Mercados Globales Larrain Vial Investec Asset Management Thanos Papasavvas Head of Currency Management March 2007
Currency Management an alternative source of alpha This presentation has been prepared for attendees of the Seminario Mercados Globales Larrain Vial acting in their professional capacity as financial advisers dealing with non-us investors Any information contained in this communication is believed to be reliable as of the date of preparation, but no warranty is given as to its accuracy or completeness Any returns data shown does not represent the performance of an Investec fund and is being shown for informational purposes only Page 1 Currency Management 00008
Why currency management Significant opportunities to add returns Currency markets are inefficient Central banks Corporate treasurers Global investors Tourists Currencies are uncorrelated to underlying assets The largest global market with a daily volume of USD 2 trillion Page 2 Currency Management 00008
Barclay Currency Traders Index An equal weighted composite of managed programs that trade currency futures and/or cash forwards in the inter bank market. In 2006 there are 106 currency programs included in the index. Sharpe Ratio: 0.41 Correlation vs S&P 500: -0.04 Correlation vs US Bonds: 0.08 Correlation vs World Bonds: 0.13 1987 29.56% 1991 10.94% 1995 11.49% 1999 3.12% 2003 11.08% 1988 4.28% 1992 10.27% 1996 6.69% 2000 4.45% 2004 2.36% 1989 18.89% 1993-3.33% 1997 11.35% 2001 2.71% 2005-1.21% 1990 57.74% 1994-5.96% 1998 5.71% 2002 6.29% 2006-0.24% Source: www.barclaygrp.com/indices/cta/sub/curr.html Page 3 Currency Management 00008
What is your risk? Are you managing the underlying currency exposure of your investments? Your Nikkei overweight is also an overweight Yen risk. The two need to be managed separately. Australia 2.55 Austria 0.25 Belgium 0.56 Canada 3.55 Denmark Finland 0.34 0.73 Japan neutral @ 10% 5% Overweight Nikkei France 4.62 Germany 3.38 Greece 0.31 Hong Kong Ireland 0.76 0.38 5% Overweight Yen Italy 1.80 Japan 9.89 Netherlands 1.61 New Zealand 0.07 Norway 0.41 Portugal 0.15 Singapore 0.40 Spain 1.79 Sweden Switzerland 1.14 3.26 7% 10% 15% United Kingdom United States 10.40 45.66 Source: Investec Page 4 Currency Management 00008
Three choices available Do Nothing Easiest option, but: Most risky Least efficient Passive or No Risk No unmanaged currency risk, but: Eliminates diversification Eliminates excess alpha returns Active Most optimal solution Managing risk Adding uncorrelated alpha Page 5 Currency Management 00008
Adding value through currency management Alternative Investments Domestic Equity Domestic Fixed Income International Equity Page 6 Currency Management 00008
Adding value through currency management A Risk Management Alternative Investments Domestic Equity Domestic Fixed Income International Equity A Page 7 Currency Management 00008
Adding value through currency management A Risk Management B Active Currency -Overlay Alternative Investments Domestic Equity Domestic Fixed Income International Equity A B Page 8 Currency Management 00008
Adding value through currency management A B Risk Management Active Currency -Overlay Alternative Investments C Domestic Equity C Active Currency - Funded Domestic Fixed Income International Equity A B Page 9 Currency Management 00008
Investec Currency Management Long heritage of active currency management back to 1981 Dedicated currency team with extensive support Disciplined discretionary style using quantitative and qualitative inputs Innovative regime driven approach to identify strategic and tactical opportunities A wide investment universe of over 30 currencies Page 10 Currency Management 00008
Investec s currency heritage Investec pioneered active currency management back in 1981 Investec Global Managed Currency Fund. Information Ratio: 0.60 since inception 700 600 500 400 300 200 100 0 Feb-84 Feb-85 Feb-86 Feb-87 Feb-88 Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 GSF Mgd Currency A Page 11 Currency Management 00008 Source: Investec, to 31 December 2006, gross of all fees Benchmark (SDR cash)
Portfolio Construction Strategic Positions + Tactical Positions + Emerging Market Positions Diversified drivers of performance Page 12 Currency Management 00008
Strategic Positions We identify changing importance of Strategic drivers Value Risk averse regime (eg. Apr/May 2006) + Risk seeking regime (eg. Jul/Aug 2006) Source: - Investec - Strategic positions adjusted to reflect this + Carry Page 13 Currency Management 00008 Source: Investec
