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UNCERTAIN TIMEs What are you going to do about it ?. David Kilmer Portfolio Manager, Head of Research. Agenda. About IOOF IOOF’s investment value proposition IOOF’s investment team We live in an unstable world Portfolio management in an unstable world

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Uncertain times what are you going to do about it

UNCERTAIN TIMEs

What are you going to do about it?

David Kilmer

Portfolio Manager, Head of Research


Agenda

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


About ioof

About IOOF

(History, Market Cap, FUA, Coverage …)


Ioof s investment value proposition

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


Ioof s investment team

IOOF’s investment team

SteveMerlicek

Chief Investment Officer

(27)

Tom Akay

David Kilmer

Rhodri Payne

Tim Cooper

Robbie Lew

Stanley Yeo

Simon Gross

David Kilmer

Hugo Agudo

Dan Farmer

Portfolio

Managers

Analysts

Research

(9)

(14)

(4)

(15)

(4)

(30)

(13)

(14)

(9)

(16)

(X) years experience


We live in an unstable world

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 world1

We live in an unstable world

  • World growth prospects

    • More fragile than they used to be – a direct result of the 2008 financial crisis.

China

Australia

GDP growth (%)

Japan

US

Germany


We live in an unstable world2

We live in an unstable world

  • World growth prospects – major economies

    • US: No.1 biggest economy – slow, but still growing

    • China: No.2 biggest economy – cooling off, but above its long-term average

    • Japan: No.3 biggest economy – strong, recovering after the tsunami

    • Germany:No.4 biggest economy – strong, benefitting from a weak euro


We live in an unstable world3

We live in an unstable world

  • Two positive factors for world growth

    • A fall in inflation will support real household income

China

US

Australia

Germany

CPI (%)

Japan


We live in an unstable world4

We live in an unstable world

  • Two positive factors for world growth

    • The strength of the corporate sector will support investment and job creation

Cash on Apple’s balance sheet

US$ (million)


We live in an unstable world5

We live in an unstable world

  • Two key risks to recovery

    • Fiscal headwinds (mainly in developed world)

    • European debt crisis


We live in an unstable world6

We live in an unstable world

  • Opportunities and threats

    • Quantitative easing – low interest rates will remain low

    • Global growth – growing but set to stay low

    • China hard landing – no!

PBC

Rate (%)

RBA

ECB

Fed

BOJ


Portfolio management in an unstable world

Portfolio management in an unstable world

  • Portfolio optimisation

    • Longer-term macro views – scenario analysis

    • Conservative return projections – expected valuation

  • Risk management

    • Limit losses in the case of extreme or violent outcomes – tail risk hedging

  • Tactical asset allocation

    • Position for cheap themes selectively


Portfolio management in an unstable world1

Portfolio management in an unstable world

  • Portfolio optimisation

    • Scenario analysis + expected valuation = risk adjust return

      (based on IOOF and Russell Investment Models)


Portfolio management in an unstable world2

Portfolio management in an unstable world

  • Risk management

    • Limit losses in the case of extreme or violent outcomes

<******************>

S&P 500

ASX 200

Commodity

Index

Currency

(AUD/USD)


Portfolio management in an unstable world3

Portfolio management in an unstable world

  • Risk management

    • Tail risk hedging – diversified hedging and active hedging

VIX

ASX 200

VIX – ASX200


Portfolio management in an unstable world4

Portfolio management in an unstable world

  • Tactical asset allocation

    • Position for cheap themes selectively

MSCI World

ASX200

MSCI – ASX


So how should you manage your clients money

So, how should you manage your clients’ money?

  • Passive approach

    • Risk profile (review every three years)

    • ‘Buy and hold’ through ‘diversification’

    • Balanced – 50/50 or 30/70 Defensive and Growth splits

  • Active approach

    • Annual risk profile review

    • Annual Asset Allocation review

    • Annual strategy review


So how should you manage your clients money1

So, how should you manage your clients’ money?

Active Approach

  • Risk indicators

    • VIX Index – watch levels at 15 and 30

    • Commodity currencies, AUD and CAD – risk on/off indicators

  • Macro – big picture

    • QE – a global event

    • Growth – US and China purchasing managers indices

  • Markets

    • Equity is cheap

    • Emerging market is cheaper


So how should you manage your clients money2

So, how should you manage your clients’ money?

  • VIX Index (1992 to 2012) – watch levels at 15 and 30


So how should you manage your clients money3

So, how should you manage your clients’ money?

  • Commodity currencies, AUD and CAD – risk on/off indicators

    • AUD/USD (1993 to 2012)

AUD/USD


So how should you manage your clients money4

So, how should you manage your clients’ money?

  • Commodity currencies, AUD and CAD – risk on/off indicators

    • CAD/USD (1993 to 2012)

CAD/USD


So how should you manage your clients money5

So, how should you manage your clients’ money?

  • QE – A global event

    • US30 Years Yield (1993 to 2012)

US 30 year yield


So how should you manage your clients money6

So, how should you manage your clients’ money?

  • Growth – US and China purchasing managers indices

    • US PMI (1992 to 2012)

US PMI


So how should you manage your clients money7

So, how should you manage your clients’ money?

  • Growth – US and China purchasing managers indices

    • China PMI (2005 to 2012)

China PMI


So how should you manage your clients money8

So, how should you manage your clients’ money?

  • Markets

    • Equity is cheap

    • Emerging market is cheaper

MXEF

SPX

SPX (P/E)

MXEF (P/E)


Four investment imperatives in a binary pay off world

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

Conclusion

Markets are at a crossroad

Although downside risks to growth exist, don’t discount the upside!


Multiple choice questions

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 questions1

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 questions2

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


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