FTSE

Rus

sell

1

ftser

usse

ll.co

m

Hom

e B

ias

and

Avo

idin

g R

egre

ts

Rad

ius

Exch

ange

Tra

ded

Foru

mTo

ront

o, C

anad

a

May

1, 2

018

Tom

Goo

dwin

, PhD

Seni

or R

esea

rch

Dire

ctor

, FTS

E R

usse

ll

FTSE

Rus

sell

2

FTSE

Rus

sell

is n

ot a

n in

vest

men

t firm

and

this

pre

sent

atio

n is

not

adv

ice

abou

t any

inve

stm

ent

activ

ity. N

one

of th

e in

form

atio

n in

this

pre

sent

atio

n or

refe

renc

e to

a F

TSE

Rus

sell

inde

x co

nstit

utes

an

offe

r to

buy

or s

ell,

or a

pro

mot

ion

of, a

sec

urity

. Thi

s pr

esen

tatio

n is

sol

ely

for i

nfor

mat

iona

l pu

rpos

es.A

ccor

ding

ly, n

othi

ng c

onta

ined

in th

is p

rese

ntat

ion

is in

tend

ed to

con

stitu

te le

gal,

tax,

se

curit

ies,

or i

nves

tmen

t adv

ice,

nor

an

opin

ion

rega

rdin

g th

e ap

prop

riate

ness

of m

akin

g an

y in

vest

men

t thr

ough

our

inde

xes.

FTSE

Rus

sell

3

Hom

e B

ias

–w

hat i

s it?

Sour

ce: I

nter

natio

nal M

onet

ary

Fund

Sur

vey,

201

2.

FTSE

Rus

sell

4

Ther

e ar

e go

od re

ason

s fo

r som

eho

me

bias

•Inv

esto

rs fe

el s

afer

(and

pat

riotic

) hol

ding

dom

estic

equ

ities

w

ith fa

mili

ar n

ames

•Les

s cu

rren

cy ri

sk

•Low

er c

osts

•Mor

e fa

vour

able

tax

trea

tmen

t

•Som

e de

gree

of h

ome

bias

may

hav

e lo

wer

vol

atili

ty

FTSE

Rus

sell

5

Hom

e bi

as le

ads

to th

eore

tical

ly in

effic

ient

al

loca

tions

Sou

rce:

Van

guar

d. C

ount

ry d

ata

from

Dec

embe

r 31,

196

9 to

Mar

ch 3

1, 2

014.

The

front

ier i

s pu

rely

theo

retic

al

FTSE

Rus

sell

6

Som

e re

cent

evi

denc

e on

the

trad

eoffs

Sou

rce:

FTS

E R

usse

ll. D

ata

from

May

5, 2

015

to A

pril

13, 2

018.

Pas

t per

form

ance

is n

o gu

aran

tee

of fu

ture

resu

lts. P

leas

e se

e th

e en

d fo

r im

porta

nt le

gal

disc

losu

res.

FTSE

Rus

sell

7

Onc

e yo

u’ve

dec

ided

to in

crea

se e

xpos

ure

to o

vers

eas

equi

ty, s

houl

d yo

u he

dge

the

curr

ency

?

•Sta

ndar

d ar

gum

ents

for a

cur

renc

y he

dge

•R

educ

es v

olat

ility

•N

o lo

ss o

f lon

g ru

n re

turn

•Pr

otec

ts a

gain

st a

rise

in th

e C

anad

ian

Dol

lar i

n th

e sh

ort r

un

•Sta

ndar

d ar

gum

ents

for l

eavi

ng c

urre

ncy

unhe

dged

•Av

oids

hed

ging

cos

ts

•N

o lo

ss o

f lon

g ru

n re

turn

•Pr

otec

ts a

gain

st a

fall

in th

e C

anad

ian

Dol

lar i

n th

e sh

ort r

un

FTSE

Rus

sell

8

Doe

s he

dgin

g el

imin

ate

curr

ency

risk

?

•U

nhed

ged

Ret

urn

= Lo

cal R

etur

n +

Cur

renc

y R

etur

n

•A

hed

ged

inde

x co

ntai

ns a

n im

plic

it be

t tha

t CA

D w

ill a

ppre

ciat

eag

ains

t fo

reig

n cu

rren

cies

. Th

e in

vest

or is

long

CA

D a

nd s

hort

all

othe

r cu

rren

cies

.

