Leicestershire County Council Pension Fund 16 September 2011 Scott - PowerPoint PPT Presentation

Leicestershire County Council Pension Fund 16 September 2011 Scott Jamieson – Head of Multi Asset Investing Scott Jamieson Head of Multi Asset Investing

No, No, No’ – a Greek tragedy , , g y • One year government bonds yield 81% – Full repayment not expected • Budget rebalancing talks have been suspended B d t b l i t lk h b d d – Broken down (with EUU, ECBN and IMF officials having left the country) • Budgetary position deteriorating • NO appetite to raise taxes NO tit t i t • NO appetite to pay taxes • NO end to the need for hand-outs from rest of EU 2

The simple arithmetic of a crisis p Ineffective Deflation policy response Too little Too politicised Too much debt Too much debt Policy error Policy error Depression Depression economic growth i th an environment i t Aggressive Recovery policy response and inflation (?) 3

̵ The backdrop – what a mess p • For all the headlines (EU and US fiscal and political), the real issue is the synchronised slowdown in the world economy • Final demand is weak and weakening • All talk of ‘exit strategies’ has evaporated as investors demand new stimulants – QE3 now a must-have and set to embrace yield capping in the US • The Credit Crunch was going to bankrupt swathes of the corporate landscape; Th C dit C h i t b k t th f th t l d Governments assumed the burden – The Credit Crunch is now bankrupting Governments …what began in the corporate sector may yet end back there what began in the corporate sector may yet end back there • Needed: tax cuts financed by funny money and access to Asian reserves 4

Potential ‘Tail’ events 1. Things don’t get better (‘Tail’ event against the policy goal) 2. Credit blow-out 3. Disorderly EU break-up 4. Fresh US banking crisis 5. Capital flight from China in tandem with recession in China as ‘ponzi’ infrastructure plan exposed 6. Surge in energy costs e.g. driven potentially by conflagration in Middle East 7. US economy embarks on UK-style fiscal recovery exacerbated by contraction at state level 8. Force majeure market intervention 5

Putting this all together g g • Trend deterioration Current 1 • Credit blow out 8 8 2 2 • Disorderly EU blow out • US banking crisis Soon • China implodes Current portfolio: Core: Aussie and US bonds • Energy surge 7 3 CHF vs. €, short $, Gold Threat • US contraction Options: A$ puts, Euribor puts US bond call, Gold calls • Force majeure Be wary 6 4 5 There is no one single risk and no unique mitigant Th i i l i k d i iti t 6

Activity and observations y • Positives – Bonds – Gold G ld – Commodities – Selected equity markets • Negatives • Negatives – Currency – European equity dividends • Tail positions kicked in Tail positions kicked in – Long bond price calls – Gold calls • Currency positions reworked and restructured y p – Inter-market positions set up – Long Asia/ short US$ – Long Swiss franc/ short Euro 7

̵ ̵ Principle positions (1) p p ( ) • Long Eurostoxx dividend futures Current Forecast % change – Selling off hard into market weakness price settlement – Based on index constituents at the time, B d i d tit t t th ti 2011 124 125 +1% not today 2012 105 135 +28% – Positions held would be worth £2.4m if held to 2013 88 148 +68% maturity and on consensus forecasts y 2014 80 157 +96% 2015 77 166 +115% • Long Gold Long Gold 2100 – Where else to hide? 1900 – Fund weightings 1700 +2% in Gold options 1500 Dec 2000 and Oct 2050 strikes 1300 1100 900 09 10 10 11 11 Sep 0 Mar 1 Mar Sep Sep Source: Datastream as at August 2011 8

̵ ̵ Principle positions (2) p p ( ) • Bonds US long bond yield (%) – ‘Crazy’ yield levels based on history 6 – Far too high for policymakers F t hi h f li k 5 5 4 – Long Bonds 3 – Programme ‘long’ 4% 2 Aug 06 Feb 07 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 • Short CHFJPY – CHF has been THE defensive CHF has been THE defensive Matching Gold CHF vs Yen – ‘swine flu’ could spread in 115 Switzerland 105 95 Use Yen for defensive exposure 85 – Fund 1.7% long yen 75 p 09 ar 10 p 10 ar 11 p 11 Sep Sep Sep Ma Ma Source: Datastream as at August 2011 9

AAS in practice – current positioning p p g Core allocations Strong ‘left tail’ Reflex upside warranted by potential warrants commitment to risk commitment to risk exposure to the exposure to the assets and ‘right side’ market/economic risks Options for a higher A$ Options for a higher A$ Growth bias Growth bias ‘Optionated’ stocks ‘Optionated’ stocks • Long ‘dividends’ • Long US equities • Long commodities g • Long defensive FX • Long bonds 10

