Sequencing Risk. Moat Capital PO Box 63, The Gap, Qld 4061 T: M: E:

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1 Sequencing Risk Craig Parker Private Client Adviser ADFS (FP), ADA1, ADA2 Authorised Representative Sentinel Private Wealth AFSL Member of Financial Planning Association of Australia (FPA) Moat Capital PO Box 63, The Gap, Qld 4061 T: M: E:

2 General Advice Disclosure Important Information This document and its contents are general in nature and do not constitute or convey personal advice. It has been prepared without consideration of anyone's particular financial situation, needs or financial objectives. Personal advice should be sought before acting on any of the areas discussed. The authors and distributors of this document accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this document. Moat Capital has made every reasonable effort to ensure the information provided is correct, but Moat Capital makes no representation or any warranty as to whether the information is accurate, complete or up to date. To the extent permitted by law, Moat Capital accepts no responsibility for any errors or misstatements, negligent or otherwise. The information provided may be based on assumptions or market conditions and may change without notice.

3 CONTENTS Risks Sequencing Risk A Strategy for Sequencing Risk - Protected High Income Market Round Up A Technical Analysis Perspective

4 RISKS TO RETIREMENT Longevity Living longer than your capital o o Larger amount of capital before retiring Invest in higher income assets Personal Something adverse happening to you or one of your immediate family members o o Healthy habits Ensure adult children are adequately insured Permanent Loss of Capital Product failure Selling at bottom of cycles and buying at the top Guaranteeing adult children s loans Sequencing Order of returns

5 Investor Behaviour Selling and buying at the wrong time Risk Time to be Fearful! Offloading Growth Assets EUPHORIA ANXIETY THRILL DENIAL OPTIMISM EXCITEMENT FEAR OPTIMISM Accumulating Growth Assets DESPERATION RELIEF PANIC DESPONDENCY HOPE Opportunity Time to be Greedy!

6 EFFECTS ON PORTFOLIO $482, S&P 500 $151, Average Investor

7 Lifecycle Risk

8 SEQUENCING RISK Definition of 'Sequencing Risk ' The risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments. Investopedia Pattern of returns Order of returns

9 Example - Assumptions Investing $200, year time frame Retirement Income $75,000 Retirement income indexed at 2% p.a. Returns sourced from Vanguard Index tables For Sequencing purposes the returns are simply reversed US Shares (Un-Hedged) Reversed Returns % 22.70% % 32.50% % 11.10% % 3.70% % 8.90% % % % % % 5.60% % 11.60% % -4.10% % 15.40% % % % % % 0.50% % 18.20% % 14.20% % 58.20% % 42.60% % 12.90% % 30.00%

10 Accumulation Phase Actual Returns Reversed Returns

11 Pension Phase Retirement Income $75,000 Retirement income indexed at 2% p.a Actual Returns Reversed Returns Run out of funds in year 17

12 Accumulation Phase 1990 to Actual Returns Reversed Returns

13 Pension Phase 1990 to 2009 Retirement Income $75,000 Retirement income indexed at 2% p.a Actual Returns Reversed Returns Run out of funds in year 7

14 DIVERSIFICATION to Reduce Risk ASSET CLASS Risk Profile Cash Aust Fixed Interest Int. Fixed Interest Property & Infrastructure Aust Shares Global Shares Secure 20% 40% 40% 0% 0% 0% Defensive 20% 30% 30% 6% 8% 6% Conservative 10% 25% 25% 12% 15% 13% Moderate 5% 17.5% 17.5% 12% 25% 23% Moderate to Aggressive 5% 7.5% 7.5% 12% 35% 33% Aggressive 0% 0% 0% 10% 46% 44%

15 Equities and Property allocation is still at Risk Asset Class Risk Profile Cash Aust Fixed Interest Int. Fixed Interest Property & Infrastructure Aust Shares Global Shares Secure 20% 40% 40% 0% 0% 0% Defensive 20% 30% 30% 6% 8% 6% Conservative 10% 25% 25% 12% 15% 13% Moderate 5% 17.5% 17.5% 12% 25% 23% Moderate to Aggressive 5% 7.5% 7.5% 12% 35% 33% 60% at RISK Aggressive 0% 0% 0% 10% 46% 44%