•A

n un

hedg

ed in

dex

cont

ains

an

impl

icit

bet t

hat C

AD

will

dep

reci

ate

agai

nst f

orei

gn c

urre

ncie

s. T

he in

vest

or is

sho

rt C

AD

and

long

all

othe

r cu

rren

cies

•If

eith

er b

et tu

rns

out t

o be

wro

ng, i

t will

gen

erat

e lo

wer

retu

rns

than

the

alte

rnat

ive

and

the

end

inve

stor

may

exp

erie

nce

regr

et

FTSE

Rus

sell

9

Doe

s he

dgin

g re

duce

vol

atili

ty?

-C

urre

ncy

hedg

ing

cann

ot g

uara

ntee

redu

ctio

n of

retu

rn v

olat

ility

-Fo

r thi

s w

hole

per

iod,

hed

ged

vola

tility

is 1

3.1%

ver

sus

12.3

% fo

r unh

edge

d

Sou

rce:

FTS

E R

usse

ll. D

ata

from

Dec

embe

r 31,

200

9 to

Mar

ch 3

0, 2

018.

Pas

t per

form

ance

is n

o gu

aran

tee

of fu

ture

resu

lts. P

leas

e se

e th

e en

d fo

r im

porta

nt le

gal d

iscl

osur

es.

FTSE

Rus

sell

10

Bes

ides

vol

atili

ty, t

here

is a

lso

Reg

ret R

isk

•Reg

ret i

s th

e em

otio

n ex

perie

nced

whe

n an

inve

stm

ent

outc

ome

is le

ss th

an a

n al

tern

ativ

e in

vest

men

t tha

t cou

ld

have

bee

n ea

sily

mad

e

•The

inve

stor

will

exp

erie

nce

regr

et if

:•

He/

she

goes

to a

ll ca

sh a

nd th

e m

arke

t tak

es o

ff

•H

e/sh

e st

ays

fully

inve

sted

in th

e m

arke

t and

ther

e is

a c

orre

ctio

n

•Thi

s is

a b

ehav

iour

al p

heno

men

on –

mod

ern

port

folio

theo

ry

does

n’t a

ckno

wle

dge

it as

it’s

“no

n-ra

tiona

l”

FTSE

Rus

sell

11

Hed

ged

Unh

edge

dH

edge

d –

Unh

edge

d

CA

D D

eclin

e A

ug 2

012

to J

an 2

016

49.8

%80

.7%

-30.

8%C

AD

Sur

ge J

an 2

016

to J

an 2

017

12.8

%4.

3%8.

5%C

AD

Dec

line

Jan

2017

to M

ar 2

018

13.3

%20

.3%

-6.9

%

Tota

l Ret

urn

for F

TSE

Dev

elop

ed e

x N

orth

Am

eric

a In

dex

over

diff

eren

t cur

renc

y pe

riods

Sou

rce:

FTS

E R

usse

ll an

d B

ank

of C

anad

a. D

ata

from

Dec

embe

r 31,

200

9 to

Mar

ch 3

0, 2

018.

Pas

t per

form

ance

is n

o gu

aran

tee

of fu

ture

resu

lts. P

leas

e se

e th

e en

d fo

r im

porta

nt le

gal d

iscl

osur

es.

FTSE

Rus

sell

12

If re

gret

is p

ossi

ble

whe

ther

we

hedg

e or

not

, w

hat s

houl

d w

e do

?•

Har

ry M

arko

witz

sug

gest

ed a

pos

sibl

e di

rect

ion

in th

e co

ntex

t ofh

is

own

inve

stin

g:

“I s

houl

d ha

ve c

ompu

ted

the

hist

oric

al c

ovar

ianc

e of

the

asse

t cl

asse

s an

d dr

awn

an e

ffici

ent f

ront

ier.

Inst

ead

I vis

ualis

ed m

y gr

ief

if th

e st

ock

mar

ket w

ent w

ay u

p an

d I w

asn’

t in

it –

or if

it w

ent w

ay

dow

n an

d I w

as c

ompl

etel

y in

it.

My

inte

ntio

n w

as to

min

imiz

e m

y fu

ture

regr

et, s

o I s

plit

my

(pen

sion

sch

eme)

con

trib

utio

ns 5

0/50

be

twee

n bo

nds

and

equi

ties.

”

Quo

ted

in Z

wei

g, “

Am

eric

a’s

Top

Pens

ion

Fund

,”M

oney

Mag

azin

e, 1

998.

