uncertain times what are you going to do about it? david kilmer portfolio manager, head of research
TRANSCRIPT
Agenda
• About IOOF• IOOF’s investment value proposition• IOOF’s investment team• We live in an unstable world• Portfolio management in an unstable world• So, how should you manage your clients’ money?• Four investment imperatives in a binary pay off world• Conclusion
IOOF’s investment value proposition
IOOF provides a range of investment solutions designed to help you and your clients achieve your goals.
We offer you:• insightful investing that leads to innovative solutions• a partnership approach that is mutually beneficial• the right scale – not too big; not too small• 25 years of multi-manager and research experience
PortfolioManagers
Analysts Research
IOOF’s investment teamSteve Merlicek
Chief Investment Officer
Hugo Agudo(9)
David Kilmer(14)
Dan Farmer(16)
Stanley Yeo(13)
Simon Gross(30)
Robbie Lew(4)
Tim Cooper(15)
Rhodri Payne(4)
David Kilmer(14)
Tom Akay(9)
(X) years experience
(27)
We live in an unstable world
• World growth prospects
• Two positive factors for growth
• Two key risks to recovery
• Opportunities and threats
We live in an unstable world
• World growth prospectso More fragile than they used to be – a direct result of the 2008 financial
crisis.
GD
P g
row
th (
%)
China
AustraliaJapanUSGermany
1997
1999
2001
2003
2005
2007
2009
2011
-10
-5
0
5
10
15
We live in an unstable world
• World growth prospects – major economieso US: No.1 biggest economy – slow, but still growing o China: No.2 biggest economy – cooling off, but above its long-term
averageo Japan: No.3 biggest economy – strong, recovering after the tsunami o Germany: No.4 biggest economy – strong, benefitting from a
weak euro
We live in an unstable world
• Two positive factors for world growtho A fall in inflation will support real household income
1997 1999 2001 2003 2005 2007 2009 2011
-8
-6
-4
-2
0
2
4
6
8
10
AustraliaUSChina
JapanGermany
CP
I (%
)
We live in an unstable world
• Two positive factors for world growtho The strength of the corporate sector will support investment and job
creation
FY1999
FY2000
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY20080
2,000
4,000
6,000
8,000
10,000
12,000
US
$ (m
illi
on
)
Cash on Apple’s balance sheet
We live in an unstable world
• Two key risks to recoveryo Fiscal headwinds (mainly in developed world)o European debt crisis
Rank Country Debt to GDP ratio
1 Japan 233%
2 Greece 166%
3 Italy 121%
4 Ireland 109%
5 Portugal 106%
6 United States 100%
7 France 87%
8 Canada 84%
9 Germany 83%
10 United Kingdom 81%
20 China 27%
22 Australia 23%
23 Russia 12%
We live in an unstable world
• Opportunities and threatso Quantitative easing – low interest rates will remain low
o Global growth – growing but set to stay lowo China hard landing – no!
2007 2008 2009 2010 2011 20120
1
2
3
4
5
6
7
8
Rat
e (%
)
RBA
FedBOJ
ECB
PBC
Portfolio management in an unstable world
• Portfolio optimisation o Longer-term macro views – scenario analysis o Conservative return projections – expected valuation
• Risk management o Limit losses in the case of extreme or violent outcomes – tail risk
hedging
• Tactical asset allocationo Position for cheap themes selectively
Portfolio management in an unstable world
• Portfolio optimisation o Scenario analysis + expected valuation = risk adjust return
(based on IOOF and Russell Investment Models)Asset classes Nominal expected
return (%pa)Nominal volatility
(%pa)
Australian cash 4.3 1.9
Australian fixed interest 4.9 2.1
Australian equities 7.6 18.7
Australian listed property 6.6 17.6
Australian unlisted property 6.2 11.4
Fixed interest 4.5 2.0
Global equities 7.7 17.4
Global fixed interest 4.1 2.8
Global listed property (hedged) 7.4 15.1
Property 6.6 12.7
Portfolio management in an unstable world
• Risk management o Limit losses in the case of extreme or violent outcomes
12/27/0
7
03/05/0
8
05/12/0
8
07/17/0
8
09/23/0
8
11/28/0
8
02/04/0
9
04/13/0
9
06/18/0
9
08/25/0
9
10/30/0
9
01/06/1
0
03/15/1
0
05/20/1
0
07/27/1
0
10/01/1
0
12/08/1
0
02/14/1
1
04/21/1
1
06/28/1
1
09/02/1
1
11/09/1
1
01/16/1
2
03/22/1
2
05/29/1
20
10
20
30
40
50
60
70
80
<**
****
****
****
****
>
CommodityIndex
S&P 500
Currency(AUD/USD)
ASX 200
Portfolio management in an unstable world
• Risk management o Tail risk hedging – diversified hedging and active hedging
-4000
-3500
-3000
