ANDREW COLE SENIOR INVESTMENT MANAGER, INTERNATIONAL MULTI ASSET 7 September 2017
% IT HAS BEEN A GOOD TIME TO BE PASSIVE 14 50% EQUITIES/50% BONDS IN 12 10 8 6 4 2 0 Source: Thomson Reuters. Performance for 50% MSCI World Index (Equities) / 50% J.P. Morgan Government Bond Index (Bonds) over the period 31.01.1997-30.12.2016, in Sterling. 2
% IT HAS BEEN A GOOD TIME TO BE PASSIVE 14 BONDS IN 50% EQUITIES/50% BONDS IN 12 10 8 6 4 2 0 Source:Thomson Reuters. Performance for the J.P. Morgan Government Bond Index (Bonds) and 50% MSCI World Index (Equities) / 50% J.P. Morgan Government Bond Index (Bonds) over the period 31.01.1997-30.12.2016, in Sterling. 3
% IT HAS BEEN A GOOD TIME TO BE PASSIVE 18 EQUITIES IN BONDS IN 50% EQUITIES/50% BONDS IN 16 14 12 10 8 6 4 2 0-2 Source:Thomson Reuters. Performance for the MSCI World Index (Equities), J.P. Morgan Government Bond Index (Bonds) and 50% MSCI World Index / 50% J.P. Morgan Government Bond Index over the period 31.01.1997-30.12.2016, in Sterling. 4
POST GLOBAL FINANCIAL CRISIS Increased regulatory framework for risk taking A subpar acceleration in economic growth Continued overestimate of forward inflation Ongoing? Intervention by central banks 5
Cumulative Growth (last Price) A SUBPAR ACCELERATION IN ECONOMIC GROWTH In this recovery, US GDP has grown at half the average pace of prior expansions. 180 160 140 120 100 80 60 40 Q2 1954 Q2 1958 Q1 1961 Q4 1970 Q1 1975 Q3 1980 Q4 1982 Q1 1991 Q4 2001 Q2 2009 20 0 0 5 10 15 20 25 30 35 40 Quarters After Trough Source:, Bloomberg. Data as of Q2 2017. 6
CONSENSUS EPS US 7
%pa CONTINUED OVERESTIMATE OF FORWARD INFLATION Inflation outcomes have been systematically over-predicted: 0.0 Cumulative forecast errors of one-year ahead inflation forecasts -0.5-1.0-1.5-2.0 World DM EM -2.5-3.0-3.5-4.0 2000 2000 2001 2002 2003 2004 2005 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013 2014 2015 2015 2016 Source: Barclays Equity Gilt Study 2017. 8
FROM A UK PERSPECTIVE GILTS HAVE BEATEN EQUITIES 2007 2016 Equities 5.3% p.a. Gilts 7.2% p.a. Indeed gilts beat equities over 20 years, albeit by a lesser amount Source: Barclays Equity Gilt Study 2017. Nominal returns in sterling of the Barclays UK Equity and Gilt funds, over period 01.01.2007-31.12.2016. 9
CONSENSUS EPS UK 10
CONSENSUS EPS GERMANY 11
CONSENSUS EPS FRANCE 12
DESIRE FOR YIELD OR LOWER VOLATILITY Asset management industry has responded Investment Grade Credit, High Yield Credit, Equity Income, Loans, Absolute Return Fixed Income, Alpha? 13
THE HEADWIND Long run ambition of most governments to deleverage Transfer of wealth from those with savings to those without Financial repression 14
LOW GROWTH, RISING INFLATION, LOW AND VOLATILE RETURNS PAM Secular outlook: forecasts over the next 5 years AVERAGE GROWTH AVERAGE INFLATION CURRENCY APPRECIATION P.A.