FTSE

Rus

sell

13

Aca

dem

ics

have

look

ed a

t the

hed

ging

de

cisi

on in

the

cont

ext o

f reg

ret r

isk

•If t

he in

vest

or e

xper

ienc

es m

ore

than

twic

e th

e re

gret

of

bein

g al

l wro

ng o

n th

e di

rect

ion

of th

e cu

rren

cy o

ver b

eing

on

ly h

alf w

rong

(beh

avio

ural

ass

umpt

ion)

,

•And

the

inve

stor

has

no

shor

t-to-

med

ium

term

vie

w o

n th

e di

rect

ion

of th

e cu

rren

cy,

•The

n th

e re

gret

min

imiz

ing

choi

ce is

to h

edge

hal

f the

al

loca

tion

and

leav

e ha

lf un

hedg

ed.

Sou

rce:

Mic

hena

ud a

nd S

olni

k, “A

pply

ing

Reg

ret T

heor

y to

Inve

stm

ent C

hoic

es: C

urre

ncy

Hed

ging

Dec

isio

ns,”

Jour

nal o

f Int

erna

tiona

l Mon

ey a

nd F

inan

ce,

2008

.

FTSE

Rus

sell

14

Com

paris

on

with

50/

50

allo

catio

n

Can

adia

n D

olla

r ex

US

FTSE

Dev

ex

NA

unh

edge

d In

dex

FTSE

Dev

ex

NA

hed

ged

Inde

x

FTSE

Dev

ex

NA

50/

50

hdg/

unhd

gD

ec-2

009

–M

ar-2

018

Ann

. Ret

-0.7

%8.

8%7.

7%8.

3%

Ann

. Vol

atili

ty4.

7%12

.3%

13.1

%12

.1%

Max

imum

Dra

wdo

wn

-19.

7%-2

3.1%

-20.

6%

Aug

-201

2 –

Jan-

2016

Ann

. Ret

-4.2

%16

.0%

11.4

%13

.7%

Ann

. Vol

atili

ty4.

0%11

.4%

12.2

%11

.3%

Max

imum

Dra

wdo

wn

-11.

3%-1

8.5%

-13.

5%

Jan-

2016

–Ja

n-20

17

Ann

. Ret

8.9%

4.1%

12.2

%8.

0%

Ann

. Vol

atili

ty4.

9%12

.3%

14.0

%12

.4%

Max

imum

Dra

wdo

wn

-9.2

%-1

0.2%

-8.8

%

Jan-

2017

–M

ar-2

018

Ann

. Ret

-5.6

%16

.5%

10.9

%13

.8%

Ann

. Vol

atili

ty6.

3%9.

0%8.

1%7.

9%

Max

imum

Dra

wdo

wn

-8.1

%-9

.2%

-7.7

%S

ourc

e: F

TSE

Rus

sell

and

Ban

k of

Can

ada.

Dat

a fro

m D

ecem

ber 3

1, 2

009

to M

arch

30,

201

8. P

ast p

erfo

rman

ce is

no

guar

ante

e of

futu

re re

sults

. Ple

ase

see

the

end

for i

mpo

rtant

lega

l dis

clos

ures

.

FTSE

Rus

sell

15

Sum

mar

isin

g

•R

educ

ing

hom

e bi

as fr

om h

igh

leve

ls h

as re

duce

d vo

latil

ity a

nd

incr

ease

d di

vers

ifica

tion

hist

oric

ally

•Th

e de

cisi

on o

n cu

rren

cy h

edgi

ng o

f ove

rsea

s eq

uitie

s is

not

so

sim

ple:

•D

oes

the

end

inve

stor

exp

erie

nce

the

emot

ion

of re

gret

?

•D

oes

the

end

inve

stor

hav

e a

view

on

the

dire

ctio

n of

the

curre

ncy?

•H

as h

edgi

ng re

duce

d vo

latil

ity h

isto

rical

ly?

•D

epen

ding

on

the

answ

ers

to th

e ab

ove,

a b

lend

of h

edge

d an

d un

hedg

ed

allo

catio

ns m

ight

be

appr

opria

te

FTSE

Rus

sell

16

Than

k yo

u.

FTSE

Rus

sell

17

Impo

rtan

t inf

orm

atio

n•

©20

18 L

ondo

n St

ock

Exch

ange

Gro

up p

lc a

nd it

s ap

plic

able

gro

up u

nder

taki

ngs

(the

“LSE

Gro

up”).

The

LSE

Gro

up in

clud

es (1

) FTS

E In

tern

atio

nal L

imite

d (“F

TSE”

), (2

) Fr

ank

Rus

sell

Com

pany

(“R

usse

ll”),

(3) F

TSE

TMX

Glo

bal D

ebt C

apita

l Mar

kets

Inc.

and

FTS

E TM

X G

loba

l Deb

t Cap

ital M

arke

ts L

imite

d (to

geth

er, “

FTSE

TM

X”),

(4)

MTS

Nex

t Lim

ited

(“MTS

Nex

t”), (

5) M

erge

nt, I

nc. (

“Mer

gent

”), (6

) FTS

E Fi

xed

Inco

me

LLC

(“FT

SE F

I”) a

nd (7

) The

Yie

ld B

ook

Inc.

