MILLENNIUM GLOBAL INVESTMENT WHITE PAPER

Partnership, Integrity, Experience MILLENNIUM GLOBAL INVESTMENT WHITE PAPER The Yield Shield : An Approach to Managing Emerging Market Currency Risks URN: 102173

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2 would be profitable if implemented. It should not be assumed that any trade or illustration contained in this document would be implemented by Millennium Global or that it would be profitable if implemented. Hypothetical Information This document includes information representing the performance of a portfolio of hypothetical investments selected by Millennium Global over various periods; it is provided for general information purposes only and does not reflect real investments actually made. This information is provided to you on the understanding that, as a sophisticated investor, you understand and accept the inherent limitations of such illustrations, will not rely on it in making any investment decision regarding Millennium Global, and will use it for the sole purpose of deciding whether to proceed with a further investigation of the product. Hypothetical results may not always be duplicated in reality; it should not be expected that the product s actual returns will replicate the returns of the hypothetical portfolio. These results are based on hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. Hypothetical performance is subject to inherent limitations such as the impact of concurrent economic or geo-political elements not addressed in the analysis and market factors such as lack of liquidity. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. In particular, hypothetical results do not represent actual trading costs of managing a portfolio. Any reliance you place on this information is therefore strictly at your own risk. In no event will Millennium Global be liable for any loss or damage including without limitation, indirect or consequential loss or damage, arising out of or in connection with the use of this information.

3 INTRODUCTION Global investors typically allocate to emerging markets with the aim of benefiting from the growth of developing economies and to improve the diversification of their portfolios. Typically, emerging market fixed income provides attractive yields and emerging market equities can offer cheaper valuations and superior growth than those of developed markets. However, from a foreign exchange perspective, there is a widespread view that when investing in emerging market assets there is no point hedging the currency exposure. This belief is based broadly on the following perceptions: 1) Emerging market currencies tend to appreciate in the long term and therefore investors should not hedge the currency risk. 2) The cost of hedging emerging market currencies is punitively high due to the interest rate differentials and therefore movements do not offset the cost of hedging. 3) It is unrealistic to try to actively manage emerging market currency risks because of market illiquidity and the lack of useful information to help make hedging decisions. We believe that these perceptions are no longer as valid as they were. Our analysis shows that in reality, emerging market currencies have not appreciated on average against the US dollar for the last decade and, in fact, hedging would have been beneficial for much of this period. Today, the majority of the actual emerging market currency exposure of the MSCI Emerging Market Index (MSCI EM Index) can be hedged using fairly liquid instruments. In addition, the increasing liquidity of these currencies means that they can be analysed in a similar manner to developed market currencies. In our view, emerging market investors should become familiar with the impact of currency exposure on their investments and consider the effectiveness of actively hedging this exposure. In this note we explore emerging market currency trends and their impact on emerging market equity investments using MSCI Emerging Market Index data, before examining the efficacy of hedging and discussing the Millennium Global EM currency solution The Yield Shield, which is applicable to a more liquid subset of the emerging market currency universe.

4 EMERGING MARKET FX BEHAVIOUR Contrary to common perception, over time emerging market currencies have not experienced a steady appreciation against the US dollar but rather have: a) Exhibited long and large cycles; b) Experienced extended periods of substantial depreciation; and c) Fallen not only during times of financial crisis. Chart 1 FX contribution to EM equities returns 140 130 120 110 100 90 80 2003 2005 2007 2009 2011 2013 2015 2017 MSCI EM Index FX vs. USD Source: Bloomberg, January 2003 to December 2017, based on the monthly returns of the currency exposure in the MSCI Emerging Market Index. This has been calculated by taking the difference between the MSCI Emerging Market Local Currency Index Returns and the MSCI Emerging Market USD Index Returns. Between 2003 and 2010, the average absolute annual return for the benchmark MSCI Emerging Market Equities Index (in USD) was 29%. In every one of those 8 years, EM currencies and EM equities moved in the same direction.

5 However, in the period since 2010, the return characteristics of emerging market currencies and their relationship with emerging equity markets has changed. Notably, annual equity returns have been compressed and the contribution of currency to returns has been more significant. Chart 2 - Equity and Currency Contribution to MSCI EM Index (2003 to 2017) 80% 60% 40% 20% 0% -20% -40% -60% -80% Currency Return Equity Return 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Millennium Global and MSCI, January 2003 to December 2017. Currency Return calculated by taking the difference between the MSCI Emerging Market Local Currency Index Returns and the MSCI Emerging Market USD Index Returns. This highlights the increased impact of emerging market currencies on total EM returns and consequently the importance of addressing EM currency and equity exposure separately.

