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Asset Allocation & Risk Management in a Highly Volatile and Uncertain World. FELIX STEPHEN Head of Strategy & Research ADVANCE Asset Management Limited Aug 2013. THE FUTURE.

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Asset Allocation & Risk Management in a Highly Volatile and Uncertain World


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    1. Asset Allocation & Risk Management in a Highly Volatile and Uncertain World FELIX STEPHEN Head of Strategy & Research ADVANCE Asset Management Limited Aug 2013

    2. THE FUTURE.... You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life. Steve Jobs (Co Founder, Chairman and CEO Apple Inc, Pixar, NeXT Inc) (24th Feb 1955 – 5th Oct 2011)

    3. Uncertainty, Predictability & Time Source: Dr Tim Jones & Advance Asset Management

    4. What are the factors that drive the future investment environment? • Policy – monetary, fiscal and regulatory changes • Demographic – population, wealth trends, demands • Geopolitical – conflicts, relationships • Psychological – emotion, behaviour, sentiment • Necessity – meeting risk/return objectives • Valuation – are assets cheap or expensive? • Cycle - at what point are we in the financial market • and/or business cycle?

    5. What drives people to make an investment decision? Risk / Return Fear / Greed

    6. Investor decisions are influenced by information and emotion Risk Appetite Euphoria Panic Greed drives decision making Fundamental research drives decision making Fear drives decision making

    7. Stock markets usually peak well before the peak of a business cycle because investors discount future news into the present value of assets.. Source: StockCharts.com & Advance Asset Management

    8. S&P 500 Futures Positioning Equity sentiment indicator (period ended 23rd July 2013) Source: Lipper, Goldman Sachs & Advance Asset Management

    9. Ponzi Finance.... Source: NYSE, Bloomberg & Advance Asset Management

    10. Ponzi Finance.... • “Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi Finance...The greater the weight of speculative and Ponzi Finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure” • Hyman Minsky – Macroeconomics • (university of Chicago and Harvard) • (23rd September 1919 - 24th October 1996)

    11. Strategic, Dynamic & Tactical Asset Allocation • Strategic Asset Allocation (SAA) is designed to meet long term strategic return objectives taking into account the relevant risk level and investment time frame • SAA is the foundation for your objectives & risk tolerance • Dynamic Asset Allocation (DAA) is designed to tilt an investment portfolio depending on the medium term trends while taking into account the strategic return objectives, the relevant risk level and investment time frame • DAA is more medium term in nature and is designed to capture key financial market themes that exist within market cycles • Tactical Asset Allocation (TAA) can be used to tilt an investment portfolio depending on the current environment. • TAA is more short term in nature and is designed to better manage shorter term market volatility and opportunities

    12. Our Asset Allocation Shifts over time

    13. Types of Risks • Unanticipated spikes in volatility and strongly correlated markets • Tracking Error & Peer performance risks • Liquidity risk & Drawdown risks • Concentration risks • Manager risks • Country risks • Credit risk • Currency risk • Default and Bankruptcy risk • Counterparty risk • Legislative and Policy risk

    14. Dynamic and Tactical Asset Allocation Strategies & Currency Risk Management • Dynamic Asset Allocation (DAA) can be used for implementing view’s based on more short to medium term thematic’s around market environment • Tactical Asset Allocation (TAA) can be used to take advantage of ultra- short term technical and flow driven opportunities. • Currency Risk Management (CRM) can be used to manage Currency drawdown risks and/or capital erosion due to base currency depreciation/appreciation.

    15. Our response to uncertainty and volatility: SAA,DAA & TAA

    16. THE FUTURE.... “ In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that NO LONGER EXISTS”Eric Hoffer(American Social Writer & Philosopher) 25th July 1902 – 21st May 1983

    17. This information is of a general nature only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. Before acting on the information, a person should consider its appropriateness having regard to these factors. The information is made available for use by advisers only and must not be passed on to clients. The Advance Multi-Blend Funds (Funds) are issued by Advance Asset Management Limited ABN 98 002 538 329 AFSL No. 240902 (Advance). Before deciding whether to acquire or to continue to hold an investment in a Fund, investors should obtain and consider the current Product Disclosure Statement for the Fund, available from www.advance.com.au. Past performance is not a reliable indicator of future performance. While the information in this document is given by Advance in good faith, it does not warrant that it is accurate, reliable, free from error or omission. Information from third parties is believed to be reliable however it has not been independently verified. Advance is a member of the Westpac Banking Corporation (Westpac) Group of companies. An investment in the Fund does not represent an investment in, deposit with or other liability of Westpac or any other member of the Westpac Group. It is subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither Westpac, nor any other member of the Westpac Group, stands behind or otherwise guarantees the capital value or the performance of an investment in a managed fund issued by Advance. Subject to any terms implied by statute which cannot be excluded, neither Advance nor any other company in the Westpac Group or their directors, employees and associates accept any responsibility for errors in, or omissions from the information. The Lonsec Limited ("Lonsec") ABN 56 061 751 102 rating (assigned January 2010) presented in this document is limited to "General Advice" and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. The scores used by Chant West to derive the ratings are subjective scores that have been awarded based on data (including historical financial performance information) supplied by third parties. While such information is believed to be accurate, Chant West does not accept responsibility for any inaccuracy in such data. Past performance is not a reliable indicator of future performance. The Chant West rating does not constitute financial product advice. However to the extent that the information may be considered to be general financial product advice then Chant West warns that: (a) Chant West has not considered any individual's objectives, financial situation or particular needs; and (b) individuals need to consider whether the advice is appropriate in light of their goals, objectives and current situation. This is an overall rating awarded by Chant West, and different ratings may have been awarded to individual products. Disclaimer

    18. Questions?Follow Felix’s weeklypodcast at advance.com.au