DWS Enhanced Commodity Strategy Fund

Transcription

1 Alternative 3rd quarter 2013 DWS Enhanced Commodity Strategy Fund

2 Take advantage of the experience of Deutsche Bank: a pioneering global commodities manager Canada United States Netherlands Belgium United Kingdom Luxembourg France Spain Germany Poland Austria Italy Russia Switzerland Bahrain China UAE Saudi Arabia India Japan South Korea Taiwan Philippines Singapore Australia A pioneering global commodities manager Deutsche Bank has been creating successful commodity strategies since February 2003, when it created the DBLCI and DBLCI-MR Indices. Today, Deutsche Bank, through its commercial and investment banking division, is one of the largest global traders of direct commodities. DWS Enhanced Commodity Strategy Fund leverages the quantitative methodology created by Deutsche Bank s institutional commodities group. Portfolio managers have access to more than 50 investment professionals who support the commodities and fixed-income components of the portfolio. Accolades won by Deutsche Bank s institutional commodities group IFR Awards 2010, 2012 Risk/Energy Risk Rankings 2013 House of the year commodity derivatives Freight House of the Year Coal House of the Year Precious Metals House of the Year Number 3 dealer overall, energy (excluding metals), energy and metals, and electricity, 2010 The IFR Commodity Derivatives House of the Year award recognizes breadth of business in commodity derivatives, innovation in product offering, structuring expertise and ability to leverage industry trends to deliver overall strong performance to clients and to the bank as a whole. Risk/energy risk rankings are decided by the industry through an online survey; criteria include pricing, flexibility, market making, reliability, integrity and speed of execution. The Asset magazine awards are adjudicated on both qualitative and quantitative criteria by The Asset magazine s board of editors. Awards do not apply to any Deutsche Asset & Wealth Management product. About Deutsche Asset & Wealth Management Deutsche Asset & Wealth Management combines all of Deutsche Bank s active, passive and alternative asset management activities, as well as its retail and institutional distribution functions. This alignment of the manufacturing, distribution and marketing functions supports optimal efficiency and performance. It also allows Deutsche Asset & Wealth Management to deliver a comprehensive set of capabilities few competitors in the world can match. 2 DWS Enhanced Commodity Strategy Fund

3 World trends are driving demand for commodities A growing and urbanizing population is driving demand for commodities (world population growth, 1950 to 2030) 10 Population (billions) Urban population World population Source: United Nations, 2009 for urban data and 2008 for world data. What s driving demand for commodities? There are more people. The world s population has more than doubled in the past 50 years, and is expanding by more than 78 million people per year, according to the United Nations. The world population is becoming more urban. In 2010, 3.5 billion of the world s 6.9 billion people are estimated to live in cities. By 2030, 5 billion of the world s 8 billion people could live in cities, according to the United Nations. The emerging markets are modernizing. As countries develop, they spend more money on infrastructure, and infrastructure requires commodities. China and India are good examples: Each has a population of approximately 1 billion people who are demanding more food, more housing and more infrastructure. Supply is decreasing. Most commodities are a finite resource. As the world demands more commodities in the face of limited supplies, prices could increase. Fast facts Commodities are basic goods, used in commerce, that are interchangeable with other goods of the same type. They include oil, metals, agricultural goods and livestock, among others. In regard to motor vehicles, in 2011, the United States had 991 personal vehicles for every 1,000 drivers, while China had just 51 personal vehicles for every 1,000 drivers, according to J.D. Power. With three times the population of the United States, according to the United Nations, that gives China plenty of future demand for vehicles and plenty of future demand for the commodities used to manufacture them. DWS Enhanced Commodity Strategy Fund 3