Strategic Positions Most models do this 114 Cumulative Returns 112 110 Fixed Weights 108 106 104 102 100 Risk 0.75% Return 0.46% RATIO 0.6 The model results shown above are backtested based on a methodology that is derived from an analysis of past market data. These results do not reflect the performance of an Investec managed account or fund and are being shown for informational purposes only. 98 96 Apr-93 Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Source: Investec Page 14 Currency Management 00008
Our innovative approach allows us to do this Strategic Positions 114 Cumulative Returns 112 110 108 106 104 102 100 98 Fixed Weights Strategic Weights Risk 0.75% Return 0.73% RATIO 1.0 Risk 0.75% Return 0.46% RATIO 0.6 The model results shown above are backtested based on a methodology that is derived from an analysis of past market data. These results do not reflect the performance of an Investec managed account or fund and are being shown for informational purposes only. 96 Apr-93 Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Source: Investec Page 15 Currency Management 00008
Strategic Positions 2006 in a currency pair: NZD/JPY -15% +22% Source: Bloomberg Page 16 Currency Management 00008
Tactical Positions Tactical currency analysis Tactical opportunities add another source of returns : Macroeconomic and interest rate views Technical indicators and trends Contrarian signals Page 17 Currency Management 00008
Emerging currency analysis Emerging Markets Emerging currencies offer returns & diversification Proprietary Fundamental RISK Indicator (FRISKI) developed in 1997 Monitors 5 key economic variables to identify emerging currencies vulnerable to a crisis Over 20 emerging market currencies analysed and ranked Dedicated Emerging Market team provides additional qualitative insight Page 18 Currency Management 00008
Emerging Market Currency (EMFX) Emerging Markets outperforms even despite crisis episodes 160 Cumulative return of FRISKI Basket & Equally weighted EMFX basket vs equally weighted basket of USD & EUR 150 EMFX Basket 140 130 120 110 100 Information Ratio EMFX vs G2 IR 0.99 Ann Excess Ret 3.05% Ann Std Dev 3.10% 90 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Source: JP Morgan ELMI+ indices, Investec Asset Management calculations. Period: Jan 1997 to Dec 2006 Page 19 Currency Management 00008
but FRISKI does better Emerging Markets 160 Cumulative return of FRISKI Basket & Equally weighted EMFX basket vs equally weighted basket of USD & EUR 150 140 FRISKI Basket EMFX Basket 130 120 110 100 Information Ratios EMFX vs FRISKI vs G2 G2 IR 0.99 1.38 Ann Excess Ret 3.05% 4.28% Ann Std Dev 3.10% 3.10% 90 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Source: JP Morgan ELMI+ indices, Investec Asset Management calculations. Period: Jan 1997 to Dec 2006 Page 20 Currency Management 00008
Portfolio risks managed at every stage Strategic Portfolio Risk Managed Tactical Portfolio Risk Managed Emerging Portfolio + Total Portfolio = Risk Managed Continuous monitoring of risk within the process External review by dedicated risk specialists Draw down limits managed via market orders Risk Managed Page 21 Currency Management 00008
In summary Currency management an alternative source of alpha uncorrelated returns to other asset classes inefficient market due to the non-profit maximising participants a tool to manage risk as well as return Page 22 Currency Management 00008
Important information 1 US, S America, UK & Europe This presentation does not constitute an advertisement for a Fund in a country where that Fund is not registered for sale Should you be interested in investing in an Investec fund, the full documentation required to make an investment, including the Prospectus or Scheme Particulars, is available from Investec Asset Management The Scheme Particulars contain more complete information on risks, sales charges and expenses. It should be read carefully before investing Page 23 Currency Management 00008
Contact Details Thanos Papasavvas Investec Asset Management 2 Gresham Street, London EC2V 7QP +44 20 7597 2164 thanos.papasavvas@investecmail.com Richard Garland Managing Director, Mutual Funds Investec Asset Management US Limited 299 Riverside Avenue Westport, CT 06880 Tel: 203 222 7444 Cell: 203 385 2692 Website: www.investecfunds.co.uk Issued by Investec Asset Management Limited. November 2006 Page 24 Currency Management 00008