Currency Hedging Impact 6 EMERGING MARKET FX: THE EFFECTS OF HEDGING Cyclicality and volatility in emerging market currency performance in the period from the global financial crisis (January 2008 to December 2017) is reflected in Chart 3. While there is a cost to hedging Emerging Market currencies given the negative interest rate differential - the difference in the returns of hedged versus unhedged MSCI EM Index portfolios shows that there have been many years when, even accounting for the hedging costs (included in these figures), hedging the Emerging Market currency exposure would have benefitted investors. Chart 3 Currency Hedging Impact: MSCI EM Index Hedged minus Unhedged USD Returns (2008 to 2017) 10% 5% 0% -5% -10% -15% -20% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: Hedging is beneficial (detrimental) in periods when the currency hedging impact is positive (negative). Source: Millennium Global and MSCI, January 2008 to December 2017. Currency Return calculated by subtracting MSCI Emerging Market USD Index Returns from the MSCI Emerging Market USD Hedged Index Returns. Our analysis shows that leaving emerging market currency exposure unhedged on a continuous basis is not optimal even over multi-year periods. In five of the past ten years (2008, 2011, 2013, 2014 and 2015) it would have been beneficial to hedge MSCI EM FX exposures 1. Indeed the average benefit in these years was 5.2%. This illustrates how the decision to hedge or not to hedge has had an impact on overall portfolio returns. 1 Based on the difference in performance between the unhedged MSCI EM USD Index and the hedged MSCI EM USD Index. Note that it may not always be practical to hedge all the currencies included in the Index and that costs and bid/ask spreads may be significant.

7 THE EMERGING MARKET FOREIGN EXCHANGE MARKET The Korean Won, Taiwan Dollar, Indian Rupee, Brazilian Real, South African Rand, Mexican Peso, Russian Ruble and Indonesian Rupiah are the major local currencies represented in the MSCI EM index. The Bank for International Settlements Triennial Survey of foreign exchange turnover (April 2016) points to significant liquidity in these currencies, with a daily traded volume of over USD 400 billion. Daily turnover in the largest EM currencies Mexican Peso (USD 97 billion) and Korean Won (USD 84 billion), for example, is comparable with that of the New Zealand Dollar (USD 104 billion), Norwegian Kroner (USD 85 billion) and Swedish Krona (USD 112 billion). Bid/offer spreads in USD vs EM pairs have compressed in a period of increased EM currency liquidity and this has created market conditions that support the effective implementation of emerging market hedging policies. THE BENEFITS OF ADOPTING A FLEXIBLE HEDGING POLICY The table below shows the hypothetical difference in outcomes between leaving the currency exposure of a portfolio of emerging market equities hedged at all times, versus leaving it unhedged in the calendar years when EM currencies went up and hedging in years when they went down. While the figures understate the performance of a perfect hedge that would switch on and off at the best possible moments, they illustrate the potential return improvements from adopting a flexible hedging policy. MSCI EM Equities Index Total Cumulative Return in USD No Currency Hedge Calendar Year Currency Hedge 2 Difference 5 Years to 31 Dec 2017 30% 44% 14% 10 Years to 31 Dec 2017 24% 68% 44% Source: Millennium Global and MSCI, January 2008 to December 2017. According to this analysis, it would therefore be very desirable to have a mechanism to trigger currency hedging when the emerging market currencies depreciate but switch it off when the emerging market currencies move sideways or appreciate, because the potential impact and value-added is so substantial. This begs the question whether is it possible to vary a currency hedge ratio over time to capture some of this potential gain? 2 The calculation considers that hedging is in place only in calendar years when hedging would have given a positive result.