4 Commodities may lower correlations by adding diversification to portfolios Direct commodities have demonstrated low correlation to stocks (correlation, 10/1/08 9/30/13) Investors can gain access to commodities by purchasing stocks of companies that produce commodities or by purchasing commodities themselves ( direct commodities ). But direct commodities are less correlated to stocks than the stocks of companies that produce commodities U.S. stocks Commodities stocks Commodities Source for chart and text below: Morningstar as of 9/30/13. Past performance and correlation are historical and do not guarantee future results. The chart above is for illustrative purposes only and does not represent any Deutsche Asset & Wealth Management product. U.S. stocks are represented by the S&P 500 Index. International stocks are represented by the MSCI EAFE Index. Commodities stocks are represented by a 50% allocation to the MSCI World Energy Index and a 50% allocation to the MSCI World Materials Index. Commodities are represented by the Dow Jones-UBS Commodity Index. The nine equity assets classes are Large Blend, Large Value, Large Growth, Small Blend, Small Value, Small Growth, Mid-Cap Blend, Mid-Cap Value and Mid-Cap Growth, all represented by Morningstar categories. The values of equity investments are more volatile than those of other securities. Commodities are long-term investments and should be considered part of a diversified portfolio; market-price movements, regulatory changes, economic changes and adverse political or financial factors could have a significant impact on performance. Correlations for other time periods may not have been as favorable. In today s market environment, correlations between traditional domestic asset classes are high. Correlations of large-blend stocks to the other eight domestic equity asset classes range from 0.94 to 1.00 for the 10-year period as of 9/30/13, according to Morningstar. Correlations of international stocks to U.S. stocks have also increased, from 0.47 in the 1980s to 0.54 in the 1990s to 0.87 in the 2000s. Investing in commodities may help address rising correlations by adding an element of diversification to a portfolio. Of course, diversification neither guarantees a profit nor protects against a loss. Fast fact Correlation is a measure of how closely two variables move together over time. A 1.0 equals perfect positive correlation, where variables move in the same direction. A 1.0 equals perfect negative correlation, where variables move in opposite directions. 4 DWS Enhanced Commodity Strategy Fund

5 Commodities have historically performed well in rising-inflation environments Commodities have performed well when inflation has risen (average annual total return, 12/31/76 12/31/12) Average inflation is represented by the average U.S. Consumer Price Index (CPI) inflation growth rate from 12/31/76 through 12/31/12, which was 4.3%. Inflation was considered rising when it was higher than it was one year prior. 23.5% 28.3% 5.9% 6.3% 8.4% 5.9% Commodities Stocks Bonds Commodities Stocks Bonds Below average and rising Above average and rising Source: Morningstar, Bloomberg and FactSet. Past performance is no guarantee of future results. The chart above is for illustrative purposes only and does not represent any Deutsche Asset & Wealth Management product. Commodities, bonds and stocks are represented by the S&P Goldman Sachs Commodities Index, Barclays U.S. Aggregate Index and S&P 500 Index, respectively. The values of equity investments are more volatile than those of other securities. Fixed-income investments are subject to interest-rate risk, and their values will decline as interest rates rise. Commodities are long-term investments and should be considered part of a diversified portfolio; market-price movements, regulatory changes, economic changes and adverse political or financial factors could have a significant impact on performance. Equity index returns include reinvestment of all distributions. Index returns do not reflect fees or expenses, and it is not possible to invest directly in an index. Since 2008 and 2009, in order to keep the struggling U.S. economy from plummeting even deeper into recession, the U.S. Federal Reserve Board (Fed) printed an unprecedented amount of money amassing more than $2 trillion in government debt and mortgage-backed securities, according to The New York Times as of September Printing money may have helped the U.S. economy, but it can also create problems. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid, said Dallas Federal Reserve Bank Head Richard Fisher in May Why? In part because rising inflation usually puts a crimp on traditional asset classes. It s potentially bad for bonds because when inflation rises, existing bond prices tend to fall since the future interest payments the bondholder expects to receive will be less valuable. Likewise, it may be bad for stocks, because inflation devalues corporate earnings, a major driver of stock prices. Inflation may be good for commodities, however, because as inflation rises, the prices of commodities have the potential to rise. DWS Enhanced Commodity Strategy Fund 5

