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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. 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 ?

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  1. UNCERTAIN TIMEs What are you going to do about it? David Kilmer Portfolio Manager, Head of Research

  2. 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

  3. About IOOF (History, Market Cap, FUA, Coverage …)

  4. 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

  5. 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

  6. We live in an unstable world • World growth prospects • Two positive factors for growth • Two key risks to recovery • Opportunities and threats

  7. 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

  8. 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

  9. 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

  10. 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)

  11. We live in an unstable world • Two key risks to recovery • Fiscal headwinds (mainly in developed world) • European debt crisis

  12. 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

  13. 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

  14. Portfolio management in an unstable world • Portfolio optimisation • Scenario analysis + expected valuation = risk adjust return (based on IOOF and Russell Investment Models)

  15. 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)

  16. Portfolio management in an unstable world • Risk management • Tail risk hedging – diversified hedging and active hedging VIX ASX 200 VIX – ASX200

  17. Portfolio management in an unstable world • Tactical asset allocation • Position for cheap themes selectively MSCI World ASX200 MSCI – ASX

  18. 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

  19. 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

  20. So, how should you manage your clients’ money? • VIX Index (1992 to 2012) – watch levels at 15 and 30

  21. So, how should you manage your clients’ money? • Commodity currencies, AUD and CAD – risk on/off indicators • AUD/USD (1993 to 2012) AUD/USD

  22. So, how should you manage your clients’ money? • Commodity currencies, AUD and CAD – risk on/off indicators • CAD/USD (1993 to 2012) CAD/USD

  23. So, how should you manage your clients’ money? • QE – A global event • US30 Years Yield (1993 to 2012) US 30 year yield

  24. So, how should you manage your clients’ money? • Growth – US and China purchasing managers indices • US PMI (1992 to 2012) US PMI

  25. So, how should you manage your clients’ money? • Growth – US and China purchasing managers indices • China PMI (2005 to 2012) China PMI

  26. So, how should you manage your clients’ money? • Markets • Equity is cheap • Emerging market is cheaper MXEF SPX SPX (P/E) MXEF (P/E)

  27. 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

  28. Conclusion Markets are at a crossroad Although downside risks to growth exist, don’t discount the upside!

  29. 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

  30. 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

  31. 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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