For professional investors only Aiming to deliver attractive absolute returns with style BMO Global Equity Market Neutral (SICAV)
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BMO Global Equity Market Neutral (SICAV) Leveraging our proven capabilities in systematic investment strategies, the BMO Global Equity Market Neutral (SICAV) aims to offer investors the potential benefits of multiple style factors in a single portfolio. Investing both long and short in global equities, the fund aims to deliver a positive absolute return over a three year period regardless of market conditions, and targets an annualised volatility of 6%. A positive return is not guaranteed over this or any time period. At a glance: Aiming for absolute returns by investing long and short in global equities across a range of defined styles, the fund aims to deliver positive returns over a three year period regardless of market conditions. Targeting a defined outcome targeting 6% annualised volatility over a three-year market cycle and aiming for a 4.5% annual return over the risk-free rate. Low historical correlation with traditional assets including bonds, equities and also with hedge fund indices. Cost-effective implementation disciplined systematic investment approach applied within a robust risk management framework. Proven expertise experienced systematic strategies team has developed and refined its True Styles approach since 2003, implementing it across a range of products. Key facts Name BMO Global Equity Market Neutral (SICAV) Investment Objective The BMO Global Equity Market Neutral (SICAV) aims to deliver a positive return regardless of market conditions over a three year period but such a positive return is not guaranteed over this or any time period. Capital is at risk and on sale of shares in the Fund an investor may receive back less than the original investment. Fund Structure F&C Portfolios Fund (SICAV) Invests in Long and short in global equities from the MSCI World Index via total return swaps Currency USD/EUR Launch 8 April 2016 Liquidity Daily (to 06:00 Central European Time) 3
Style benefits A style is a quantifiable characteristic of a group of stocks or bonds that determines the risk and return of that group. Some styles have been empirically shown to generate positive long-term returns or premia both in extensive academic research and through their implementation within investment strategies. Examples of styles demonstrating these positive characteristics include value: long cheap stocks and short expensive stocks; momentum: long past winners and short past losers; low volatility: long low-risk stocks, short high-risk stocks. Why do styles work? The observation that styles generate positive returns is not a controversial or new one. The question is why do they work? Some argue that the positive returns are effectively a compensation for taking risk this is very much an efficient market point of view. Others say that these returns are the result of behavioural biases in investors like mistaking a good company for a good stock. Our view is that it is likely that both effects play a role. What is crucial though is that under each hypothesis the efficacy of styles will persist. Observed returns to selected styles Logarithmic scale 1000 800 600 400 200 100 0-20 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Value Size Momentum Source: BMO Global Asset Management, Factset. January 1988 to April 2017. A logarithmic scale shows two equal percent changes plotted as the same vertical distance on the scale. The returns represent observed outcomes of zero investment portfolios that go long the top 20% of stocks with each particular attribute and go short the bottom 20%, rebalanced monthly, and do not include any transaction costs. This information is not a representative investment strategy but an indication of the efficacy of each style. Academic research discussing style investing Buying rising stocks and selling falling stocks leads to excess outperformance of about 1% per month (1965-1989) the momentum factor Jegadeesh & Titman (1993) Small cap stocks outperform large cap stocks over the long term (1962-1989) the size factor Cheap stocks (based on fundamental ratios such as price-tobook or price-to-earnings) outperform expensive stocks the value factor Fama & French (1992) Over the past 40 years, high volatility and high beta stocks in U.S. markets have substantially underperformed low volatility and low beta stocks. low volatility factor Baker, Bradley, Wurgler (2009) 4
