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The Evolution of Absolute Return
Cazenove Capital Management Limited 12 Moorgate London EC2R 6DA Telephone +44 (0) 20 7155 5600 www.cazenovecapital.com
Registered Office 12 Moorgate London EC2R 6DA Registered in England No 3017060 Authorised and regulated by the Financial Services AuthorityCazenove Capital Management Limited provides independent advice
For professional advisers authorised and regulated by the FSA only. This document must not be distributed to non-regulated persons or retail investors
Robert Thorpe - Director, UK Advisory Sales
2
Agenda
Part 1
Demand for Absolute Return
Part 2
Absolute returns - reducing marketing risk and volatility
Part 3
The Evolution of Absolute return
3
Defining Absolute Return
IMA: Absolute Return Sector: A return above zero in any market condition
A return above inflation
A return above cash
4
What Absolute Funds are not
Guaranteed to deliver positive returns each month - but potential for fewer negative months
Immune from volatility - but expect volatility to be lower than traditional funds
A new way of investing - but techniques now accessible to retail investors
Hedge funds - but borrow techniques from them, and are regulated funds
5
6
A truly global crisis
7
8
A truly global crisis
9
2008: Correlation Year
Average UK All Companies Fund -32.07% over 12 months
Average UK Corporate Bond Fund -10.01% over 12 months
Average UK Property Fund -30.43% over 12 months
Average Global Equity Fund -24.37% over 12 months
Average Asian Equity Ex Jap Fund -33.59% over 12 months
Average Emerging Markets Fund -37.14% over 12 months
Source: Lipper mid to mid, net income reinvested over one year to 31/12/08
10
Reduced return from cash
11
Who could Absolute Funds be suitable for?
Investors seeking positive returns above cash
Investors seeking low correlated asset classes
Investors seeking the potential for excellent returns with low volatility
Investors seeking to reduce risk in their portfolio
Investors seeking exposure to outstanding investment talent
Most investors….?
Investors close to retirement/drawdown
With-profit holders?
Those who didn’t invest last year!
12
Absolute return funds – enhancing returns/reducing risk
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
6.00 6.50 7.00 7.50 8.00 8.50
Core Portfolio 95% Core - 5% Abs Ret Fund 90% Core - 10% Abs Ret Fund
85% Core - 15% Abs Ret Fund 80% Core - 20% Abs Ret Fund
Source: Cazenove Capital. Abs Ret Fund (50% Caz UK EQ Abs Ret GBP/50% Threadneedle Abs Rtn Bond Fund)
3 years to 31st Dec 08. Core Fund is average IMA Cautious Managed Fund
Volatility
Re
turn
Absolute Returns – reducing market risk and volatility
Part 2
14
Shorting – simple explanation of profit from falling prices
£100k profit
Sell £200k
Buy back £100k
20
60
100
140
180
Property market crashes 50%!
15
FSA: Alternate Strategies to enter retail space
March 2007 – Consultation Paper CP07/6
1.2 A wider range of investment products is increasingly entering the retail market
and there is little, if any, possibility of preventing this. Indeed, because of the
recent downturns in the equity market retail consumers appear to be actively
seeking out alternative investments to increase their returns.
1.3 For this reason we have considered how we might create a regime to
accommodate these diverse products in a well-regulated environment. The
advances that have taken place in portfolio management mean that the
traditional, long-only style of management typically found in retail investment
products may no longer be the only appropriate strategy for every investor.
16
A market neutral fund
50% Long (beta +1)
50% Short (beta -1)= Zero Beta
Beta: Sensitivity of a share price to wider market movement (e.g tracker has a beta of 1)
Alpha: Return over and above market or index
Market neutral: no sensitivity to market risk (e.g beta of zero)
17
Example
Source: Datastream 1 December 2008Source: Datastream 1 December 2008
Stock: Reed ElsevierSector: Media & EntertainmentStyle: Growth Defensive
Stock: ITVSector: Media & EntertainmentStyle: Consumer Cyclical
20
3040
5060
7080
90100
110
120130
140150
160170
180
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
ITV relative to FTSE All Share Reed Elsevier relative to FTSE All Share
The Evolution of Absolute Return
Part 3
19
Cash+/above zero
UCITS 3 (EPM plus derivatives)
CGT qualifying
Daily dealing
1-3 year outlook
High transparency
Absolute
Absolute evolution
Relative objective
UCITS 3 (EPM)
CGT/Income tax (up to 32%)
Daily dealing
3-5 year outlook
High transparency
Traditional
Range of targets
Unregulated collective investment
Income tax only (to 32%)
Monthly dealing
6-18 month outlook
Lack of transparency
Hedge
Efficient Portfolio Management: A set of standards in the U.K. for prudent management of investment accounts. The standards call for economically appropriate transactions, i.e., transactions that reduce risk, reduce cost, or generate additional capital or income.
20
Aide memoire to Absolute Due Diligence
What is the volatility compared to the market? What is the Beta?
Has the fund manager used a rising market to achieve performance?
How much has the fund lost in any one month?
How many negative months?
Where have the returns come from?
How successful has the shorting record been?
