1 Association of Provident FundsRisks of offshore investing Greg Liddell JUNE 2013
2 Benefits of Overseas InvestingAccess to different companies and sectors Diversification of economic/growth cycle Diversification of interest rate cycle Benefits of currency diversification Reduction of home country bias
3 Risks Of Offshore InvestingMarket Risk Equity market risk Credit Currency Manager Risk Operational Risks Counter party Settlement Custodian
4 Risks Management – Market Crises1972 World Oil Crisis (1 Dec’72 – 30 Sep’74) 1987 Crash (14 Oct’87 – 19 Oct’87) 1990 Recession (17 Jul’90 – 15 Nov’92) 2000 Argentine Economic Crisis (3 Mar’00 – 26 Jun’02) 2001 Dot-Com Slowdown (10 Mar’01 – 9 Oct’02) 2002 Accounting Scandals & WorldCom (30 Apr’02 – 23 Jul’02) 2008 Global Financial Crisis (1 Oct’07 – 27 Feb’09)
5 1972 World Oil Crisis (1 Dec’72 – 30 Sep’74)Overview of market conditions Severe downturn in global equity markets High inflation Australian interest rates jump sharply => negative bond returns Property market collapses
6 1972 World Oil Crisis (1 Dec’72 – 30 Sep’74)
7 Subprime Mortgage Crisis (1 Oct’07 – 27 Feb’09)Complex and multi-faceted crisis Followed extended period of artificially low US interest rates => lower investment disciplines Credit failures led to equity falls Losses extended to other risk asset classes Sovereign bonds the best performing asset class
8 Subprime Mortgage Crisis (1 Oct’07 – 27 Feb’09)
9 2001 Dot-com Slowdown (10 Mar’01 – 9 Oct’02)Fall in equity markets following speculative tech bubble burst in April 2000 General slump in investor sentiment Spread to other global risk assets e.g. listed property Australian shares underperformed during bubble build up and outperformed as it burst
10 2001 Dot-com Slowdown (10 Mar’01 – 9 Oct’02)
11 1987 Crash (14 Oct’87 – 19 Oct’87) Short period of equity market decline globally Prior years saw relaxed investment, governance and balance sheet disciplines Largest one-day percentage fall in the Dow Jones Industrial Average of 22.6% Economic fundamentals unaffected
12 1987 Crash (14 Oct’87 – 19 Oct’87) WKC Current WKC pre-GFCSuper SA Balanced Scenario return -5.2% -5.3% -6.0%
13 Currency Risk
14 Strategies to Manage Volatility1. Strategically de-risk 2. Diversify e.g. Tactical Trading 3. Change flavor e.g. Defensive Equity, Low volatility 4. Change shape e.g. Options / non-delta 1 strategies 5. Vary exposure e.g. Volatility Responsive Asset Allocation (VRAA) p.14
15 Operational Risks Counter Party Risk Can Impact FraudNegligence/Error or Omission Bankruptcy Can Impact Fund Managers Brokers Custodians Accountants/Auditors/Valuers Exchanges
16 Operational Risk MitigationRisk audit Operational due diligence Contract review – use of credit support annexes (CSA) Jurisdiction Mark-to-market Counter-party identification and use of credit limits Agent versus principal Agent liability Settlement protocols e.g. Continuously Linked Settlement of FX
17 Association of Provident FundsTaxation of offshore investments Raewyn Williams, Director, After-Tax Investment Strategies June 2013
18 I will cover… Taxation of Thai provident funds in ThailandAdding offshore investments – exploring the Australian tax impact Conclusion – What does this mean for the investment strategies of Thai provident funds?
19 Taxation of Thai provident funds - Thailand‘EEE’ approach: Employers Contributions Investment earnings Benefits Employees
20 Taxation of Thai provident funds – investing offshoreEmployers Contributions Investment earnings Benefits Employees Exempt Taxation of AU sourced income and gains, unless AU exemptions apply
21 Types of tax on AU sourced income and gainsGenerally, non-resident withholding tax (see Thailand-AU tax treaty) on: 10% or 25% on interest on bonds (fixed interest securities) 15% or 20% on unfranked dividends (equities) 0% on franked dividends (equities) BUT good news: AU exemption for tax-exempt foreign pension funds (Thai provident funds satisfy this definition) see s128B(3)(jb) Income Tax Assessment Act 1936 Distributions of other AU sourced income from managed fund withholding tax of 22.5% (Thailand is an ‘EOI’ country’) see s Taxation Administration Act no equivalent foreign pension fund exemption Capital gains tax exemption for asset sales where investment < 10% of total value of fund or asset; some exclusions e.g. AU direct property, REITs
22 What does this mean for investment strategies of Thai provident funds?Assess offshore investment opportunities on an after foreign tax basis other countries may not respect funds’ ‘EEE’ status need to make sense based on after-tax return and diversification (lower risk) recognise that foreign withholding taxes can’t be recouped by Thai provident funds (ok in AU) Look for countries like AU where funds can qualify for tax exemptions (e.g. withholding tax exemption for foreign pension funds, non-resident capital gains tax exemption) In AU, favour direct mandate over managed fund investment Look for offshore investment managers who understand the tax profile of Thai provident funds and will manage to funds’ after-tax, not pre-tax, outcomes
