CM17973 UK Connections matter For professional investors only Erik Rubingh, Managing Director Factor Investments Applying factor investing across asset classes
Investment risks 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. Changes in interest rates can affect the value of fixed interest holdings and may adversely affect the value of your investment. Receiving the profit due from a derivative is dependent upon the counterparty fulfilling its contractual obligation. Derivatives are used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment. 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. 2
Agenda Introduction Factors within equities Moving beyond equities Factors across asset classes Currencies Commodities Equities Building a Multi Asset Risk Factor product MARP as component of a Multi Asset portfolio Summary 3
Factors within equities 4
Equity factors BMO Global Equity Market Neutral Strategy Targeted styles: Value Small Size Momentum Low Volatility GARP (growth at a reasonable price) Targeted volatility: 10% Targets excess return: 7%* Assets under management: US$ 1786 million Source: BMO Global Asset Management as at 31.08.2018. *In excess of the risk free rate, gross of fees. The Global Equity Market Neutral Strategy is an absolute return strategy. The Global Equity Market Neutral Strategy 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. 5
BMO Global Equity Market Neutral Strategy Strategy performance BMO Global Equity Market Neutral Strategy [volatility 10] 3 months Year to date 12 months 3 years annualised Since inception* (annualised) Volatility since inception (annualised) -0.02% -2.68% 1.24% 6.38% 9.46% 9.83% Asset class correlations 20% 15% 10% 5% 0% -5% -10% -15% -20% 12.0% 14.3% -6.3% Global Govt Bonds Global Corporate Bonds Global High Yield Global Equities Emerging Equities Global Hedge Funds Past performance should not be seen as an indication of future performance. Past correlations are not indicative of future correlations. The performance figures are shown gross of fees. The effect of fees or costs will be to lower the figures shown. Source: BMO Global Asset Management, Bloomberg as at 31.08.2018. *Strategy inception based on full calendar month performance, 01.10.2014 to 31.08.2018 daily observations, performance is net of implementation costs but gross of any ongoing Fund specific fees and costs. Annualised performance for periods greater than 1 year. The data shown is of a representative account, is for informational purposes only and is not indicative of future portfolio characteristics. Actual results may vary due to specific client guidelines and other factors. -2.3% 0.8% -7.8% 6
BMO Global Equity Market Neutral Strategy Performance Discrete performance (12 month rolling) Percentage growth % 2017/2018 2016/2017 2015/2016 2014/2015 2013/2014 BMO Global Equity Market Neutral Strategy [volatility 10] 1.24 12.20 5.99 NA NA Past performance should not be seen as an indication of future performance. The performance figures are shown gross of fees. The effect of fees or costs will be to lower the figures shown. Source: BMO Global Asset Management, Bloomberg as at 31.08.2018. The discrete performance periods are to the end of the respective month each year. *Strategy inception based on full calendar month performance, 01.10.2014 to 31.08.2018 daily observations, performance is net of implementation costs but gross of any ongoing Fund specific fees and costs. The data shown is of a representative account, is for informational purposes only and is not indicative of future portfolio characteristics. 7
Moving beyond equities 8
Shared rationale Why they exist Compensation for taking risk Efficient market Result of hardwired human nature Behavioural Constraints imposed on market participants Structural/Institutional.and persist 9
Moving beyond equities What & where are they? Low Vol Size GARP Value Momentum Carry Equity ü ü ü ü ü û Currencies û û û ü û ü Commodities û û û ü ü ü 10
