KEEP CALM AND
CARRY ON
INVESTMENT SOLUTIONS FOR UNCERTAIN TIMES
Frontier Investment Management Overview •
Frontier Investment Management (“Frontier”) specialises in advanced indexation strategies to provide a range of low-cost multi-asset investment funds
•
The firm was founded in 2004 as an independent, privately owned business that has grown to 20 partners/employees with an AUM of $650m
•
Frontier differentiates itself by using an innovative approach to access alternative asset classes that target low correlation to traditional asset classes
•
Frontier’s investment philosophy is “Evidence-Based” and is supported by 100 years of empirical evidence and academic research
•
Frontier has attracted a diversified, high-quality client base comprising leading financial planning businesses, wealth managers, charities and institutions
2
Table of Contents 1. Long term asset class returns : Achieving “real returns” above inflation 2. Strategic vs tactical investing: How important is market timing and fund selection? 3. Diversification: Why modern portfolio theory is still modern 4. “True” diversifiers: an introduction to hedge funds and managed futures 5. Endowment Style Investing: Theory into practice 6. The importance of low cost investing 7. Frontier’s Multi-Asset Platform Fund 8. Frontier Investment Management & Your Business
3
LONG TERM ASSET CLASS RETURNS
“The length of time investments will be held…is the single most powerful factor in any investment program” Charles D. Ellis, Winning the Loser’s Game: Timeless Strategies for Successful Investing
Asset Classes Generate Long Run “Real Returns” •
Historical returns have been significantly higher than cash and inflation
•
The return above cash is known as the “Excess Return” or “Risk Premium”
•
Return embedded in asset class (index); fund manager not required Asset Class Returns Above Inflation January 1973 to December 2011
Asset Class Returns Above Inflation January 1991 to December 2011
Each asset class is represented by a relevant benchmark index. 4 and 8 Asset Class Portfolios are equally weighted and rebalanced annually on December 31. Returns are GBP hedged. Asset class returns are shown gross and have not been adjusted for management, administration and access costs incurred by the Fund. Accompanying notes are an integral part of this presentation.
5
Rolling Returns explained Rolling Returns Rolling returns illustrate returns for holding periods experienced by an investor. For example, the 1 year rolling return to March 2010 will be the return for April 2009 to March 2010. 12m Rolling Period 1
12m Rolling Period 2
100 80 60 40 20 0 -20 -40 -60
Oct-11
Sep-11
Jul-11
Aug-11
Jun-11
Apr-11
May-11
Mar-11
Jan-11
Feb-11
Dec-10
Oct-10
Nov-10
Sep-10
Jul-10
Aug-10
Jun-10
Apr-10
May-10
Mar-10
Jan-10
Feb-10
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
Jun-09
Apr-09
May-09
Mar-09
Jan-09
Feb-09
Dec-08
Oct-08
Nov-08
Sep-08
Jul-08
Aug-08
Jun-08
Apr-08
May-08
Mar-08
-100
Jan-08
-80
Feb-08
•
Months 6
Probability of Return Capture Increases with Time 1 Year Rolling Returns: December 1973 – December 2011 (456 periods) 90% of 12 month periods produce positive returns
60%
73% of 12 month periods produce returns above cash
50% 40% 30% 20% 10% 0% -10% Multi Asset Portfolio (1Y Annualised)
-20%
Cash (1Y Annualised) Inflation (1Y Annualised)
-30% 1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Number of rolling periods included in calculations: 1 Year = 456, 3 Year = 432, 5 Year = 408, 10 Year = 348. Multi-Asset Portfolio is 4 and 8 asset class portfolio as shown previously. Returns are in GBP. Cash is 1 Month UK Libor less 0.5%. Accompanying notes are an integral part of this presentation.
7
Probability of Return Capture Increases with Time 3 Year Rolling Returns: December 1975 – December 2011 (432 periods) 99% of 36 month periods produce positive returns 35%
84% of 36 month periods produce returns above cash
30% 25% 20% 15% 10% 5% 0% Multi Asset Portfolio (3Y Annualised)
-5%
Cash (3Y Annualised) Inflation (3Y Annualised)
-10% 1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Number of rolling periods included in calculations: 1 Year = 456, 3 Year = 432, 5 Year = 408, 10 Year = 348. Multi-Asset Portfolio is 4 and 8 asset class portfolio as shown previously. Returns are in GBP. Cash is 1 Month UK Libor less 0.5%. Accompanying notes are an integral part of this presentation.
8
Probability of Return Capture Increases with Time 5 Year Rolling Returns: December 1977 – December 2011 (408 periods) 100% of 60 month periods produce positive returns 30%
95% of 60 month periods produce returns above cash
25% 20% 15% 10% 5% 0% Multi Asset Portfolio (5Y Annualised)
-5%
Cash (5Y Annualised) Inflation (5Y Annualised)
-10% 1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Number of rolling periods included in calculations: 1 Year = 456, 3 Year = 432, 5 Year = 408, 10 Year = 348. Multi-Asset Portfolio is 4 and 8 asset class portfolio as shown previously. Returns are in GBP. Cash is 1 Month UK Libor less 0.5%. Accompanying notes are an integral part of this presentation.
