Managing Risk in an Uncertain World \\\\ \\ September 2017 This - - PowerPoint PPT Presentation

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Managing Risk in an Uncertain World

Matt Parlour

This presentation is for Professional Clients only and is not for consumer use. Please do not redistribute.

Investment Speaker September 2017

Learning outcomes Following this presentation, you will understand:

All images sourced from iStock Getty.

• How clients perceive and define risk
• Different methods of managing risk
• How investment solutions have evolved to

deliver greater precision in risk management

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How clients perceive and define risk

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How clients perceive and define risk Definition

Source: Natixis Individual Investor Survey 2016, Key findings.

35% 20% 16% 15% 8% 6%

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Permanent loss of capital Underperforming the market Failing to meet financial goals Exposing assets to market volatility Missing out on potential investment returns Other

How clients perceive and define risk Perception vs reality

5 13% 18% 25% 43% 57% 80% 87% 82% 75% 57% 43% 20%

Thoughtful Cautious Research-driven Self-sufficient Trend follower Fearful

Emotional Aggressive Instinctual Advice-seeking Contrarian Confident Source: Coredata Research 2016.

How clients perceive and define risk Many HNWs are struggling with market volatility

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Source: Coredata Research 2016. HNW= High Net Worth investors.

69%

“While I worry about market shocks, I feel helpless when trying to protect my portfolio from them”

48%

“I struggle to avoid making emotional decisions when market shocks occur”

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Source: Coredata Research 2016. UK HNW investors.

How clients perceive and define risk What were the perceived investment risks – end 2016

45% 38% 37% 19% 16% 9%

Global economic slowdown Economic slowdown in China Rising interest rates Geopolitical event Oil price rise Terrorism

How clients perceive and define risk Confusion about passive investing

Source: Natixis Individual Investor Survey 2016, key findings.

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Investor perception Approximately 60% of investors believe that index funds are:

Investment reality Less risky Can help minimise losses Offer better diversification Lack any risk management Experience full market loss (plus charges) Many indices are heavily weighted by a handful of sectors

What do investors want?

A majority of investors want new portfolio strategies that:

• Better manage risk
• Offer a balance of risk and return
• Better insulate their portfolios in volatile markets
• Help them better diversify their portfolios

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Source: Natixis Individual Investor Survey 2016, key findings.

Managing risk

Managing risk

• Diversification & correlation
• Investment specific risk vs market risk
• Managing risk with derivatives
• Derivatives in practice

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Managing risk

• Diversification & correlation

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Diversification & correlation Theory

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Source: Invesco Perpetual. For illustration purposes only

Return Time Umbrella manufacturer Combined return Ice cream company Dry Wet Dry

Diversification & correlation Diversification in practice

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Source: Invesco, Datastream and Bloomberg as at 20 March 2017. Gilts - BofA ML Gilt Index , Equities - FTSE All Share. *Based on 31 year monthly returns Dec 1985 – Dec 2016.

8.0 8.5 9.0 9.5 10.0 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Annual total return CAGR (%) Risk, standard deviation of returns (% pa)

Combining UK gilts and equities - Return and Risk (%)*

100% Gilts 100% Equities Minimum Risk 86% Gilts 14% Equities Same risk as 100% Gilts: 71% Gilts 29% Equities "Balanced Fund" 60% Equities 40% Gilts

Diversification & correlation Correlations in practice

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Source: Datastream and Bloomberg as at 20 March 2017. *Gilts - BofA ML Gilt.

• 1.0
• 0.8
• 0.6
• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Correlation between FTSE All Share and Gilts indices (weekly one year rolling)*

Diversification & correlation Impact of changing correlations

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Source: Invesco, Datastream and Bloomberg as at 20 March 2017. Based on BofA ML Gilt Index and FTSE All Share. *Based on 30 year monthly returns Dec 1985 – Dec 2015.

8.0 8.5 9.0 9.5 10.0 2 4 6 8 10 12 14 16 18

Annual total return CAGR (%) Risk, standard deviation of returns (% pa)

1.00 0.50 0.00

• 0.50
• 1.00

Effects of varying correlations on risk/return trade-off UK gilts and equities*

Managing risk

• Diversification & correlation
• Investment specific risk vs market risk

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Investment specific risk vs market risk

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Source: Invesco Perpetual. For illustration purposes only

Number of different investments in portfolio Investment-specific risk Total risk Market risk 10 20 Risk in portfolio

Managing risk

• Diversification & correlation
• Investment specific risk vs market risk
• Managing risk with derivatives
• Potential uses

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Managing risk with derivatives Potential uses

• Gain exposure
• Increase opportunities
• Tailor positions
• Manage downside risk
• Provide flexibility
• Provide additional income stream

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Source: Invesco Perpetual for illustrative purposes.