23 Taxation of offshore investments – an introductionQuestions?
24 Association of Provident FundGlobal Market Outlook and Risks Looking Forward Graham Harman – Investment Strategist, Asia-Pacific June 2013
25 No catch-up growth for the US “Sweet spot” – Excess capacity positive for bonds AND equities
26 Recovery fragile, but relatively “normal”
27 Key messages We are: Cautious near-term on equities (longer-term there is upside) Looking for a gradual rise in bond yields Seeing moderate US growth, decreasingly worried about structural headwinds Decreasingly worried about Europe, and see value longer term Seeing a slowdown in China, but still like the story Positive about Japan, although phase 2 will be more challenging Seeing value, but no short term positive catalysts, for emerging market equities Cautious about the “safe havens” of the past few years – gold, US treasuries, Australian dollar, emerging market debt
28 Risks Valuation/duration Currency Economic growth InflationSocial fabric Geopolitical Agency
29 World CVIs overvalued – Valuation of Equities
30 Currency risk and exposure
31 Currency risk and exposureEM = Emerging Markets; PPP = Purchasing Power Parity
32 Is the end of European recession near?
33 Italian and Spanish bond yields still at “safe” levels
34 Portugal and Slovenia yields to rise?
35 Unemployment rates at disturbingly high levels
36 Geopolitical
37 Association of Provident FundsAustralian Funds Management Industry Overview James McSkimming JUNE 2013
38 Australian Managed Funds Landscape$1,662bn Total Assets Resident Investment Managers manage $1,365bn of this
39 Australia’s Money ManagersPredominantly focussed on investing in Australia Secondary interest in New Zealand, Asia Pac, Global Few Global investment funds offered by resident money managers Russell monitors and researches around 175 Aust Equity products, 110 Aust Cash and FI products Boutique firms have dominated for the last ten years Staff ownership Life cycle challenge; Who will lead the firm tomorrow? Institutional or global ownership - not a safer haven than boutiques Competition and Consolidation Internal management, overseas entrants, scale Shifting emphasis in investment approaches Eg Income, mortgage credit, managed volatility, beta variations, absolute return
40 Russell Asia-Pac Multi-asset capabilitiesScott Fletcher Director, Client Investment Strategies June 2013
41 FINANCIAL PROFESSIONAL USE ONLYWhat we do // Multi-asset solutions We will be recognised around the world as the leading provider of multi-asset solutions, by both institutional and retail investors Multi-asset investing: Building portfolios from a broad range of asset classes, styles and strategies, all with investors’ desired outcomes in mind How? By drawing on and integrating the 5 core competencies of our global business to meet client outcomes. Investment Value Proposition Investment Division is the core part of the global business that makes this happen ... Building outcome-focused, actively managed, multi-asset portfolios FINANCIAL PROFESSIONAL USE ONLY
42 Russell Global AUM breakdownBy Region By Segment Global AUM US$ 175 billion Source: Russell Investments, AUM as at 30 April Segment split data as at 31 December 2012. FINANCIAL PROFESSIONAL USE ONLY
43 Investment Management : Sydney officeMulti-asset Australian Institutional Funds (PSTs & Unit trusts) Australian Retail Funds Bespoke Retail Funds (B2B Retail) Asian Institutional accounts Australian MAGS Multi-strategy Australian Shares Australian Fixed Interest & Cash Pacific Basin Shares Direct Investments (CPM, Select Exposure) ETFs Capabilities Portfolio Management Investment Strategy Research – Manager & Capital Markets Client investment support (external & internal clients) Governance (operational due diligence & risk management) FINANCIAL PROFESSIONAL USE ONLY
44 Investment Division : Global StructurePete Gunning Global Chief Investment Officer James Barber CIO, Equities Jeff Hussey CIO, Fixed Income Christophe Caspar CIO, Multi-Strategies Erik Ristuben Chief Investment Strategist Adam Goff MD, Investments Vic Leverett MD, Alternatives US / Canada / Public Real Estate US/Canada US Client Strategies Investment Process & Risk US US PORTFOLIO MGMT Jon Eggins PM Damien Amato APM Rob Kuharic PM Josh Goodell PA Richard Yasenchak PM Dave Hintz PM RESEARCH Dave Brunette Sr. RA Steve Skatrud H of R Megan Roach Sr. RA Steve Swartley Sr. RA Eric Papesh Sr. RA Tom Warburton Sr. RA Kathleen Wylie Sr. RA Kathleen Baldwin RA Sherrie Trecker RA John Lidington RA Curtis Yasutake RA Keith Brakebill PM PORTFOLIO MGMT Kelly Mainelli Director (STI) Gerard Fitzpatrick PM Brian Pringle PM (STI) Greg Nott CIO/PM, CAN Kevin Lo Associate PM John Greves PM Lee Kayser APM Brian Meath MD Investments Venkat Kopanathi PA Brian Yadao PA Mike Ruff PCS Director / PM Mark Eibel Director CIS Iheshan Faasee Client PM Steve Wood Chief Mkt Strategist, North America Scott Fletcher Director CIS Rob Balkema Sr. Analyst, Portfolio Management Practice John Forrest Head Manager Research Practice Jordan McCall Sr. Analyst, Investment Practice INVESTMENTS