16 PROTECTED HIGH INCOME STRATEGY Combatting Sequencing Risk Higher Income with a Smoother Ride

17 Objectives Maintain and grow high levels of income whilst preserving your capital High Income (7% gross at October 2017) Preserve capital Reduce volatility Total return (income and growth) of o cash rate plus 5% (after fees) over rolling 3 and 5 year periods

18 Description An equity based absolute return strategy that invests directly in higher yielding Exchange Traded Funds (ETF s) that provide a high level of tax effective income. From the cash allocation, exchange traded option (ETO) strategies using Index Options are implemented to help protect capital and reduce volatility. What are Exchange Traded Funds (ETF s) ETFs are a type of investment that can be bought and sold like shares as they are listed on an exchange (ASX). In Australia, all ETFs are 'passive' investments that track assets or a market index (for example, an index that tracks the top 200 Australian shares) up or down. ETFs generally do not try to outperform those markets or assets. Often promoted as an easy way to diversify your investments, usually with lower fees than traditional managed funds.

19 What are Exchange Traded Options (ETO s) An exchange traded option (ETO) is simply a contract between two parties: A Buyer or Taker and A Seller or Writer Main Components of the Contract: Strike Price Expiry Date Type (Call or Put) Premium Traded on ASX Highly Liquid Standardised

20 What is an Index Option? An Index option is an option that is traded over a share market index such as the S&P/ASX 200. Index option contracts are cash settled and priced using points with a multiplier of 10, For example: If the S&P/ASX 200 is at 5000, the exposure for one contract is $50,000 (5,000 points * 10). Key advantage of utilising options when protecting the downside is still being able to benefit from the upside

21 Buyer or Taker of an ETO: Has the right but not the obligation to either purchase or dispose of a security or basket of securities (Index Options) at a predetermined price and date. For this right the Buyer pays the Seller a Premium. Seller or Writer of an ETO: Is obligated to either purchase or dispose of a security or basket of securities (Index Options) at a predetermined price and date. For this obligation the Seller receives a premium from the Buyer.

22 Put Option; Gives the buyer/taker the right but not the obligation to SELL a particular security or basket of securities (Index Options) at a predetermined price on or before a predetermined date (excluding Index Options). The seller/writer is obliged to acquire the security upon being exercised. Market View: Buyer believes the market is going to go DOWN Seller believes the market will remain STEADY or RISE Risks: The Buyers only risk is the cost of the option (Premium) The Sellers risk is limited to the strike price less premium received (significant risk)

23 Call Option; Gives the buyer/taker the right but not the obligation to BUY a particular security or basket of securities (Index Options) at a predetermined price on or before a predetermined date (excluding Index Options). The seller/writer is obliged to deliver the security upon being exercised. Market View: Buyer believes the market is going to go UP Seller believes the market will remain STEADY or FALL Risks: The Buyers only risk is the cost of the option (Premium) The Sellers risk is unlimited

24 Purpose of Options Protection: Protect securities/portfolios from possible larger downturns 10% plus Reduce Volatility: Offset smaller market downturns up to 5% Income: Generate income by selling options Profit: Turning your market view into profits

25 PROTECTION Strategy Owner of the asset is concerned about a FALL in value Buy a Put Option (Long Put Strategy): Right but not the obligation to sell their asset at a predetermined price and date $500,000 Asset Value Predetermined price - $500,000 (Strike Price) Predetermined Date - 2 months time (Expiry Date) Cost (paid to Seller of the option) - 2% or $10,000 (Premium) RISKS Put Buyer Limited to the premium $10,000 Put Seller Strike Price ($500,000) less premium paid ($10,000) = $490,000

26 Scenario 10% FALL at expiry date Options Outcomes Put Buyer: Has the right to Sell at $500,000 ($50,000 higher than the asset value of $450,000) Option is worth $50,000 less cost ($10,000) Asset worth $490,000 and not $450,000 (8.9%) improvement Put Seller: Obliged to purchase the asset at $500,000 when the asset is worth $450,000 Lost $50,000 less the premium received ($10,000)

27 Scenario 10% RISE at expiry date Options Outcomes Put Buyer: Has the right to Sell at $500,000, $50,000 less than the asset value of $550,000 Option is worthless Asset worth $540,000 and not $550,000 (1.8%) less Put Seller: Retains the $10,000 premium