9
Probability of Return Capture Increases with Time 10 Year Rolling Returns: December 1982 – December 2011 (348 periods) Worst 10 year period produced 4% p.a. above cash 25%
20%
15%
10%
5%
0% Multi Asset Portfolio (10Y Annualised)
-5%
Cash (10Y Annualised) Inflation (10Y Annualised)
-10% 1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Number of rolling periods included in calculations: 1 Year = 456, 3 Year = 432, 5 Year = 408, 10 Year = 348. Multi-Asset Portfolio is 4 and 8 asset class portfolio as shown previously. Returns are in GBP. Cash is 1 Month UK Libor less 0.5%. Accompanying notes are an integral part of this presentation.
10
Probability of Return Capture Increases with Time 12 Month vs 10 Year Rolling Returns vs Inflation +3% December 1982 – December 2011 (348 periods) 50% 40% 30% 20% 10% 0% -10% -20%
Inflation + 3% (10Y Annualised)
-30%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Number of rolling periods included in calculations: 10 Year = 348. Accompanying notes are an integral part of this presentation.
11
Probability of Return Capture Increases with Time 12 Month vs 10 Year Rolling Returns vs Inflation +3% December 1982 – December 2011 (348 periods) 76% of 12 month periods are over inflation +3%
50% 40% 30% 20% 10% 0% -10% -20%
Multi Asset Portfolio (1Y Annualised) Inflation + 3% (10Y Annualised)
-30%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Number of rolling periods included in calculations: 10 Year = 348. Accompanying notes are an integral part of this presentation.
12
Probability of Return Capture Increases with Time 12 Month vs 10 Year Rolling Returns vs Inflation +3% December 1982 – December 2011 (348 periods) 76% of 12 month periods are over inflation +3%
50%
100% of 10 year periods are over inflation +3%
40% 30% 20% 10% 0% -10% -20%
Multi Asset Portfolio (1Y Annualised) Multi Asset Portfolio (10Y Annualised) Inflation + 3% (10Y Annualised)
-30%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Number of rolling periods included in calculations: 10 Year = 348. Accompanying notes are an integral part of this presentation.
13
Probability of Return Capture Increases with Time 10 Year Rolling Returns: December 1982 – December 2011 (348 periods) 100% of 10Y periods above Inflation + 3%
Worst 10 year period 5.2% over inflation
25% 20% 15% 10% 5% 0% -5%
Multi Asset Portfolio (10Y Annualised) Inflation + 3% (10Y Annualised)
-10%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Number of rolling periods included in calculations: 10 Year = 348. Accompanying notes are an integral part of this presentation.
14
Long Term Asset Class Returns & Your Business •
Multi-asset portfolios generated an “Excess Return” of 6.7% p.a. over the past 20 years
•
Adopting a longer term horizon maximises the probability of achieving “real returns” above inflation in line with the client’s financial plan (cash flow model)
•
Clients that understand the importance of time will be less reactive to adverse movements in the market resulting in fewer phone calls and meetings to discuss market volatility Value of Initial 250,000 Investment (11.3% growth pa) 8 Asset Class Portfolio
6.2 million
5.3 million
6.7% annual return above cash
0.9 million Cash 5yrs
10yrs
15yrs
20yrs
25yrs
30yrs
Accompanying notes are an integral part of this presentation.
15
STRATEGIC VS
TACTICAL INVESTING
“For the individual investor, the asset allocation decision is by far the most important factor in determining returns” Sandler Report, July 2002
Strategic Asset Allocation as a Portfolio Driver Drivers of Portfolio Return and Risk
Brinson, Hood, Beebower, Journal of Finance (1986) 17
Managers Deliver Performance of the Asset Class Managed Funds tend to rise/fall with the Asset Class 30%
20%
10%
0%
-10%
-20%
-30% 2000
2001
2002
2003
2004
FTSE All Share (UK Equities)
2005
2006
2007
2008
2009
2010
2000-2010 (A)
IMA Active Managed
Source: Bloomberg 18
Strategic Asset Allocation as a Portfolio Driver Percentage of Return Explained by Asset Allocation Research:
Brinson
Brinson
Ibbotson -
Ibbotson -
(1986)
(1991)
Mutual
Pension
Percentage
94%
92%
81%
88%
Active Return
-1.1
-0.1
-0.3
-0.4
•
Asset class performance determines the majority of the return and risk of the portfolio
•
Therefore, ASSET CLASS selection and strategic allocations are the MOST IMPORTANT drivers of multiple asset class portfolio returns and risk
19
Market Timing/Tactical Asset Allocation •
Definition: A market timer attempts to move into and out of different asset classes in order to increase returns i.e. moving out of stocks and into bonds during a bear market
•
David Dreman study of “expert” market strategists going back to 1929
•
Results indicated that the consensus was WRONG 77% of the time
•
Graham and Campbell study of 237 “market timing” newsletters
•
Less than 25% of recommendations were correct (less than the random 50% achievable by throwing darts)
•
No advisors were consistently correct (no persistence)
•
The only consistency found was for the worst advisors who were wrong very often
•
Malcolm Forbes: “The only money made in the investment newsletter business is in the subscription fees – not in the advice”
20
Behavioral Responses: 2008 Financial Crisis The financial crisis of 2008 exhibited a typical behavioral response resulting in investors selling at the market bottom – The MSCI World Index fell 50.4% between October 2007 and February 2009 Net investor flows relative to total return on equities: January 2007 – March 2010
40
60
30 40 20 20 10
0
0
-10 -20 -20 -40 -30
-40
New Net Cash Inflows ($Bn) Total Return on Equities Jan 07
-60 Jan 08
Jan 09
Jan 10
Net new cash flow to equity funds is plotted as a six-month moving average. The total return on equities is measured as the year-over-year change in the MSCI All Country World Daily Total Return Index. 3. Sources: Investment Company Institute and Morgan Stanley Capital International.