Experience and evidence is crucial
21
Cazenove UK Absolute Target Fund
Launched July 2008
Targeting between 8 and 10% per annum, net of fees (Not guaranteed*)
Volatility significantly less than the equity market
UCITS Fund, daily priced and liquid
Managed by Tim Russell. Experienced, track record
Rated by OBSR and S&P
£213m under management
* There is no guarantee that either the target or positive returns will be achieved
Broadly market neutral (BETA 0)
Cazenove UK Absolute Target fund
22
Tim Russell’s Absolute Record at Cazenove Capital (rebased) GBP Class
80
100
120
140
160
180
200
Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09
Inde
xed
Cazenove UK Equity Absolute Return Fund (Class A GBP) FTSE All Share - TR UK Interbank 7 Day
Source: Cazenove Capital/Bloomberg at 31/03/09.Source: Cazenove Capital/Bloomberg at 31/03/09.
23
1 Yr to 31/03/09 UK Hedge Long Short TotalsAerospace & Defence -53 36 -17Automobiles & Parts 0 16 16Banks -271 95 -177Beverages -15 -7 -22Chemicals 0 87 87Construction & Materials -63 386 324Electricity 11 33 44Electronic & Electrical Equipment -2 37 35Equity Investment Instruments -4 11 8Food & Drug Retailers 3 21 24Food Producers -47 102 55Forestry & Paper -16 0 -16Future -103 8 -95Gas, Water & Multiutilities -8 9 1General Financial -262 35 -227General Industrials -45 2 -44General Retailers -148 157 9Healthcare Equipment & Services -97 8 -88
12 Months to 31/03/09 UK Hedge Long Short TotalsHousehold Goods & Textiles -51 2 -49Industrial Engineering -81 121 40Industrial Transportation -79 159 79Life Insurance -350 28 -322Media -95 6 -89Mining -231 352 120Mobile Telecommunications -125 34 -91Nonlife Insurance 17 32 49Oil & Gas Producers -93 25 -68Oil Equipment, Services and Distribution -17 -28 -45Pharmaceuticals & Biotechnology 73 26 99Real Estate -13 279 266Software & Computer Services -27 10 -17Support Services 19 176 194Technology Hardware & Equipment -9 23 14Tobacco -35 2 -33Travel and Leisure 45 138 183TOTALS -2171 2419 248
Tim Russell Absolute Portfolio 12 Months period
Performance attribution by sector – UK Equity Absolute Return Fund1 year to end March 2009 (basis points)
1 Yr to 31/03/09 UK Hedge Long Short Totals
Mining -231 352 120
1 Yr to 31/03/09 UK Hedge Long Short Totals
General Retailers -148 157 9
24
Tim Russell’s Absolute Record at Cazenove Capital
UK Equity Absolute ReturnFTSE All Share
Index
Months since launch 65 n/a
Monthly positives 57 40
Monthly negatives 8 25
Best monthly return (%) 2.5 6.26
Maximum monthly loss (%) -3.50 -13.24
Average net exposure (%) 14.40 n/a
Average gross exposure (%) 131.60 n/a
Beta -0.02 1
Volatility 3.36 13.3
Annualised return (%) 7.50 2.20
As at 30 March 2009Source: Cazenove Capital
As at 30 March 2009Source: Cazenove Capital
25
Tim Russell’s Absolute Strategy Performance: 10 biggest fall of FTSE since launch
-4.78
-3.33
-4.75
-8.67
-7.06
-3.60
-13.24
-11.90
-5.83-6.52
0.17
1.80
0.501.09 1.12
-0.03
1.98
0.23
-0.76
-3.50
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
May-06 Jul-07 Nov-07 Jan-08 Jun'08 Jul-08 Sep-08 Oct-08 Jan-09 Feb-09
FTSE All-Share UK Core Fund
26
Cazenove UK Absolute Target Fund
Monthly statistics since launch July 2008 to May 2009
Months since launch 10
Fund positive months since launch 8
Index positives month since launch 5
Fund negative months since launch 2
Index negative months since launch 5
Number of months fund out-performed index 6
Number of months fund fell further than index 1
Fund Volatility since launch 9%
Index Volatility since launch of fund 39%
Relative performance to all-share since launch: +15.6%
Fund return since launch +1.3% (avg IMA Absolute +1.2%)
Index return -14.3%
*Performance 18.7.08 to 27.05.09. P2 share class mid to mid, source Financial Express. Index FTSE All-Share
27
Disclaimer
This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitute an offer to enter into
any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein.
This document is solely for the use of professional intermediaries and is not for general public distribution.
The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no
guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove Capital or connected companies, directors, officers
and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein which, moreover, are subject to
change without notice.
This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view. Unless otherwise stated all views
are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission of Cazenove Capital Management and to the extent
that it is passed on, care must be taken to ensure this is in the form which accurately reflects the information given here. Unless otherwise indicated, the source for all
data is Cazenove Capital.
Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and an
investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates.
Cazenove Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment Fund Management
Limited (registered No. 2134680) each authorised and regulated by the Financial Services Authority and of 12 Moorgate London EC2R 6DA provide investment products
and services.