Moving beyond equities Carry, Value & Momentum Carry > Higher returns for taking the risk of longer-term/higher yield securities Value > Seeking returns from the mean-reversion of prices to their fair-value Momentum > Tendency for asset prices to exhibit serial correlation 11
Moving beyond equities True Styles Methodology Improve the quality of the signal and remove overlap Intelligent portfolio construction Equal risk contribution no timing of allocation to components Efficient implementation Synthetic exposure affords efficient use of capital and flexible access 12
Factors within currencies 13
Factors within currencies Carry, Value & Momentum Carry > Interest rate implied from short term currency forwards Go long high yielding currencies/short low yielding currencies Value > Difference between market price and PPP* Go long undervalued currency/short overvalued currency Momentum > Past total return of currency Go long winner go short loser *PPP = Purchasing Power Parity. 14
Factors within currencies Results without volatility targeting 50 40 30 20 10 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 currency - carry currency - value currency ERC combined - unlevered 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe Currency carry 3.07% 4.24% 0.72 1.63% 5.62% 0.29 2.34% 4.97% 0.47 Currency value -0.81% 5.73% -0.14 3.55% 4.53% 0.78 1.36% 5.17% 0.26 Currency- ERC combined unlevered 1.61% 4.98% 0.32 3.44% 5.16% 0.67 2.53% 5.06% 0.50 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018. ERC = Equal risk contribute. Ret( xs of rf) = return in of excess of risk free. 15
Factors within currencies Results with volatility targeting 100 90 80 70 60 50 40 30 20 10 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 currency rpv10 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe Currency - rpv10 3.01% 9.66% 0.31 8.12% 10.60% 0.77 5.55% 10.13% 0.55 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018. RPV10 = risk premia vol 10. Ret( xs of rf) = return in of excess of risk free. 16
Factors within commodities 17
Risk premia commodities Carry, Value & Momentum Carry > Exploiting the difference in roll down on a single commodity curve Value > Exploiting the difference in roll down on different commodity curves Momentum > Tendency for asset prices to exhibit serial correlation winners remain winners 18
Factors within commodities Results without volatility targeting 350 300 250 200 150 100 50 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 commodity - momemtum commodity - value commodity - carry Commodity - ERC combined - unlevered 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe Commodity momentum 8.07% 10.16% 0.79-0.52% 8.23% -0.06 3.66% 9.29% 0.39 Commodity value 20.44% 18.05% 1.13 4.89% 11.59% 0.42 12.34% 15.24% 0.81 Commodity carry 4.56% 2.58% 1.77 1.70% 1.93% 0.88 3.11% 2.30% 1.35 Commodity ERC combined unlevered 8.69% 3.70% 2.35 2.62% 2.96% 0.88 5.59% 3.44% 1.62 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018. ERC = Equal risk contribute. Ret( xs of rf) = return in of excess of risk free. 19
Factors within commodities 500 450 400 350 300 250 200 150 100 50 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 commodity - rpv10 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe Commodity rpv10 23.69% 9.68% 2.45 8.94% 10.22% 0.87 16.03% 10.09% 1.59 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018.. RPV10 = risk premia vol 10. Ret( xs of rf) = return in of excess of risk free. 20
Factors within equities 21
Factors within equities Results without volatility targeting 80 70 60 50 40 30 20 10 0-10 -20 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 equity low vol equity - momentum equity - garp equity - value equity - size equity - ERC combined - unlevered 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe Equity low vol 0.69% 3.83% 0.18 4.12% 5.12% 0.80 2.40% 4.54% 0.53 Equity momentum 4.90% 13.08% 0.37 2.61% 10.56% 0.25 3.74% 11.84% 0.32 Equity garp 2.72% 6.96% 0.39 3.68% 4.78% 0.77 3.21% 5.94% 0.54 Equity value 1.64% 8.02% 0.20-2.10% 5.41% -0.39-0.26% 6.83% -0.04 Equity size -0.94% 6.14% -0.15 1.53% 3.49% 0.44 0.29% 4.98% 0.06 Equity ERC comb unlevered 2.98% 3.72% 0.80 3.68% 3.20% 1.15 3.33% 3.45% 0.96 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018. Simulated data pre October 2014 and live thereafter. ERC = Equal risk contribute. Ret( xs of rf) = return in of excess of risk free. 22