Sam Baughn Director Ops DD Lance Babbit Sr. PM Julia Cormier Director, Alt Investments Brian Burke Sr. Inv Risk Analyst Andrew Howeiler Sr Oversight Analyst Keith Espirito Sr Oversight Analyst Jennifer Keeney Ops DD Ed Garcia PM Patrick Nikodem PA Maniranjan Kumar PA Derek Williams Director, Private RE Ed Robertiello MD, Hedge Funds CANADA PORTFOLIO Kevin Eng APM Thierry Vallee, Head of Canadian Equities, PM Open, H of R RESEARCH David Jurca Assoc RA Ryan Dembinsky Sr. RA Yoshie Phillips Sr. RA Bilal Naqvi Sr. RA Yoel Prasetyo Sr. RA Europe Quantitative Analytics Alexandre Attal PA Neil Jenkins MD Investments Mayank Markanday PA Ran Karni, Associate, Open World William Pearce PM Rory McPherson APM David Rae Head of Investment Solutions, EMEA Soeren Soerensen PA Faisal Rahman PM Stanislava Vrabcheva PA Wee-Tsen Lee PA Alain Zeitouni PM Craig Austin Mgr Inv Bus Intelligence Steve Bui Busines Intelligence Analyst Justin Knowles Technical Bus Analyst Ashish Katyal Inv Bus Intelligence Analyst Paul Oldenkamp Sr Inv Bus Intel Analyst Anthony Lawver Inv Bus Intelligence Analyst John Sacks Director, Quantitative Analytics David Pedack Quantitative Analyst Eric Thaut Quantitative Analyst Mark Terjeson Sr Inv Bus Intel Analyst Bin Wang Sr Quantitative Analyst Sanjeeth Vijayan Sr Inv Bus Intel Analyst RE PORTFOLIO MGMT Adam Babson PM Bruce Eidelson Dir. RE Patrick Nikodem PA Adrianna Giesey APM DIRECT INVESTING Brian Mock MD, Direct Investments Marc Hewitt PM Mahesh Pritamani Sr RA Rich Johnson Sr PM Sean Smith RA Kevin Reinkensmeyer Sr PA Nick Zylkowski APM Rafael Zayas PM RESEARCH Joe Belladonna Product Specialist Brett Deits Sr. RA Ariel Castle RA Jack Fadule RA Cedric Fan Sr. RA Wade Millen RA Cameron McVie Sr. RA Tamara Larsen Sr. RA Paul Kreiselmaier Sr. RA Mark Rapela Sr. RA European/Global PORTFOLIO MGMT Al Jalso PM James Mitchell PM Mark Klein PM (STI) Andreas Koester PA Emerging Markets / Global Capital Markets Research Japan RESEARCH Franklin Schram RA Marcus Graf RA Europe PORTFOLIO MGMT Matt Beardsley PM Gustavo Galindo PM Scott Crawshaw PM Jim Jornlin PM Phil Hoffman PM Iwona Kochanska PA Olen Storaasli PA Yiannis Vairamis PA RESEARCH Mark Thurston Head EM Manager Research James Carpenter Head Global Manager Research Tereasa Gandhi Sr. RA Patrick Egan Sr. RA Simo Sorsa RA Joe Hemmant Sr. RA Artemiza Woodgate Sr. RA Vikrant Verma RA Gashirai Zengeni RA Peter Ballantyne Snr Forecasting Analyst Aran Murphy Product Strategist Evgenia Gvozdeva Forecasting PS Leola Ross Sr RA Mahesh Pritamani Sr RA Sean Smith RA Patrick Rowland Sr. PS Ian Toner Director, Research & Communication Vivek Sondhi Sr RA Hiroyuki Nakagawa Director / PM Michinori Kanokogi APM INVESTMENTS John Mancuso Director, Real Estate, EMEA Efua Mercer Sr Oversight Analyst Australasia Australasia PORTFOLIO MGMT Austin Loke PA Clive Smith PM RESEARCH Majid Kahn Sr. RA, Hedge Fund Tom Richardson RA Andrew Sneddon MD Investments Thomas McDonald PA Robert Moore RA RESEARCH Investment Tools Australasia Strategists European/UK RESEARCH Stephen Hunt Sr Oversight Analyst Samantha Steele Sr. RA Graham Harman Inv Strategist Asia-Pac Andrew Pease Global Head of Inv Strategy Wouter Sturkenboom Head, Capital Markets Research-Europe Yuliya Brayshaw Invest Strat Analyst Mike Dueker Chief Economist Abraham Robinson Inv. Strategy Analyst Doug Gordon Sr. Investment Strategist Justin Johnson Sr Analytic Product Manager Carrie Luetzow Sr Product Manager PORTFOLIO MGMT James Barber PM Robert Mears APM Ronnie Sabel PM Anthony Cherrington PA RESEARCH Graeme Allan H of R Ana Harris RA Veronique Botton Sr. RA Gabriel Sauma RA Asia Pacific Asset Allocation / Model Strategies PORTFOLIO MGMT Masaki Kai Sr. PA Symon Parish CIO/PM Andrew Zenonos PA Leslie Kapin APM Satoshi Tawada PM RESEARCH Makiko Hakozaki Sr. RA Scott Anderson H of R Japan Sarah Lien Sr. RA Kathrine Husvaeg Sr. RA Ayumu Matsuura ARA James McSkimming H of R AUS Bradley Street. RA Yuan-An Fan Sr. RA Steve Murray Director, Asset Allocation Strategies Sam Pittman Sr. RA Steve Meyer Managing Director, Investment Operations Scott Bennett PM DIRECT INVESTING Investments MD = Managing Director PM = Portfolio Manager APM = Associate Portfolio Manager Sr. PA = Senior Portfolio Analyst PA = Portfolio Analyst APA = Associate Portfolio Analyst STI = Short Term Investments Research H of R = Head of Research Sr. RA = Senior Research Analyst RA = Research Analyst ARA = Associate Research Analyst PS = Portfolio Strategist IS = Investment Strategist Mikel Ross Chief Operating Officer, Investment Division FINANCIAL PROFESSIONAL USE ONLY