21
Extreme Variability of Asset Class Performance Not possible to consistently forecast asset class winners / losers Frequent tactical changes increase cost / risk Ranked Asset Class Returns – Calendar Years (January 1991 to December 2011)
Best
Worst
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 60%
11%
75%
5%
27%
39%
24%
22%
66%
50%
10%
32%
56%
31%
34%
37%
39%
17%
79%
22%
9%
39%
11%
44%
-1%
21%
34%
17%
11%
41%
20%
7%
14%
31%
26%
26%
32%
25%
8%
31%
19%
5%
20%
9%
25%
-2%
20%
29%
15%
8%
29%
16%
3%
11%
29%
17%
16%
17%
11% -10% 26%
17%
-4%
16%
8%
22%
-4%
18%
18%
13%
-6%
26%
11%
2%
9%
24%
12%
12%
10%
8%
-22% 26%
12%
-5%
14%
7%
20%
-4%
14%
14%
11% -11% 25%
5%
-1%
6%
21%
11%
12%
5%
6%
-38% 15%
10%
-7%
13%
4%
19%
-6%
11%
13%
9%
-3%
13%
2%
12%
-7%
10%
-6%
-4% -12% -19% -5%
Global Equities
Global Bonds
-14%
3%
3%
0%
12%
6%
6%
3%
6%
-39% 10%
9%
-7%
8%
-12% -25%
1%
-8% -14% -6%
11%
5%
5%
0%
6%
-45%
3%
5%
-7%
6%
-14% -36% -4% -31% -32% -25%
3%
3%
4%
-15% -16% -53% -4%
5%
-18%
Emerging Equities
Emerging Bonds
Real Estate
Commodities
Hedge Funds
Managed Futures
For example, Emerging Equities were the top performing asset class 1991-1993, then consistently bottom (with the exception of 1999) to 2002. This asset class was again a top performer 2003-2007 followed by a loss of more than 50% in 2008., a gain of 79% in 2009 and -18% in 2011 Accompanying notes are an integral part of this presentation. Returns are in USD. 22
Strategic Asset Allocation & Your Business •
The Strategic Asset Allocation of a portfolio will determine the vast majority of a portfolio’s risk and return characteristics
•
The impact of manager selection and short term market timing or tactical asset allocation changes is likely to be negligible over time and could negatively effect portfolio performance
•
Behavioural responses to bull and bear markets can precipitate poor investment decisions that severely impact returns
•
An important role of a financial planner is to educate clients on the merits of strategic asset allocation helping them “stay the course” during market downturns
23
DIVERSIFICATION: WHY MODERN PORTFOLIO THEORY IS STILL MODERN
“A good portfolio is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies” Harry Markowitz, Portfolio Selection: Efficient Diversification of Investments (1959)
Modern Portfolio Theory •
Harry M. Markowitz developed MPT in 1952 with the publication of a paper : “Portfolio Selection” for which he received the Nobel Laureate in Economics in 1990
•
Markowitz identified that combining investments with less than perfect correlation produced portfolios with higher risk-adjusted returns
•
The key principle was that different investments can be un-correlated to each other over various periods of time - the lower the correlation, the greater the benefit derived
ExpectedReturn Return (%)
Addition of alternative asset classes HF/MF Stocks
Bonds Risk/Volatility (%)
Risk
25
Multi Asset Investing improves risk-adjusted returns Combining asset classes with variable correlations significantly decreases risk Benefits of Modern Portfolio Theory (January 1991 – December 2011) PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3 PORTFOLIO 4 PORTFOLIO 5 PORTFOLIO 6 Global Equities
100%
Current MAP Allocation
60%
50%
40%
30%
25%
12%
Global Fixed Income
30%
30%
30%
30%
25%
20%
Global Real Estate
10%
10%
10%
10%
10%
8%
10%
10%
10%
10%
10%
Emerging Equities
5%
5%
5%
5%
Emerging Bonds
5%
5%
5%
5%
10%
10%
20%
10%
20%
Commodities
Hedge Funds Managed Futures TOTAL
100%
100%
100%
100%
100%
100%
100%
Annualised Return
7.7%
8.7%
8.8%
9.5%
9.5%
9.6%
9.5%
Volatility (Ann Std Deviation)
14%
10%
9%
9%
8%
7%
6%
Maximum Loss
-49%
-35%
-34%
-33%
-30%
-26%
-20%
Avg Top 3 Maximum Losses
-36%
-23%
-21%
-19%
-17%
-15%
-12%
Return/Volatility Ratio
0.5
0.9
1.0
1.1
1.2
1.3
1.5
Return/Maximum Loss Ratio
0.2
0.2
0.3
0.3
0.3
0.4
0.5
Return/Top 3 Max Loss Ratio
0.2
0.4
0.4
0.5
0.6
0.6
0.8
Each asset class is represented by a relevant benchmark index with returns hedged into GBP where relevant. Portfolios are rebalanced annually. See notes for further information. The portfolio asset allocations above are intended to illustrate the impact of diversification across an increasing number of asset classes. Current MAP allocation represents the current asset allocation of Frontier’s multi-asset funds applied to gross asset class returns over the whole period and is not representative of actual fund performance.