Source: Datastream as at August 2011 Markets (%) £ Trade Weighted Index £ Trade Weighted Index World Equities 100 105 125 115 94 96 98 95 95 Au ug 10 Aug 10 Se ep 10 Sep 10 Oc ct 10 Oct 10 ( No ov 10 Nov 10 ) De ec 10 Dec 10 Ja an 11 Jan 11 Fe eb 11 Feb 11 Ma ar 11 Mar 11 Ap pr 11 Apr 11 Ma ay 11 May 11 Ju un 11 Jun 11 J ul 11 Jul 11 Au ug 11 Aug 11 Long Gilts Commodities Commodities 105 125 135 100 105 105 110 115 95 85 85 90 95 Au ug 10 Aug 10 Sep 10 Se ep 10 Oc ct 10 Oct 10 No ov 10 Nov 10 De ec 10 Dec 10 Ja an 11 Jan 11 Fe eb 11 Feb 11 Ma ar 11 Mar 11 Ap pr 11 Apr 11 Ma ay 11 May 11 Ju un 11 Jun 11 J ul 11 Jul 11 Au ug 11 Aug 11 11

Inflation (%) ( ) US US 6 6 5 5 4 4 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 3 -3 3 1997 1999 2001 2003 2005 2007 2009 2011 1997 1999 2001 2003 2005 2007 2009 2011 CPI Excluding food & energy CPI Excluding food & energy Europe p China China 10 10 8 8 6 6 4 2 4 0 2 -2 0 -4 1997 1999 2001 2003 2005 2007 2009 2011 1997 1999 2001 2003 2005 2007 2009 2011 Source: Datastream as at July 2011 12

Source: Datastream as at July 2011 Europe UK Real economic growth (quarter on quarter, %) -3 -2 -1 -3 -2 -1 0 1 2 0 1 2 Q3 3 2001 Q3 2001 p Q3 2002 Q3 3 2002 Q3 2003 Q3 3 2003 Q3 2004 Q3 3 2004 g Q3 2005 Q3 3 2005 Q3 2006 Q3 3 2006 Q3 2007 (q Q3 3 2007 Q3 2008 Q3 3 2008 Q3 2009 Q3 3 2009 Q3 2010 Q3 3 2010 q China US 12 16 -3 -2 -1 0 1 2 0 4 8 Q3 2001 Q3 3 2001 , Q3 2002 Q3 3 2002 ) Q3 2003 Q3 3 2003 Q3 2004 Q3 3 2004 Q3 2005 Q3 3 2005 Q3 2006 Q3 3 2006 Q3 2007 Q3 3 2007 Q3 2008 Q3 3 2008 Q3 3 2009 Q3 2009 Q3 3 2010 Q3 2010 13

Business confidence UK US 20 65 10 10 60 60 0 55 -10 50 -20 45 -30 40 -40 35 -50 30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Europe u ope China C a 10 104 102 0 100 -10 98 96 -20 94 -30 92 -40 90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Datastream as at July 2011 14

Consumer confidence UK US 10 120 100 100 0 0 80 -10 60 -20 40 -30 30 20 -40 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Europe u ope China China 0 120 -5 115 -10 -15 110 -20 20 105 -25 -30 100 -35 -40 95 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Datastream as at July 2011 15

Risk appetite pp World equities and bonds Commodities 10 30 8 Investors complacent p Investors complacent Investors complacent 20 20 6 4 10 2 0 0 -2 -4 4 -10 10 Investors pessimistic -6 Investors pessimistic -8 -20 1981 1986 1991 1996 2001 2006 2011 1970 1975 1980 1985 1990 1995 2000 2005 2010 Currency Currency Volatility (Vix) Volatility (Vix) 2.5 80 2.0 70 Investors complacent 1.5 60 1.0 50 0 5 0.5 40 40 0.0 30 -0.5 20 -1.0 10 Investors pessimistic -1.5 0 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010 Source: Credit Suisse,Datastream as at July 2011 16

Facilitated strategies 1 – passive overlay g p y Performance summary 1.00% 0.50% 0 00% 0.00% -0.50% -1.00% -1.50% Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Periodic PnL vs bmk 0.44% 0.19% -0.77% -0.41% -0.05% -0.70% 0.35% 0.20% -0.16% C m lati e PnL s bmk Cumulative PnL vs bmk 0 44% 0.44% 0 63% 0.63% -0.14% 0 14% -0.54% 0 54% -0.59% 0 59% -1.29% 1 29% -0.94% 0 94% -0.75% 0 75% -0.91% 0 91% Source: Datastream, Kames Capital as at July 2011. 17