Factors within equities Results with volatility targeting 250 225 200 175 150 125 100 75 50 25 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 equity -rpv10 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe eqty - rpv10 7.48% 10.24% 0.73 12.20% 9.75% 1.25 9.83% 9.98% 0.98 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018. Simulated data pre October 2014 and live thereafter. 23
Pulling it all together. Multi Asset Risk Factor product 24
Multi Asset Risk Factor product Results return and risk 500 450 400 350 300 250 200 150 100 50 0-20 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 commodity rvp10 currency rvp10 equity - rvp10 MARP 02-2007 10-2012 11-2012 08-2018 02-2007 08-2018 ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe ret (xs of rf) vol sharpe Commodity rpv10 23.69% 9.68% 2.45 8.94% 10.22% 0.87 16.03% 10.09% 1.59 Currency rpv10 3.01% 9.66% 0.31 8.12% 10.60% 0.77 5.55% 10.13% 0.55 Equity rpv10 7.48% 10.24% 0.73 12.20% 9.75% 1.25 9.83% 9.98% 0.98 MARP 11.30% 5.51% 2.05 10.16% 6.18% 1.64 10.72% 5.84% 1.84 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, as at 31.08.2018. All data for commodity rvp10, currency rpv10 and MARP are simulated. Data prior to 10.2014 is a historical simulation for equity rpv10, live thereafter. ERC = Equal risk contribute. Ret( xs of rf) = return in of excess of risk free. 25
Multi Asset Risk Factor product Results allocation to component strategies 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-07 Dec-08 Nov-10 Oct-12 Sep-14 Aug-16 Jul-18 commodity rpv10 currency rpv10 equity rpv10 This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods Source: BMO GAM, Bloomberg, Factset as at 31.08.2018. 26
MARP as component of a Multi Asset portfolio 27
Multi Asset Risk Factors Results beta with respect to traditional asset classes 1.00 0.80 0.60 0.40 0.20 0.00-0.20-0.40-0.60-0.80 commodity - rpv10 equity - rpv10 currency - rpv10 MARP -1.00 ICE BoAML Global Govt TRH$ MSCI World TR$ Bloomberg Commodity Index Dollar Index This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO GAM, Bloomberg, Factset as at 31.08.2018. All data for commodity rvp10, currency rpv10 and marp are simulation. Data prior to 10.2014 is a historical simulation for Equity rpv10, live thereafter. 28
Multi Asset Risk Factors Results as a component of a multi asset fund, risk/returns February 2007 August 2018 14% 12% BMO MARP 10% return (ann) 8% 6% 35 Global Eq/55 Global Bonds/10 BMO MARP 40 Global Eq/60 Global Bonds Global Equities 4% Global Bonds 2% 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% volatility (ann) This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset, Data from 02.2017 to 08.2018. 29
Multi Asset Risk Factors Results as a component of a multi asset fund 0% -5% -5.3% -4.2% -4.0% -3.4% -4.0% -3.5% -2.5% -2.4% return -10% -15% -20% -25% -19.1% -15.2% Oct-07 - Feb-09 Apr-11 - Sep-11 Apr-15 - Sep-15 Apr-10 - Jun-10 Apr-13 - Jun-13 40 Global Eq/60 Global Bonds 35 Global Eq/55 Global Bonds/10 BMO MARP This data refers to simulated or hypothetical performance and it is not a reliable indicator of future performance. Simulated or hypothetical performance results do not reflect actual trading and have certain inherent limitations. The results are calculated by applying an investment strategy or methodology to existing historical market data, on prior time periods. Source: BMO Global Asset Management, Bloomberg, Factset as at 31.08.2018. 30
Summary 31
What do Multi Asset Risk Factors offer? Genuine alternative Systematic/non discretionary approach Good liquidity Portfolio diversifier Cost efficient ü ü ü ü ü 32
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