Modern Portfolio Theory & Your Business •
A key objective when constructing a portfolio should be to build a globally diversified portfolio of asset classes that exhibit varied correlations
•
The inclusion of alternative asset classes which are exposed to a different set of returns/risks adds large value when combined with equity/bond portfolios
•
Educating clients about the benefits of diversification through the inclusion of additional asset classes results in: More resilient performance across varying market cycles Reducing the volatility of their portfolio (higher risk-adjusted returns) Providing clients and you with greater peace of mind
27
TRUE DIVERSIFIERS: AN
INTRODUCTION TO
HEDGE FUNDS AND
MANAGED FUTURES
“Good quality portfolio diversification is based on assets that are exposed to different risks. The alternative class, through the strategies and instruments it contains, provides this difference” Benefits and Risks of Alternative Investment Strategies, EDHEC-Risk Institute Research (2002)
Annual Performance •
Attractive annual returns, few negative years Annual Returns from 1991 to 2011
30%
20%
10%
0%
-10% Annual Performance of Hedge Funds
-20%
Annual Performance of Managed Futures
Source: Bloomberg, Frontier Investment Management LLP
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-30%
Performance in Negative Equity Markets • •
Hedge funds positive in 44% of FTSE down months Managed Futures positive in 51% of FTSE down months
50%
Hedge Fund Returns 45%
Managed Futures Returns
40% 35% 30% 25% 20% 15% 10% 5% 0% -10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0%
1%
2%
3%
4%
5%
6%
7%
8%
9% 10%
Note: Hedge Fund and Managed Futures returns were hedged in to GBP and adjusted by 1% per annum. See accompanying notes for further information. 30
Multi Asset Performance During Bear Markets Asset Class Performance During Largest Equity Drawdowns Over 31 years Global Equities
Global Real Estate
Comm odities
Hedge Funds
Managed Futures
Nov-07 to Feb-09
-49%
-63%
-44%
-21%
19%
Sep-00 to Mar-03
-44%
25%
3%
4%
34%
Jan-90 to Sep-90
-24%
-16%
58%
21%
31%
Sept-87 to Nov-87
-20%
-15%
3%
-7%
9%
Dec-80 to July-82
-23%
1%
-19%
na
17%
Average:
-32%
-14%
0%
-1%
22%
Period
Returns in USD 31
What is Managed Futures? •
Professional money managers pursuing an alternative investment strategy
•
Industry has been in existence for more than 30 years
•
Managers trade extremely liquid listed futures contracts and currencies across over 80 markets/instruments worldwide on a 24 hour basis
•
Global opportunity set across commodities, currency and financial futures
•
Generally pursue market momentum or trend following strategies using rules based trading strategies. A minority of managers use discretion
•
Considered a separate asset class to Hedge Funds due to unique return profile and low correlation to other asset classes particularly to equities during bear markets
•
Benefits from the technical and behavioural characteristics exhibited in financial markets
Trading Strategies Market Focus
Source: Frontier Investment Management LLP. Estimated market breakdown based on Managed Futures funds that report to industry databases.
Managed Futures Performance vs Global Equities •
Low correlations and positive performance in all bear markets From
To
Global Equities
Managed Futures
Correlation
January-80
November-80
Bullish
25%
45%
-0.10
December-80
July-82
Bearish
-24%
17%
-0.04
August-82
August-87
Bullish
279%
147%
0.04
September-87
November-87
Bearish
-21%
8%
-0.01
December-87
December-89
Bullish
68%
29%
0.20
January-90
September-90
Bearish
-28%
24%
-0.76
October-90
August-00
Bullish
304%
125%
0.01
September-00
March-03
Bearish
-46%
29%
-0.47
April-03
May-06
Bullish
119%
25%
0.53
June-07
February-09
Bearish
-50%
23%
-0.20
March-09
December-10
Bullish
65%
5%
0.26
January-80
December-10
1320%
2491%
-0.03
Source: Bloomberg, Frontier Investment Management LLP
Academic Research: Benefits of Alternative Asset Classes Managed Futures and Hedge Funds: A Match Made in Heaven Harry M. Kat, Cass Business School, November, 2002 •
“We found that allocating to Managed Futures allows investors to achieve a very substantial degree of overall risk reduction at limited costs.”
•
“Overall portfolio standard deviation can be reduced further by combining both hedge funds and managed futures with stocks and bonds.”
Lintner Revisited: The Benefits of Managed Futures 25 Years Later CME Group research paper, 2009 •
“The results are so compelling that the board of any institution…should be forced to articulate in writing their justification in not having a substantial allocation to the liquid alpha space of Managed Futures”
35
No longer perceived as ‘alternative’ •
Rapid acceptance by most investor types
•
More than 7% of UK pension funds invest in hedge funds1, including BT, the BBC, Dorset County Council and many other local authorities
•
Top performing Endowment Funds (e.g. Cambridge, Oxford, Harvard and Yale) have a significant proportion (c. 20%) of their assets in hedge funds and managed futures “Hedge funds … no longer seem so alternative but rather a core component of
a modern and dynamic market place.” Financial Services Authority, 2006
Source: Mercer research, September 2006 36
Benefits of Alternative Asset Classes •
Diversification and portfolio enhancement – Moderate to high returns vs. traditional asset classes – Low volatility relative to other asset classes – Varied correlations to other asset classes – Addition creates overall large improvement in portfolio efficiency
•
Hedge Funds and Managed Futures should be considered a “strategic” allocation
ExpectedReturn Return (%)
Increasing Alternatives allocation
HF/MF Stocks
HF/MF
*
Bonds Risk/Volatility (%) For illustrative purposes only.
Risk
37
Hedge Funds, Managed Futures & Your Business •
Hedge Funds and Managed Futures can be powerful diversification tools when included within an investor’s portfolio as a result of their varied correlations thus enhancing the portfolio’s risk/return profile
•
Alternative asset classes have been readily accepted by all main investor groups and are becoming a significant component of sophisticated portfolios
•
Frontier’s MAP Funds are unique by providing access to Hedge Funds and Managed Futures providing clients with the full benefits of diversification
38
ENDOWMENT STYLE INVESTING: THEORY INTO PRACTICE
“Substantial allocations to alternative assets offer a level of diversification unavailable to investors in traditional assets, allowing the creation of portfolios with superior risk and return characteristics” David F. Swensen, CIO, Yale Endowment Fund The Yale Endowment Report 2010
Endowments: Innovative Multi Asset Portfolios Multi asset portfolios with high historical risk adjusted returns Top 20 Endowments (Assets > $1bn)
Source: NACUBO 2011; Annual reports (various); Frontier Investment Management. Accompanying notes are an integral part of this presentation. 40
Innovative Portfolios & Exceptional Returns •
Innovative portfolios with exposure to multiple asset classes; large allocations to alternatives
•
Significantly higher returns than traditional equity/bond portfolios
•
Allocations to alternative assets have been a key performance driver Returns by Endowment Fund Size to June 2011 Alternative Assets % of Total
10yr Annualised Return
15yr Annualised Return
20yr Annualised Return
0%
4.6%
6.7%
7.8%
Average US Endowment Fund
53%
5.6%
NA
NA
Top 20 US Endowment Funds by Assets
59%
8.0%
NA
NA
Top 5 US Endowment Funds with AUM > $10bn
72%
9.7%
NA
NA
Harvard and Yale (Average)
69%
9.8%
12.6%
13.5%
US Equity/Bond Portfolio (60/40)
41
Emulating Endowment Funds •
If Brinson et al are correct, then Asset Allocation drives portfolio return and risk
•
Therefore, emulating the asset allocation of the Endowments, should generate similar performance
•
Frontier research indicates that an “Indexed” Endowment portfolio achieves excellent results
Relative Performance of Super Endowments to June 2011 10yr Annualised Return
10yr Annualised Volatility
Return/Vol Ratio
Harvard and Yale (Average)
9.8%
-
-
Endowment Index Portfolio GBP
9.1%
9.3%
1.0
UK Equities
4.8%
15.3%
0.3
UK Equity/Bond Portfolio (60/40)
5.8%
8.8%
0.7
IMA Active Managed
3.6%
13.5%
0.3
42
Large Endowments: Stable Asset Allocations •
Harvard and Yale average annual change only 7% pa
•
Most of this small change is due to asset class movement, not tactical decisions Harvard/Yale Average Asset Allocation
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Estimated average asset allocation of the Harvard/Yale is calculated by Frontier. The lagged impact of returns uses Frontier asset benchmark indices and the estimated average asset allocation of the Harvard/Yale. Accompanying notes are an integral part of this presentation. 43
Endowment Style Investing & Your Business •
Harvard and Yale have achieved excellent performance due to their multi-asset approach to investing, their strategic approach to asset allocation, and their significant exposure to alternative asset classes
•
Investors cannot invest like the Endowment funds, however by applying multi-asset principles to an index based portfolio generates risk-adjusted returns that have historically been superior to those of traditional portfolios
•
Taking inspiration from an investment philosophy that is backed by empirical evidence and employed by some of the most successful investors in the world provides sound justification when presenting Frontier’s investment proposition as a core solution to your clients
44
THE IMPORTANCE OF LOW COST INVESTING
“Most investors will find the best way to own equities is through an index fund that charges minimal fees. They are sure to beat the net results (after fees and expenses) delivered by the majority of investment professionals” Warren Buffett
Active versus Index •
Asset Allocation has taught us that the asset class return (index) is the main driver of portfolio return and risk
•
Modern portfolio theory has taught us that combining uncorrelated return streams generates the greatest benefit to portfolios
•
Therefore, additional returns above or below the index from active management (positive or negative) are less important than the above points
•
There are two central questions in the active versus passive (indexing) debate 1. Does the average active fund outperform the index? 2. Is there a reliable method to pick the funds that will outperform in the future?
