Navigating the storm Investing in ideas to aid diversification April 2017 Richard Batty Fund Manager, Multi Asset This presentation is for Professional Clients only and is not for consumer use. Please do not redistribute this document.
There are always storms on the horizon Protecting capital? or Generating returns?
Monetary policy is diverging Led by the Federal Reserve Major central bank interest rates (%) Federal Reserve Target range raised to 50-75bps FOMC median expectation now for three hikes in 2017 ECB QE programme extended and universe broadened, but tapering also announced Main Refinancing rate 0.0% and deposit rate -0.4% BoE Bank Rate cut to 0.25% 60bn addition to asset purchases plus 10bn of corporate bond purchases New 100bn term funding scheme BoJ Policy-Rate Balance interest rate -0.1% JPY80tr QE programme Yield curve control Source: Macrobond, Bloomberg, Invesco Perpetual, as at 31 January 2017. 3
Quantitative easing Is cessation a storm on the European horizon? Italian 10 year government bond yield (%) 8 7 6 5 4 3 2 1 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Bloomberg as at 18 April 2017. 4
Bund market High duration & low yield not a great combination Bund market yield (%) and modified duration Source: Macrobond, BoAML, 31 December 2016. 5
% Bonds Can yields rise further in the US & UK? 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 US UK 10-year bond yield 10-year annualised nominal GDP growth Source: Thomson Reuters Datastream, 31 January 2017. 10-year bonds are Treasuries and Gilts. 6
Basis points over Governement bonds Basis points over Government bonds Credit How much further can spreads narrow? 3000 600 2500 500 2000 400 1500 300 1000 200 500 100 0 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 0 Sterling High Yield, lhs Sterling BBB non-financials Source: Bloomberg, Merrill Lynch, 31 January 2017 7
Price Index (MXWO) EPS Index Major equity markets de-coupled from earnings performance in 2013 Developed market equities and earnings 1860 155 1740 Price index (LHS) 145 1620 1500 +68% 135 125 1380 115 1260 1140 Forecast EPS (RHS) 105 95 1020 85 900 75 2010 2011 2012 2013 2014 2015 2016 2017 Source: Minack as at 13 October 2016. Market is on a PE of 12 when the index line overlaps the EPS line. MXWO = MSCI World Total Return index. 8
Political storm Dispersion was triggered by Brexit & the Trump victory Major sectors 1 price returns 140 135 130 125 120 115 110 105 100 95 90 85 80 75 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Tobacco Pharmaceuticals Real Estate Investment Service Life Insurance Banks Oil & Gas Producers Travel & Leisure Financial Services Source: Bloomberg as at 31 December 2016. Prices rebased to 100 on 31 March 2016. 1 Sectors represented: FTSE all-share Index sectors. 9
Traditional multi asset approaches A well trodden path
Traditional multi asset investing Investing in asset classes has risks Asset classes can be driven by the similar factors Correlations between asset classes change daily Traditional asset allocation may not provide the diversification benefits hoped for 11
An alternative approach to multi asset Investing in ideas
Diversification benefit Harnessing genuine diversification by investing in ideas Total independent risk Portfolio risk For illustrative purposes only. 13
through building a well diversified portfolio Invesco Perpetual Global Targeted Returns Fund 28 ideas Each idea is sized to deliver an estimated 25-50 bps contribution to return 1 Commodity - Commodity Carry Credit - US High Yield Currency - Indian Rupee vs Chinese Renminbi Currency - Long EM Carry Currency - Russian Ruble vs Canadian Dollar Currency - US Dollar vs Euro Equity - France vs Germany & Italy Equity - Japan Equity - UK Inflation - Short Real Yields and Inflation Interest Rates - Australia vs US Interest Rates - Japanese Curve Steepener Interest Rates - Swap Spreads Interest Rates - Yield Compression Credit - Selective Credit Currency - Chile and Mexico vs Australia and NZ Currency - Japanese Yen vs Korean Won Currency - Long Sterling Currency - US Dollar vs Canadian Dollar Equity - European Divergence Equity - Global Equity - Selective Asia Exposure Equity - US Large Cap vs Small Cap Inflation - US vs UK Interest Rates - European Curve Steepener Interest Rates - Selective EM Debt Interest Rates - Sweden Volatility - Asian Equities vs US Equities 7 asset classes Each asset class must contribute less than 50% to total risk 1 17 regions Reduce risk of concentration to a particular country/region Source: Invesco Perpetual. For illustrative purposes only. This information relates to the portfolio based on market conditions as at 31 March 2017, subject to change. 1 There is no guarantee these targets will be achieved. 14
Seeking additional drivers of return Beyond the traditional balanced portfolio Illustrative Global Balanced Portfolio* Invesco Perpetual Global Targeted Returns Fund Equities and interest rates explain 75% of the risk in an illustrative Global Balanced Portfolio 39% of the risk in Invesco Perpetual Global Targeted Returns Fund Equity risk Interest rate risk Other risks Past performance is not a guide to future returns. Source: Invesco Perpetual as at 31 March 2017. For illustrative purposes only. Subject to change. *Global balanced portfolio comprises of 60% global equities (30% FTSE 100, 15% Eurostoxx 50, 15% S&P 500) and 40% global bonds (20% Gilts, 20% Markit itraxx indices). Equity risk is represented by % volatility of the MSCI World index, interest rate risk represented by % volatility of 10 year US government bond, other risks, may include, but are not limited to currency risk, credit risk. Period covered: 180 weeks to March 2017. Based on a regression analysis. An investment cannot be made directly in an index. 15
