P R E S E N T S U.S. Economic Outlook Virtuous Growth December 2013
Presenter Robin Wehbé, CFA, CMT Director (617) 722-3965 Robin is the Lead Portfolio Manager on the Global Natural Resources Long/Short Opportunity strategy, Dreyfus Natural Resources Fund and the Global Natural Resources and Global Long/Short Sector Equity strategies. He also serves as an Equity Research Analyst on The Boston Company s Global Research Team, covering the energy sector and leading the natural resources analyst team. Before joining the firm, Robin was a Research Analyst at State Street Global Advisors, covering the basic materials sector. He first started working at the company on the Global Macro Strategy Team. He holds a BS from Lehigh University and an MBA and an MSF from the Carroll School of Management at Boston College. He holds both the Chartered Financial Analyst and the Chartered Market Technician designations. He is a member of the Boston Security Analysts Society and The Market Technicians Association. 2 CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute.
Agenda Deflationary Pressures 4 Reinvestment Story 9 Oil Example As A Deflationary Pressure 13 Appendix: Commodity Investments as an Inflation Hedge 21 3
Deflationary Pressures 4
China GDP (Quarterly % Change) Slow Growth In China 16 15 14 China GDP vs. CRB Spot Index (3/31/00-9/30/13) 600 550 500 13 450 12 11 10 9 8 7 6 400 350 300 250 200 150 100 CRB Spot Index China GDP (Constant Prices %YoY) China GDP (IMF Forecast) CRB Index 5 Source: FactSet Research Systems, IMF Database. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Yield (%) Rising Interest Rates Should Strengthen USD & Benefit Growth Companies 14 13 12 11 10 10YR US Treasury Yield November 1983 - November 2013 9 8 7 6 5 4 3 2 1 Bernanke's Tapering Comments - 5/22/13 6 Source: FactSet Research Systems. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Natural Gas Production (Dry Gas in Trillion Cubic Feet (Tcf) U.S. Energy Production Growth 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 U.S. Oil & Natural Gas Production 12/31/1973-7/31/2013 (Monthly) 9.2 8.8 8.4 8.0 7.6 7.2 6.8 6.4 6.0 5.6 5.2 4.8 Oil Production (in Million Barrels per Day (MM b/d)) U.S. Natural Gas (Smoothed 12-Month) U.S. Oil (Smoothed 12-Month) 7 Source: data from Ned Davis Research. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Percent of Nominal GDP (%) Healthy Consumer Bodes Well For Future GDP Growth 110% Components of GDP 90% 70% 50% 30% 10% -10% 1970 1976 1982 1988 1994 2000 2006 2012 Net Exports Government Investment Consumption 8 Source: Bloomberg; as of 1/31/13. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Reinvestment Story 9
US Corporate Profits ($bil) U.S. Corporations Remain Healthy 2,300 U.S. Corporate Profits vs. S&P 500 Total Debt as a % of Total Equity December 1998 September 2013 220 2,100 207 1,900 1,700 1,500 1,300 1,100 900 700 193 180 167 153 140 127 113 S&P 500 Total Debt as a % of Total Equity 500 100 Corporate Profits ($bil) S&P 500 - Debt as a % of Total Equity 10 Source: FactSet Research Systems. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
U.S. Has Deferred Capital Spending Over the Past Decade 20.0% Gross Fixed Capital Formation as a % of GDP 19.5% 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% 1963-1972 1973-1982 1983-1992 1993-2002 2003-2012 % of GDP 11 Source: Federal Reserve Economic Data. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
10YR US Treasury Yield (%) Rising Rates Hurt Dividend Yield Stocks 4.0 10YR US Treasury Yield vs. S&P 500 Cumulative Excess Return of Bond Proxies Versus Non-Bond Proxies November 2008 October 2013 (Monthly) 15% 3.5 3.0 2.5 2.0 1.5 8% 0% -8% -15% -23% Cumulative Excess Return (%) 1.0-30% US 10YR Treasury Yield Cumulative Excess Return - S&P 500 Equal Weighted Bond Proxies vs. Non-Bond Proxies 12 Source: FactSet Research Systems. Bond Proxies = REITs, Consumer Staples, Utilities & Telecommunication Services; Non-Bond Proxies = Financials ex-reits, Consumer Discretionary, Energy, Information Technology, & Industrials. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Oil Example As A Deflationary Pressure 13