We believe that systematically investing in recognised styles is a cost-effective way of driving superior investment returns by minimising exposure to unwanted stock-specific risks. Erik Rubingh, Head of Systematic Strategies. Understanding portfolio returns Typical portfolio returns are comprised of two elements beta (the market return) and alpha (outperformance of the market). Outperformance is often a result of persistent exposure to certain styles; the remainder may be attributable to stock picking. Style-based investing aims to add value through focused exposure to defined styles and the premia they generate whilst reducing exposure to stock-specific risk. Style premia Market Portfolio Beta+Alpha Beta+Style+Alpha Source: BMO Global Asset Management. For illustrative purposes only. Smarter thinking about style investing Although certain styles offer long-term performance potential returns can be time varying in nature meaning that they can endure periods of underperformance. Another potential drawback is that styles can be highly (positively or negatively) correlated, which can lead to worse diversification benefits than hoped for. At BMO Global Asset Management, we systematically refine individual styles with our True Styles methodology an approach that aims to harness the potential of investment styles whilst countering both the time varying nature of returns and the high correlations between individual styles. 5
Style investing at BMO Global Asset Management In reality, investment styles rarely exist independently of each other. A perceived value stock for example may also be one whose price has fallen significantly and is therefore exhibiting poor momentum. Recognising this and considering the implications on potential returns, volatility and portfolio diversification, we have worked to develop a more effective way of isolating individual styles into what we call True Styles. From Styles...... to True Styles Isolating the desired style Size True size Enhanced long-term returns potential GARP Value True GARP True Value Lower correlation between styles Momentum True Momentum Reduced volatility Improved diversification benefits True Styles in focus We have developed a range of individual True Style exposures. The systematic deployment of these styles either singularly, or combined in a multi-style format is dependent on each of our strategy s defined aims and objectives. True Style Low Volatility True Size True Momentum True Value True GARP Style rationale Low risk names outperform higher risk counterparts hampered by excessive borrowing and lottery effect. Higher (diversifiable) risk of smaller companies leads to better returns of smaller companies as a group. Market fails to recognise importance of past trends winners continuing to win and losers continuing to lose. Excessive pessimism for prospects for cheap companies leads to higher returns. Good growth, moderate valuations and quality financial statements = best of all worlds. 6
Reducing absolute correlation between styles 100 In this bar chart, we show how our refined individual True Style exposures demonstrate lower correlations with other styles than their raw style counterparts do. -100 Value Momentum Value Size Size Momentum Raw Styles True Styles Source: BMO Global Asset Management as at 30.04.2017. Correlations of observed style returns. Enhanced potential The impact of the True Styles approach is not just to reduce the correlation between styles but also to reduce unwanted volatility from the individual styles the target result being enhanced risk adjusted returns and the creation of attractive portfolio components. In this example, the true style of value companies, characterised by a high book-to-price ratio is revealed. Back-tested simulated risk and return information Return (per annum) Volatility (annualised) Raw Value Style* 4.5% 12.4% 0.36 True Value Style** 5.6% 4.8% 1.16 Sharpe Ratio *In this example, the Raw Style is companies with a high book-to-price ratio **Once our systematic approach has reduced the impact of overlapping styles the True Style of companies with a high book-to-price ratio is revealed Back-tested simulated performance (Raw value Style vs. True Value Style) Logarithmic scale 1000 800 600 500 400 300 200 100 0-20 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Raw Value Style True Value Style Source: BMO Global Asset Management as at 30 April 2017. Factset. December 1987 to April 2017. Universe: MSCI World. The returns represent observed outcomes of zero investment portfolios that go long the top 20% of stocks with each particular attribute and go short the bottom 20%, rebalanced monthly, and do not include any transaction costs. This information is not a representative investment strategy but an indication of the efficacy of each style. A logarithmic scale shows two equal percent changes plotted as the same vertical distance on the scale. The backtested performance shown is for illustrative purposes only and does not represent actual results. It is based on an analysis of past market data with the benefit of hindsight and it does not reflect the reinvestment of dividends, interest, capital gains, withholding taxes, the deductions of fees, commissions or any other expenses a client would have to pay. Actual results may significantly differ from the returns being presented. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. 7