28 SHORT FUNDS (ETP) BetaShares Australian Equities Strong Bear Hedge Fund Aims to help investors profit from, or protect against, a declining Australian Share market (S&P/ASX 200 Index) Seeks to generate magnified returns that are negatively correlated to S&P/ASX 200 Index Invests assets into cash and cash equivalents and sells equity index futures contracts (i.e. ASX SPI 200 futures). Fund doesn t borrow, it will use ASX SPI futures to obtain a magnified (or geared ) short exposure Exposure will generally vary between 200% and 275% of the Funds Net Asset Value Listed on the ASX

29 Example Using Strong Bear Fund 28/04/15 to 29/06/15: XJO declined 8.8% down to Same period BBOZ appreciated 22.8% up to 2969 Strong Bear Fund S&P/ASX % Positive % Loss 8.8% Negative 5422

30 Significant Market Drops All Ordinaries since 1985

31 Sample Retirement Portfolio ASSET CLASS Risk Profile Cash Aust Fixed Interest Int. Fixed Interest Property & Infrastructure Aust Shares Global Shares Secure 20% 40% 40% 0% 0% 0% Defensive 20% 30% 30% 6% 8% 6% Conservative 10% 25% 25% 12% 15% 13% Moderate 5% 17.5% 17.5% 12% 25% 23% Moderate to Aggressive 5% 7.5% 7.5% 12% 35% 33% Aggressive 0% 0% 0% 10% 46% 44% Protected High Income Strategy

32 Ideal for investors who; Are looking for a higher tax effective income strategy Are concerned about significant share market downturns Want access to growth opportunities (accumulators as well) Are looking to enter the share market but concerned it is overvalued Looking to diversify their income strategies Want transparency Want clear ownership (HIN based via CommSec) Want liquidity (access to available funds any time)

33 Process - How it works Require a SMSF (Retail superannuation version with Short Fund ETF s) Set up a CommSec trading, Cash and ETO account (HIN based) Options strategies with analysis ed to you for approval On approval trades are brokered via CommSec Quarterly performance updates provided Assistance with end of year tax with accountant and/or SMSF administrator Hands on process limited to 25 to 30 investors

34 Market Place Alternative Managers Fees 1% to 4% p.a. Opaque fee structure Complex ownership structures Possible liquidity issues Focus on FUM Financial Planners Lack of expertise AFSL restrictions Brokers Same issues as planners Brokerage focussed

35 FEES (Inclusive of GST) Set up Fee Nil for AIA members / Non-Members 2.2% Management fee 1.10% Maximum Options Brokerage $44.00 per leg or 0.55% No doubling up of accounting fees No financial planner fees No platform administration fees Save approximately 1.50% p.a. to 2.00% p.a. by going direct Min exposure amount $100,000

36 MARKET ROUNDUP

37 S&P/ASX Daily Source: Bourse Data

38 S&P/ASX Weekly Source: Bourse Data

39 S&P/ASX Monthly Source: Bourse Data

40 Small Ordinaries - Weekly Source: Bourse Data

41 S&P Weekly Source: Bourse Data

42 NIKKEI Weekly Source: Bourse Data

43 SHANGHAI COMPOSITE - Weekly Source: Bourse Data

44 FTSE - Weekly Source: Bourse Data

45 GOLD - Weekly Source: Bourse Data

46 OIL - Weekly Source: Bourse Data

47 Iron Ore - Weekly Source: Bourse Data

48 US DOLLAR - Weekly Source: Bourse Data

49 General Advice Disclosure Important Information This document and its contents are general in nature and do not constitute or convey personal advice. It has been prepared without consideration of anyone's particular financial situation, needs or financial objectives. Personal advice should be sought before acting on any of the areas discussed. The authors and distributors of this document accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this document. Moat Capital has made every reasonable effort to ensure the information provided is correct, but Moat Capital makes no representation or any warranty as to whether the information is accurate, complete or up to date. To the extent permitted by law, Moat Capital accepts no responsibility for any errors or misstatements, negligent or otherwise. The information provided may be based on assumptions or market conditions and may change without notice.

50 CONTACT DETAILS T M Web: Moat Capital PO Box 63, The Gap, Qld 4061 T: M: E: