The Benefits of Recent Changes to Trustees Investment Powers June 2006
Financial Markets and Rollercoasters Spot the Difference? Performance from 1 Jan 1998 to 31 Mar 2006 80 % 60 % 40 % 20 % 0 % -20 % -40 % Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Source: Thomson Financial Datastream S&P 500 in USD Nikkei 225 Stock Average in USD MSCI Europe Index in USD MSCI World Index in USD FTSE All-Share Index in USD
So Buy and Hold Was Never A Serious Strategy
Difficult to Prevent The Ride Due To Constraints Drawing from income not total return restricts use of roll-up funds. Many fund managers strategies structured as roll-up funds so constrains what can be included in portfolio. Some strategies perceived as risky as viewed in isolation, not as a part of a diversified portfolio. PORTFOLIO MANAGERS HAVE BEEN CONSTRAINED IN THE BREADTH OF STRATEGIES THAT CAN BE INCLUDED
The Constrained Approach
The Seasonality of Returns It s About Skew & Predictability Very Rainy Rainy Fine Warm Hot
Equities Provide Potential For Growth Volatility: 16-18% 18% Difficult to predict monthly outcomes Frequency -10-9 -8-6 -4-2 0 2 4 6 8 10 12 Monthly Returns (%) Source: GAM
But What About The Risks (for Client & Trustee!)?
Including Bonds Will Reduce The Risk Volatility: 5% Average is positive and monthly returns exhibit a high level of predictability Frequency -6-4 -2 0 2 4 6 Monthly Returns Source: GAM
Skews The Return Towards The Positive 31 Dec 1998 to 28 Feb 2005 70 60 50 Frequency (%) 40 30 20 10 0-17 -15-13 -11-9 -7-5 -3-1 1 3 5 7 9 11 13 15 17 Return (%) US Government Bonds (3-5) MSCI World GAM Balanced Benchmark Source: GAM, MSCI, Thomson Financial Datastream, Hedge Fund Research
...and Produce Reasonable Results But Still Volatile Performance from 31 May 1996 to 31 May 2006 100 % 80 % 60 % 40 % 20 % 0 % Dec 96 Dec 98 Dec 00 Dec 02 Dec 04 50% WCI 50% SGD Composite Index to 19 MSCI World Index in USD May 2006 Citigroup (WGBI) United States Index in USD Source: MSCI, Thomson Financial Datastream
The Un-Constrained Approach
Many More Strategies In The Un-constrained Universe Distressed Bonds Merger Arbitrage Event Driven Relative Value Absolute Return Leveraged Mortgage Based CTA Managed Futures Global Macro Convertible Arbitrage Long/Short Equity Market Neutral Statistical Arbitrage Long Only Global Currency Fixed Income Arbitrage
Equity Long/Short Skew Is Everything! Volatility: 10% 10 % 35 Lower volatility & much less probability of losses. 8 Alpha 30 25 6 4 Active Beta Frequency 20 15 10 2 Passive Beta 5 0 Long/Short Equity 0-8 -6-4 -2 0 2 4 6 8 10 12 14 Monthly Returns Source: GAM
Alternative Investments Add Even More Skew!
What Are Alternative Investments? Alternative Investments Cash Bonds Alternative investments are non-equity correlated investments Currencies Commodities Bonds Equities
Alternatives - Add More Skew To Portfolios % 10 Volatility: 7% Distribution positively skewed with limited downside deviation. Infrequent negative outliers. 8 6 4 Alpha Frequency 2 0 Alternative Investments -6-4 -2 0 2 4 6 8 10 12 14 Monthly Returns (%) Past Presented performance as supplemental is not indicative information of future only. results. Please refer to the compliance text in this presentation. Source: GAM
Low Correlation to Equities is Valuable Ten Year Asset Class Correlation to 28 Feb 2006 Alternative Investments Equity Long/Short Equity Long Bonds Alternative Investments 1.00 0.04-0.06 0.28 Equity Long/Short 1.00 0.73-0.02 Source: GAM
Predictability and Skew Key Drivers 100 90 80 70 Frequency (%) 60 50 40 Less of this More of this 30 20 10 0-17 -15-13 -11-9 -7-5 -3-1 1 3 5 7 9 11 13 15 17 Return (%) US Government Bonds (3-5) HFR Long/Short Equity HFI Arbitrage MSCI World HFR Global Macro GAM Absolute Return Source: GAM, MSCI, Thomson Financial Datastream, Hedge Fund Research. 31 Dec 1998 to 28 Feb 2005
To Summarise: Before and After Constrained Portfolio Unconstrained Portfolio Cash Bonds Cash Alternative Investments Bonds Equities Equities Long/Short Equities Long Only
So if it is so easy, what s the big deal?
