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

SLIDE 1

Leicestershire County Council Pension Fund

16 September 2011 Scott Jamieson – Head of Multi Asset Investing Scott Jamieson Head of Multi Asset Investing

SLIDE 2

No, No, No’ – a Greek tragedy

One year government bonds yield 81%

– Full repayment not expected

B d t b l i t lk h b d d

, , g y

Budget rebalancing talks have been suspended

– Broken down (with EUU, ECBN and IMF officials having left the country)

Budgetary position deteriorating

NO tit t i t

NO appetite to raise taxes
NO appetite to pay taxes
NO end to the need for hand-outs from rest of EU

2

SLIDE 3

The simple arithmetic of a crisis p

Ineffective policy response Deflation Too much debt Too little i th Too politicised i t Policy error Depression Too much debt economic growth an environment Policy error Depression Aggressive policy response Recovery and inflation (?)

3

SLIDE 4

The backdrop – what a mess

For all the headlines (EU and US fiscal and political), the real issue is the synchronised

slowdown in the world economy

p

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

Th C dit C h i t b k t th f th t l d

The Credit Crunch was going to bankrupt swathes of the corporate landscape;

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

SLIDE 5

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

SLIDE 6

Putting this all together

Trend deterioration
Credit blow out

g g

1 2 8

Current

Disorderly EU blow out
US banking crisis
China implodes

Current portfolio:

2 8

Soon

Energy surge
US contraction
Force majeure

Core: Aussie and US bonds CHF vs. €, short $, Gold Options: A$ puts, Euribor puts US bond call, Gold calls

3 7

Threat

4 5 6

Be wary Th i i l i k d i iti t

6

There is no one single risk and no unique mitigant

SLIDE 7

Activity and observations

Positives

– Bonds

G ld

y

– Gold – 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

SLIDE 8

Principle positions (1)

Long Eurostoxx dividend futures

– Selling off hard into market weakness

B d i d tit t t th ti

p p ( )

Current price Forecast settlement % change

– Based on index constituents at the time,

not today

– Positions held would be worth £2.4m if held to

maturity and on consensus forecasts

2011 124 125 +1% 2012 105 135 +28% 2013 88 148 +68%

y

Long Gold

2014 80 157 +96% 2015 77 166 +115%

Long Gold

– Where else to hide? – Fund weightings ̵

+2% in Gold options

1500 1700 1900 2100

̵

Dec 2000 and Oct 2050 strikes

900 1100 1300 09 10 10 11 11

Source: Datastream as at August 2011 8

Sep 0 Mar 1 Sep Mar Sep

SLIDE 9

Principle positions (2)

Bonds

– ‘Crazy’ yield levels based on history

F t hi h f li k

p p ( )

5 6

US long bond yield (%)

– Far too high for policymakers – Long Bonds – Programme ‘long’ 4%

2 3 4 5

Short CHFJPY

CHF has been THE defensive

Aug 06 Feb 07 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11

– CHF has been THE defensive ̵

Matching Gold

– ‘swine flu’ could spread in

Switzerland

105 115

CHF vs Yen

̵

Use Yen for defensive exposure

– Fund 1.7% long yen

75 85 95 p 09 ar 10 p 10 ar 11 p 11

Source: Datastream as at August 2011 9

Sep Ma Sep Ma Sep

SLIDE 10

AAS in practice – current positioning p p g

Strong ‘left tail’ warranted by commitment to risk Core allocations Reflex upside potential warrants exposure to the commitment to risk assets and market/economic risks exposure to the ‘right side’ Options for a higher A$ ‘Optionated’ stocks Growth bias Options for a higher A$ ‘Optionated’ stocks Growth bias

Long ‘dividends’
Long US equities
Long commodities

g

Long defensive FX
Long bonds

10

SLIDE 11

Markets (%) ( )

125

World Equities

105 110

Long Gilts

95 105 115 85 90 95 100 105 95 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 85 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11

