[PPT] - MANAGING INVESTMENT RISK The Key to Investment Outperformance PowerPoint Presentation

SLIDE 1

MANAGING INVESTMENT RISK

The Key to Investment Outperformance

Harold Y. Kim, Ph.D. haroldkim@neoriskinvestment.com June 2016

SLIDE 2

AGENDA

The Challenge
What is Risk? What is Risk Management?
Risk-focused Investment Management
Examples: Asian Equity Index

SLIDE 3

3

Source: Bloomberg

100 200 300 400 500 600 700 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

MSCI Asia ex-Japan Index 1987-2016

THE CHALLENGE: VOLATILE PRICES

SLIDE 4

4

Source: Bloomberg

0% 10% 20% 30% 40% 50% 60% 70% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

MSCI Asia ex-Japan Volatility 1987-2016

THE CHALLENGE: CHANGING RISK

SLIDE 5

Risk – uncertainty of investment returns
Investor categories
Low risk
Medium risk
High risk

5

WHAT IS RISK?

SLIDE 6

WHAT IS RISK MANAGEMENT?

Risk management – managing (reducing) uncertainty of

investment returns

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

70
66
62
58
54
50
46
42
38
34
30
26
22
18
14
10
6
2

2 6 10 14 18 22 26 30 34 38 42 46 50 54 58 62 66 70 74 78 82 86 90

Probability Return

SLIDE 7

7

Utility Function 1 100% Equity Utility Function 2 100% Bonds

RESPONDING TO CHANGES IN RISK

What if equity risk doubles?

Volatility Expected Return

100% Equity

30% Equity

Utility Function 3

SLIDE 8

RISK-FOCUSED INVESTMENT MANAGEMENT

Risk-focused investment management – investing with

emphasis on managing risk to acceptable (optimal) levels

Risk management tools include:
Dynamic asset allocation
Diversification
Hedging
Derivatives

SLIDE 9

EXAMPLE 1: TARGET VOLATILITY

Systematically adjusting equity

exposure to manage risk

Improved return-risk ratio
Dynamic asset allocation

Benchmark Target Vol (15%)

Ann. Rtn

7.3% 6.1%

Ann. Vol

21.1% 13.5% Info Ratio 0.34 0.46 Skew (0.29) (0.49) Kurtosis 7.22 1.93 Max Drawdown

65.5%
39.8%

Index: MSCI Asia Ex-Japan Source: Bloomberg and Neo Risk Investment Advisors

SLIDE 10

EXAMPLE 2: TARGET VOL 2.0

Optimizing for risk characteristics
f Asian equity market
Higher returns with lower volatility,

resulting in higher return-risk ratio

Benchmark Base Risk Model

Ann. Rtn

7.3% 9.2%

Ann. Vol

21.1% 14.4% Info Ratio 0.34 0.64 Skew (0.29) (0.12) Kurtosis 7.22 3.60 Max Drawdown

65.5%
38.9%

*Benchmark: MSCI Asia Ex-Japan Index +Model returns are after management fees and transactions costs Source: Bloomberg and Neo Risk Investment Advisors

SLIDE 11

EXAMPLE 3: EFFECTIVE HEDGING

Risk-based diversifying hedge
verlay
Designed to be more effective as

risk increases

Correlation with Benchmark -65%

Benchmark Hedge Portfolio

Ann. Rtn

7.3% 4.3%

Ann. Vol

21.1% 9.9% Info Ratio 0.34 0.44 Skew (0.29) (0.06) Kurtosis 7.22 3.11 Max Drawdown

65.5%
20.2%

*Benchmark: MSCI Asia Ex-Japan Index +Model returns are after management fees and transactions costs Source: Bloomberg and Neo Risk Investment Advisors

SLIDE 12

EXAMPLE 4: ASIA REAP PORTFOLIO

Combining Target Volatility 2.0

and Effective Hedging

Dramatic improvement in returns

with lower risk and drawdown

Benchmark Asia REAP Portfolio

Ann. Rtn

7.3% 14.1%

Ann. Vol

21.1% 12.1% Info Ratio 0.34 1.17 Skew (0.29) (0.16) Kurtosis 7.22 2.70 Max Drawdown

65.5%
25.2%

*Benchmark: MSCI Asia Ex-Japan Index +Model returns are after management fees and transactions costs Source: Bloomberg and Neo Risk Investment Advisors

SLIDE 13

PERFORMANCE BY YEAR: RETURN

Outperformance driven by

asymmetric response to up/down markets

Large outperformance during

weak markets

Marginal underperformance

during strong markets

*Benchmark: MSCI Asia Ex-Japan Index +Model returns are after management fees and transactions costs Source: Bloomberg and Neo Risk Investment Advisors

80%
60%
40%
20%

0% 20% 40% 60% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Return by Year

Benchmark REAP

SLIDE 14

PERFORMANCE BY YEAR: VOLATILITY

Impact of active risk

management evident

Compare Benchmark vs REAP

portfolio volatility

*Benchmark: MSCI Asia Ex-Japan Index +Model returns are after management fees and transactions costs Source: Bloomberg and Neo Risk Investment Advisors

0% 5% 10% 15% 20% 25% 30% 35% 40% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Volatility by Year

Benchmark REAP

SLIDE 15

OUTPERFORMING IN WEAK MARKETS

Large outperformance

during weak markets

Target volatility (BRM) manages
verall risk level
Hedge portfolio delivers positive

(diversified) returns

*Benchmark: MSCI Asia Ex-Japan Index +Model returns are after management fees and transactions costs Source: Bloomberg and Neo Risk Investment Advisors

Month Benchmark* Base Risk Model Hedge Portfolio Asia REAP Oct-08

27.5%
5.1%

3.5%

1.4%

Sep-08

18.1%
5.8%

2.7%

3.0%

Jan-08

14.9%
8.9%

3.7%

4.9%

Sep-11

14.1%
5.8%

4.9%

0.7%

Jun-08

12.7%
6.3%

4.0%

2.1%

Aug-11

10.4%
6.3%

5.0%

1.0%

Aug-15

10.3%
7.1%

1.6%

5.4%

May-12

10.1%
7.8%

2.8%

4.8%

Nov-07

8.9%
7.3%

0.7%

6.6%

May-10

8.8%
5.0%

3.0%

1.8%

Ten Worst Monthly Returns for Benchmark during Sample Period 2005-2015

SLIDE 16

SUMMARY

Volatile market movements presenting challenges to investing
Risk-focused investment management required to deliver
ptimal results for investors
Asymmetric response to positive/negative markets adds value
Smoothed returns, smaller drawdowns, overall outperformance

This communication is provided for information and discussion purposes only and does not constitute a recommendation or an offer to sell or a solicitation to buy any financial product or enter into any transaction. This communication is directed exclusively at market professionals, financial intermediaries and institutional investor customers and is not intended for distribution to retail customers. The information contained in this communication is based on generally available information, and although obtained from sources believed by to be reliable, the accuracy and completeness of the information cannot be assured, and such information may be incomplete or condensed.