8 THE YIELD SHIELD: MILLENNIUM GLOBAL S APPROACH TO EM CURRENCY HEDGING Millennium Global has over 20 years of experience in forecasting currency market trends and has conducted research into the behaviour of emerging market currencies. In particular, we have applied recent academic insights into how currency options pricing in particular contains useful information in forecasting FX behaviour. Based on this analysis, we believe that it is possible to implement a dynamic currency hedge ratio that delivers superior results compared with both remaining permanently unhedged or maintaining a static passive hedge. Taking a dynamic hedging approach seeks to deliver positive results by acting as a "Yield Shield" i.e. maintaining exposure to the high yield typically available in emerging market currencies when they are stable or appreciating and employing a hedging strategy or shield when they are depreciating. The Yield Shield strategy seeks to reduce emerging market currency exposure in periods of emerging market currency weakness in order to improve investors currency return profile and reduce drawdowns and volatility. It seeks to improve on momentum-based hedging approaches, principally by interpreting option market volatility and skew in addition to FX price movements. The model is applied to individual EM currency exposures to generate a hedging signal for each EM exposure. Rather than employing a binary approach where the hedge ratio is either 0% or 100% hedged, the strategy uses a quantitative model to move between 0% - 100% hedged for each EM currency exposure, based upon the signal output of the model. As an example, we have analysed a hypothetical portfolio of the more liquid major EM currency exposures (namely BRL, INR, KRW, MXN, ZAR, hereafter the EM Currency Portfolio ), weighted in proportion to their size in the MSCI EM Index. Note that this basket is not identical to the full MSCI EM Index referenced in the previous sections. The calculations hereafter refer to exchange rates against the US dollar, but the same conclusions would apply against Sterling or Euros.

Hedge Ratio EM-FX Basket vs. USD 9 For the period 2008 to 2017, Chart 4 shows i) the aggregate hedge ratio (0% to 100%) across the basket of currencies covered by the Yield Shield and ii) the performance of the hypothetical EM Currency Portfolio versus the US dollar. Chart 4 Yield Shield: Hypothetical Dynamic Hedging of EM Currency Portfolio (2008 to 2017) 2 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Hedge Ratio (LHS) EM-FX Basket per USD (RHS) 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 The results of the Yield Shield strategy applied to the hypothetical EM Currency Portfolio can be quantified in comparison with a do-nothing approach where emerging market currencies remain unhedged at all times. The table below shows that the dynamic hedging strategy would have materially reduced currency drawdowns and volatility and improved returns. Yield Shield: Hypothetical Returns of an EM Currency Portfolio (2008 to 2017) DO NOTHING Unhedged EM-FX Exposure YIELD SHIELD Dynamic Hedged EM-FX Exposure YIELD SHIELD Improvement Max. Drawdown -48.6% -32.4% 16.2% Total Return -31.5% -11.4% 20.1% Annual Volatility 10.1% 7.6% 2.5% Avg Annual Return -3.1% -1.1% 2.0% Source: Millennium Global and Bloomberg, 1 January 2008 to 29 December 2017. Results shown are net of indicative management fees of 0.20% and do not reflect commissions, custodial fees and other fees and expenses involved in the operation and management of client accounts. Information is hypothetical and based on back-tested data. This information is based on hypothetical performance results that can have inherent limitations. See full disclosures on pages 2 and 3. Past performance is not a guide to future returns and the value of investments may fall as well as rise. No representation is made that any account will or is likely to achieve returns similar to those shown.

-11.00% -10.0% -9.0% -8.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% Frequency -11.00% -10.0% -9.0% -8.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% Frequency 10 The distribution of monthly returns is also transformed with left tail negative returns (cash flows) reduced and the distribution skewed to the right-hand side (see charts 5 & 6). Chart 5 Unhedged EM Currency Benchmark Gross Monthly Returns Distribution (2008 to 2017) 30 25 Unhedged Benchmark Gross Monthly Returns 20 15 10 5 0 Chart 6 Unhedged EM Currency Benchmark Gross Monthly Returns Distribution (2008 to 2016) 3 30 25 Dynamically Hedged Portfolio Gross Monthly Returns 20 15 10 5 0 Source: Millennium Global and Bloomberg, 1 January 2008 to 29 December 2017. Results shown are gross of fees and do not reflect management fees, performance fees, commissions, custodial fees and other fees and expenses involved in the operation and management of client accounts. Information is hypothetical and based on back-tested data. This information is based on hypothetical performance results that can have inherent limitations. Past performance is not a guide to future returns and the value of investments may fall as well as rise. No representation is made that any account will or is likely to achieve returns similar to those shown.

11 In summary, our analysis shows that over the entire period from 2008 to 2017, investors in emerging market equities would have benefited from: EM currency losses reduced by 70% Maximum peak-to-trough drawdown reduced by 35% Annual currency volatility reduced by 25% Extreme monthly currency losses eliminated CONCLUSION Based on our analysis, emerging market currency exposure within EM portfolios contributes a substantial and varying impact on the risk and return of the underlying investment. There are long periods when it is preferable to hedge emerging market currency exposure and also times when an unhedged position is appropriate. The difference between hedged and unhedged returns can be very material. By employing a Yield Shield strategy to dynamically hedge Emerging Market currency exposure, we believe it is possible to achieve better results than remaining unhedged or maintaining a static hedging policy.