Returns Vary Widely From Year to Year Highest Return Lowest Return 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Citigroup Non USD (WGBI) US 3-73 7 years index in USD Compound 3 Month Libor in USD Citigroup (WGBI) USD 3-7 years Index in USD HFRI Equity Hedge Index in USD HFRI Fund of Funds Composite Index in USD MSCI EAFE Index in USD S&P 500 In USD Source: MSCI, Financial Times, Thomson Financial Datastream as at 31 Dec 2005
1. Active Asset Allocation Must Be Dynamic Equity Long Alternatives Bonds Equity Long Bonds Approach A: Set In Stone Alternatives Approach B: Dynamic Equity Long/Short
1. Asset Allocation Must Be Dynamic GAM Composite Absolute Return Dec 1997 to Mar 2006 100% 80% 60% 40% 20% 0% -20% Dec 97 Sep 98 Jun 99 Mar 00 Dec 00 Sep 01 Jun 02 Mar 03 Dec 03 Sep 04 Jun 05 Mar 06 Liquidity Bonds Equities Long Equities Long/Short Trading Strategies Arbitrage Strategies Source: GAM
2. Use The Best in Their Field!
So Make Sure You Know Your Manager
and Avoid Black Box Solutions
Make Sure The Theory Works Its all about The Skew! Very Rainy Rainy Fine Warm Hot
Make Sure The Theory Works! Risk characteristics from 1 Jan 1999 to 30 Apr 2006 6.8 6.7 6.8 0.9 0.8 0.7 0.8 18 16 14 16.0 6.6 0.6 0.5 12 10 6.5 6.4 6.5 0.4 0.3 0.2 0.1 0.2 8 6 4 2 5.3 6.3 0 0 The higher the number, the greater the variability of performance / risk Annualised Std Deviation % A ratio of reward to risk. In general, the higher the number the better Sharpe Ratio The largest loss, peak to trough based on monthly data Maximum Drawdown % GAM Absolute Return Strategy USD 50% MSCI World in USD / 50% Citygroup (WGBI) United States in USD Source: GAM, Citigroup. Past performance is no indicative of future performance.
Capital Preservation In Falling Markets MSCI World 31 Dec 98 to 28 Feb 06 30% 20 % 10 % 0 % -10 % -20 % -30 % 2000, 2001 and 2002 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Preservation GAM Absolute Return Strategy 31 Dec 99 to 31 Dec 02 10 % 0 % MSCI World Index in USD GAM Absolute Return Strategy USD -10 % -20 % -30 % -40 % Dec 99 Dec 00 Dec 01 Dec 02 Source: GAM, MSCI. Past performance is no indicative of future performance
GAM Absolute Return Strategy USD Performance from inception to 30 Apr 2006 80 % 60 % 40 % 20 % 0 % -20 % Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 GAM Absolute Return Strategy USD Average USD 1 Month Deposit Rate MSCI World Index in USD Past Presented performance as supplemental is not indicative information of future performance. only. Please refer to the compliance text in this presentation. Source: GAM, MSCI, Financial Times Funds do not have the security of capital characteristic of a bank deopsit
GAM Absolute Return Strategy USD Performance from inception to 30 Apr 2006 80 % Compound Growth % p.a. Annualised Standard Deviation % 60 % GAM Absolute Return Strategy USD 8.72 6.47 40 % MSCI World Index in USD 4.37 14.16 20 % Average USD 1 Month Deposit Rate 3.38 0.56 0 % -20 % Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 GAM Absolute Return Strategy USD Average USD 1 Month Deposit Rate MSCI World Index in USD Past Presented performance as supplemental is not indicative information of future performance. only. Please refer to the compliance text in this presentation. Source: GAM, MSCI, Financial Times Funds do not have the security of capital characteristic of a bank deopsit
Absolute Return Outlook Forecast Returns and Ranges USD 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 Positive Forecast Skew Forecast 60 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 An Absolute Return Strategy MSCI World Source: GAM, MSCI
Disclaimer Past performance is not indicative of future performance. The performance information shown is supplemental to, and should be read in conjunction with, the GIPS compliant report that is included. This material is intended solely for the use of the reader. It is not an invitation to subscribe and is by way of information only. It may not be reproduced of distributed to any other person. Please note that the price of shares and the income from funds may go down as well as up and may be affected by changes in rates of exchange. An investor may not get back the amount invested. Please note that the composition of mandates may change over time. This presentation is issued and approved by GAM London Limited (Authorised and regulated by the Financial Services Authority), 12 St. James s Place, London SW1A 1NX