45 Investment Team : AustralasiaPete Gunning Global Chief Investment Officer James Barber Chief Investment Officer, Equities Jeff Hussey Chief Investment Officer, Fixed Income Christophe Caspar Chief Investment Officer, Multi-Strategies Erik Ristuben Chief Investment Strategist Adam Goff Managing Director, Investments Troy Rucker Managing Director, Implementation Services PORTFOIO MGMT Symon Parish CIO/PM Scott Bennett PM Leslie Kapin APM Andrew Zenonos PA PORTFOLIO MGMT Clive Smith PM Austin Loke PA PORTFOLIO MGMT Andrew Sneddon MD/PM Thomas McDonald PA CLIENT STRATEGIES Scott Fletcher Dir ASSET ALLOCATION Peter Ballantyne CMA IMPLEMENTATION Adam Van Ness PM Daniel Birch PM Jerome Hogan PM Diana Wijaya PA*** DUE DILIGENCE Samuel Baughn Dir RESEARCH Robert Moore RA STRATEGIST Graham Harman Inv.Strategist Yuliya Brayshaw PA DUE DILIGENCE Stephen Hunt Snr OA RESEARCH James McSkimming H of R Kathrine Husvaeg H of R^ Sarah Lien Sr RA Brad Street RA Vic Leverett Managing Director, Investments - Alternatives RESEARCH Samantha Steele Snr RA Jane Bouris - Admin Steve Bui – Systems Analyst Daniel Choo - Intern ^Maternity Leave ***Maternity Leave cover – Alistair Martyres London Seattle Australasia New York
46 Multi-asset investment frameworkToolkit Solutions Active AA Real Assets Global Bonds Australian Bonds Australian Shares Smart Beta Global Shares Alternatives External Market (Client Multi-asset) Manager Research Implementation Services Primary thrust to market Exist for use in Russell multi-asset solutions Only if used in Russell multi-asset solutions Multi-asset investment framework
47 Multi-asset in Australia Current spectrum of Russell’s Australian multi-asset solutionsMulti-asset TOOLS Sector Funds Smart Beta Active AA TM & Overlay BALANCED FUND OPPORTUNITIES PARTNERSHIP FUNDS MAGS & ABSOLUTE RETURN Intermediary Groups Matrix Asia-Pac Institutional RETAIL MULTI - ASSET CO MANUFACTURE OUTCOME ORIENTED FULL INSTO MULTI Master Trust Clients
48 FINANCIAL PROFESSIONAL USE ONLYPortfolio Construction // From theory to reality We then need to take that investible strategy into the real world using the most effective components. The first step is to decide how to break the design down into investable components. There are many ways to achieve key exposures. We need to decide where the greatest opportunity lies and build a portfolio to exploit those opportunities. Russell uses its deep understanding of market structure taken from our index research and construction. Then we evaluate where we believe the best returns—the best alpha lies. We call that “Alpha Mapping”. This helps us decide how to break the design into investable pieces that combine both efficiency and opportunity. Once we choose the sections of the market we want to invest in, we need to find the right experts for those market segments. We believe that if we choose the right experts—the right money managers—then this process should be the most reliable source of return we generate. Manager research makes it possible to find what we consider the right experts. Then we use our expertise to combine those managers in the appropriate way. At an even more detailed level, our portfolio managers then work with our trading desk to create precisely-selected exposures to make sure the total portfolio reflects our best thinking. At every step of the way, we’re looking back at the portfolio design to make sure the final portfolio is still optimally aligned with what matters most—the goals you want to achieve. Portfolio design largely determines the overall positioning and risk posture of the total portfolio, but it is still just the beginning of the investment process So once we have the asset allocation and the plan for the client, we then need to go and invest it in the real world. Constructing a portfolio transforms a design into an investable combination of strategies and investment vehicles. The portfolio manager has the task of constructing a powerful portfolio using every tool at their disposal, making each part of the portfolio as targeted as possible for success. A PM’s tools include active strategies and targeted exposure and risk management. We are an open architecture firm Active manager selection, if done well, should be the most reliable source of return we generate. Our portfolios feature diverse mixes of powerful investment strategies, selected and combined to emphasize their ability to get more return out of each of the asset classes invested. Manager research makes this possible but creating the right balance is the key to success. Our manager research team is well known for the depth and insight of its approach to finding best of breed strategies. We cover every major (and most of the minor) investment strategies in the search for more excess return and we are consistently seeking out the best new areas to get extra return for our clients—recent additions include frontier markets, single country EM, Local currency EMD, Tactical trading strategies, active commodities, XXXXXX. Russell is routinely listed top in manager research in industry surveys, but the real challenge is generating excess return, and Russell’s best ideas have a strong record. So our manager research team puts in a lot of effort, time and money into finding us the best ingredients around the world. If we cant find it we will build it. Our portfolio management teams are able to call upon direct investment capabilities in equities, fixed income, commodities, and other securities to created targeted sub-portfolios created to bring the total portfolio where it needs to be. Using rules-based or optimized