Optimising Asset Allocation with Exchange Traded Funds (ETFs)

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1 Optimising Asset Allocation with Exchange Traded Funds (ETFs) Well-informed investors are discovering what institutional investors have long understood: asset allocation, not security selection, is the key to driving long term investment results. State Street Global Advisors (SSGA) tactical ETF model portfolios are a cost-effective way for your clients to gain instant exposure to a diversified portfolio tailored to their investment needs backed by expertise and proprietary research from Australia s first provider of ETFs. Getting the Right Investment Mix When it comes to creating a successful portfolio, academic studies have confirmed that getting the right mix of assets can have a far greater influence than the individual securities in that mix. While chasing last year s high performers or newly fashionable asset classes can prove successful over a short period, 90% of the return variability of a portfolio over time 1 can be attributed to choosing the right mix of investment classes and deciding when this mix should be changed. That means asset allocation may be the most important decision an investor can make. While advanced asset allocation strategies can t ensure a profit or guarantee against loss, they can help to reduce investment risk significantly. For investors with a longer-term investment horizon, disciplined asset allocation can provide a high level of diversification, while taking advantage of inefficiencies in the market. It s also important to actively manage asset allocations in response to changing market conditions. Over time, asset classes can become mispriced. Equipped with the right research techniques, it s possible to identify investment classes which may be currently undervalued or overvalued. Like any value-minded shopper, it s prudent to reflect those findings in an investment portfolio, by overweighting the bargains and underweighting the expensive classes. At a Glance The right asset allocation is critical in helping investors meet their investment objectives. Using ETFs in an asset allocation model can provide unique advantages compared with other options. SSGAs tactical ETF model portfolios offer direct access to cost-effective asset allocation strategies, similar to those used by institutional investors. The Investment Solutions Group (ISG) draws on the experience of more than 60 investment professionals worldwide, as well as cutting-edge proprietary analysis tools, such as the SSGA Market Regime Indicator (MRI). Benefits of Including ETFs in Asset Allocation Models In the past, an advanced asset allocation strategy was out of reach for many individual investors, due to size of the assets involved and the costs of creating meaningful diversification. But ETFs have revolutionised the investing landscape, offering investors a sophisticated tool to efficiently gain exposure to broad market segments, encompassing a wide range of asset classes, equity market capitalisations, styles and sectors. This enables investors to have access to diversified investment portfolios consistent with their financial needs, risk tolerance and investment horizon.