(“YB

”). A

ll rig

hts

rese

rved

.

•FT

SE R

usse

ll®is

a tr

adin

g na

me

of F

TSE,

Rus

sell,

FTS

E TM

X, M

TS N

ext L

imite

d,M

erge

nt, F

TSE

FI a

nd Y

B. “F

TSE®

”, “R

usse

ll®”,

“FTS

E R

usse

ll®”,

“MTS

®”,

“FTS

E TM

X®”,

“FTS

E4G

ood®

”, “IC

B®”,

“Mer

gent

®”, “

Wor

ldBI

G®”,

“USB

IG®”,

“Eur

oBIG

®”,

“Aus

BIG

®”,

“The

Yie

ld B

ook®

”, a

nd a

ll ot

her t

rade

mar

ks a

nd s

ervi

ce m

arks

use

d he

rein

(whe

ther

re

gist

ered

or u

nreg

iste

red)

are

trad

emar

ks a

nd/o

r ser

vice

mar

ks o

wne

d or

lice

nsed

by

the

appl

icab

le m

embe

r of t

he L

SE G

roup

or t

heir

resp

ectiv

e lic

enso

rs a

nd a

re o

wne

d,

or u

sed

unde

r lic

ence

, by

FTSE

, Rus

sell,

MTS

Nex

t, FT

SE T

MX,

Mer

gent

, FT

SE F

I or Y

B.

•Al

l inf

orm

atio

n is

pro

vide

d fo

r inf

orm

atio

n pu

rpos

es o

nly.

All

info

rmat

ion

and

data

con

tain

ed in

this

pub

licat

ion

is o

btai

ned

byth

e LS

E G

roup

, fro

m s

ourc

es b

elie

ved

by it

to b

e ac

cura

te a

nd re

liabl

e. B

ecau

se o

f the

pos

sibi

lity

of h

uman

and

mec

hani

cal e

rror a

s w

ell a

s ot

her f

acto

rs, h

owev

er, s

uch

info

rmat

ion

and

data

is p

rovi

ded

"as

is" w

ithou

t w

arra

nty

of a

ny k

ind.

No

mem

ber o

f the

LSE

Gro

up n

or th

eir r

espe

ctiv

e di

rect

ors,

offi

cers

, em

ploy

ees,

par

tner

s or

lice

nsor

s m

ake

any

clai

m, p

redi

ctio

n, w

arra

nty

or

repr

esen

tatio

n w

hats

oeve

r, ex

pres

sly

or im

plie

dly,

eith

er a

s to

the

accu

racy

, tim

elin

ess,

com

plet

enes

s, m

erch

anta

bilit

y of

any

info

rmat

ion

or o

f res

ults

to b

e ob

tain

ed fr

om th

e us

e of

the

FTSE

Rus

sell

Inde

xes

or th

e fit

ness

or s

uita

bilit

y of

the

FTSE

Rus

sell

Inde

xes

for a

ny p

artic

ular

pur

pose

to w

hich

they

mig

ht b

e pu

t. An

y re

pres

enta

tion

of h

isto

rical

da

ta a

cces

sibl

e th

roug

h FT

SE R

usse

ll In

dexe

s is

pro

vide

d fo

r inf

orm

atio

n pu

rpos

es o

nly

and

is n

ot a

relia

ble

indi

cato

r of f

utur

epe

rform

ance

.

•N

o re

spon

sibi

lity

or li

abilit

y ca

n be

acc

epte

d by

any

mem

ber o

f the

LSE

Gro

up n

or th

eir r

espe

ctiv

e di

rect

ors,

offi

cers

, em

ploy

ees,

par

tner

s or

lice

nsor

s fo

r (a)

any

loss

or

dam

age

in w

hole

or i

n pa

rt ca

used

by,

resu

lting

from

, or r

elat

ing

to a

ny e

rror (

negl

igen

t or o

ther

wis

e) o

r oth

er c

ircum

stan

ce in

volv

ed in

pro

curin

g, c

olle

ctin

g, c

ompi

ling,

in

terp

retin

g, a

naly

sing

, edi

ting,

tran

scrib

ing,

tran

smitt

ing,

com

mun

icat

ing

or d

eliv

erin

g an

y su

ch in

form

atio

n or

dat

a or

from

use

of t

his

docu

men

t or l

inks

to th

is d

ocum

ent o

r (b

) any

dire

ct, i

ndire

ct, s

peci

al, c

onse

quen

tial o

r inc

iden

tal d

amag

es w

hats

oeve

r, ev

en if

any

mem

ber o

f the

LSE

Gro

up is

adv

ised

in a

dvan

ce o

f the

pos

sibi

lity

of s

uch

dam

ages

, res

ultin

g fro

m th

e us

e of

, or i

nabi

lity

to u

se, s

uch

info

rmat

ion.