strategies we have been able to create completion portfolios that reduce portfolio risk without diminishing security selection risk-taking, reduce excessive country bets driven by biases in the universe of available managers, and fill in strategy holes in portfolios where satisfactory active strategies are unavailable. This means portfolio managers have all of the tools they need to build the portfolio they want. Often the total portfolio risk needs to be tailored to ensure that the managers’ best ideas drives return and portfolio biases are kept in control and not allowed to swamp excess return. Portfolio managers work with our trading desk to create select exposure portfolios or combinations of derivatives and physical securities to make sure the total portfolio reflects our best thinking. Examples: Portfolio equitization—standard and adaptations, Select exposure, overlays, Min Variance portfolio, etc. It is then the portfolio manager’s job to intelligently combine these active strategies in a broadly diversified manner, eliminating unintended biases. We have lots of tools and techniques that aid us in seeing how managers compliment eachother: Three lenses – performance, risk, and fundamental It often requires more than just a collection of strong strategies to complete the portfolio structure. Constructing a portfolio is more than finding the best strategies, it is about intelligently using those active strategies within the framework of the portfolio design to make your money work harder. Getting the right strategies and scaling the risks correctly are the keys to investing in a real world investment environment where small, inadvertent exposures can trip even the best investment ideas. FINANCIAL PROFESSIONAL USE ONLY
49 FINANCIAL PROFESSIONAL USE ONLYExample // Balanced Opportunities Fund Listed Equities 57.0% Australian Shares 29.0% Australian Shares Tracker 18.0% Australian Shares Opportunities 11.0% International Shares % Global Opportunities 24.6% Emerging Markets Index 1.5% Global Defensive Equity 1.9% Real Assets & Alternatives 17.5% Global REITs 2.5% Australian Unlisted (Dexus) 2.0% Global Listed Infrastructure 2.0% Unlisted Infrastructure (IFM, Hastings) 2.0% Commodities Fund 0.5% Global Strategic Yield Fund 5.0% Absolute Return (DA & AREF) 2.5% Local Currency EMD 1.0% Fixed Income & Cash 25.5% International Bonds 8.5% Australian Bonds 10.0% Absolute Return Bonds 1.0% Cash Enhanced 6.0% Fixed Income & Cash We then need to take that investible strategy into the real world using the most effective components. The first step is to decide how to break the design down into investable components. There are many ways to achieve key exposures. We need to decide where the greatest opportunity lies and build a portfolio to exploit those opportunities. Russell uses its deep understanding of market structure taken from our index research and construction. Then we evaluate where we believe the best returns—the best alpha lies. We call that “Alpha Mapping”. This helps us decide how to break the design into investable pieces that combine both efficiency and opportunity. Once we choose the sections of the market we want to invest in, we need to find the right experts for those market segments. We believe that if we choose the right experts—the right money managers—then this process should be the most reliable source of return we generate. Manager research makes it possible to find what we consider the right experts. Then we use our expertise to combine those managers in the appropriate way. At an even more detailed level, our portfolio managers then work with our trading desk to create precisely-selected exposures to make sure the total portfolio reflects our best thinking. At every step of the way, we’re looking back at the portfolio design to make sure the final portfolio is still optimally aligned with what matters most—the goals you want to achieve. Portfolio design largely determines the overall positioning and risk posture of the total portfolio, but it is still just the beginning of the investment process So once we have the asset allocation and the plan for the client, we then need to go and invest it in the real world. Constructing a portfolio transforms a design into an investable combination of strategies and investment vehicles. The portfolio manager has the task of constructing a powerful portfolio using every tool at their disposal, making each part of the portfolio as targeted as possible for success. A PM’s tools include active strategies and targeted exposure and risk management. We are an open architecture firm Active manager selection, if done well, should be the most reliable source of return we generate. Our portfolios feature diverse mixes of powerful investment strategies, selected and combined to emphasize their ability to get more return out of each of the asset classes invested. Manager research makes this possible but creating the right balance is the key to success. Our manager research team is well known for the depth and insight of its approach to finding best of breed strategies. We cover every major (and most of the minor) investment strategies in the search for more excess return and we are consistently seeking out the best new areas to get extra return for our clients—recent additions include frontier markets, single country EM, Local currency EMD, Tactical trading strategies, active commodities, XXXXXX. Russell is routinely listed top in manager research in industry surveys, but the real challenge is generating excess return, and Russell’s best ideas have a strong record. So our manager research team puts in a lot of effort, time and money into finding us the best ingredients around the world. If we cant find it we will build it. Our portfolio management teams are able to call upon direct investment capabilities in equities, fixed income, commodities, and other securities to created targeted sub-portfolios created to bring the total portfolio where it needs to be. Using rules-based or optimized strategies we have been able to create completion portfolios that reduce portfolio risk without diminishing security selection risk-taking, reduce excessive country bets driven by biases in the universe of available managers, and fill in strategy holes in portfolios where satisfactory active strategies are unavailable. This means portfolio managers have all of the tools they need to build the portfolio they want. Often the total portfolio risk needs to be tailored to ensure that the managers’ best ideas drives return and portfolio biases are kept in control and not allowed to swamp excess return. Portfolio managers work with our trading desk to create select exposure portfolios or combinations of derivatives and physical securities to make sure the total portfolio reflects our best thinking. Examples: Portfolio equitization—standard and adaptations, Select exposure, overlays, Min Variance portfolio, etc. It is then the portfolio manager’s job to intelligently combine these active strategies in a broadly diversified manner, eliminating unintended biases. We have lots of tools and techniques that aid us in seeing how managers compliment eachother: Three lenses – performance, risk, and fundamental It often requires more than just a collection of strong strategies to complete the portfolio structure. Constructing a portfolio is more than finding the best strategies, it is about intelligently using those active strategies within the framework of the portfolio design to make your money work harder. Getting the right strategies and scaling the risks correctly are the keys to investing in a real world investment environment where small, inadvertent exposures can trip even the best investment ideas. Real Assets & Alternatives Listed Equities Strategic Asset Allocation as at 30 April 2013 FINANCIAL PROFESSIONAL USE ONLY
50 FINANCIAL PROFESSIONAL USE ONLYPortfolio Construction // From theory to reality We then need to take that investible strategy into the real world using the most effective components. The first step is to decide how to break the design down into investable components. There are many ways to achieve key exposures. We need to decide where the greatest opportunity lies and build a portfolio to exploit those opportunities. Russell uses its deep understanding of market structure taken from our index research and construction. Then we evaluate where we believe the best returns—the best alpha lies. We call that “Alpha Mapping”. This helps us decide how to break the design into investable pieces that combine both efficiency and opportunity. Once we choose the sections of the market we want to invest in, we need to find the right experts for those market segments. We believe that if we choose the right experts—the right money managers—then this process should be the most reliable source of return we generate. Manager research makes it possible to find what we consider the right experts. Then we use our expertise to combine those managers in the appropriate way. At an even more detailed level, our portfolio managers then work with our trading desk to create precisely-selected exposures to make sure the total portfolio reflects our best thinking. At every step of the way, we’re looking back at the portfolio design to make sure the final portfolio is still optimally aligned with what matters most—the goals you want to achieve. Portfolio design largely determines the overall positioning and risk posture of the total portfolio, but it is still just the beginning of the investment process So once we have the asset allocation and the plan for the client, we then need to go and invest it in the real world. Constructing a portfolio transforms a design into an investable combination of strategies and investment vehicles. The portfolio manager has the task of constructing a powerful portfolio using every tool at their disposal, making each part of the portfolio as targeted as possible for success. A PM’s tools include active strategies and targeted exposure and risk management. We are an open architecture firm Active manager selection, if done well, should be the most reliable source of return we generate. Our portfolios feature diverse