2 Why Use ETFs for Asset Allocation? The potential benefits of using ETFs for asset allocation include: Diversification ETFs offer one of the easiest ways to help diversify a portfolio. By using an index ETF, your clients can achieve broad exposure to a market segment, helping to reduce risk and smooth investment returns. Transparency Unlike actively managed funds, index ETFs enable investors to identify precisely which securities their fund holds on any given day; there is no need to wait for the end of the month or quarter to review a fund s holdings. Investors have all the information they need to make informed investment decisions and co-ordinate their core ETF portfolio with their other assets. Tax Efficiency With an ETF, you and your clients decide when to buy and sell your holdings, rather than relying on an investment manager. That gives you more control over timing of capital gains and losses. And the structure of ETFs potentially reduces capital gains tax that would flow to the investor in a traditional managed funds. 2 What Are SPDR ETFs? SPDR ETFs are a family of exchange traded funds brought to you by SSGA pioneer of the ETF industry both globally and in Australia. In January 2001 SSGA introduced ETFs in Australia when it launched the SPDR S&P/ASX 200 ETF, which has more than US$2.6 billion in assets under management. 3 Today, SPDR ETFs manage over US$442 billion in assets under management 4 globally. An ETF is a collection of securities designed to track the performance of a certain market index, such as the S&P /ASX 200, or an index tracking a particular market sector or outcome, such as listed property or dividends. ETFs trade like stocks on a securities exchange and may be purchased and sold throughout the trading day based on their market price. Meeting Your Objectives with SSGA s Tactical ETF Model Portfolios SSGA s tactical ETF model portfolios provide a cost-effective option for investors to take advantage of tactical asset allocation (TAA) and ETFs with investments that facilitate broad diversification across the full range of asset classes. The tactical ETF model portfolios work by combining a number of SPDR ETFs and other leading exchange traded products (ETPs) to create a portfolio with a specific risk and/or outcome profile depending on your investment goals. Our Investment Strategy The Investment Solutions Group (ISG) within SSGA provides the portfolio strategy for the tactical ETF model portfolios, covering both: Development of a sound strategic asset allocation. Active management in the form of tactical overweighting and underweighting, depending on each portfolio s investment objectives. The ISG consists of more than 70 investment professionals located in seven offices around the world, with wide-ranging multi-asset-class experience. It specialises in tactical asset allocation and manages in excess of US$219 billion 5 in assets, utilising an expansive product set which includes SPDR ETFs. The tactical ETF model portfolios are designed to have a baseline, or strategic asset allocation, that is diversified and suitable as a core investment. The range of asset classes in these strategies may include: Australian and international shares Australian and international bonds Cash Other real return or alternative asset classes These model portfolios are available for those seeking ASX listed investments only, or for those with the ability to invest through multiple stock exchanges. On top of our strategic allocations, thematic tactical overweight s and underweights are developed based on our analysis of global markets. The process for identifying relative value opportunities is quantitative and also incorporates a fundamental review. The tactical positions are intended to add value around the strategic allocations and are constructed depending on the goals of the portfolio. For example, a conservative TAA model portfolio might be allowed to vary no more than 10% from its strategic asset allocation. In contrast, an absolute return TAA model portfolio will have only limited constraints. State Street Global Advisors 2

3 Figure 1A: Return ETF Model Portfolio Equity Australian Core 5% Australian High Dividend 15% International Equities 10% Emerging Markets 10% Fixed Income Australian Bonds 30% High Yield Bonds 10% Emerging Market Bonds 10% Real Assets Commodities 5% REITs 5% Figure 1B: Growth ETF Model Portfolio, ASX Listed ETFs Source: SSGA, as at 31 March Growth Australian Core 15% Australian High Dividend 10% International Equities 10% Emerging Markets 5% Listed Properties 15% Gold 5% Defensive Emerging Market Bonds 25% Commodities 10% REITs 5% A Disciplined and Quantitative Approach to Building our ETF Portfolio Models Our process is based on a disciplined, quantitative analysis that can identify assets that deviate from their historical value information that investors can then reflect in their portfolios. We then add another layer of analysis by applying a qualitative, or fundamental, review on top of the quantitative process. SSGA utilises an in-depth and disciplined process to create each portfolio model: Market Regime Identification (MRI) Our MRI is a proprietary macro indicator that analyses a range of market information to help identify the current risk and volatility of the market. Based on this information, we ll then adjust a portfolio s risk budget. For example, in periods of high riskaversion, the model portfolio may take on less risk than under normal circumstances. Evaluation To identify market inefficiencies, we use our proprietary indicator to objectively process data for more than 100 global asset classes, generating forecasts and providing initial allocation targets for stocks, bonds, commodities and cash. Construction Once the initial targets for each asset class have been determined, we apply a rigorous screening process, using a quantitative optimisation and fundamental review to select suitable investments and weightings. The broad investment themes are turned into specific portfolio positions, creating an optimal model portfolio for each risk profile. To do this, the portfolio management team adjusts the tactical active risk budget according to the MRI, then incorporates the quantitative scores and fundamental views of the investment team. In addition, the global investment team meets at least monthly to review the quantitative model outputs and consider variables outside the models that may be influencing markets. Active Monitoring and Management We continue to monitor each model portfolio s composition and performance, identifying undervalued or overvalued assets and making any necessary adjustments to the model portfolio. Why Choose a SSGA Tactical ETF Portfolio Model 1. Tactical ETF portfolio models offer a high level of diversification across all asset sectors, with a range of low cost options tailored to different risk profiles and outcomes. 2. SSGA is one of the largest institutional investment managers in the world, with a proven track record in delivering custom allocation solutions to institutions and investors. 3. Investors benefit from the expertise of the Investment Solutions Group, with in-depth experience in the ETF market in Australia and around the globe. 4. Expert analysis and proprietary forecasting tools, such as the Market Regime Indicator, offer detailed insights into global markets, helping guide our investment decisions and adjust our models as conditions change. 5. SSGA was the first company to introduce ETFs into the Australian market, thus have a unique understanding of local conditions and investor needs. 1 Brinson, G.P., L.R. Hood, and G.L. Beebower, Determinants of Portfolio Performance II, an Update, Financial Analyst Journal, May June Like managed funds, though; there may be times when the underlying index trigger the sale of securities held by the ETF. 3 SSGA, as of 31 March As of 31 March This AUM includes the assets of the SPDR Gold Trust (approx. $ billion as of 31 March 2015), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors serves as the marketing agent. 5 As at 31 December Total ISG AUM includes all Balanced Portfolios, Exposure Management, and the ISG LDI component of Liability Driven Investment. Derivatives based exposure management assets under management represents the gross notional value of exposure managed. Total AUM figure excludes execution only LDI mandates. State Street Global Advisors 3

