Presentation Transcript

1. Alternative Thinking About Investments Living in the Age of Financial Repression November 2012
2. Words of Wisdom “Any plan conceived in moderation must fail when circumstances are set in extremes.” Prince Metternich “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don't let yourself be lulled into inaction.” Bill Gates
3. Surprise! First Member of Notre Dame Class of ‘33
4. Living in the "New Abnormal" Requires New Perspective Source(s): JPM.
5. New Abnormal: “Risk” Not Rewarded, Less Debt Wins Emerging market companies have little debt; Their equity performed like equity Enhanced Efficient Frontier Top Quartile Endowments Efficient Frontier Developed market equity became an option; some options have significant value, however… Most expire worthless Traditional Portfolio Note(s): Past performance is not indicative of future results. Please see index definitions at the end of this presentation. No investment is risk free; loss of principal is possible. Alternative investments involve specific risks that may be greater than those associated with traditional investments. One should consider the special risks with alternative investments, including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regularly and reporting requirements. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Source(s): Bloomberg, GMO, NACUBO, MCCM estimates. Definition(s): Compound ROR = compound rate of return; Annualized standard deviation = risk as measured by the variability of performance. The higher the standard deviation, the greater the variability (and therefore, the risk) of the fund or index; Traditional Efficient Frontier = addition of traditional asset classes such as stocks and bonds; Enhanced Efficient Frontier = addition of more alternative asset classes.
6. Fed Has Expanded B/S, Initiated Financial Repression
7. Positive Outcomes: Falling Rates, No Deflation, Rising S&P Source(s): Yardeni.com
8. Collateral Damage: Rising Food & Gas Prices, Inflation? Source(s): Hoisington Management, Yardeni.com
9. Looks More Like Deflation: Velocity of Money Collapsing Source(s): Hoisington Management
10. Why Are Traditional Portfolios Still U.S. Equity-Centric? Target Domestic Equity Large Cap Value Domestic Equity Large Cap Growth Domestic Equity Medium Cap Value Domestic Equity Medium Cap Growth Domestic Equity Small Cap Value Domestic Equity Small Cap Growth 50% International Equity Value International Equity Growth International Equity Emerging Markets 15% Absolute Return Hedge Funds 5% Private Equity Venture Capital Private Equity Buyouts Private Equity International 5% Inflation Hedge Real Estate - REITs Inflation Hedge Real Estate - Private 5% Fixed Income Domestic Fixed Income Global 20% Source(s): UNC (University of North Carolina Management Company). Note(s): Percentages represent target allocations within a traditional investment portfolio.
11. When Current Trends Suggests Lower Future Returns May be difficult to match long-term domestic equity performance going forward Source of Equity Returns 9.8% 5.1% Source(s): Based on research study conducted by Ibbotson & Chen. Research Report dated 2000. Study has not been replicated since 2000. Dividends represent dividend yield of Standard & Poor’s 500 as of 12/01/11. Inflation rate reflects CPI as of 12/31/11 (information from Bureau of Labor Statistics). MCCM believes that, following the Ibbotson model and methodology of forecasting, equity returns could stem from four sources that are added together to form a current outlook forecast.  The four sources are Inflation, Dividends, Real Earnings Growth, and P/E Multiple Expansion.  MCCM defines Inflation as the yield of the 10-year Treasury Note less the 10-year Treasury TIPS yield (+1.9 – (-0.1) = +2.0).  Dividends are represented by the dividend yield of the S&P 500 as of 12/31/11 (+2.1).  Real GDP Growth is estimated by World Bank’s Economic Forecast of the U.S., and MCCM estimates/calculates Real Earnings Growth as current 10 year trend GDP growth less 1 (+2.0 – 1 = +1.0).  Lastly, P/E multiples have been at historically high levels, so MCCM does not believe expansion is a likely source of growing equity returns and estimates the factor to be zero as of 12/31/11.  Hatteras’ forecast methodology is not a guarantee of future performance and should not be relied upon for any investment decisions. 