* 10Y BOND YIELD IN 5Y** EQUITY RETURN P.A*** Global 3.0 2.7-2.7 4.6 US 1.8 2.5-1.8 3.3 1.9 Euro-area 1.4 2.0 3.1 2.4 7.6 UK 1.6 2.5 2.3 3.0 7.6 Switzerland 1.7 1.2 3.6 1.9 6.7 Japan 0.9 1.3 1.7 2.1 6.8 Emerging Markets 4.5 3.5 2.1 7.2 10.7 China 5.8 2.5 2.8 EM Asia 5.6 2.9 2.4 5.8 11.7 Latam 2.5 4.2 0.8 7.7 6.9 Source:, Datastream, Bloomberg. As of 31 March 2017. Forecasts, assumptions and expectations are not indicative of future performance of any product. Forecasted returns are based on simulated data. They are hypothetical, unaudited and are intended for illustrative purposes only. Projected future performance is not indicative of actual returns and there is a risk of substantial loss. Inherent limitations to forecasted returns can be disclosed upon request. Refer to full disclosure at the end of this document. Forecasted returns over a period of 5 years, excludes cash or transaction costs, gross of fees. Forecasted secular returns are based on fundamental analysis and generated using an in-house model. Multi Asset Strategists and Economists at provide their expertise on the various economies estimating the different metrics used as inputs in the model, such as: Equity: dividend yield, EPS growth, margin change. Fixed Income: Economic growth forecast, change in the yield curve, change in spread. Trade-weighted USD for the US and pairwise against USD for all others. ** German 10Y for EMU. JPM GBI local currency for global bonds, Japan and EM aggregates *** Equity return in USD 15
FRONTIER MARKETS EM ASIA EQUITIES EM EQUITIES EM LOCAL (GBI) UK EQUITIES EMU EQUITIES LATAM EQUITIES SWISS EQUITIES JP EQUITIES EUR CORP.HY DM EQUITIES EM HARD (EMBI) EM CORPORATE US HY EUR CORP. IG JPM EMU US TIPS US EQUITIES SWISS BONDS (SBI) 10Y US BONDS 10Y GER BUNDS JPM JAPAN GOLD PRIVATE EQUITY UK REAL ESTATE SWI REAL ESTATE HEDGE FUNDS US REAL ESTATE LONG-TERM ASSET CLASSES RETURN FORECASTS Asset classes 5Y return forecasts in GBP, p.a. 14.0% 12.0% 11.4% ----------Alternatives-------- 10.0% 9.2% 8.2% 6.0% 8.0% 6.0% 5.6% 5.2% 5.2% 4.5% 4.3% 4.2% 4.5% 4.0% 2.6% 1.4% 1.0% 0.9% 0.9% 2.9% 2.7% 1.0% 0.9% 2.0% 0.9% 0.6% 0.0% -2.0% -0.3% -0.4% -0.5% -0.9% -1.0% -2.7% -4.0% 5Y TOTAL RETURNS IN LOCAL CURRENCY, P.A. 16 CURRENCY IMPACT Source: Datastream,. End of March 2017. The strategic allocation is derived from our secular forecasts over a period of 5 years and historical risk data for those asset classes. The strategic allocation is provided for information purposes only and does not represent an investment recommendation. Forecasts, assumptions and expectations are not indicative of future performance of any product. Forecasted returns are based on simulated data. They are hypothetical, unaudited and are intended for illustrative purposes only. Projected future performance is not indicative of actual returns and there is a risk of substantial loss. Inherent limitations to forecasted returns can be disclosed upon request. Refer to full disclosure at the end of this document. 1) Data in GBP, as at end of March 2017. Forecasted returns over a period of 5 years, excludes cash or transaction costs, gross of fees. Forecasted secular returns are based on fundamental analysis and generated using an in-house model. Multi Asset Strategists and Economists at provide their expertise on the various economies estimating the different metrics used as inputs in the model, such as: Equity: dividend yield, EPS growth, margin change. Fixed Income: Economic growth forecast, change in the yield curve, change in spread. 2) Forecasted annualised portfolio volatility based on historical volatility data over the last 10 years.
