UNCERTAIN TIMEs What are you going to do about it ?

UNCERTAIN TIMES What are you going to do about it?

David KilmerPortfolio 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• So, how should you manage your clients’ money?• Four investment imperatives in a binary pay off world• Conclusion

About IOOF

(History, Market Cap, FUA, Coverage …)

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

PortfolioManagers

Analysts Research

IOOF’s investment teamSteve Merlicek

Chief Investment Officer

Hugo Agudo(9)

David Kilmer(14)

Dan Farmer(16)

Stanley Yeo(13)

Simon Gross(30)

Robbie Lew(4)

Tim Cooper(15)

Rhodri Payne(4)

David Kilmer(14)

Tom Akay(9)

(X) years experience

(27)

We live in an unstable world

• World growth prospects

• Two positive factors for growth

• Two key risks to recovery

• Opportunities and threats


• World growth prospectso More fragile than they used to be – a direct result of the 2008 financial

crisis.

GD

P g

row

th (

%)

China

AustraliaJapanUSGermany

1997

1999

2001

2003

2005

2007

2009

2011

-10

-5

0

5

10

15


• World growth prospects – major economieso US: No.1 biggest economy – slow, but still growing o China: No.2 biggest economy – cooling off, but above its long-term

averageo Japan: No.3 biggest economy – strong, recovering after the tsunami o Germany: No.4 biggest economy – strong, benefitting from a

weak euro


• Two positive factors for world growtho A fall in inflation will support real household income

1997 1999 2001 2003 2005 2007 2009 2011

-8

-6

-4

-2

0

2

4

6

8

10

AustraliaUSChina

JapanGermany

CP

I (%

)


• Two positive factors for world growtho The strength of the corporate sector will support investment and job

creation

FY1999

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY20080

2,000

4,000

6,000

8,000

10,000

12,000

US

$ (m

illi

on

)

Cash on Apple’s balance sheet


• Two key risks to recoveryo Fiscal headwinds (mainly in developed world)o European debt crisis

Rank Country Debt to GDP ratio

1 Japan 233%

2 Greece 166%

3 Italy 121%

4 Ireland 109%

5 Portugal 106%

6 United States 100%

7 France 87%

8 Canada 84%

9 Germany 83%

10 United Kingdom 81%

20 China 27%

22 Australia 23%

23 Russia 12%


• Opportunities and threatso Quantitative easing – low interest rates will remain low

o Global growth – growing but set to stay lowo China hard landing – no!

2007 2008 2009 2010 2011 20120

1

2

3

4

5

6

7

8

Rat

e (%

)

RBA

FedBOJ

ECB

PBC

Portfolio management in an unstable world

• Portfolio optimisation o Longer-term macro views – scenario analysis o Conservative return projections – expected valuation

• Risk management o Limit losses in the case of extreme or violent outcomes – tail risk

hedging

• Tactical asset allocationo Position for cheap themes selectively


• Portfolio optimisation o Scenario analysis + expected valuation = risk adjust return

(based on IOOF and Russell Investment Models)Asset classes Nominal expected

return (%pa)Nominal volatility

(%pa)

Australian cash 4.3 1.9

Australian fixed interest 4.9 2.1

Australian equities 7.6 18.7

Australian listed property 6.6 17.6

Australian unlisted property 6.2 11.4

Fixed interest 4.5 2.0

Global equities 7.7 17.4

Global fixed interest 4.1 2.8

Global listed property (hedged) 7.4 15.1

Property 6.6 12.7


• Risk management o Limit losses in the case of extreme or violent outcomes

12/27/0

7

03/05/0

8

05/12/0

8

07/17/0

8

09/23/0

8

11/28/0

8

02/04/0

9

04/13/0

9

06/18/0

9

08/25/0

9

10/30/0

9

01/06/1

0

03/15/1

0

05/20/1

0

07/27/1

0

10/01/1

0

12/08/1

0

02/14/1

1

04/21/1

1

06/28/1

1

09/02/1

1

11/09/1

1

01/16/1

2

03/22/1

2

05/29/1

20

10

20

30

40

50

60

70

80

<**

****

****

****

****

>

CommodityIndex

S&P 500

Currency(AUD/USD)

ASX 200


• Risk management o Tail risk hedging – diversified hedging and active hedging

-4000

-3500

-3000

-2500

-2000June 2011 September 2011 December 2011 March 2012 June 2012600700800900

1000110012001300140015001600

3800390040004100420043004400450046004700

VIX

VIX – ASX200

ASX 200

-3650

-3450

-3250

-3050

-2850


• Tactical asset allocationo Position for cheap themes selectively

October 2010 April 2011 October 2011 April 20123800

4000

4200

4400

4600

4800

5000

5200

1050

1100

1150

1200

1250

1300

1350

1400

MSCI World

ASX200

MSCI – ASX

So, how should you manage your clients’ money?• Passive approach

o Risk profile (review every three years)o ‘Buy and hold’ through ‘diversification’o Balanced – 50/50 or 30/70 Defensive and Growth splits

• Active approacho Annual risk profile reviewo Annual Asset Allocation reviewo Annual strategy review

So, how should you manage your clients’ money?Active Approach• Risk indicators

o VIX Index – watch levels at 15 and 30o Commodity currencies, AUD and CAD – risk on/off indicators

• Macro – big pictureo QE – a global evento Growth – US and China purchasing managers indices

• Marketso Equity is cheapo Emerging market is cheaper

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

19921993

19931994

19951996

19961997

19981999

19992000

20012002

20022003

20042005

20052006

20072008

20082009

20102011

0

10

20

30

40

50

60

70

80

90

So, how should you manage your clients’ money?• Commodity currencies, AUD and CAD – risk on/off indicators

o AUD/USD (1993 to 2012)

19931994

19951996

19971998

19981999

20002001

20022003

20042005

20062007

20082009

20092010

20110.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

AUD/USD

So, how should you manage your clients’ money?• Commodity currencies, AUD and CAD – risk on/off indicators

o CAD/USD (1993 to 2012)

0.6

0.7

0.8

0.9

1

1.1

CAD/USD

So, how should you manage your clients’ money?• QE – A global event

o US30 Years Yield (1993 to 2012)

19931994

19941995

19961997

19971998

19992000

20002001

20022003

20032004

20052006

20062007

20082009

20092010

20112012

2

3

4

5

6

7

8

9

US 30 year yield

So, how should you manage your clients’ money?• Growth – US and China purchasing managers indices

o US PMI (1992 to 2012)

19931994

19941995

19961997

19971998

19992000

20002001

20022003

20032004

20052006

20062007

20082009

20092010

20112012

30

35

40

45

50

55

60

65

US PMI

So, how should you manage your clients’ money?• Growth – US and China purchasing managers indices

o China PMI (2005 to 2012)

20052006

20072008

20092010

20112012

35

40

45

50

55

60

China PMI

So, how should you manage your clients’ money?• Markets

o Equity is cheapo Emerging market is cheaper

0

10

20

302000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011200

400

600

800

1000

1200

1400

600

800

1000

1200

1400

1600

SPX

MXEF

SPX (P/E)

MXEF (P/E)

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

Conclusion

Markets are at a crossroad

Although downside risks to growth exist, don’t discount the upside!

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


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


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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UNCERTAIN TIMEs What are you going to do about it ?