Managing risk

• Diversification & correlation
• Investment specific risk vs market risk
• Managing risk with derivatives
• Derivatives in practice

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Derivatives in practice Selling an equities index future as a hedge

1,800 1,900 2,000 2,100 2,200 2,300 2,400 2,500 5 10 15 20 25 30 35 40 45 50

Index / market values (rebased) Time

Japan Hong Kong New Zealand Singapore Australia

• 20

20 40 5 10 15 20 25 30 35 40 45 50

Profit / loss Time

Hedge

Hedge Fund (unhedged) Fund (hedged)

Source: Fitch Learning/Invesco Perpetual. For illustration purposes only.

Example Asian Fund (unhedged), components and Asian Fund (hedged)

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Derivatives in practice Using a put option as crash mitigation

Loss Profit Put strike Market now

Fund:

long equity exposure Underlying at expiry Long put option

Overall:

long equity exposure + long put option

Source: Fitch Learning/Invesco Perpetual. For illustration purposes only.

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Adidas 1.25% 2025

EUR Currency risk

Derivatives in practice Greater precision in risk management

EUR Interest rate risk Adidas credit risk

Interest rate swap EUR forward

+ + =

Source: Fitch Learning/Invesco Perpetual. For illustration purposes only.

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How investment solutions have evolved to deliver greater precision in risk management

The evolution of investment solutions

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Balanced Multi Asset “Traditional” Risk Targeted Multi Strategy “Modern” Equities Bonds Single asset

Source: Invesco Perpetual. For illustrative purposes only.

Highly flexible Limited flexibility Highly diversified Limited diversification Risk/return focus Return focus “Strategy / Idea” allocation Asset allocation Complex Simple

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The benefit of diversification Change in volatility by adding a multi-asset fund

0% 1% 2% 3% 4% 5% 6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Portfolio Risk Profile 3 Portfolio Risk Profile 4

Annualised standard deviation of portfolio

Source: Invesco Perpetual/Bloomberg. For illustration purposes only. Based upon example model portfolios. Volatility data is annualised, 3 years to 31/3/2017. Multi-asset fund used is Invesco Perpetual Global Targeted Returns, gross performance.

Weighting of multi-asset fund as a % of portfolio

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The benefit of diversification Change in potential returns by adding a multi-asset fund

Source: Invesco Perpetual/Bloomberg. For illustration purposes only. Based upon example model portfolios. Performance data is gross, annualised 3 years to 31/3/2017. Multi-asset fund used is Invesco Perpetual Global Targeted Returns.

0% 2% 4% 6% 8% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Portfolio Risk Profile 3 Portfolio Risk Profile 4

Annualised return of portfolio

Weighting of multi-asset fund as a % of portfolio

Managing risk in an uncertain world Summary

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• A majority of investors would like to better insulate their portfolios in

volatile markets

• Portfolio volatility is only reduced if asset classes have a low

correlation to one another

• Derivatives allow fund managers to manage exposure & focus risk

precision

• Traditional multi-asset funds continue to play a role in client portfolios
• Modern investment solutions potentially deliver greater precision in

risk management

Learning outcomes Following this presentation, you will understand:

All images sourced from iStock Getty.

• How clients perceive and define risk
• Different methods of managing risk
• How investment solutions have evolved to

deliver greater precision in risk management

32

Important information

This presentation is for Professional Clients only and is not for consumer use. All information as at 5 September 2017 sourced from Invesco Perpetual unless otherwise stated Past performance is not a guide to future returns. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. The Invesco Perpetual Global Targeted Returns Fund makes significant use of financial derivatives (complex instruments) which will result in the fund being leveraged and may result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended

• bjective. Leverage occurs when the economic exposure

created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment. The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Manager, through the use of collateral management. The securities that the fund invests in may not always make interest and other payments nor is the solvency of the issuers

• guaranteed. Market conditions, such as a decrease in market

liquidity for the securities in which the Fund invests, may mean that the Fund may not be able to sell those securities at their true value. These risks increase where the Fund invests in high yield or lower credit quality bonds and where we use derivatives. Where Matt Parlour has expressed opinions, they are based on current market conditions and are subject to change without notice. For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports and the Prospectus, which are available using the contact details shown.

Invesco Perpetual is a business name of Invesco Fund Managers Limited and Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on- Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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