£ Trade Weighted Index Commodities

98 100

£ Trade Weighted Index

115 125 135

Commodities

94 96 ug 10 ep 10 ct 10

v 10

ec 10 an 11 eb 11 ar 11 pr 11 ay 11 un 11 ul 11 ug 11 95 105 ug 10 ep 10 ct 10

v 10

ec 10 an 11 eb 11 ar 11 pr 11 ay 11 un 11 ul 11 ug 11

Source: Datastream as at August 2011 11

Au Se Oc No De Ja Fe Ma Ap Ma Ju J Au Au Se Oc No De Ja Fe Ma Ap Ma Ju J Au

SLIDE 12

Inflation (%) ( )

4 5 6

US

4 5 6

US

3

2
1

1 2 3 4 3

2
1

1 2 3 4

Europe China

3

1997 1999 2001 2003 2005 2007 2009 2011 CPI Excluding food & energy

3

1997 1999 2001 2003 2005 2007 2009 2011 CPI Excluding food & energy 6 8 10

p

4 6 8 10

China

2 4

4
2

2

Source: Datastream as at July 2011 12

1997 1999 2001 2003 2005 2007 2009 2011 1997 1999 2001 2003 2005 2007 2009 2011

SLIDE 13

Real economic growth (quarter on quarter, %) g (q q , )

1 2

UK

1 2

US

3
2
1
3
2
1

Q3 2001 Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2001 Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010

Europe China

1

1 2

p

8 12 16

3
2

3 2001 3 2002 3 2003 3 2004 3 2005 3 2006 3 2007 3 2008 3 2009 3 2010 4 3 2001 3 2002 3 2003 3 2004 3 2005 3 2006 3 2007 3 2008 3 2009 3 2010

Source: Datastream as at July 2011 13

Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3

SLIDE 14

Business confidence

10 20

UK

60 65

US

30
20
10

10 40 45 50 55 60

50
40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 30 35 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Europe China

10

10

u ope

98 100 102 104

C a

40
30
20

90 92 94 96

Source: Datastream as at July 2011 14

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

SLIDE 15

Consumer confidence

10

UK

100 120

US

30

20
10

40 60 80 100

40
30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Europe China

20

15
10
5

u ope

110 115 120

China

40
35
30
25
20

95 100 105

Source: Datastream as at July 2011 15

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

SLIDE 16

Risk appetite pp

8 10

World equities and bonds

Investors complacent

20 30

Commodities

Investors complacent

4
2

2 4 6

p

10 10 20

Investors complacent

8
6

4 1981 1986 1991 1996 2001 2006 2011

Investors pessimistic

20
10

1970 1975 1980 1985 1990 1995 2000 2005 2010

Investors pessimistic

Currency Volatility (Vix)

0 5 1.0 1.5 2.0 2.5

Currency

Investors complacent

40 50 60 70 80

Volatility (Vix)

1.5
1.0
0.5

0.0 0.5

Investors pessimistic

10 20 30 40

Source: Credit Suisse,Datastream as at July 2011 16

1990 1995 2000 2005 2010 1990 1995 2000 2005 2010

SLIDE 17

Facilitated strategies 1 – passive overlay

1.00%

Performance summary

g p y

0 00% 0.50%

0.50%

0.00%

1.50%
1.00%

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 0 44% 0 63% 0 14% 0 54% 0 59% 1 29% 0 94% 0 75% 0 91% Cumulative PnL vs bmk 0.44% 0.63%

0.14%
0.54%
0.59%
1.29%
0.94%
0.75%
0.91%

Source: Datastream, Kames Capital as at July 2011. 17

SLIDE 18

Facilitated strategies 1 – passive overlay

Performance attribution

g p y

Period total P&L (%) -0.17%

Net % P&L vs Benchmark Q2

0.11% 0.02%

0.01%

0.00% 0.01% 0 00%

0.25%
0.20%
0.15%
0.10%
0.05%

0.00% 0.05% 0.10% 0.15%

Australian Dollar Brazilian Real Canadian Dollar Chilean Peso Chinese Renminbi Columbian Peso ( ) 0.00% 0.00% 0.01% 0.00%

0.19%

0.00% 0.00% 0.00% 0.00% 0 00% Columbian Peso Czech Koruny Danish Krone Egyptian Pound Euro Hong Kong Dollar Hungarian Forint Indian Rupee Indonesian Rupiah Japanese Yen 0.00% 0.05% 0.00% 0.00% 0.00% 0.00%