mixes of powerful investment strategies, selected and combined to emphasize their ability to get more return out of each of the asset classes invested. Manager research makes this possible but creating the right balance is the key to success. Our manager research team is well known for the depth and insight of its approach to finding best of breed strategies. We cover every major (and most of the minor) investment strategies in the search for more excess return and we are consistently seeking out the best new areas to get extra return for our clients—recent additions include frontier markets, single country EM, Local currency EMD, Tactical trading strategies, active commodities, XXXXXX. Russell is routinely listed top in manager research in industry surveys, but the real challenge is generating excess return, and Russell’s best ideas have a strong record. So our manager research team puts in a lot of effort, time and money into finding us the best ingredients around the world. If we cant find it we will build it. Our portfolio management teams are able to call upon direct investment capabilities in equities, fixed income, commodities, and other securities to created targeted sub-portfolios created to bring the total portfolio where it needs to be. Using rules-based or optimized strategies we have been able to create completion portfolios that reduce portfolio risk without diminishing security selection risk-taking, reduce excessive country bets driven by biases in the universe of available managers, and fill in strategy holes in portfolios where satisfactory active strategies are unavailable. This means portfolio managers have all of the tools they need to build the portfolio they want. Often the total portfolio risk needs to be tailored to ensure that the managers’ best ideas drives return and portfolio biases are kept in control and not allowed to swamp excess return. Portfolio managers work with our trading desk to create select exposure portfolios or combinations of derivatives and physical securities to make sure the total portfolio reflects our best thinking. Examples: Portfolio equitization—standard and adaptations, Select exposure, overlays, Min Variance portfolio, etc. It is then the portfolio manager’s job to intelligently combine these active strategies in a broadly diversified manner, eliminating unintended biases. We have lots of tools and techniques that aid us in seeing how managers compliment eachother: Three lenses – performance, risk, and fundamental It often requires more than just a collection of strong strategies to complete the portfolio structure. Constructing a portfolio is more than finding the best strategies, it is about intelligently using those active strategies within the framework of the portfolio design to make your money work harder. Getting the right strategies and scaling the risks correctly are the keys to investing in a real world investment environment where small, inadvertent exposures can trip even the best investment ideas. FINANCIAL PROFESSIONAL USE ONLY
51 Association of Provident FundRussell Implementation Services - Passive Currency Overlay Daniel Birch june 2013
52 2012 Publication of EDHEC-Risk Solvency II BenchmarksOur History: An Overview A legacy of industry-shaping thought leadership 2011 Russell and EDHEC-Risk begin research 2010 Russell brings “Safety First” to market 2003 Russell launches T-standard for calculating performance of portfolios during transition 2012 Russell launches Global Stability Indexes 2002 Russell begins Agency FX program 2010 Russell advances liability responsive asset allocation techniques 1994 Russell starts currency hedging 2003 Russell launches passive currency overlay for the Russell funds 1986 Sharpe-Russell Research, Inc. venture launched leading to advancements in asset allocation methodology 1999 Russell acquired by US insurer, The Northwestern Mutual Life Insurance Company 1980 Russell launches first multi-manager fund and provides Transition Management 1992 Russell performs its first 3rd Party Transition Management assignment 1936 Russell established as brokerage firm 1984 Russell launches new objective equity index methodology leading to creation of Russell Indexes [to be changed later – text will be added then] 1976 Russell is the first to develop Equity style classifications 1969 Russell pioneers objective manager research and investment consulting Source: Russell Investments. Data as of 31 March 2013 unless otherwise stated .. 52 52 52
53 Russell Investments ExpertiseStrategic Advice Implementation Services Advice & Execution › Transition Management › Exposure Management › Execution Management › AUD $673 billion transitioned in 2012 Strategic advice to asset owners since 1969 › AUD $157 billion assets under management Asset Management › Capital markets insights › Manager Research › Portfolio Construction › Indexes PROPOSED SPEAKER: PROPOSED TIME: Russell has more than 30 years of experience integrating expertise to deliver multi-asset solutions to clients Source: Russell Investments. Data as of 31 December 2012 unless otherwise stated ..
