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Baring AssetManagement Limited155 Bishopsgate, London EC2M 3XY
Tel +44 (0)20 7628 6000Fax +44 (0)20 7638 7928
www.barings.com
Authorised and regulated by theFinancial Services Authority
Andrew Cole
Why Top Down Asset Allocation Matters
New Model Advisers Conference
January 2010
2
Barings Multi Asset Investing
Barings have been running Multi Asset Investment Solutions since 2000
£5bn aum, across Multi Asset Portfolios
Launched Multi Asset Fund in March 2009 for Retail Investors
Fund Manager Andrew Cole has 29 years of Investment experience
3
Strategic Asset Allocation
“Investing should be dull . . . it shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas . . . it is not easy to get rich in Las Vegas . . . or at the local Merrill Lynch office.”
Paul Samuelson – Nobel Prize Laureate (Economics)
“The key is not to predict the future, but to be prepared for it.”
Pericles, 495-429BC
“It’s not what we don’t know that hurts us; it’s what we know for sure that just ain’t so.”
Mark Twain – Nobel Prize Laureate (Literature)
Source: Brainyquote.com – 11th January 2010
4
Can managers add value?
Information Ratio of Selected Asset Classes - 10 years to 30th September 2009
Over the long-run, even fourth quartile managers have added value in Asset Allocation
Source: Mercers MPA US$ universe, as at 30th November 2009
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
US Fixed
Euro Fixed
UK Fixed
Global Fixed
Asset Allocation
US Equity
Euro Equity
UK Equity
Global EM
Global Equity
1st Quartile Median 4th Quartile
5
Why bother with asset allocation? Equities outperform
Source: Barclays Equity Gilt Study - 2009
1980
UK Equity Annual Returns Gilt Annual Returns
-10
10
30
50
1984 1988 1992 1996 2000
%
6
-40
-20
0
20
40
60
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
UK Equity Annual Returns
%
Gilt Annual Returns
They do, but it’s a bumpier road than you might desire
149
-50
Source: Barclays Equity Gilt Study - 2009
7
Lowering the risk profile
Source: Barclays Equity Gilt Study 2009, 1899 – 2008* Cumulative ~ Annual
Equity like returns with less risk
UK equity returns % (RHS)~UK Equity Nominal TR Index (LHS)*
UK Cash + 4% Index (LHS)*UK Cost of Living + 5% Index (LHS)*
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1899
1903
1907
1911
1915
1919
1923
1927
1931
1935
1939
1943
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
-60
-40
-20
0
20
40
60
80
100
120
140
8
Strategic Asset AllocationForecasting Long-Term returns
We know that we need return and inflation assumptions.
- What drives asset market returns in the medium-term?
Macroeconomics drive markets
Overlaying risk environments
Big questions that will make or break any long-term savings plan
- What do we do with these assumptions once they are made?
Combining assets in a Strategic Asset Allocation
NB: Fragility of assumptions
9
Macroeconomics Drive Markets
IMF 1 Yr Nominal GDP Growth Forecast - %
Nom
inal
12m
th F
wd
10yr
Bon
d Y
ield
- %
Japan
EU Canada
UKUS
AustraliaR
2
= 0.66
0
2
4
6
7
5
3
1
1.5 3.51.0 2.50.0 2.0 4.00.5 3.0
Nom
inal
Ann
ualis
ed E
quity
Mar
ket
Ret
urn
- %
R2
= 0.37
0 2 4 6 8 10-25
-20
-15
-10
-5
0
5
10
15
20
25
Nominal Annualised GDP Growth-%
Nominal GDP Growth and Nominal Equity Market Returns, MSCI AC Members (2005-2009)
IMF 1 Yr Nominal GDP Forecast vs 12mth Forward G7 Bond Yields
Source: MSCI, IMF, Factset, Bloomberg & Barings, as at 10 th January 2010
10
Forecasting Long-Term Returns using Macroeconomics
Time to make some more assumptions…
Cash Rates
- Where will inflation be on average?
- What is the long-term productivity growth trend for an economy?
- Where is the ‘neutral rate’ for an economy?