0.01%

0.00% 0.00% 0.00% Japanese Yen Korean Won Malaysian Ringgit Mexican Nuevo Peso Moroccan Dirham New Zealand Dollar Norwegian Krone Pakistani Rupee Peruvian Nuevos Soles Philippine Peso 0.01% 0.00% 0.02% 0.00% 0.00%

0.20%

0.04% 0.00% 0.00% 0 02% pp Polish Zloty Russian Ruble Singapore Dollar South African Rand Swedish Krona Swiss Franc Taiwan Dollar Thailand Baht UAE Dirham US Dollar

18

0.02%

0.00% US Dollar Yeni Turkish Lira

SLIDE 19

Facilitated strategies 2 – emerging markets currency exposure

Performance summary to 8 August 2011

g g g y p

106 103 104 105

Profit £2.2m

101 102 103

at close

98 99 100 97 98 Apr 11 May 11 May 11 Jun 11 Jul 11 Aug 11

Source: Datastream and Kames Capital, July 2011. Unaudtied data 19

Latam (£20m) Asia (£40m)

SLIDE 20

Outlook

Things would have to get much, much worse in the US before we assume QE3 becomes a

realistic option

Wh t if

– When, not if

FOMC meeting in September will now last for two days – why?
Germany’s judiciary will deliver its ruling on legal complaints against eurozone rescue

k 7 S t b packages on 7 September

20

SLIDE 21

Important information – Asset Allocation Service (AAS)

This presentation relates to the AAS provided by Kames Capital plc. The AAS is subject to the terms of an investment management agreement between Kames Capital and a pension fund selecting the AAS and subject to such disclaimers, notices, warnings or separate agreements, including those set out below, as Kames Capital may communicate to you or agree with you. THE CONTENT OF THIS PRESENTATION IS DESIGNED FOR THE PROFESSIONAL PENSION FUND MARKET. IF YOU ARE NOT AN INVESTMENT PROFESSIONAL OR

p ( )

A PERSON PROFESSIONALLY INVOLVED IN OR HAVING RESPONSIBILITIES RELATING TO PENSION FUND MANAGEMENT YOU SHOULD NOT ACT UPON IT. This presentation is directed only at persons having professional experience in matters relating to investments falling within article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and high value entities or trusts falling within article 49 of that Order. Consequently, Kames Capital has not approved the content of this presentation for the purposes of section 21 of the Financial Services and Markets Act 2000. No other person should act upon this presentation or any information contained in it. Kames Capital has procedures in place to ensure that no instrument or investment activity referred to in this presentation is available to any other person. Th t t f thi t ti h b d l l f i f ti A t t t f t t f d t ti t j ti i l d d i th The content of this presentation has been prepared solely for information purposes. Any statements, forecasts, past performance data, estimates or projections included in the presentation are for illustrative purposes only and may be provided by Kames Capital or third parties. Any view, opinions or statements made in or in relation to this presentation should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments and the income from them may fall as well as rise and there is no guarantee that the AAS will achieve the objectives described in this presentation. No investment advice or tax advice is being given in this presentation. Nothing in this presentation should be regarded as an offer to provide investment services or products or as a comment on the merits of engaging in any investment transaction or activity or an inducement to do so. The content of this presentation is subject to change and correction g g g y y p j g without notice. Kames Capital does not represent that (i) the content of this presentation; (ii) any investments or investment services referred to in this presentation; or (iii) any oral or written statements provided by or made by Kames Capital or persons connected with it are suitable for or relevant to you. Kames Capital is an Kames Capital company and includes Kames Capital plc (no: SC113505) and Kames Capital Management Ltd (no: SC212159). Both are registered in Scotland and have their registered office at 3 Lochside Avenue, Edinburgh Park, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Services Authority (FSA reference no: 144267). Kames Capital plc provides segregated and retail funds and is the Authorised Corporate Director of Kames Capital ICVC, an Open Ended Investment Company. Kames Capital Management Ltd provides investment management services to AEGON, which provides pooled funds, life and pension contracts. Kames Capital Management Ltd is an appointed representative of Scottish Equitable plc, an AEGON company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548). Kames Capital UK rebranded to Kames Capital on 1 September 2011.

FP ID: 2011/CS1037 21