46
Logic: Average Active Fund Must Underperform •
The total holdings of all active managers is identical to the holdings contained in the index
•
Therefore, gross returns will be identical but net returns very different Active Manager 1
Stock
% Portfolio
Stock X
X%
BP
5.07%
Stock Y
Y%
Active Manager 2 Stock
% Portfolio
Stock X
X%
BP
3.99%
Stock Y
Y%
Aggregate Active Manager Portfolio Stock BHP BILLITON RIO TINTO ROYAL DUTCH SHELL-B GLAXOSMITHKLINE BP
Active Manager 3 Stock Stock X BP
% Portfolio X% 4.62%
Stock Y
Y%
VODAFONE GRP RECKITT BENCK GRP HSBC HLDG BG GROUP BRIT AMER TOBACCO
Market Cap ($bn)
10.57 9.46 8.89 7.32 7.30 7.21 6.06 5.52 5.15 4.70
FTSE All Share Index - Top 10 Holdings
% Portfolio
6.26% 5.60% 5.27% 4.34% 4.33% 4.27% 3.59% 3.27% 3.05% 2.78%
Stock Title BHP BILLITON RIO TINTO ROYAL DUTCH SHELL-B GLAXOSMITHKLINE BP VODAFONE GRP RECKITT BENCK GRP HSBC HLDG BG GROUP BRIT AMER TOBACCO
Market Cap ($bn)
10.57 9.46 8.89 7.32 7.30 7.21 6.06 5.52 5.15 4.70
% Index
6.26% 5.60% 5.27% 4.34% 4.33% 4.27% 3.59% 3.27% 3.05% 2.78%
Active Manager 4 Stock
% Portfolio
Stock X
X%
BP Stock Y
3.66% Y%
47
Logic: Average Active Fund Must Underperform “The Arithmetic of Active Management” (1991), William Sharpe: Nobel Laureate •
The total equity holdings off all active investors is identical to the equity holdings represented in the FTSE All Share Index
•
The total return of all active equity portfolios must be equal to the total market return (e.g. FTSE All Share Index) minus: – Management Fees – Custody and Administration expenses – Trading commissions paid during the year(£ billions) – Bid/Ask spreads incurred during the year – Market impact incurred paid during the year
•
Therefore, the total return on the average indexed investment must always be higher than the total return on the average actively managed investment
•
Why? Both produce the same gross return but the active strategy has higher cost and therefore must underperform a low cost index strategy
Source: Fitzrovia and Legal and General 48
Index Investing Minimises Hidden Cost •
Active management costs are significantly higher than index investing costs
•
Visible “Above Water” Costs
•
•
Management Fees:
•
Significantly higher vs indexing
Total Cost Iceberg
Hidden “Below Water” Costs –
Trading Commissions: Active funds have higher turnover than buy & hold indexing
–
Bid / Ask Spread: Price to buy, another to sell
–
Market Impact Costs: Larger buy/sell orders affect price
49
Active Expenses • Research: “The Cost of Active Investing” (2008) – Kenneth R. French PhD •
US Research conducted between 1980 and 2006 found active investors paid approximately $80bn annually in active management fees over the period
Average US Active Fund Expenses Large Cap
Small Cap and Foreign
Emerging Markets
Expense Ratio
1.3%
1.6%
2.0%
Commissions
0.3%
0.5%
1.0%
Bid-ask Spread
0.3%
1.0%
3.0%
Impact Costs
0.3%
1.0%
3.0%
Total
2.2%
4.1%
9.0%
Increasing
Source: French – “The Cost of Active Investing”, National Bureau of Economic Research, 2008. Bernstein - “The Intelligent Asset Allocator” 50
Active Underperformance Percentage of Active Funds Underperforming The Index
Source: Lipper, MSCI, S&P, The Vanguard Group 51
No Performance Persistence in USA •
Only 3/269 and 1/124 managers remain top quartile after 5 years
•
Manager turnover approximately 20% - therefore unlikely the same manager is running the fund
•
Most funds grow after good performance increasing costs leading to underperformance
Number of 1st Quartile Funds Repeating
Source: Standard and Poor's: Mutual Fund Performance Persistence (2006) 52
Index Investing Quotes “Most investors will find the best way to own equities is through an index fund that charges minimal fees. They are sure to beat the net results (after fees and expenses) delivered by the majority of investment professionals.” Warren Buffett, 1997
“Most people think they can find managers who can outperform … I would say that 85 to 90 percent of [active] managers fail to match their benchmarks.” Jack Meyer, former President, Harvard University Endowment Fund, 2004
“Most of the mutual fund investments I have are in index funds.” Charles Schwab, pioneer of online brokerage, 1998
53
The Importance of Low Cost Investing & Your Business •
Asset allocation is the main driver of portfolio returns and risk – not manager selection
•
An investor must therefore build a portfolio with an appropriate asset allocation for their risk profile
•
We have seen that index returns with no active management have provided more return than required by most clients to achieve their objectives
•
Logic dictates that the average fund cannot beat the index
•
There is a low probability of consistently selecting fund managers that outperform the index
•
Talented fund managers tend to leave the long only world and migrate to hedge funds due to the higher compensation structure
•
Educating clients about the Arithmetic of Active Asset Management and the Total Cost Iceberg makes the provision of a core passive investment solution a logical step when creating their risk rated portfolio 54
FRONTIER INVESTMENT SOLUTIONS
Quote Goes Here
Expanding the Frontier of Investment Opportunities
Frontier Investment Solutions •
