Global commodities - capturing the boom without the bust Brett Dobeson, Associate Director PortfolioConstruction Conference 2006 1
Disclaimer The investment manager is GoldLink Capital Asset Management Limited ABN 27 103 567 291, AFS Licence No. 230983. This presentation is provided for information purposes only and is not an invitation or solicitation to invest in GoldLink Capital Asset Management Ltd (GCAM) or any products managed or promoted by GCAM. This presentation has been prepared without taking into account the objectives, financial situation or needs of the investor, and should not be regarded as financial product advice. Investors should seek their own financial counsel in relation to investment matters. While efforts have been made to check to the accuracy of the information provided, neither GCAM or any related party does not warrant the accuracy or reliability of the information. The Directors and employees of GCAM do not accept any liability for any error or omission in this report. Past performance is not a reliable indicator of future performance. There is no guarantee of a positive return. The information in this presentation should not be relied upon as a complete and accurate representation of any matters that could be considered in the future. 2 2
Contents Commodity boom Set to continue? Commodities as an asset class Passive commodity investment strategies (beta) Active commodity investment strategies (alpha) Avoiding the commodity bust 3 3
Commodity boom set to continue? 4 4
Key drivers The China story Price 9500 7500 GSCI Total Return Index (1990 - July 2006) 5500 Supply constraints Global economy Geo-political risk 3500 1500 1990 1992 1994 1996 1998 2000 2002 2004 2006 Estimated Commodity Index Investment US$ Bn 100 (1990 - July 2006) 80 60 Investment demand 40 20 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: GoldLink, Bloomberg, Goldman Sachs 5 5
Commodities as an asset class 6 6
Why Commodities Excess returns 16% 12% 12.38% Asset Class Annual Returns 1970-April 2006 11.05% Equity like volatility 8% 4% 7.87% Low correlation to traditional assets 0% 25% GSCI S&P 500 US Bonds Asset Class Annual Volatility 1970-April 2006 Hedge against inflation and event risk 20% 15% 10% 19.95% 16.63% 10.12% 5% Source: GoldLink, Bloomberg, Goldman Sachs 0% GSCI S&P 500 US Bonds 7 7
Low correlation GoldLink IndexPlus 10 Year Blended Benchmark Correlation with Traditional Assets Low correlation to traditional assets Australian Cash International Fixed Interest Australian Fixed Interest Australian Listed Property International Shares (MSCI) Commodities low correlation to traditional assets Portfolio diversification Australian Shares (ASX300) -1.00-0.75-0.50-0.25 0.00 0.25 0.50 0.75 1.00 GSCI and S&P 500 rarely generate a negative return in the same year 50% 30% 10% -10% Annual Returns GSCI TR & S&P 500-30% Negative returns both asset classes -50% 1970 1975 1980 1985 1990 1995 2000 2005 S&P 500 GSCI TR Source: DJAIG, GSCI, Bloomberg & GoldLink Monthly total return return data 8 8
Commodities as a hedge Commodities strong correlation to inflation Traditional assets negative correlation to inflation Commodities as a hedge against event risk GSCI Spot US CPI & Commodities (GSCI) % 600 500 400 300 200 100 1990 1992 1994 1995 1997 1999 2000 2002 2004 2005 GSCI Spot (LHS) US CPI (RHS) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Source: GoldLink, Bloomberg 9 9
Passive Commodity Investing (Beta) 10 10
Passive Investment Alternatives Exchange Traded Funds (ETFs) Retail Institutional Commodity related equities Structured notes Commodity indices 11 11
Commodity Indices Estimated US$90 billion Commodity Index Approximate Weighting Passive long only investment Components GSCI 24 DJ- AIG 19 CRB 19 RICI 35 DBC 6 GoldLink Blended 25 Energy 75% 28% 39% 44% 55% 51% Broad commodity exposure (beta) Industrial Metals Precious Metals 10% 2% 25% 10% 13% 7% 14% 7% 10% 10% 18% 6% Agriculture 10% 26% 34% 32% 25% 18% Not all commodity indices are created equal Livestock Vegetable Oil 3% 0% 8% 3% 7% 0% 3% 0% 0% 0% 6% 1% Source: GoldLink, Bloomberg, Goldman Sachs, DJ-AIG, Deutsche Bank 12 12
Index Return Sources 40% GSCI TR- Sources of Returns Rolling 3 Years to 30 Dec 2005 Spot 30% 20% Collateral Return 10% 0% Roll Yield -10% -20% Negative Roll Yield Dec-72 Dec-74 Dec-76 Dec-78 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Spot Collateral Roll Yield Source: GoldLink, Bloomberg 13 13
Active Commodity Investing (Alpha) 14 14
Active Investment (Alpha) Exploit commodity market inefficiencies Tactical tilting of sub-sector weightings Roll yield Collateral enhancement Downside risk protection 15 15
Index Tactical Tilts Avoid sub-optimal performance outcomes 1.50% 1.19% Ranked Universe of Sharpe Ratios (1991-2006) 1.00% Tactical tilts generate superior risk adjusted returns 0.50% 0.00% -0.50% 0.60% 0.39% -0.24% -0.26% Energy exposure may reduce portfolio volatility -1.00% Industrial Metals Precious Metals -0.55% Sub-optimal performance outcomes Energy Vegetable Oil Livestock Agriculture Source: GoldLink, Bloomberg, Goldman Sachs, DJ-AIG 16 16
Index Roll Yield Enhancement Alternative roll dates Roll less frequently Seasonality US$ per barrel 78.0 77.0 76.0 75.0 74.0 73.0 72.0 71.0 70.0 69.0 Indices Brent Crude Forward Curve Basket Forward Swap 1 7 13 19 25 31 37 43 Mths Exploit backwardation US$ per MMBTU 12 11 10 9 8 7 Natural Gas Forward Curve Seasonal backwardation Source: GoldLink, Bloomberg 6 0 6 12 18 24 30 36 42 48 Mths 17 17
Avoiding the Bust Volatile asset class Passive strategies offer no downside protection Tactical tilts to reduce overweight exposure 60% 40% 20% 0% -20% -40% GSCITR Annual Return Vs GoldLink Risk Mitigation* Option strategies designed to reduce volatility Downside Risk Mitigation -60% 1970 1975 1980 1985 1990 1995 2000 2005 Return with risk mitigation Return without risk mitigation * Illustration purposes only, actual results may differ GoldLink Enhanced Commodity IndexPlus Fund Source: GoldLink, Bloomberg 18 18
Summary Commodities offer portfolio risk return benefits Inefficient commodity markets offer alpha opportunities Active management may exploit limitations of passive long only commodity investing Option strategies to avoid the bust 19 19
Gizmo time Which session are you in? 6. Tyndall 7. AMP Capital Investors 8. Schroders 9. Nicholas Applegate/Allianz Global Investors 10. Challenger Financial Services 20
Gizmo time Please rate the overall quality of this session 1. awful 2. Poor 3. Mediocre 4. Good 5. Very good 6. Great! 21