12. Endowment Portfolios Focus on Consistent Compounding From 1950 to 2011, the arithmetic average annual return of the S&P 500 has been 8.6% with a standard deviation of 16.7%1 $134k S&P 500 Hypothetical investment with the same return but half of the volatility Growth of $1,000 $73k Over that time period, if an investment could have achieved the same return with half of the volatility, it would have outperformed by over 80% 2 Note(s): The above information is hypothetical and is meant as an illustration only of consistent compounding of an original investment. Unmanaged indices are for illustrative purposes only. An investor cannot invest directly in an index. Past performance is not a guarantee of future results. Source(s): 1) Standard & Poor’s and Bloomberg; 2) Morgan Creek Capital Management, LLC.
13. Three Big Risks Facing Investors Today Source(s): Sharenator.com
14. 3 Big Risks: Euro Crisis, US Fiscal Cliff, China Slowdown Source(s): GS Research.
15. European Sovereign Risk Source(s): Sharenator.com
16. World Economic Growth Stalling, Europe in Full Recession Percent of World Economy With Rising Growth European 2012 GDP Growth Rates Source: Bridgewater, Trading Economics
17. Surprise! Austerity Created Unemployment, Not Growth Sources: Bridgewater, Neuberger Berman, Thompson Reuters
18. ECB Fended Off Spanish Crisis, Real Problems Starting… As Bad Loans accelerate, recent rally could be at risk Sources: CLSA, TIS Group
19. European Problems Are Very Large & Getting Worse… Sources: The Punchline
20. The U.S. Fiscal Cliff Source(s): Sharenator.com
21. Number 4 is Bad Omen in Chinese and Economics… Source(s): Strategas.
22. Entitlements Bigger Problem Than Debt, Fiscal Cliff Looms Sources: TIS Group, The Punchline
23. Fiscal Cliff is Larger than Largest U.S. Tax Increase Ever 40% Correction from Half the Fiscal Drag Source(s): Strategas.
24. Need Congressional Miracleto Avoid U.S. Recession in 2013 Source(s): TIS Group, Strategas
25. Demographics Points to Period of Secular Decline in P/Es Secular Trend Implies 50% Downside Source(s): Strategas., dshort.com
26. No Growth in Wages = Declining Income = More Debt 80% of Recent Consumer Debt Growth from Student Loans Sources: CLSA, TIS Group
27. China Hard Landing Source(s): Sharenator.com
28. Inflation Fading in BRICs, Unfortunately, So is Growth Sources: Deutsche Bank
29. Chinese Retail & Auto Sales Fall, Electricity/Petrol Down Sources: The Global Macro Investor
30. China: Falling Exports/LEI = Falling GDP = Falling Stocks? Technical patterns say SHCOMP could hit 1,500 or 1,000 Japan 2.0? Sources: The Global Macro Investor
31. China Hard Landing Debate, Money Supply Growth is Key Sources: SMC China, JP Morgan
32. Valuations Look Quite Attractive Relative To History Sources: SMC China
33. Chinese Manufacturing Data: Green Shoots or iPhone Lift? Sources: zerohedge.com
34. Global Reflation Favors China, Some Signs of Recovery Sources: TIS Group
35. Market Outlook Protecting Capital and Finding Alpha in the Current Environment
36. Words of Wisdom “Creative risk taking is essential to success in any goal where the stakes are high. Thoughtless risks are destructive, of course, butperhaps even more wasteful is thoughtless caution, which prompts inaction and promotes failure to seize opportunity.” Gary Ryan Blair, Author
