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Management of Deposit Insurance Funds 16 November 2006

Management of Deposit Insurance Funds 16 November 2006. Michael Wilson +44 20 7742 3701. Management of Deposit Insurance Funds. Investment management goals Risk management Benchmark selection Conclusions. Investment management goals. Capital preservation Maximise returns.

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Management of Deposit Insurance Funds 16 November 2006

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  1. Management of Deposit Insurance Funds 16 November 2006 Michael Wilson +44 20 7742 3701

  2. Management of Deposit Insurance Funds • Investment management goals • Risk management • Benchmark selection • Conclusions

  3. Investment management goals • Capital preservation • Maximise returns … these can be contradictory

  4. How can we refine these goals? • Capital preservation • Over what time period? • With what probability? • Maximise returns • Subject to what risk? • In what currency?

  5. Where does return come from? Returns from active management of portfolio Excess Returns from passive management of benchmark Benchmark Returns … benchmark usually dominates risk and return

  6. Management of Deposit Insurance Funds • Management goals • Risk management • Benchmark selection • Conclusions

  7. Risk management: What are the risks? • Interest rate risk • Currency risk • Credit risk • Liquidity risk

  8. Management of Deposit Insurance Funds • Management goals • Risk management • Benchmark selection • Conclusions … the biggest risk of all

  9. As portfolios grow, broader benchmarks usual Goals Long term growth Buffer tranche Liquidity provision Benchmarks Full maturity index, equities 1-3 index 3 month bills / cash Increasing returns and risks Reserves

  10. Risk versus return for US Indices $ Returns (%) 1-30 years 1-10 years 1-5 years US Treasuries 1-3 years Data: Quarterly return data annualised; JP Morgan traded indices; returns in USD, currency hedged versus unhedged; data from December 1994 - December 2006

  11. US Treasuries: Historical ranges provide indication of likely future returns $ Returns (%) Max = 17.34% (Dec 1995) 1-30 Year 1-10 Year 1-5 Year 1-3 year Min = -2.90% (Dec 1994) Data: Annual return data; JP Morgan traded indices; returns in USD data from December 1987 -September 2004. Chart shows average, high and low annual performance during rolling years in sample period

  12. Unhedged markets add risk $ Returns (%) 1-30 years 1-30 years 1-10 years 1-10 years 1-5 years Global Govt.Unhedged US Treasuries 1-5 years 1-3 years 1-3 years Data: Quarterly return data annualised; JP Morgan traded indices; returns in USD, currency hedged versus unhedged; data from December 1994 - December 2006

  13. Hedged markets reduce risk and improve risk/return ratio $ Returns (%) Global Govt.Hedged 1-30 years 1-10 years 1-30 years 1-30 years 1-10 years 1-5 years 1-10 years 1-5 years 1-3 years Global Govt.Unhedged US Treasuries 1-5 years 1-3 years 1-3 years Data: Quarterly return data annualised; JP Morgan traded indices; returns in USD, currency hedged versus unhedged; data from December 1994 - December 2006

  14. Management of Deposit Insurance Funds • Management goals • Risk management • Benchmark selection • Conclusions

  15. Conclusions • Management goals • Capital preservation and maximise returns contradictory • Need to define more precisely • Risk management • Most risk is from benchmark • Interest rate, credit and currency are major market risks • Benchmark selection • Unhedged returns historically more volatile than single currency US$ indices • Currency hedged indices historically lower volatility • 1-3 year indices offer good protection against annual negative returns

  16. JPMorgan Asset Management Any forecasts or opinions expressed are JPMorgan’s own at the date of this document and may be subject to change. The value of investments and the income from them may fluctuate and your investment is not guaranteed and investors may not get back the full amount invested. Past performance is not a guide to future performance. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in smaller companies may involve a higher degree of risk as they are usually more sensitive to market movements. Investments in emerging markets may be more volatile than other markets and the risk to your to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made. Telephone lines are recorded and may be monitored for security and training purposes

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