Creating a more robust portfolio Correlation analysis Asset class Correlation with Invesco Perpetual Global Targeted Returns Fund Global stocks 0.36 US stocks 0.29 European stocks 0.43 Equities The fund provided good diversification with both global and US equities Emerging markets stocks 0.43 Global government bonds -0.10 Global bonds -0.06 Commodities 0.08 Currency (USD) 0.21 Bonds Fund performance was largely unrelated to fixed income Alternatives The fund provided good diversification with commodities and currency The Invesco Perpetual Global Targeted Returns Fund typically has between 20-30 independent investment ideas which seek to deliver truly diversified returns. This approach means the strategy could complement more traditional asset allocation approaches. Source: Bloomberg. Period covered: inception of the Invesco Perpetual Global Targeted Returns Fund (9 September 2013) through 31 March 2017. Weekly data used. Global stocks are represented by the MSCI World index. US stocks are represented by the S&P 500 index. European stocks are represented by the Eurostoxx 50 index. Emerging Market stocks are represented by the MSCI EM index. Global government bonds are represented by the Bloomberg Global Developed Sovereign Bond index. Global bonds are represented by Barclays Global Agg index. Commodities are represented by the Bloomberg Commodity index. Currency is represented by the US Dollar index. 16
Finding an investment path One idea at a time
percentage points Inflation opportunity US versus UK 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2 10 11 12 13 14 15 16 17 UK 10-year inflation swap less US 10-year inflation swap Source: Bloomberg, as of 31 January 2017. 18
Currency opportunity India versus China 0.104 0.102 0.100 0.098 0.096 0.094 0.092 0.090 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Indian Rupee vs Chinese Renminbi Source: Bloomberg, as of 31 January 2017 19
Volatility opportunity Long Sterling through selling options GBPUSD exchange rate has fallen to 5-year lows 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 2012 2013 2014 2015 2016 2017 14 13 12 11 10 9 8 7 6 GBPUSD Exchange Rate GBPUSD 1Y Implied Volatility % (RHS) Source: Bloomberg as at 31 January 2017. For illustrative purposes only. 20
Good risk management essential to smooth the path
Derivatives are an important tool to access different return streams Derivatives allow investors to take pinpoint exposure in markets Using derivatives can change the payout profile of an investment Derivatives can provide downside as well as upside protection Illustrating an asymmetric payoff structure 25 20 15 10 5 0-5 -10-15 -20-25 Chart: For Illustrative purposes only. The dark blue line shows a payoff structure that has cushioned downside risk versus the light blue line. 22
Diversification benefits of blending different investment ideas together 0.8 0.6 0.4 0.2 0-0.2 Risk off Risk on -0.4-0.6 Currency - Japanese Yen vs Korean Won Correlation with MSCI World* Interest rates - Yield Compression Interest rates - Japanese Curve Steepener Equity - Japan Source: Invesco Perpetual as at 31 December 2016; *Calculated using weekly date over 180 weeks. 23
Performance, % Correlation of daily returns Incorporating returns and risk Data since 4 March 2015 12 10 8 6 4 2 0-2 -4 120 100 80 60 40 20 0-20 -40-6 Japanese Yen vs. Korean Won Nikkei Index Correlation, daily returns rhs -60 Source: Invesco as at 28 February 2017. 24
Conclusion There are always storms on the horizon therefore we believe a balanced approach to protecting capital whilst aiming to generate returns is needed at all times Asset class labels can restrict an investor s ability to seek out consistent return opportunities and do not always provide diversification for a multi asset portfolio Investing in ideas rather than asset classes provides an alternative approach to a dual risk and return target through building a well diversified portfolio 25
Important information This presentation is for Professional Clients only and is not for consumer use. Please do not redistribute. Past performance is not a guide to future returns. Where Richard Batty has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of Invesco investment professionals. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell. The Invesco Global Targeted Returns Fund makes significant use of financial derivatives (complex instruments) which will result in the fund being leveraged and may result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment. The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Manager, through the use of collateral management. The securities that the fund invests in may not always make interest and other payments nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity for the securities in which the Fund invests, may mean that the Fund may not be able to sell those securities at their true value. These risks increase where the Fund invests in high yield or lower credit quality bonds and where we use derivatives. For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports and the Prospectus, which are available using the contact details shown. Invesco Perpetual is a business name of Invesco Fund Managers Limited. Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. 26