-2500
-2000June 2011 September 2011 December 2011 March 2012 June 2012600700800900
1000110012001300140015001600
3800390040004100420043004400450046004700
VIX
VIX – ASX200
ASX 200
-3650
-3450
-3250
-3050
-2850
Portfolio management in an unstable world
• Tactical asset allocationo Position for cheap themes selectively
October 2010 April 2011 October 2011 April 20123800
4000
4200
4400
4600
4800
5000
5200
1050
1100
1150
1200
1250
1300
1350
1400
MSCI World
ASX200
MSCI – ASX
So, how should you manage your clients’ money?• Passive approach
o Risk profile (review every three years)o ‘Buy and hold’ through ‘diversification’o Balanced – 50/50 or 30/70 Defensive and Growth splits
• Active approacho Annual risk profile reviewo Annual Asset Allocation reviewo Annual strategy review
So, how should you manage your clients’ money?Active Approach• Risk indicators
o VIX Index – watch levels at 15 and 30o Commodity currencies, AUD and CAD – risk on/off indicators
• Macro – big pictureo QE – a global evento Growth – US and China purchasing managers indices
• Marketso Equity is cheapo Emerging market is cheaper
So, how should you manage your clients’ money?• VIX Index (1992 to 2012) – watch levels at 15 and 30
19921993
19931994
19951996
19961997
19981999
19992000
20012002
20022003
20042005
20052006
20072008
20082009
20102011
0
10
20
30
40
50
60
70
80
90
So, how should you manage your clients’ money?• Commodity currencies, AUD and CAD – risk on/off indicators
o AUD/USD (1993 to 2012)
19931994
19951996
19971998
19981999
20002001
20022003
20042005
20062007
20082009
20092010
20110.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
AUD/USD
So, how should you manage your clients’ money?• Commodity currencies, AUD and CAD – risk on/off indicators
o CAD/USD (1993 to 2012)
0.6
0.7
0.8
0.9
1
1.1
CAD/USD
So, how should you manage your clients’ money?• QE – A global event
o US30 Years Yield (1993 to 2012)
19931994
19941995
19961997
19971998
19992000
20002001
20022003
20032004
20052006
20062007
20082009
20092010
20112012
2
3
4
5
6
7
8
9
US 30 year yield
So, how should you manage your clients’ money?• Growth – US and China purchasing managers indices
o US PMI (1992 to 2012)
19931994
19941995
19961997
19971998
19992000
20002001
20022003
20032004
20052006
20062007
20082009
20092010
20112012
30
35
40
45
50
55
60
65
US PMI
So, how should you manage your clients’ money?• Growth – US and China purchasing managers indices
o China PMI (2005 to 2012)
20052006
20072008
20092010
20112012
35
40
45
50
55
60
China PMI
So, how should you manage your clients’ money?• Markets
o Equity is cheapo Emerging market is cheaper
0
10
20
302000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011200
400
600
800
1000
1200
1400
600
800
1000
1200
1400
1600
SPX
MXEF
SPX (P/E)
MXEF (P/E)
Four investment imperatives in a binary pay-off world
What should you do under the active approach?• Position in cheap (risk) assets • Lock in elevated long-dated real yields• Position for cheap emerging markets theme• Protect pro-growth risk assets with diversified hedging
Conclusion
Markets are at a crossroad
Although downside risks to growth exist, don’t discount the upside!
Multiple choice questions
1. Which of the following two factors did David indicate were positive factors for growth:
a) Continued growth in China and emerging markets principally India and Brazil
b) Fall in inflation
c) Continued recovery of USA as an engine room of global growth
d) Strength in the corporate sector
2. What were two key risks that David identified to recovery
a) Fiscal headwinds
b) Surge in oil prices
c) The European debt crisis
d) Conflict in the middle east and possible contagion
Multiple choice questions
3. David outlined his thoughts on portfolio optimisation. Based on Russell/IOOF investment models, which asset class has the highest nominal expected return?
a) Property
b) Fixed Interest
c) Australian Equities
d) Global equities
4. What VIX levels did David suggest you watch
a) 10 and 15
b) 25 and 30
c) 15 and 30
d) 10 and 20
Multiple choice questions
5. Which of the following is not part of the IOOF investment value proposition?
a) Insightful investing that leads to innovative solutions
b) An investment approach modelled on strong quantitative investment portfolio
modelling
c) The right scale – not too big and not too small
d) 25 years of multi-manager and research experience