4 Investment Process QUANTITATIVE FUNDAMENTAL Market Regime Indicator (MRI) Predict market risk aversion using a proprietary regime model Identify tracking error target and potential alpha adjustments Fundamental Insights provided by Policy and Politics Team Asset Class Evaluation Expected asset class returns and rankings across asset classes, markets and sectors using multi-factor models Asset class team experts analyse model inputs/outputs Portfolio Optimisation & Construction Proprietary optimisation software generates suggested asset class allocations and trades Fundamental Portfolio Manager Views Disciplined fundamental review of optimised asset allocations by global portfolio management team Trade Decision Across Global Portfolios Source: SSGA. The information contained above is for illustrative purposes only. State Street Global Advisors 4

5 ssga.com spdrs.com.au For public use. State Street Global Advisors, Australia, Limited Level 17, 420 George Street, Sydney, NSW 2000, Australia Issued by State Street Global Advisors, Australia Services Limited (AFSL Number )(ABN ) ( SSGA, ASL ), the holder of Australian Financial Services Licence ( AFSL ) number Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia. T: F: Investors should read and consider the Product Disclosure Statement (PDS) for the relevant SPDR ETF carefully before making an investment decision. A copy of the PDS is available at The material is general information only and does not take into account your individual objectives, financial situation or needs. It should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF s net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Diversification does not ensure a profit or guarantee against loss. Sector ETFs products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. Brokerage commissions and ETF expenses will reduce returns and transaction costs will also be incurred when buying or selling units of an ETF on ASX markets. ETF units may only be redeemed directly by persons called Authorised Participants. SSGA ASL is the issuer of units in the SPDR funds and the Responsible Entity for the managed investment scheme Australian SPDR funds quoted on the ASX or AQUA Product Issuer for those Australian SPDR funds quoted on the AQUA market of the ASX. State Street Bank and Trust Company (ABN ) (AFSL number ) is the trustee of, and the issuer of interests in, the SPDR S&P 500 ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol SPY. SSGA ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or CDIs ) which have been created over units in SPY and are quoted on the AQUA market of the ASX. The rights of CDI investors are different to those of investors in an Australian registered managed investment scheme and investors should read the applicable PDS before investing to understand the additional risk factors associated with investing in CDIs. An investment in SPDR funds or SPY CDIs do not represent a deposit with or liability of any company in the State Street group of companies including State Street Bank and Trust Company and are subject to investment risk including possible delays in repayment and loss of income and principal invested. No company in the State Street group of companies guarantees the performance of SPDR funds or SPY CDIs, the repayment of capital or any particular rate of return. Standard & Poor s, S&P and SPDR are registered trademarks of Standard & Poor s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. State Street Global Advisors 2015 State Street Corporation. All Rights Reserved. ID3784-AUSMKT Exp. Date: 31/12/2015 5