Your business can access Frontier’s Multi-Asset Funds in 3 ways: 1. Directly access Frontier’s Multi-Asset Funds on one of the platform providers below 2. Frontier Select Portfolios™ - 5 unique platform-based model portfolios that combine Frontier’s multi-asset fund with a selection of leading low cost fund providers 3. Use our Portfolio Analyser Tool™ to build risk rated portfolios that incorporate Frontier as an integrated part of your investment solution
56
Next Steps: Working with Frontier •
Use our Portfolio Analyser Tool™ to build risk rated portfolios that incorporate Frontier as an integrated part of your investment solution
57
Frontier Multi Asset Funds •
The IFDS Frontier Multi Asset Fund range provides investors with the returns of eight asset classes, both traditional and alternative, in a single investment at low cost
•
The Fund range includes a Balanced and Cautious Fund with 0.75% AMC
•
Strategic Asset Allocation, Low Cost Indexation and Annual Rebalancing Quantitative Analysis
University Endowments
Frontier Experience
2012 Asset Allocation IFDS Frontier MAP Balanced Fund
IFDS Frontier MAP Cautious Fund
58
One Fund … Eight Asset Classes Global Equities
Global Bonds
Emerging Bonds
MSCI World Index
Barclays Capital Global Aggregate Bond Index 35 Countries, 12105 Bonds
JP Morgan Emerging Bond Index
24 Countries, 1649 Equities
Emerging Equities
33 Countries, 145 Bonds
Global Real Estate
25 Countries, 854 Equities
Frontier MultiAsset Fund
27 Countries, 238 Securities
Hedge Funds
Commodities
Managed Futures
HFRI Fund of Funds Index
S&P GSCI Light Energy Index
NewEdge CTA Index
10 Strategies, 800+ Funds
5 Sectors, 24 Commodities
20 Largest CTA Funds
MSCI Emerging Market Index
Dow Jones Real Estate Index
59
IFDS Frontier MAP Balanced Summary •
The IFDS Frontier MAP Balanced fund launched April 2009 and has risen 28% to date
•
Fully FSA Regulated, Daily Dealing UK OEIC, 0.75% Annual Management Charge
•
Investment Objective: Deliver asset class index returns at ultra-low cost
•
One fund, 8 asset classes, 15,000+ securities*, ideal core investment
•
Disciplined asset allocation with rebalancing IFDS Frontier MAP Balanced Fund Monthly Returns Jan
Feb
Mar
2009
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
YTD
4.02%
4.87%
0.89%
2.11%
2.48%
1.50%
0.66%
0.99%
0.69%
19.66%
2010
-2.58%
0.44%
3.53%
0.67%
-4.03%
-0.33%
2.66%
0.24%
3.28%
1.86%
-1.05%
2.83%
7.45%
2011
0.07%
1.13%
0.10%
1.97%
-1.70%
-1.22%
0.68%
-2.42%
-3.41%
2.94%
-3.32%
1.44%
-3.91%
2012
2.27%
2.22%
-0.89%
0.13%
3.75%
Frontier Select Portfolios •
Frontier Select Portfolios™ - 5 unique platform-based model portfolios that combine Frontier’s multi-asset fund with a selection of leading fund providers
61
Frontier Select Portfolios Risk Grade
Asset Allocation
Cost
Historical Performance
Frontier Select
Rating
GE
GB
EE
EB
RE
CO
HF
MF
AMC
Ann. Return
Ann. Risk
Max Loss
Frontier Select 1
3
5%
67%
2%
5%
5%
4%
5%
8%
0.58%
3.7%
4.5%
-2.3%
Frontier Select 2
4
8%
50%
3%
9%
8%
7%
7%
9%
0.62%
5.4%
5.7%
-3.7%
Frontier Select 3
5
15%
37%
5%
8%
9%
9%
8%
9%
0.63%
6.7%
7.5%
-6.4%
Frontier Select 4
6
18%
25%
10%
8%
12%
10%
9%
9%
0.65%
8.2%
9.4%
-8.9%
Frontier Select 5
7
20%
10%
16%
9%
14%
11%
10%
10%
0.68%
10.0%
FSP 1
Global Equities
FSP 2
Global Bonds
Emerging Equities
FSP 4
FSP 3
Emerging Bonds
Real Estate
Commodities
11.3% -11.3%
FSP 5
Hedge Funds
Managed Futures
62
Frontier Select Portfolios •
5 Model Portfolios tailored to meet a range of client risk profiles
•
Multi-Manager, Multi-Strategy, Multi-Asset
•
Up to 20 underlying holdings centred around Frontier’s established Multi-Asset Funds
•
Flat portfolio management fee of 10bps 10.0%
FSP 5
9.0% 8.0%
FSP 4
7.0% 6.0%
FSP 3
5.0%
FSP 2 4.0% 3.0% 2.0% 4.0%
FSP 1 5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0% 63
FRONTIER & YOUR BUSINESS
Quote Goes Here
Expanding the Frontier of Investment Opportunities
Integrating Frontier’s Investment Philosophy into Your Business •
•
Adoption of this investment philosophy transforms the Client/Financial Planner relationship:
“Evidence based” approach backed by empirical data makes it logical and straightforward for clients to understand
Client review meetings are no longer about short term market/portfolio performance
You and your clients are much less stressed during periods of market crisis
Less “re-active” behaviour by clients means less work for you
Clients assets are more sticky
Cash flow modelling is backed by empirical evidence that increases client confidence
Your role as an “Educator” is perceived as a large value added by the client
End result is satisfied clients and a more profitable business
65
Adapting to RDR: Frontier and the MOT •
The Frontier funds save approximately 2% p.a. in fees/costs vs an active investment
•
RDR means providing financial planning advice and charging a financial planning fee
•
MOT: Moment of Truth – The moment when you explain your value proposition and fee to the client and ask for commitment
•
Integrating Frontier’s Funds as a core investment solution saves the client MORE than your annual financial planning fee
•
Combining this client saving with Frontier’s investment philosophy will help bolster your value proposition ensuring success for your financial planning business Value of Initial 250,000 Investment (10% growth pa) Low Cost Portfolio
4.4 million
2.2 million
2.3% Annual Savings
2.2 million
High Cost Portfolio 5yrs 10yrs 15yrs 20yrs 25yrs 30yrs Frontier total cost savings based on Benchmark Asset Allocation weights and published research on cost savings across asset classes.