HOW TO GET TO A REASONABLE RATE OF RETURN GBP INVESTORS Incremental real return p.a. for a global balanced portfolio* in GBP 50/50 equity/bond long-term average = 5% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -1.10% -2.0% 50/50 PASSIVE 10% OW EQUITIES 5%+5% EM EQUITIES + BONDS 10% THEMATICS 10% ABS. RETURN VS. BONDS 10% UK REAL ESTATE VS. BONDS TACTICAL ALLOCATION (IR = 0.25) Volatility 10.0% 9.5% 9.0% 8.5% 8.0% 50/50 PASSIVE 10% OW EQUITIES 5%+5% EM EQUITIES + BONDS 10% THEMATICS 10% ABS. RETURN VS. BONDS 17 10% UK REAL ESTATE VS. BONDS TACTICAL ALLOCATION (IR = 0.25) Souce: Datastream,. * based on GBP. We assume 4% absolute return and a quarterly allocation change between equities and bonds. Initial portfolio is 25% global equities, 25% UK equities and 50% UK government bonds. Final portfolio is 45% DM equities, 5% EM equities, 10% thematic equities, 15% UK bonds, 5% EM bonds, 10% absolute return, 10% UK real estate. As of 31 March 2017. Forecasts, assumptions and expectations are not indicative of future performance of any product. Forecasted returns are based on simulated data. They are hypothetical, unaudited and are intended for illustrative purposes only. Projected future performance is not indicative of actual returns and there is a risk of substantial loss. Inherent limitations to forecasted returns can be disclosed upon request. Refer to full disclosure at the end of this document. Data in GBP, as at end of March 2017. Forecasted returns over a period of 5 years, excludes cash or transaction costs, gross of fees. Forecasted secular returns are based on fundamental analysis and generated using an in-house model. Multi Asset Strategists and Economists at provide their expertise on the various economies estimating the different metrics used as inputs in the model, such as: Equity: dividend yield, EPS growth, margin change. Fixed Income: Economic growth forecast, change in the yield curve, change in spread. Forecasted annualised portfolio volatility based on historical monthly volatility data over the last 10 years.
IMPLIED RETURNS ACROSS ASSET CLASSES 9% 8% 7.9 Risk Premium Inflation 7% 6.9 7.0 6% 6.1 5.7 5.4 5% 4% 3% 2% 1% 0% 2.2 1.0 0.3 0.1 3.2 1.0 2.5 1.5 0.9 0.6 0.3 0.2 3.9 4.7 3.5 3.2 4.7 6.9 6.7 5.3 10 Year Government Bonds Lending to Investment Grade companies Lending to High Yield companies Owning shares in companies Source:, Datastream, June 2017. 10 Year Government Bonds = Real Yield (10Y Inflation-Linked Yield) + 10Y breakeven inflation rate. Owning shares in companies: Equity Risk Premium (ERP) = DCF based on consensus EPS 1-5 year and trend nom. GDP growth thereafter, 45% payout ratio. Implied future returns are per annum in local currency, are not indicative of actual returns and there is a risk of substantial loss. Please refer to full disclosure at the end of this document. 18
EQUITY RISK PREMIA 12.0% 10.0% 8.0% 6.0% 4.0% 6.80% 6.49% 5.59% 4.69% 2.0% 0.0% US IMPLIED ERP (4.83%) UK IMPLIED ERP (4.68%) GERMANY IMPLIED ERP (4.85%) JAPAN IMPLIED ERP (3.72%) -2.0% Source:, Datastream. Data from 19.08.1992 23.08.2017. Average between brackets. ERP = Estimated based on a DCF model with consensus EPS growth till year 5, then fade to trend nominal GDP growth of 4.0% (our forecast) till year 10, 45% payout ratio. 10Y range = 90% percentiles 19
MANAGING VOLATILITY Volatility of equities has been high It is falling Better equity selection reduces risk You can have less of it Understanding and responding to valuation Significant asset allocation changes 20
SUMMARY This is likely to be one of the longest economic expansions on record Few signs of excess Corporate profits still below trend Inflation stubbornly low Regulatory demand for bonds remains high Prospective returns from bonds negative in real terms Equity risk premium largely above average 21
SUMMARY Two further thoughts. 22
Disclaimer Simulated data, projected forecast figures presented in slide 15, 16, 17 and 18 are figures that are hypothetical, unaudited and prepared by Pictet Asset Management Limited. The results are intended for illustrative purposes only. Past performance is not indicative of future results, which may vary. Projected future performance is not indicative of actual returns and there is a risk of substantial loss. Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown herein. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual performance results. Hypothetical performance results are presented for illustrative purposes only. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. There is no guarantee, express or implied, that long-term return and/or volatility targets will be achieved. Realized returns and/or volatility may come in higher or lower than expected. A full list of the assumptions made can be provided on request. 23
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