6 Active management: the next evolution in commodity investing? While commodities may offer opportunities in today s market environment, we believe traditional commodity investing indices and commodity investing strategies based on them such as the Dow Jones (DJ)-UBS Commodity Index, S&P Goldman Sachs Commodities Index (GSCI) and Deutsche Bank Liquid Commodities Indices (DBLCI) have limitations: They roll futures contracts on a pre-defined schedule, they re static and they re potentially volatile, all of which may decrease returns. To address these limitations, Deutsche Bank has developed three actively managed versions of the DBLCI: the DBLCI Optimum Yield, DBLCI Mean Reversion and DBLCI Mean Reversion Plus. (See back page for index definitions.) DWS Enhanced Commodity Strategy Fund uses similar methodologies as these actively managed indices. Three major limitations with traditional passive commodity indices: DJ-UBS Commodity Index, S&P GSCI and DBLCI Challenge They roll futures contracts on a pre-defined schedule. This can decrease returns because the next contract not the best contract is selected. Our response: active management Response Manage rolls (roll enhancement strategy) They re static. Typical commodity products are static, meaning they don t change their commodity weighting based on current commodity prices. Actively manage allocations (relative value strategy) They re potentially volatile. Commodities can be volatile, with commodities suffering periods of negative returns, particularly when global demand is weak. Seek to provide a measure of downside protection (tactical strategy) Generally, actively managed investments have higher fees associated with them than passively managed investments. In addition, actively managed investments tend to have more risk since portfolio management could be wrong in its analysis of the underlying investments it selects. Fast fact What are rolls? Direct commodities investing entails buying a contract to buy or sell a specific commodity on a specific date. This contract, called a future, typically expires monthly. When a contract expires, passive commodity investing strategies automatically purchase or roll into the next available contract. Shorting is borrowing, then 6 DWS Enhanced Commodity Strategy Fund

7 Why actively manage commodities exposure? Commodities consist of a number of distinct sectors (energy, agriculture, base metals, precious metals and livestock), each of which has unique characteristics. Different commodities indices have different weights to these sectors. For example, the S&P GSCI has a 72% allocation to energy, while the DJ-UBS Commodity Index has a 37% allocation (as of 9/30/13, according to Deutsche Asset & Wealth Management). In our view, neither is optimal. In some market environments, investors may want to increase exposure to energy. In other market environments, they may want to reduce it. As shown in the chart below, the newer Deutsche Bank indices use active management by managing rolls, actively managing allocations and using a downside protection strategy. DWS Enhanced Commodity Strategy Fund Deutsche bank index DBLCI Optimum Yield Potential alpha driver Now a mutual fund combines all three strategies in a single product that provides a 1099 tax form. DBLCI Mean Reversion DBLCI Mean Reversion Plus When one contract expires, instead of rolling to the next contract to track on a pre-defined schedule, seek to roll into a contract that may have the potential to optimize returns. Actively overweight, underweight or short each commodity depending on how cheap or expensive portfolio managers think it is, seeking to help investors buy low and sell high. Tactically reduce net commodity exposure when the technical trend which commodities tend to follow suggests that commodities appear overvalued. How do we do it? We take the best of the traditional passive commodity indices and offer broad exposure to the 20 different commodities in the DJ-UBS Commodity Index. We then use our potential alpha drivers to seek outperformance of the DJ-UBS Commodity Index. selling, a security with the expectation that the security will fall in value. The security can then be purchased and repaid at a lower price. Alpha refers to return in excess of a benchmark s return. Overweighting or underweighting means having a higher or lower weighting in a given sector or security than a benchmark, respectively. DWS Enhanced Commodity Strategy Fund 7

8 Consider the potential opportunities of active management Effect of active management on returns and volatility (average annual return and volatility, as of 9/30/13) Traditional passive indices (and inception dates) 1-year 3-year 5-year Return Volatility Return Volatility Return Volatility DJ-UBS Commodity Index (1/2/91) 14.35% 9.40% 3.16% 16.44% 5.29% 19.17% S&P GSCI (1/30/70) 4.15% 11.84% 3.59% 17.72% 8.46% 25.05% DBLCI (2/28/03) 9.04% 13.09% 1.62% 18.34% 7.06% 24.00% Actively managed DBLCI indices (and inception dates) DBLCI Optimum Yield (5/31/06) 9.18% 11.81% 1.42% 17.29% 4.67% 22.62% DBLCI Mean Reversion (2/28/03) 7.30% 12.92% 2.47% 18.91% 3.42% 23.72% DBLCI Mean Reversion Plus (6/20/07) 8.60% 6.66% 0.42% 12.80% 1.43% 13.40% Source: Bloomberg and Morningstar. Past performance is no guarantee of future results. Volatility is represented by standard deviation; the higher the standard deviation, the higher the volatility. All data shown reflects index performance and is not representative of the performance of any Deutsche Asset & Wealth Management product. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. It is not possible to invest directly in an index. See the last page for index definitions. You ve seen how Deutsche Bank s three actively managed commodity investing indices work; now consider the potential opportunities. Compare the passive commodity investing indices which include the DJ-UBS Commodity Index, S&P GSCI and DBLCI to the actively managed DBLCI indices. Over some time periods, the actively managed DBLCI indices have more compelling risk-return ratios (as evidenced by higher Sharpe ratios) than the passive commodity investing indices. The three actively managed DBLCI indices achieved these risk-adjusted returns by taking the approach described on the prior pages. The three actively managed DBLCI indices increased their Sharpe ratios by: Managing rolls. The DBLCI Optimum Yield analyzed the commodity futures curve in an attempt to maximize return when contracts are rolled. 1 Actively managing allocations. The DBLCI Mean Reversion actively overweighted, underweighted or shorted each commodity based on price movements. 1 Providing downside protection. The DBLCI Mean Reversion Plus tactically reduced commodity exposure when commodities appeared overvalued. 1 1 The DBLCI Optimum Yield, DBLCI Mean Reversion and DBLCI Mean Reversion Plus invest in the same commodities with the same weights as the DBLCI. One can therefore derive the outperformance of the DBLCI Optimum Yield, DBLCI Mean Reversion and DBLCI Mean Reversion Plus methodology by looking at the difference in returns between those indices and the DBLCI. 8 DWS Enhanced Commodity Strategy Fund