54 Integrated Investment SolutionsInvestment Consulting Implementation Services Multi-Manager Alternative Investments Indexes Portfolio strategy Investment consulting Research Risk budgeting Russell Strategic Review More than 40 years of experience in strategic advice Overlay Services Transition Management Portfolio Solutions Cash Management Agency FX Currency Overlay Commission Recapture Access to best-of-breed managers Russell portfolio management capabilities Implementation and due diligence Private Equity Real Estate Hedge Funds 30 years experience in alternative investments Transparent and objective methodology Cover more than 98% of assets managed around the globe “Russell’s focus must be on being the best in the world at solving clients’ needs through multi-strategy portfolios... …This focus is built upon the complementary mix of our five core competencies – manager research, capital markets research, portfolio construction, portfolio implementation and indexes. It’s a combination of differentiators that gives Russell a tremendous competitive advantage.” Len Brennan President & CEO, Russell Investments Data to the end of December 2012 unless otherwise stated. 1. Data as of 30 June 2012 54
55 RIS Investment SolutionsExposure Management Use of derivatives to transform what you have and don’t want into what you want and don’t yet have - with persistence Active & Passive Rebalancing Liability Hedging Currency Hedging Transition Management Interim Management Select Exposures Emulation Direct Investments Specialty Asset Management Actively, quantitatively or passively managing portfolios of assets Execution Management Multi-venue Pure Agency Agency FX Commission Recapture Increasing returns by reducing structural and frictional costs associated with implementation Client solutions involve combining one or more of these areas of expertise to create sophisticated bespoke investment strategies
56 RIS Investment Solutions - CurrencyAssets under Management Currency Overlay: A$40.3 bn Derivative Overlay: A$109.2 bn Direct Investments (AUM): A$10.9 bn A$673 bn transitioned in 2012 Asset Allocation Overlays - De-risking strategies, dynamic asset allocation, multi-asset transitions Currency Overlays Liability Hedging Manager Changes Custom quantitative portfolio management Strategies Implemented Clients 30+ RIS Clients in Asia Pacific Superannuation Funds, Central Banks, Sovereign Wealth Funds, Asset Managers, Insurance Companies Australia, New Zealand, Singapore, Hong Kong, China, Japan, South Korea Source: Russell. Data as of 31 December 2012
57 Russell’s Currency Overlay AUME Take advantage of Russell’s hedging experience and global client base Region Number of accounts AUME A$ million Australasia 36 4,758 Europe 94 31,416 North America 27 4,153 TOTAL 157 40,327 THIS IS 3RD PARTY ONLY DOES NOT INCLUDE HEDGE SHARE CLASS Increase in 2009 were new clients, specifically a large Swiss client. Number of clients reduced as funds were consolidated? (AUM still increased) As of 30 April 2013 Source: Russell Implementation Services Inc. Data as of 31 December for all years except (30 April) AUME = assets under management equivalent.
58 Business Model MattersRussell Investments Less aligned Truly aligned Broker/dealer Principal Proprietary platforms Undisclosed/implicit Opaque Trading fiduciary Principal/agent Affiliated business lines Hybrid Selective Investment manager Pure agent Multi venue Fully disclosed/explicit Fully transparent Contracting method Execution method Primary liquidity Remuneration Reporting and Communication Russell’s business model is fully aligned with the objective of preservation of value For illustrative purposes only
59 Currency Overlay Service Key BenefitsDisciplined portfolio management approach Considerable scale and expertise which can be leveraged to clients benefit Purpose built analytical, trading and reporting platforms Customised research and design Portfolio analysis Benchmark construction Currency portfolio optimisation Liquidity management Risk-managed implementation Management and implementation in compliance with investment guidelines Comprehensive management of post trade outcomes (operational risk) Extensive counterparty credit review, conducted internally, covering: Company reports: Financial statements/ Press releases/ Webcasts and analyst meetings Rating agency analysis: Rating agency reports/ Discussions with rating agency analysts Brokerage firm research: Fixed Income/ Equity Financial press Fully transparent reporting Measurement and attribution of performance (tracking error, trading costs) Cash flow reporting (mark to market reports) Exposure reporting (credit risk, currency forward positions) Tailored client communications Comprehensive reporting, customisable to client’s needs Total gain/loss on the fund level and by currency Total exposures by currency and counter-party
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