Multi-styles an intelligent combination The True Styles approach produces individual style portfolios that exhibit improved risk/return characteristics and lower correlation with other styles. By intelligently combining styles we aim to create a well-diversified portfolio that offers attractive absolute returns on a consistent basis. Low correlation between True Styles Low correlations between styles This is no coincidence: explicit result of True Styles Significant diversification benefits when constructing a portfolio Benefits of diversification low correlation between styles Low Volatility True Size True Momentum True Value True Size -14.8% True Momentum 23.5% -7.3% True Value -16.3% -3.2% -26.8% True GARP -5.2% -14.9% -11.8% 28.5% Source: BMO Global Asset Management, Bloomberg. Since inception full calendar month performance, 01.10.2014 to 30.04.2017 daily observations. Performance shown gross of fees in excess of 3 months LIBOR (London Interbank Offered Rate) of the strategy, performance is net of implementation costs. Constructing the portfolio Using the MSCI World universe comprised of around 1600 companies we create five individual long/short style portfolios. These are then combined into a single portfolio using a portfolio construction technique that makes no assumption as to the future returns of the individual styles and which results in each style contributing the same amount of risk to the final multi-style portfolio. Combine True Styles exposures into one multi-style portfolio using Equal Risk Contribution methodology Approx. 300 long and 300 short positions: final portfolio remains beta neutral Portfolio rebalanced monthly Low Volatility True GARP True Value True Size True Momentum Portfolio style allocation for illustrative purposes only. 8
We view the fund as a source of attractive, reliable and uncorrelated returns characteristics that make it an ideal portfolio component. Indeed, our True Styles strategy is now an integral component of a number of our own multi-asset products. Christopher Childs, Director Multi-Strategy. Ideal portfolio component Applying our market neutral implementation to our combined individual True Style exposures leads to the creation of a portfolio that exhibits very low historical correlations to traditional asset classes a characteristic that underlines its potential as a standalone strategy or a potential building block within a well-diversified multi-asset portfolio. Correlation of Global Equity Market Neutral Strategy to key traditional asset classes 20 15 10 16.7% 19.2% 5 0 0.3% -5-10 -15-7.6% -5.2% -11.8% Global Government Bonds Global Corporate Bonds Global High Yield Global Equities Emerging Equities Global Hedge Funds Source: BMO Global Asset Management, Bloomberg as at 30.04.2017. Strategy inception based on full calendar month performance, 01.10.2014 to 30.04.2017 daily observations. Performance is net of implementation costs and annualised. * Equity Market Neutral an investment strategy that seeks to exploit differences in stock prices by being long and short in stocks within markets, sectors, industries or countries. This strategy is intended to create returns that, over an extended period of time, are uncorrelated with general equity market performance, however this cannot be guaranteed and over discrete periods there may be a high degree of positive or negative correlation. 9
Systematic equity expertise Having developed his first style strategy in 2003, Erik Rubingh has been leading our Systematic Strategies team since 2007. Extending and enhancing our capabilities over time the team has developed an innovative True Styles approach that has been successfully employed within a range of strategies, both long and short. 2017 Team AUM over 4,398mn Managing style based strategies since 2003 2013 2003 2007 True Style strategy first developed by Erik Rubingh at ABP Investments Erik joined as Head of Systematic Equity. The core portfolio management team has been working together since 2007 2008 Launched regional versions of the strategy using the True Style approach 2010 Launch of the global strategy utilising the True Styles approach Launch of equity market neutral long/ short strategy for Diversified Growth Fund Erik Rubingh, Head of Systematic Strategies Erik Rubingh is Head of the Systematic Strategies team. He joined the company in July 2007. Prior to joining us, Erik worked at ABP Investments (now APG Investments), first as Senior Portfolio Manager in the Global Quantitative Strategies Group and later as Head of that group. Erik graduated from Groningen University with an MSc in Econometrics. He is also a CFA charterholder. * BMO Global Asset Management, 31 March 2017 10
Potential risks include: Capital is at risk and on sale of shares in the Fund an investor may receive back less than the original investment. Credit Risk: receiving income or capital due from debt instruments is dependent on the provider s ability to pay. Derivative Risk: derivative values rise and fall at a greater rate than related equities and debt instruments. Loses can be greater than the initial investment. Fixed Interest Securities Risk: changes in interest rates can affect the values of fixed interest holdings. Counterparty Risk: to gain greater income the Fund may deposit cash with various approved Counterparties. Return of the cash is dependent upon the continued solvency of the Counterparty. Derivative Counterparty Risk: receiving the profit due from a derivative is dependent upon the counterparty fulfilling its contractual obligation. Capital is not guaranteed and there is no guarantee that a positive return will be achieved over any time period. 11
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