•N

o m

embe

r of t

he L

SE G

roup

nor

thei

r res

pect

ive

dire

ctor

s, o

ffice

rs, e

mpl

oyee

s, p

artn

ers

or li

cens

ors

prov

ide

inve

stm

ent a

dvic

e an

d no

thin

g co

ntai

ned

in th

is d

ocum

ent o

r ac

cess

ible

thro

ugh

FTSE

Rus

sell

Inde

xes,

inc

ludi

ng s

tatis

tical

dat

a an

d in

dust

ry re

ports

, sho

uld

be ta

ken

as c

onst

itutin

g fin

anci

al o

r inv

estm

ent a

dvic

e or

a fi

nanc

ial

prom

otio

n.

FTSE

Rus

sell

18

Impo

rtan

t inf

orm

atio

n (c

ontin

ued)

•Pa

st p

erfo

rman

ce is

no

guar

ante

e of

futu

re re

sults

. Cha

rts a

nd g

raph

s ar

e pr

ovid

ed fo

r illu

stra

tive

purp

oses

onl

y. In

dex

retu

rns

show

n m

ay n

ot re

pres

ent t

he re

sults

of t

he

actu

al tr

adin

g of

inve

stab

le a

sset

s. C

erta

in re

turn

s sh

own

may

refle

ct b

ack-

test

ed p

erfo

rman

ce. A

ll pe

rform

ance

pre

sent

ed p

rior t

o th

e in

dex

ince

ptio

n da

te is

bac

k-te

sted

pe

rform

ance

. Bac

k-te

sted

per

form

ance

is n

ot a

ctua

l per

form

ance

, but

is h

ypot

hetic

al. T

he b

ack-

test

cal

cula

tions

are

bas

ed o

n th

e sa

me

met

hodo

logy

that

was

in e

ffect

whe

n th

e in

dex

was

offi

cial

ly la

unch

ed. H

owev

er, b

ack-

test

ed d

ata

may

refle

ct th

e ap

plic

atio

n of

the

inde

x m

etho

dolo

gy w

ith th

e be

nefit

of h

inds

ight

, and

the

hist

oric

cal

cula

tions

of

an in

dex

may

cha

nge

from

mon

th to

mon

th b

ased

on

revi

sion

s to

the

unde

rlyin

g ec

onom

ic d

ata

used

in th

e ca

lcul

atio

n of

the

inde

x.

•Th

is p

ublic

atio

n m

ay c

onta

in fo

rwar

d-lo

okin

g as

sess

men

ts. T

hese

are

bas

ed u

pon

a nu

mbe

r of a

ssum

ptio

ns c

once

rnin

g fu

ture

con

ditio

ns th

at u

ltim

atel

y m

ay p

rove

to b

e in

accu

rate

. Suc

h fo

rwar

d-lo

okin

g as

sess

men

ts a

re s

ubje

ct to

risk

s an

d un

certa

intie

s an

d m

ay b

e af

fect

ed b

y va

rious

fact

ors

that

may

cau

se a

ctua

l res

ults

to d

iffer

mat

eria

lly.

No

mem

ber o

f the

LSE

Gro

up n

or th

eir l

icen

sors

ass

ume

any

duty

to a

nd d

o no

t und

erta

ke to

upd

ate

forw

ard-

look

ing

asse

ssm

ents

.

•N

o pa

rt of

this

info

rmat

ion

may

be

repr

oduc

ed, s

tore

d in

a re

triev

al s

yste

m o

r tra

nsm

itted

in a

ny fo

rm o

r by

any

mea

ns, e

lect

roni

c, m

echa

nica

l, ph

otoc

opyi

ng, r

ecor

ding

or

othe

rwis

e, w

ithou

t prio

r writ

ten

perm

issi

on o

f the

app

licab

le m

embe

r of t

he L

SE G

roup

. Use

and

dis

tribu

tion

of th

e LS

E G

roup

dat

a re

quire

s a

licen

ce fr

om F

TSE,

Rus

sell,

FT

SE T

MX,

MTS

Nex

t, M

erge

nt, F

TSE

FI, Y

B an

d/or

thei

r res

pect

ive

licen

sors

.

FTSE

Rus

sell

19

ftser

usse

ll.co

m