Dynamic Asset Allocation

• Asset Management• Investment Management• Portfolio Construction

Investment Strategy has moved from focusing on INVESTMENT RETURNS to focusing on INVESTMENT RISK.

Welcome to the world of

“Dynamic Asset Allocation”

Gary Williams

IntroductionSection A: History

Section B: Investment Philosophy and Process for Dynamic Asset Allocation

Dynamic Asset Allocation Fund Selection Portfolio Construction

Section A History: key influences

Date Influence Nature of the influence Area of impact

1952 Harry Markowitz Diversification; efficient frontiers and modern portfolio thinking

Diversification and risk management

1991 Professor Brinson (and others)

The factors influencing portfolio performance over time Asset allocation

2002 Daniel Kahneman The psychological influence on investment decisions Investor attitude to risk

Section A History: Markowitz

Modern Portfolio Theory

• Investors’ requirements revolve around obtaining reasonable investment returns without excessive volatility (Risk).

• It’s not about getting high returns!• It’s all about blending different asset classes to produce

average to good results at a lower risk (Volatility).• Investment Strategy has moved from focusing on RETURNS to

focusing on RISK

Section A History: Brinson

Asset allocation constitutes the most important step in portfolio construction,

accounting for more than 90% of the variability in portfolio performance over time1

1 G.P. Brinson, B.D.Singer, G.L. Bebower, “Determinants of Portfolio Performance II: An Update”, Financial Analyst Journal, May-June 1991.

Section A History: Kahneman

The 2002 Nobel prize for Economics¹ winner Daniel Kahneman

states that individuals are more depressed with losses than they

are satisfied with equivalent returns.

¹ The Sveriges Riksbank Prize in Economic Science

Section B: Philosophy and Process for Dynamic Asset Allocation

The investment philosophy is built on three core capabilities:

Dynamic Asset Allocation

Fund Selection – best of breed fund solutions

Portfolio Construction

Section B: Dynamic Asset Allocation

Different asset classes such as equities, bonds and cash have different performance characteristics meaning that they respond differently to changing economic scenarios. These differences create a need for complementary asset allocation combinations with appropriate risk and return profiles.

The portfolio manager’s skill is in altering asset weights tactically in order to create combinations of asset classes that can produce differing risk and return outcomes. The Harmony Portfolios have strategic (long-term) asset allocations that are reflective of the different benefits of these asset classes.

By tilting a portfolio’s exposure between different asset classes at different times there is value to be earned: this is the premise behind tactical asset allocation.

Section B:Dynamic Asset Allocation

Source: Momentum Global Investment Management Limited - January 2011

Section B: Dynamic Asset Allocation

Risk & Return Modelling

Section B: Dynamic Asset Allocation

Performance Benchmarks:An appropriate benchmark for each of the portfolios tells

us as much about the return expectations of the typical investor in the portfolio, as it does about their appetite for risk.

It allows us to continuously compare and contrast the investment manager’s performance.

Asset Allocation Benchmarks:It includes a 20% global exposure to complement the 80%

exposure to specific geographically / Currency focused asset classes.

Expanding the benchmark’s asset class set is strategic asset allocation.

Section B: Dynamic Asset Allocation

Historical returns for asset classes are rescaled to be consistent with expectations for the future. This allows the distribution to maintain the same shape (same number of outliers, etc) with the mean return adjusted.

Source: Momentum Global Investment Management, Lipper, Historic figures are % p.a. January 2000 – December 2010.Indices used for historic returns: Credit Suisse Tremont Multi Strategy Hedge Fund, FTSE EPRA/NAREIT Global Property, JPMorgan Global Bonds, JPMorgan US Bonds, LIBOR USD 3m, MSCI World, S&P 500, Credit Suisse High Yield Bonds. Past performance is not indicative of future returns.

Section B: Fund SelectionFunds / Managers Selection

Active investment approaches reward investors across inefficient asset classes (e.g. US small cap equity). Passive investment styles (e.g. index tracking) may be appropriate in efficient markets such as US Treasuries.

Specialists create pockets of excellence in their key areas of focus.

No single fund manager can create a monopoly of quality across the spectrum of products on offer and the ability to invest with different specialists across the world is essential.

It is therefore congruent to seek out Independent Financial Advice.

Section B: Fund SelectionAsset Class ResearchWhere active management works.

Percentage of fund managers who underperform various performance hurdlesIn

effici

ent

Index +1% +2% +4%

Effici

ent

Domestic Bonds* 84

Global Bonds

EM Equity

Japanese Equity

Sem

i-Effi

cien

t

UK Equities

US Equities

Global Equities

European Equities

Small Cap*

66 77

67 77

65 71 75

69 75 81

53 66 75

59 67 73

48 57 65 75

49 54 59 67

Efficient

Inefficient

Section B: Fund SelectionManager research and selection

Assets under management Investment style High alpha

Returns based style analysis Risk/attribution analysis

Check consistency through time

Philosophy Process People Evidence

Re-evaluation of existing managers

Ongoing monitoring

Asset class screening / initial research

Quant analysis

Due diligence

Selection

Section B: Fund SelectionUsing the best talent from around the world

Tokyo:Tiburon

London:M&GRWCSchrodersThreadneedle

New York:American CenturyPzenaMuzinich

Chicago:DriehausTimpani

Paris:Comgest

Wilmington:Marvin & Palmer

Connecticut:LapidesAXA IM

Arizona:ING

San Francisco:Artisan

Sydney:Aberdeen

Section B: Portfolio ConstructionCore & Satellite Strategy

Section B: Portfolio Construction

Alternatives

commodities

BRICS

The Core Asset Allocation

Section B: Portfolio Construction

Equity26.0% Equity

21.0%Equity22.0%

Equity26.0%

Equity31.0% Equity

25.7%

Equity33.1%

Equity41.2%

Equity30.0%

Fixed Income31.0%

Fixed Income41.0% Fixed Income

34.0%

Fixed Income42.0%

Fixed Income48.0%

Fixed Income41.5%

Fixed Income40.0%

Fixed Income34.7%

Fixed Income45.0%

Alt. Investments24.0%

Alt. Investments16.0% Alt. Investments

25.0%

Alt. Investments6.0%

Alt. Investments6.0%

Alt. Investments6.9%

Alt. Investments3.9%

Alt. Investments2.5%

Property11.0%

Property9.0%

Property4.0% Property

14.0%

Property11.0%

Property8.6%

Property9.5%

Property9.7% Property

10.0%

Commodities12.0%

Cash8.0%

Cash1.0%

Cash15.0%

Cash12.0%

Cash4.0%

Cash17.2%

Cash13.5%

Cash12.0% Cash

15.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 May-11 Benchmark

Dynamic Asset Allocation over time

Dynamic Asset Allocation

• Controlling Risk• Controlling Volatility• Controlling investment returns• Looking to explore how Dynamic Asset

Allocation can benefit your investments• Then please contact us, we look forward to

talking with you soon