03/03/2015. Investing in ideas Achieving genuine diversification. Agenda. Diversification dilemma. Investing in ideas.

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Achieving genuine diversification TEXPERS Annual Conference David Millar, FIA Head of Multi Asset

is an investment adviser; it provides investment advisory services to individual and

All material presented is compiled from sources believed to be reliable and current, but accuracy

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As with all investments there are associated inherent risks.

Portfolio holdings and characteristics are subject to change.

1 Achieving genuine diversification TEXPERS Annual Conference David Millar, FIA Head of Multi Asset March, Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. Past performance is not indicative of future results. This portfolio is actively managed. Portfolio holdings and characteristics are subject to change. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. The opinions expressed herein are based on current market conditions and are subject to change without notice. All data as of December,, unless otherwise indicated. FOR US INSTITUTIONAL INVESTOR USE ONLY II-GTR-PPT-. 8 Agenda Diversification dilemma Ideas in action The Diversification Dilemma

2 The diversification dilemma Unstable correlation between bonds and equities % Rolling 8-wk correlation between global equities and -yr US government bonds 8% % % % % -% -% -% -8% -% Source: Invesco Perpetual. Thomson Datastream as of Dec.,. * MSCI World Why do correlations change? Macro factors can change asset class dynamics Inflation targeting in the 99s 9 8 Quantitative easing 8 to-date Year-on-year change in CPI 7 Jan-9 Jan-9 Jan-9 Jan-9 Jan-98 US$ billions Jan- Jan-8 Jan- Jan- Jan- US inflation UK inflation US Federal Reserve balance sheet Source: Invesco Perpetual, Bloomberg, Datastream, as of Dec., The impact of these changing correlations Correlation of global equities with other asset types and balanced portfolios % 9% 8% 7% -8% portfolio -% portfolio -% portfolio % /EH/DM/IGTR Italy Roadshow/Dec/CE#77 % CRB Commodity Index % US Dollar Brent Oil price % % Global Macro % % Gold Source :Bloomberg, Lipper, IMA., Datastream Period covered: April, 7 to December,. MSCI World The UK s Investment Management Association (IMA) mixed investment sectors offer the classifications of -% portfolio, -% portfolio and -8% portfolio for multi-asset funds, representing a mix of shares, bonds and cash. Average figures shown. Bloomberg Global Macro Fund Composite. US dollar is USD vs. GBP exchange rate. Gold is Gold bullion, London Market, USD per troy oz.

3 Solving for the Multi Asset Dilemma Removing traditional asset class constraints Search for macro based ideas that aim to provide a positive investment return over a - year time horizon in our central economic scenario Strength of the corporate sector Central bank driven volatility Deflation or inflation? Choose the right asset type(s) to represent that idea based on return potential and risk analysis Equities Government Bonds Corporate Bonds Real Estate Collective Investment Schemes Volatility Instruments Inflation Products Currencies Commodities Source: Invesco Perpetual. For illustrative purposes only. Portfolio characteristics are subject to change without notice. GTR-PPT-I. Why think about investment ideas? To ensure consistent diversification Correlation of individual investment ideas to global equities (MSCI World) % % % -% -% -% -8% 7/IGTR Austria/Nov -% Jan- Jan- Jan- Jan- US -yr versus -yr Govt bonds US dollar vs Euro US large cap vs small cap Source: Invesco Perpetual, Datastream, as of Dec.,. 7 Multi asset portfolio

