US Dollar vs Canadian Dollar
European Investment Grade Credit
US Equity
UK Equity
Global Inflation-Linked Bonds
UK Investment Grade Credit
Global Equity
Russian Equity
Korean Equity
High Yield Credit
European Equity
31
Market returns
Directional
Relative Value
Security Selection
Source: Standard Life Investments UK GARS portfolio, 31 December 2006 - 30 September 2012
Dynamic diversificationVo
latil
ity
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Mar-12 Jun-12 Sep-12
32
Historical scenario analysis
* MSCI World Returns prior to 2000 denoted in European Currency Units, except for 1987 which is denoted in German MarksSource: GARS SICAV, RiskMetrics, 30/09/2012
-28 -26 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18
Bank Meltdown 2008 ( September 12 - October 15, 2008)
Subprime Debacle 2007 (July 15 - August 15, 2007)
Emerging Market Sell-Off 2006 (May 1 - June 8,2006)
Bond Sell-Off (June 14 - July 31, 2003)
Bond Rally (May 1 - June 13, 2003)
Gulf War 2 (March 1-23,2003)
Equity Rally (October 10 - November 27,2002)
Equity Sell-Off (August 23 - October 9, 2002)
Sept 11th
Tech Wreck (April 7-14, 2000)
Russian/LTCM
Asian Crisis 1997
Mexican Crisis 1995
Rate Rise 94
Gulf War 1990
Black Monday 1987
% MoveGARS SICAV Portfolio MSCI World (EUR) move over same period*
33
From Historical To Future Scenarios
-6 -4 -2 0 2 4 60
20
40
60
80
100
120
Return %
Sce
nario
cou
nt
China crisis
-6 -4 -2 0 2 4 60
20
40
60
80
100
120
Return %
Sce
nario
cou
nt
Margin squeeze
• Other potential future scenarios we consider “interesting”:• Quantitative Easing (QE) bubble• QE collapse• Germany leaves• Shale gas
Combining quantitative models and subjective judgementSource: Bloomberg, Standard Life Investments for illustrative purposes only
34
Corporate Global Absolute
Fees (%):All stocks (0)Class Order:1 Month US Libid Index / LIBOR Top Level (factset)Benchmark / Sector:10 Year ReportReport:12/31/2011Report End Date:U.S. $Currency:Standard Life Investments Firm:07/01/2006Creation Date:US GARSComposite Name:
2
5.28
206,244,441,942
10,897,493,192
1.33
0.15
10.75
Dec 2010
3
8.58
191,669,710,118
16,448,902,409
0.14
0.11
2.89
Dec 2011
2
1.73
205,104,537,238
3,555,802,495
0.00
0.21
19.25
Dec 20093-Yr St Dev
(%) to end Dec 2011
3-Yr St Dev (%) to end Dec
2010Dec 2008Dec 2007Dec 2006Dec 2005Dec 2004Dec 2003Dec 2002
169,620,477,022
273,159,341,591
250,034,739,413
113,842,300,00093,581,500,00082,468,000,00073,201,000,000Total Firm Assets
1
0.02
61,396,573
2.63
7.92
1
0.18
480,921,603
0.00
5.28
8.36
0.02
5.77
0 1
0.70
1,193,805,120
0.00
2.58
-6.35
0.35
7.41
000Number of Funds
Percentage of Firms Assets
Composite Final Market Value
Composite Dispersion
Benchmark Weighted Average
Composite Weighted Average
Firm Disclosure
A complete list and description of all of the firm's composites are available from Standard Life Investments. The change from Process Date to Trade Date was made during 1999. No valuations are based on Settlement Date. There are no minimum asset levels set below which portfolios are not included in a composite. All performance calculations and returns have been calculated gross of management fees. All returns are presented on an all-inclusive basis and as such all capital gains interest income and withholding taxes have been taken into account in market valuations and returns. All indices are on a gross of tax basis apart from FTSE UK indices which are net of Withholding Tax There are no Non-Fee-Paying portfolios included in any composite. The Daily True Time Weighted Rate of Return methodology has been used from 2001 apart from unitised Cash Property GARS and Myfolio products where NAV performance is used. Prior to this NAV performance was used for all products. Additional information regarding policies for calculating and reporting returns is available upon request Dispersion is calculated using high/low difference
Returns and market values in Irish punts prior to 1999 are converted from punts into Euros at the fixed conversion rat Standard Life Investments 'The Firm' consists of all fee-paying funds managed by Standard Life Investments and its Subsidiaries which include Standard Life Investments (Mutual Funds) Limited SLTM Limited Standard Life Investments (Corporate Funds) Limited Standard Life Investments (USA) Limited and Standard Life Investments (Asia) Limited Past performance results from Standard Life Investments Limited UK Firm and Standard Life Investments Limited Irish Firm have been linked to form the performance record of the new firm Standard Life Investments. The new firm was created on 01/01/2008 Standard Life Investments claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Standard Life Investments has been independently verified by Pricewaterhouse Coopers for the periods 1996 to 2011. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation
Composite Disclosure
Derivatives may be used to vary exposure to markets and express views on the direction of currencies interest rates sectors and securities to enhance capital return limit downside volatility and preserve capital Includes part period return for 2006 from 01/07 The composite includes funds that invest in a highly diversified strategy including equities bonds and cash with a derivative overlay in options futures swaps and currency forwards to deliver a positive absolute return. The fund is benchmarked against 1 month US Libid The standard annual fee applicable to this composite is 1.00% but individual fees are negotiated on an account basis This composite includes GBP denominated funds that are converted into USD using 3 month USD Libor and 3 month GBP Libor rates
Composite Report
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The information shown relates to the past. Past performance is not a guide to the future. The value of investment can go down as well as up.
This type of absolute return strategy makes extensive use of financial derivative instruments for investment purposes.
This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. It does not constitute an offer, or solicitation of An offer, to sell or buy any securities or an endorsement with respect to any investment vehicle. The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in market or economic conditions.
Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use byStandard Life**. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Standard Life** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.
**Standard Life means the relevant member of the Standard Life group, being Standard Life plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time."
Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL.Standard Life Investments are authorised and regulated by the Financial Services Authority.
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