66
Our Value Proposition Frontier Value Proposition Core Multi-Asset Investment Solution Endowment Style: Alternative Assets
• • • •
Low Cost Indexation
Strategic Partner Business Services: Help define investment philosophy Formulate investment policy statement Frontier Speaker at your client events Develop professional connections
Financial Planning Ltd
Platforms / Wraps
Risk Rated Investment Solutions
Asset Flows 67
Our Client’s Feedback "The Frontier MAP funds make available an extremely sophisticated investment solution in a very straightforward and cost effective manner, providing clients with a much simpler experience with low total costs of ownership" Andrew Brook Dobson, Director, Brook-Dobson Brear Ltd
“It took me time to properly understand the Frontier proposition, now that I do, it has transformed my approach to investment planning. When recommending Frontier, I have complete confidence that I'm doing the right thing for my clients” Mike Dobson, Managing Director, Blue River Wealth Management
"The investment seminar run by Frontier really gave me a fresh perspective on the investment management industry and motivated me to redesign my investment proposition for my clients. It has been a resounding success“ Derek Stewart, Managing Director, Strategic Asset Managers Ltd
“Every IFA should make a point of hearing Mike Azlen’s investment seminar ... it will be time well spent and prove invaluable in helping shape one’s own Investment solution” Mark Pittaccio, Investment Director, In Partnership
68
KEEP CALM AND
CARRY ON
Expanding the Frontier of Investment Opportunities
Contact Details
Frontier Investment Management Berkeley Square House Berkeley Square, Mayfair London, W1J 6DB United Kingdom t: f: w: e:
+44 (0) 207 317 6900 +44 (0) 207 317 6901 www.frontierim.com
[email protected]
Andrew Cracknell Partner, Head of Intermediary Business
t: +44 (0) 152 783 9747 m: +44 (0) 781 0484 023 e:
[email protected]
Bruce Gascoine Business Development Manager
m: +44 (0) 776 0263 666 e:
[email protected]
Conor O’Donnell Relationship Manager
t: +44 (0) 207 317 6923 e:
[email protected]
Jill Laidlaw Business Development Manager
m: +44 (0) 7825 198 667 e:
[email protected]
70
Notes & Disclaimer 1.
2. 3. 4. 5.
6.
7.
8. 9.
The Frontier Investment Management (“Frontier”) Multi Asset Platform Funds were invested on September 2nd, 2005. Prior data is pro-forma and has been calculated from the original asset allocation weights applied to the original Indices and rebalanced annually at December 31 each year. Pro-forma performance is net of 50 basis points per annum to take into account index replication costs, currency hedging and annual rebalancing costs. Performance data from September 2005 to October 2006 inclusive is based on actual fund NAVs restated to reflect current fee levels. The Plus fund was invested in July 2006. While Frontier has developed methods of preparing pro-forma returns that it believes to be reasonable, fair and complete, there can be no assurances that the results derived from such methods are correct, accurate or reliable. Accordingly, the informational value of pro-forma returns is limited. Non-USD index returns have been hedged into USD except for Emerging Market Equities. All returns are USD based unless otherwise stated. Frontier annual cost savings are based on current asset allocation weights and published research on the total costs of active investing vs index investing across asset classes, with management fee savings based on fund of funds investing. Each asset class is represented by a relevant market index. UK Equities are represented by the FTSE All Share Total Return Index. UK Bonds are represented by the Citigroup 10-year Gilt Benchmark Index. US Equities are represented by the Standard & Poor’s 500 Total Return Index. US Bonds are represented by the Citigroup 10year Treasury Benchmark Index. European Equities are represented by the MSCI Europe ex UK Total Return Index. European Bonds are represented by the Citigroup 10year European Benchmark Index. Commodities are represented by the S&P GSCI Index until April 2007 and the S&P GSCI Light Energy Index thereafter. Hedge Funds are represented by the HFR Fund of Funds index (minus 1% survivorship bias) and Managed Futures by the CISDM Asset Weighted Index (minus 1% survivorship bias). Cash returns are UK 1 Month Libor minus 1% per annum. Fund performance persistence data is sourced from S&P Mutual Fund Performance Scorecard (2006) and covers those firms that were top quartile over five years to June 2001 (393 funds, comprising 269 Large cap US equity and 124 small cap US equity). Over the following five years, only 3 large cap funds and one small cap fund maintained a top quartile performance ranking. The Frontier asset allocation process combines multiple inputs including reference to major US University endowments but also includes quantitative analysis and the inputs of the Frontier Asset Allocation Committee. Frontier does not expect similar returns to those of the endowments in the MAP Conservative Fund due to the lack of private equity exposure and a significantly lower volatility target than most endowments. Endowment data is sourced from NACUBO and annual reports; calculations by Frontier Investment Management. Fund data is sourced from Bloomberg and assumes the reinvestment of any dividends issued at the time of their issuance. Bloomberg data has not been checked or verified by Frontier Investment Management
DISCLAIMER This document is issued for information purposes only by Frontier Investment Management LLP (“Frontier”) in respect of the IFDS Frontier Multi Asset Fund (“the Fund”). Frontier is authorized and regulated by the Financial Services Authority (“FSA”). This document does not constitute an offer by Frontier to enter into any contractual/agreement nor is it a solicitation to buy or sell any investment. Nothing in this document should be deemed to constitute the provision of investment, financial or other professional advice in any way. Potential investors are directed to the read the Fund prospectus and should always consult with their professional advisors. The contents of this document are based upon sources of information believed to be reliable. Frontier has taken reasonable care to ensure the information stated is factually true. However, Frontier make no representation, guarantee or warranty that it is wholly accurate and complete. PAST PERFORMANCE IS NOT NECESSARILY A GUIDE TO FUTURE PERFORMANCE.
71