4 Pursuing risk and return diversification Portfolio: Typically - individual investment ideas across asset classes Target return: -month US Treasury Bills plus % on a rolling, three-year annualized basis* Target volatility: Less than half global equity volatility over a rolling, threeyear period* Credit - High Yield Currency - Norwegian Krone vs UK Pound Currency - US Dollar vs Euro Equity - Global Equity - Sell Puts as Long German Equity Equity - UK vs Switzerland Equity - US Large Cap vs Small Cap Interest Rates - Japanese Curve Flattener Interest Rates - Sweden vs Europe Interest Rates - US Duration Volatility - Asian Equities vs US Equities Volatility - Chinese Equities Currency - Indian Rupee vs Chinese Renminbi Currency - US Dollar vs Canadian Dollar Equity - European Divergence Equity - Selective Asia Exposure Equity - UK Equity - Sell Puts as Long US Equity Interest Rates - Australian Short Rates Interest Rates - Selective EM Debt Interest Rates - UK vs France Cash & Residual FX Volatility - Australian Dollar vs US Dollar Volatility - UK Equity vs UK Rates Source: Invesco. For illustrative purposes only. This information relates to the portfolio based on market conditions as of Dec.,, subject to change. MSCI World Index *Gross of fees. There is no guarantee that these targets will be achieved. 9 GTR-PPT-8. A repeatable three step process Research Thematic T Economic E Approving ideas Analytic A Managers M Fund management Risk Scenarios Structure Liquidity Combining ideas Implementation Order Comply Execute Review Implementing ideas Review and Oversight For illustrative purposes only. Starting from an unconstrained research approach Inputs Multi Asset team Invesco Chief Economist CIO challenge process Perpetual and IVZ fund managers External research calls Proprietary research databases Idea: Interest rates lower for longer We believe growth and inflation will remain low in the US, which will likely be reflected in long-term bond yields staying relatively low versus history. Government Bonds Idea: Policy divergence In our view, the long-term growth outlook favors the US over Europe. The euro looks expensive and therefore is our chosen implementation route for this economic view. US Treasury curve US dollar vs. euro Typically - ideas that aim to achieve a positive return over a - year time horizon in our central economic scenario Source: Invesco as of Dec.,. For illustrative purposes only. GTR-PPT-I.

5 Achieving diversification A portfolio designed to target equity-like returns for less than half the risk of global equities over a rolling, three-year period 8 Total independent risk.7% Diversification benefit 8 % of global equity risk Total fund risk.% Independent risk Marginal risk Source: Invesco Perpetual as at Dec.,. There is no guarantee this target will be achieved. For illustrative purposes only. This information relates to the portfolio based on market conditions as of Dec.,, subject to change. Portfolio characteristics are subject to change without notice. Assessing other risks Stress testing and economic scenario analysis. Historical stress testing. Analysis of possible scenarios going forward: Scenario Characteristics Commodity Glut Oil price falls (-%), S&P rallies (+%), Brazilian real weakens (-%) China Bust International QE HSCEI underperforms S&P (by %), vol spikes (VIX to ), South African bond yields up (+bps) Yen falls ( /$ to ), French yields fall to Japanese levels Foreign Policy Failure Oil prices rise (+%), Polish zloty falls (-%) Cash is King S&P falls to, yield on US -yr Treasuries rises to % Melt Up US equities up %, Brazilian equities rise (+%) Recession S&P falls to, German bond prices rise For illustrative purposes only. Portfolio characteristics are subject to change without notice. Investment ideas

6 Investment idea example Australian dollar vs. US dollar China Australia is more dependent on China Volatility of economic growth Nominal growth has been more volatile 8-7/IGTR Austria/Nov Australia US % exports to China Source: Invesco Perpetual, Datastream, as of Dec.,. - Q 99 Q 99 Q 99 Q 99 Q 99 Q 99 Q 99 Q 997 Q 998 Q 999 Q Q Q Q Q Q Q Q 7 Q 8 Q 9 Q Q Q Q Q US Australia Investment idea implementation Australian dollar vs. US dollar Volatility of AUD and USD (unusually) very similar AUDJPY -month at the money volatility USDJPY -month at the money volatility Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Source: Invesco Perpetual, Bloomberg, as of Dec.,. Interest rates UK vs France The drivers of the idea UK economic surprises have not been positive for a while Forward French inflation expectations are high UK economic surprise index /EH/DM/IGTR Italy Roadshow/Dec/CE# Jan- Jul- Jan- Jul- Jan- Source: Invesco Perpetual, Bloomberg, as at January. 7 French CPI ex-tob (lhs) French CPI ex-tob fy (rhs)

Interest rates UK vs France Difference between year bond yields in the UK and France is relatively wide.. UK -year bond yield France -year bond yield..... /EH/DM/IGTR Italy Roadshow/Dec/CE#77.

7 Interest rates UK vs France Difference between year bond yields in the UK and France is relatively wide.. UK -year bond yield France -year bond yield..... /EH/DM/IGTR Italy Roadshow/Dec/CE#77... Jan- Jan- Jan- Jan- Jan- Source: Thomson Datastream, as at January. 8 Conclusion Achieving genuine diversification Asset class correlations are dynamic and change over time, so will not always provide diversification A degree of flexibility is needed to achieve genuine diversification throughout the cycle think about investment ideas rather than asset classes The key attribute for multi asset funds is considering the best combination of return generating ideas with those that provide diversification should the investment landscape start to change Source: Invesco, as of December,. 9 Thank you 7

The increasing importance of multi asset solutions genuine diversification to reduce total risk

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