9 Active management has improved upside-downside potential Increased returns and decreased volatility has raised Sharpe ratios (five-year Sharpe ratio, as of 9/30/13) The actively managed DBLCI indices enhanced returns and lowered volatility as demonstrated by their higher Sharpe ratios DJ-UBS Commodity Index S&P GSCI DBLCI DBLCI Optimum Yield Traditional passive indices DBLCl Mean Reversion Active Deutsche Bank indices DBLCl Mean Reversion Plus Sharpe ratio 1-year 3-year 5-year Traditional passive indices (and inception dates) DJ-UBS Commodity Index (1/2/91) S&P GSCI (1/30/70) DBLCI (2/28/03) Actively managed DBLCI indices (and inception dates) DBLCI Optimum Yield (5/31/06) DBLCI Mean Reversion (2/28/03) DBLCI Mean Reversion Plus (6/20/07) Source: Bloomberg and Morningstar. Past performance is no guarantee of future results. For performance of DWS Enhanced Commodity Strategy Fund, please visit The table above is for illustrative purposes only and does not represent any Deutsche Asset & Wealth Management product. Volatility is represented by standard deviation; the higher the standard deviation, the higher the volatility. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. It is not possible to invest directly in an index. See the last page for index definitions. Fast fact Sharpe ratio measures risk-adjusted performance. The higher the Sharpe ratio, the better the risk-adjusted performance. DWS Enhanced Commodity Strategy Fund 9

10 Inside the strategy behind DWS Enhanced Commodity Strategy Fund DWS Enhanced Commodity Strategy Fund seeks to use active management in an attempt to improve return potential and decrease risk potential. Now let s look at those strategies in more detail. Roll enhancement strategy (manages rolls) Systemically rolling into the next futures contract when the current contract expires could potentially result in negative returns. The fund dynamically rolls contracts in an attempt to seek to maximize positive roll and minimize negative roll. This could enhance return potential. Relative value strategy (actively manages allocations) Commodity prices tend to mean revert i.e., eventually move back towards their mean or average because of supply and demand factors. The fund overweights commodities that are cheap vs. their long-term mean and underweights commodities that are expensive vs. their long-term mean. The fund s aggregate overweights and underweights will always equal zero. This could potentially create an opportunity to buy low and sell high. Tactical strategy (seeks to provide a measure of downside protection) The broad commodity market tends to follow a technical trend over shorter time periods. The fund s methodology differentiates between short-term price movements and long-term trends. Overall commodity exposure is then tactically adjusted based on the most recent movements. This could potentially reduce exposure during negative months, helping provide a measure of downside protection. Because DWS Enhanced Commodity Strategy Fund is structured as a mutual fund, it generates a 1099, which helps simplify tax reporting. 10 DWS Enhanced Commodity Strategy Fund