37. JG: Negative Real Returns from Traditional Assets Till 2020? Alpha Source(s): GMO.
38. Good News: ECRI, Citi Surprises, Rail & Mileage Are Up Sources: Yardeni.com
39. Closer Look At Secular & Cyclical Positions Less Positive Source: The Global Macro Investor
40. Bad News: Factory Orders, Electricity & Unemployment Sources: Yardeni.com
41. Innovation in Oil Production is Bright Spot for Economy Sources: TIS Group
42. Valuations Are Well Above Average, Low Margin of Safety . Source(s): dshort.com.
43. Series of Rolling Tops in U.S. Markets Portends Trouble To be precise, I think October 5th was a short term top for stocks and the next low may not come until October 26th on the cycle work I look at. LJ Sources: TIS Group
44. Transports Did Not Confirm Others, VIX Now Jumping Danger Zone Sources: TIS Group
45. Gann “Death Zone” is 55 Days After Peak = Dec 2, 2012?? But, Seasonal Tailwind Starts (Coincidently) October 26th Sources: TIS Group
46. QuadraVu? Reliable Correction Indicator Turns Down Again Sell Longs Below 65 Get Short Below 50 Impact of Stimulus Fading, Cycles are Getting Shorter, Periods Above 65 Shrinking… Sources: dshort.com, Doug Kass
47. Mark Twain Said History Doesn’t Repeat, But It Rhymes… Final Surge for 7 Months Before U.S. Credit Crisis Fall… 7 Month Surge Before European Bank Crisis Fall? . Source(s): BigCharts.com.
48. Name That Tune: Domed House Looks Like Roof Caving In Sources: Doug Kass
49. Secular Bear Markets + Presidential Cycle = Trouble… Sources: The Global Macro Investor
50. Probability of Decline Less Important Than Size of Impact Source: dshort.com
51. Opportunities: Play Defense, Long Bonds & Options on VIX Utilities Staples Healthcare Target Yield 2.2% Source(s): Bigcharts.com, TIS Group
52. Opportunities: Buy CDS on Guarantor, Short Euro & Banks Japanese and European Bank Market Cap as a Percent of Total Market Target 1.10 Source(s): CLSA Group, TIS Group, Deutsche Bank
53. Boots on the Ground Discovering Investment Opportunities in a Global Marketplace
54. Words of Wisdom “An investment in knowledge always pays the best interest” Benjamin Franklin "Searching for investments is like looking for grubs under rocks: if you turn over 10 rocks you'll likely find one grub, if you turn over 20 rocks you'll find two…”
 Peter Lynch
55. 47,242 Miles and 100 Hours 24 Min on Airplanes, Why? Source: CIA Maps
56. Growth Investing in Future Leads to Developing World Population Growth Creating Huge “Bottom of the Pyramid” Source(s): MSN Encarta.
57. 40,000 Hong Kong 35,000 Japan 30,000 Taiwan Singapore 25,000 Korea 20,000 PPP adjusted Per Capita GDP – US$ 15,000 Malaysia 10,000 Thailand China 5,000 Philippines India 0 0 10 20 30 40 50 60 Years from beginning of economic reforms Global Investing: Skate to Where Puck is Going to be… Source: Merrill Lynch
58. The New World Order: the BRIC Century Is Coming Growth of Developed Markets and Emerging Markets GDP 1950 to 2050 Source(s): Credit Suisse, World Bank, PricewaterhouseCoopers. Note(s): Increased sizing of colored circles indicates market growth relative to other countries. Definition(s): BRIC currently references the following countries: Brazil, Russia, India and China.
59. Demographics + Debt Cycles = Investment Opportunities Demographics Early - FRONTIER Mid - BRIC Late – G7 Light infrastructure Shortage in housing, schools, hotels, supermarkets, etc. Young demographics Lower labor costs Competitive exports Favorable infrastructure Improving standard of living Middle aged demographics Rising labor costs Decline in exports and shift to higher margin contents Aging infrastructure Aging demographics High cost of labor Innovation/specialization High margin products Import/Export imbalances Debt Cycle Early Credit Credit Penetration Deleveraging Not well-developed banking Very Rapid/Uneven GDP Growth Very little insurance, credit, and investment products Emerging credit penetration Absent shadow banking system Well-developed banking system Rapid GDP Growth Inflation pressure Developing credit penetration Predominantly long-only products Developed shadow banking system DE levering Slower GDP growth Deflation pressures Increased defaults and restructurings High obsolescence Aggressive central bank intervention Investment Opportunities: Extracting Value and Realizing Alpha Sovereign Debt Commodities Long Equity/Private Equity Infrastructure Financial Services Consumer - Basics Corporate Debt Commodities Long Equity/Private Equity Consumer - Luxury Financial Services Healthcare Services Healthcare – Pharma Government Debt Long Equity/Private Equity Innovation Healthcare – Biotech/Devices Volatility Restructuring & Liquidations Short Equity Financial Sectors Obsolescence (2-3G/wired, retail)
60. Environment Supportive of Future EM Equity Returns Source of Equity Returns Current Environment Submerging Markets Source of Equity Returns Current Environment Emerging Markets Source of Equity Returns S&P 500 1926-2010* 11.0% 10.8% P/E Expansion (1%) P/E Expansion (1.3%) Real Earnings Growth (3.5%) Real Earnings Growth (2.1%) 5.0% P/E Expansion (0%) At Best Dividends (4.3%) Dividends (3.0%) Real Earnings Growth (1.0%) Dividends (2.0%) CPI / Inflation (3.5%) CPI / Inflation (3.1%) CPI / Inflation (2.0%) Source: Research Study conducted by Ibbotson & Chen. Research Report dated 2000. Study has not been replicated since 2000. Statistics above may not reflect current market statistics. Dividends represent dividend yield of Standard & Poor’s 500 as of 6/30/2012 Inflation rate reflects CPI as of 6/30/2012 + 1%(information from Labor of Bureau Statistics). Source: Ibbotson historical data, MCCM Estimates, S&P 500, BLS
61. When the 3rd Wave Comes, Don’t Be Standing on Shore Third Wave Domestic Consumption Is Doing Well Source(s): GMO.
62. Non-Traditional Asset Allocation A Solution for Financial Repression & Global Reflation
63. Global Reflation Calls for Non-Traditional Asset Allocation Sources: TIS Group, CLSA
64. TIS: Consensus Rarely Comes True, Silence is Interesting Sources: TIS Group
65. Domestic Equity International Equity Emerging Markets Equity Traditional Fixed Income Global Opportunistic Absolute Return Enhanced Fixed Income Private Equity Real Estate Energy & Natural Resources Now Is The Time to Focus on Skill-Based Investments Risk-Based Investments Traditional Investments Liquid Investments Hedge Funds Skill-Based Investments Illiquid Investments Private Investments
66. Four Ways to Make Returns, “Risk” in All Four Components of Long-Term Portfolio Returns . Note(s): Projected returns are not a guarantee of future results. Historical Averages Ibbotson Style Data for Stocks, Bonds, Cash for 1926-2011, Cambridge PE Data for Illiquidity Premium Outlook estimates are current risk free rates, current bond yields and forecast equity returns in developed and emerging markets from Bloomberg and GMO, Illiquidity forecast is MCCM estimate Source(s): Bloomberg, GMO, MCCM estimates.
67. Huge Opportunity to Capitalize on Illiquidity Premium While private asset returns are quite attractive in the current environment, we anticipate return differentiation among asset classes which will drive our tactical allocations which can add incremental value to the portfolio Breakdown of Median Return Expectation Summary . Note(s): MCCM estimates. Expected returns calculated by asset class based on expected investment yield, multiple expansion/contraction, leverage levels and pricing, earnings growth, and fee impact. The above information reflects opinions of Morgan Creek as of the time this presentation is written and all such opinions are subject to change. No representation or warranty, express or implied, is given by Morgan Creek as to the accuracy of such opinions and no liability is accepted by such persons for the accuracy or completeness of any such opinions. Source(s): S&P Leveraged Commentary & Data, Bloomberg, R.W. Baird, PricewaterhouseCoopers, National Council of Real Estate investment Fiduciaries, MCCM proprietary research and estimates.
68. CurrentInvestmentEnvironmentCreates Unique Problem In a low return world, how can investors add value? Need to focus where Alpha potential is highest
69. Focus on Embedded Value in Private Market Opportunities Going Global to Capture the Private Investment Premium . Source(s): Salient Partners, MCCM Portfolio Investments.