Price per Barrel Growing Returns the Old-Fashioned Way Price of Crude Oil (West Texas Intermediate) $160 $140 Narrowed price range focuses Energy companies on returns and growth $120 $100 $80 $60 $40 $20 $0 Price (weekly) 10-week moving average 50-week moving average 14 Source: Bloomberg, July 1999 April 2013. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Energy Thrives Beyond Oil Price Book Evolutionary lower risk Exploiting known resources differently Vast opportunity (shale and deep water) Upstream capex $700 bln for 2013 7x the level of the entire 1990s * Demand is at level of elasticity and natural gas is a looming threat Prevents price-spike crisis supports a stable price outlook 15 *Source: Barclays. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Price of Oil ($s per barrel) Worldwide Upstream Capital Spending (Inflation-Adjusted) 120 $ 800,000 100 Price weakness too short-lived to constrain capital spend 700,000 600,000 80 500,000 60 400,000 40 20 300,000 200,000 100,000 - - Worldwide Investment Brent Crude Oil Price 16 Source: Barclays, as of March 2013. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
MMBOE Offshore Discoveries 30,000 25,000 Discoveries are a lead on cap spend trend has legs 20,000 15,000 10,000 5,000 0 Brazil GOM* India Middle East/ N. Africa North Sea SE Asia W. Africa ROW 17 *Gulf of Mexico. Source: Deutsche Bank and Wood MacKenzie, as of December 2012. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
mmboe Period of Energy Underinvestment at an End 10000 9000 Decades-long production declines are reversing 8000 7000 6000 U.S. Field Production of Crude Oil (Thousands Barrels per Day) 5000 4000 Gulf Coast (PADD 3) 3000 2000 1000 0 West Coast (PADD 5) Midwest (PADD 2) Rocky Mountain (PADD 4) East Coast (PADD 1) 18 Source: Energy Information Administration, as of June 30, 2012. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
mmboe Demand at Point of Elasticity 60 Oil consumption (m bbls per day) Oil consumption when >3% of GDP Oil consumption when >6.5% of GDP Oil expenditures as a % of GDP 9% 40 Demand Destruction 6% 20 Demand Support 3% - 0% 19 Source: Data from Bloomberg, as of June 30, 2012. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Price Ratio BTU equivalent Price Incentive for Natural Gas to Take Oil Market Share 60 50 40 30 Energy equivalence 6:1 20 10 0 20 Source: Data from Bloomberg, as of December 2012. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Past performance is not a guarantee for future performance. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Appendix: Commodity Investments As An Inflation Hedge 21
Average Monthly Return (%) Commodity Investments As An Inflation Hedge Commodity-exposed equities have done the job in all inflation regimes 3.0 Average Monthly Return by Inflation Regime: January 1970 - December 2012 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 < -2% (14) -2-0% (17) 0-2% (87) 2-5% (222) > 5% (176) Deflation Inflation Rate (Number of Months) Inflation CRB Commodity Index S&P 500 Natural Resources Equities S&P 500 Index 22 Sources: St. Louis Fed, Commodity Research Bureau, FactSet. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance should not be taken as any guarantee or other assurance of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Return Commodity Investments Through The Cycle CRB Commodity Index ranges in a wide band around inflation 30% Rolling 3-Year Returns, 1970-2012 25% 20% 15% 10% 5% 0% -5% -10% -15% 1972 1977 1982 1987 1992 1997 2002 2007 2012 U.S. Inflation CRB Commodity Index 23 Sources: St. Louis Fed, Commodity Research Bureau, FactSet. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance should not be taken as any guarantee or other assurance of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Return Commodity Investments Through The Cycle Natural Resources Equities follow a more positive long-term trajectory 30% Rolling 3-Year Returns, 1970-2012 25% 20% 15% 10% 5% 0% -5% -10% -15% 1972 1977 1982 1987 1992 1997 2002 2007 2012 U.S. Inflation CRB Commodity Index S&P 500 Natural Resources Equities 24 Sources: St. Louis Fed, Commodity Research Bureau, FactSet. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance should not be taken as any guarantee or other assurance of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Cumulative Excess Return Downside Protection Can Bring High Opportunity Cost Commodities have lagged in equity market rallies 100% Pre 1980 s S&P 500 vs. CRB Index - Cumulative Excess Return Equity Market Rallies* (1965-1979) 400% Post 1980 s S&P 500 vs. CRB Index - Cumulative Excess Return Equity Market Rallies* (1980-2012) 80% 350% 300% 60% 250% 40% 200% 150% 20% 100% 0% 50% 0% -20% -50% 9/66-11/68 6/70-12/72 9/74-12/76 2/78-11/80 (Oil Crisis) 7/82-8/87 11/87-5/90 10/90-12/98 8/98-8/00 9/02-10/07 (China Boom) 2/09-12/12** Average Cumulative Excess Return = 53.8% Average Cumulative Excess Return = 137.2% 25 Source: Morningstar, Bloomberg. *Equity market (S&P 500 total return) recoveries from declines of 10% or more, trough to subsequent peak. **2009 rally has not reached peak at this point. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance should not be taken as any guarantee or other assurance of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Correlation Commodity/Equity Correlation is Unpredictable 0.8 S&P - CRB Rolling 36-Month Correlation 0.6 0.4 0.2 0.0-0.2-0.4-0.6 Falling Markets Rising Markets S&P vs. CRB Index - Rolling 36 Month Correlation 26 Source: Morningstar, Bloomberg. September 1967 December 2012. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. Past performance should not be taken as any guarantee or other assurance of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Asset Weight (%) Ann. Return (%) Commodities Sit Well Below An Efficient Portfolio Set Multi-Asset Class Efficient Frontier * 16 14 12 10 8 Max Sharpe Curve Flattens LB Corp Return/Risk ratio inverts LB Long Govt NR Index S&P 500 EAFE R2000 EM 6 4 CRB 0 5 10 15 20 25 30 Ann. Volatility (%) 100.0% Asset Weightings of Portfolios by Volatility Level 80.0% CRB Only at the lowest risk tolerance do commodities warrant a portfolio allocation 60.0% 40.0% 20.0% S&P 500 NR Index MSCI EM MSCI EAFE R2000 LB Long Govt 0.0% 6.5% 6.9% 8.0% 9.0% 10.0% 11.0% 12.5% 15.0% 17.5% 20.0% 23.8% Projected Volatility Level (%) LB Corp Projected Return 8.82 9.47 10.63 11.45 12.02 12.41 12.90 13.60 14.25 14.87 15.64 27 Source: Bloomberg. *Efficient Frontier based on historical monthly returns as follows: EAFE, S&P 500, Natural Resources Index, and CRB Index Jan70-May13; Barclay s Corporate Bond Index, Barclay s Long Government Bond Index Jan76-May13; Russell 2000 Jan79-May13; MSCI Emerging Markets Index Jan88-May13. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Please see benchmark descriptions at the end of this book. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Benchmark Descriptions Barclay s US Corporate Bond Index The Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate bond market. Barclay s US Long Government Bond Index This Index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) and U.S. government agencies and instrumentalities, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities greater than 10 years. CRB Commodity Index A commodity futures price index that measures the overall direction of commodities. MSCI EAFE The MSCI EAFE Index measures the performance of developed equity markets, excluding the United States and Canada. It aims to capture 85% of the total market capitalization. MSCI EM The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of May 27, 2010 the MSCI Emerging Markets Index consisted of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Russell 2000 The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index. It includes approximately 2,000 of the smallest companies based on a combination of their market cap and current index membership. S&P 500 The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market with approximately 75% coverage of U.S. equities. S&P 500 Natural Resources Equities Comprises those companies included in the S&P 500 that are classified as Natural Resources companies. 28 Sources: Barclays Global Investors; Commodity Research Bureau; MSCI; Russell Investments; Standard & Poor s
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