11 An efficient design: direct commodities exposure backed by fixed-income collateral We believe commodity investments are capital efficient, meaning they need to use only a small portion of their assets to gain full exposure to the commodities market. As a result, only a small portion of DWS Enhanced Commodity Strategy Fund is invested in commodities. The remainder of the fund s assets is invested in a diversified fixed-income portfolio. The DWS Enhanced Commodity Strategy Fund investment approach Commodities investments The fund s commodities assets are invested in derivatives representing 20 different commodities. The commodities allocation is adjusted using the strategies previously described. Our goal in the commodity portion of the portfolio is to seek higher returns with less risk, says Portfolio Manager Darwei Kung. Fixed-income Commodities Fixed-income investments The remainder of the portfolio is invested as collateral for the commodity positions in a diversified fixed-income portfolio. This portion of the fund targets bonds with high credit quality and low duration. 1 Our goal in the fixed-income portion of the portfolio is to construct a diversified, balanced portfolio of high-quality fixed-income securities in the government, agency and corporate sectors, says Lead Portfolio Manager William Chepolis. An experienced management team William Chepolis manages the fixed-income portion of the portfolio. He joined the firm in With more than 25 years of investment industry experience, he has extensive experience managing derivative investments and fixed-income assets. Darwei Kung manages the commodities portion of the portfolio. He joined the firm in With more than 10 years of investment industry experience, he has extensive experience in risk modeling and quantitative trading. Fast fact A derivative is a security whose price is based on an underlying asset. Common derivatives include futures, which are contracts obligating someone to buy or sell another asset (such as a stock or commodity) at a predetermined future date and price. 1 Credit quality is a measure of a bond issuer s ability to repay interest and principal in a timely manner. Rating agencies assign letter designations such as AAA, AA and so forth. The lower the rating, the higher the probability of default. Duration is a measure of a fund s sensitivity to interest-rate changes; the longer a fund s duration, the more sensitive it is to changes in interest rates. See the prospectus for details about the fund s fixed-income investment quality and duration. DWS Enhanced Commodity Strategy Fund 11

12 A C S INST Nasdaq symbols SKNRX SKCRX SKSRX SKIRX Index Definitions The Barclays U.S. Aggregate Index is widely considered representative of the U.S. bond market. The Deutsche Bank Liquid Commodities Indices (DBLCI) tracks six of the most liquid commodities, namely crude oil, heating oil, corn, wheat, aluminum and gold. The DBLCI Mean Reversion tracks the same six commodities as the DBLCI, but attempts to enhance returns by actively overweighting, underweighting or shorting each commodity based on price movements. The DBLCI Mean Reversion Plus tracks the same six commodities as the DBLCI, but attempts to enhance returns by tactically reducing commodity exposure when commodities appear overvalued. The DBLCI Optimum Yield tracks the same six commodities as the DBLCI, but attempts to enhance returns by managing when contracts are rolled. The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities. The MSCI EAFE Index measures the performance of stock markets in Europe, Australasia and the Far East. The MSCI World Energy Index measures the performance of energy stocks in world developed markets. The MSCI World Materials Index measures the performance of materials stocks in world developed markets. The S&P 500 Index is widely considered representative of the U.S. stock market. The S&P Goldman Sachs Commodities Index measures an unleveraged, long-only investment in futures that are broadly diversified across the spectrum of commodities. Important risk information The fund invests in commodity-linked derivatives, which may subject the fund to special risks. Market price movements or regulatory and economic changes will have a significant impact on the fund s performance. Any fund that concentrates in a particular segment of the market will generally be more volatile than a fund that invests more broadly. A counterparty with whom the fund does business may decline in financial health and become unable to honor its commitments, which could cause losses for the fund. Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. This fund is nondiversified and can take larger positions in fewer issues, increasing its potential risk. The fund may lend securities to approved institutions. See the prospectus for details. Obtain a prospectus To obtain a summary prospectus, if available, or prospectus, download one from dws-investments.com, talk to your financial representative or call (800) We advise you to carefully consider the product s objectives, risks, charges and expenses before investing. The summary prospectus and prospectus contain this and other important information about the investment product. Please read the prospectus carefully before you invest. Investment products: No bank guarantee Not FDIC insured May lose value Investment products offered through DWS Investments Distributors, Inc. Advisory services offered through Deutsche Investment Management Americas, Inc. Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or any of its subsidiaries. Clients will be provided Deutsche Asset & Wealth Management products or services by one or more legal entities that will be identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. DWS Investments Distributors, Inc. 222 South Riverside Plaza Chicago, IL service@db.com Tel (800) Deutsche Bank AG. All rights reserved. PM (10/13) R DECSF-600