70. Need Endowment Model Going Forward More Than Ever Private Investments Enhanced Efficient Frontier Endowment Model Portfolio Emerging Markets Hedge Funds Traditional Efficient Frontier Source(s): GMO, MCCM estimates. Forecasts: returns for cash/bonds = current yield, returns for equities = GMO estimates, returns for hedge funds = stocks+3% alpha, returns for private = 20 year historical average Definition(s): Compound ROR = compound rate of return; Annualized standard deviation = risk as measured by the variability of performance. The higher the standard deviation, the greater the variability (and therefore, the risk) of the fund or index; Traditional Efficient Frontier = addition of traditional asset classes such as stocks and bonds; Enhanced Efficient Frontier = addition of more alternative asset classes. Endowment Model Portfolio estimates calculated using Policy Portfolio and forecast asset class returns Source: Bloomberg, GMO, NACUBO, MCCM Estimates
71. Important Disclosures General This is neither an offer to sell nor a solicitation of an offer to buy interests in any investment fund managed by Morgan Creek Capital Management, LLC or its affiliates. Any such offering can be made only at the time a qualified offeree receives a Confidential Private Offering Memorandum and other operative documents which contain significant details with respect to risks and should be carefully read. Neither the Securities and Exchange Commission nor any State securities administrator has passed on or endorsed the merits of any such offerings of these securities, nor is it intended that they will. This document is for informational purposes only and should not be distributed. Securities distributed through Town Hall, Member FINRA/SIPC. Indices The index information is included merely to show the general trends in certain markets in the periods indicated and is not intended to imply that the portfolio of any fund managed by Morgan Creek Capital Management, LLC was similar to the indices in composition or element of risk. The indices are unmanaged, not investable, have no expenses and reflect reinvestment of dividends and distributions. Index data is provided for comparative purposes only. A variety of factors may cause an index to be an inaccurate benchmark for a particular portfolio and the index does not necessarily reflect the actual investment strategy of the portfolio. No Warranty Morgan Creek Capital Management, LLC does not warrant the accuracy, adequacy, completeness, timeliness or availability of any information provided by non-Morgan Creek sources, including accessibility of unavailable funds. Risk Summary Investment objectives are not projections of expected performance or guarantees of anticipated investment results. Actual performance and results may vary substantially from the stated objectives with respect to risks. Investments are speculative and are meant for sophisticated investors. An investor may lose all or a substantial part of its investment in funds managed by Morgan Creek Capital Management, LLC. There are also substantial restrictions on transfers. Certain of the underlying investment managers in which the funds managed by Morgan Creek Capital Management, LLC invest may employ leverage (certain Morgan Creek funds also employ leverage) or short selling, may purchase or sell options or derivatives and may invest in speculative or illiquid securities. Funds of funds have a number of layers of fees and expenses which may offset profits. This is a brief summary of investment risks. Prospective investors should carefully review the risk disclosures contained in the funds’ Confidential Private Offering Memoranda. No investment is risk free; loss of principal is possible. Alternative investments involve specific risks that may be greater than those associated with traditional investments. One should consider the special risks with alternative investments, including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regularly and reporting requirements. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Safe Harbor Statement This presentation shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of, the securities in any state or jurisdiction in which such offer or solicitation or sale would be unlawful prior to registration or qualification under the laws of such state or jurisdiction. Forward-Looking Statements: This presentation contains certain statements that may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included herein are "forward-looking statements." Included among "forward-looking statements" are, among other things, statements about our future outlook on opportunities based upon current market conditions. Although the company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. One should not place undue reliance on these forward-looking statements, which speak only as of the date of this discussion. Other than as required by law, the company does not assume a duty to update these forward-looking statements. Past performance is no guarantee of future results. The illustrations are not intended to predict the performance of any specific investment or security. The past performance figures do not represent performance of any MCCM security and there can be no assurance that any MCCM security will achieve the past returns of the illustrative examples. This is not an offering to subscribe for units in any fund and is intended for informational purposes only. An offering can only be made by delivery of the Prospectus to “qualified clients” within the meaning of U.S. securities laws.
72. Contact Information Morgan Creek Capital Management, LLC301 W. Barbee Chapel Road, Suite 200Chapel Hill, NC 27517Phone: 919-933-4004Fax: 919-933-4048Email: InvestorRelations@morgancreekcap.comWeb: www.morgancreekcap.com