Bond Market Returns
- Liquidity premia
- Getting from here to there…
Equity Market Returns
- Dividend yields, and long-term growth prospects
Currency Returns
- Long-term currency forecasting
11
Expected Returns/Historic Risk
10 year asset class forecasts (GBP)
UK Index Linked
Emerging Asia Equities
Taiwan Equities
LATAM Equities
Emerging Equities
Hong Kong Equities
Pacific ex Japan
Singapore Equities
Japan Equities
Europe Equities
Australian Equities
Property
Fund of Hedge Funds
US Equities
UK EquitiesUK Private Equity
US Bonds
EM Bonds
UK Gilts
UK 3 Mth Cash
0
2
4
6
8
10
12
14
0 5 10 15 20 25 30 35 40
Ret
urn
(% p
er a
nnum
)
Risk (% per annum)
Source: Barings as at 1st January 2009* Risk (standard deviation of annualised returns)
12
Strategic Asset Allocation
UK Equity35%
Intnl Equity19%
UK Fixed Income30%
Property8%
Alternatives8%
* Source: Barings, for Baring Multi Asset Fund. As at 28 th April 2009** Risk= standard deviation of annualised return
Predicted Risk** 10.25%
A wardrobe for all Seasons!
13
Tactical Asset Allocation
“Wide diversification is only required when
Investors do not understand what they are doing.”
Warren Buffett
Would you wear all the clothes in your wardrobe at the same time?
Source: Brainyquote.com – 11th January 2010
14
Why Dynamic Asset Allocation is CriticalBest and worst performing asset classes
2005 2006 2007 2008
Emerging Equities 50.5 European Equities 19.7 Emerging Equities 37.4 Overseas Bonds 58.1
Japanese Equities 39.6 Property 18.1 Gold Bullion 29.6 Gold Bullion 42.8
Asia Ex Japan 35.0 UK Equities 16.8 Asia Ex Japan 29.0 UK Bonds 12.8
Gold Bullion 30.8 Emerging Equities 16.3 European Equities 15.3 Cash 4.7
Overseas Bonds 4.3 Overseas Bonds -7.5 Japanese Equities -6.5 Emerging Equities -35.2
Cash 4.6 Japanese Equities -7.4 Property -5.5 Asia Ex Japan -31.3
UK Bonds 7.9 UK Bonds 0.7 Corporate Bonds 1.8 UK Equities -29.9
Corporate Bonds 8.7 Corporate Bonds 0.8 Hedge Funds 4.5 European Equities -24.4
The right asset class at the right time is key
Source: Barings as at 31st May 2009
15
Recession Boom
Macro economic anomalies
Direct Stock
PassiveDerivative
Active
Investment innovation /
response
UK Equities
Index Linked
F of Hedge Funds
Emerging Equities
Market valuation anomalies
Risk ManagedPORTFOLIO
Sources of asset allocation ideas
Low High
Risk appetite
16
What risks are you being compensated for?
UK 10yr Real Yield
UK 10yr Breakeven
Inflation
UK Credit UK ERP Equity Volatility Bond Volatility
Max Current 10yr Average Min
Source: Bloomberg, ML,MSCI, S&P, Barings, as at 11 th November 2009
17
More MacroEarnings and GDP Growth
12mth Change in MSCI World Earnings IMF ForecastsGlobal Growth
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
Dec-88 Dec-92 Dec-96 Dec-00 Dec-04 Dec-08 Dec-12 Dec-16
%
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0 %
Source: MSCI, IMF, Barings as at 6th January 2010
18
Equity Risk Premium (ERP) United Kingdom
31st December 2007 31st March 2009 28th December 2009
Consensus 2 year Earnings Estimate
Source: MSCI, Factset, DataStream, Barings as at 8 th November 2009
No.
of
Obs
erva
tion
- %
0 2.5 5 7.5 10 12.5 15 17.5 20 22.5
2.12.73.03.33.63.94.24.54.85.15.45.76.06.36.66.97.27.57.88.0
Level of ERP
%
-2
0
2
4
6
8
10
12
14
-60.0-40.0-20.00.020.040.060.0%
19
ERP United States
Source: MSCI, Factset, DataStream, Barings as at 8 th November 2009
31st December 2007 31st March 2009 28th December 2009
Consensus 2 year Earnings Estimate
-2
0
2
4
6
8
10
-60.0-40.0-20.00.020.040.060.0
%
%0 2.5 5 7.5 10 12.5 15 17.5
1.01.51.72.02.22.52.72.93.23.43.73.94.24.44.64.95.15.45.65.9
No.
of
Obs
erva
tion
- %
Level of ERP
20
Changes in asset allocation since inceptionBaring Dynamic Asset Allocation Fund
Source: Barings, as at 31st December 2009, Gross ExposureInception date: 16th January 2007
0
20
40
60
80
100
31-Jan-07
31-Mar-07
30-Jun-07
31-Sep-07
31-Dec-07
31-Mar-08
30-Jun-08
30-Sep-08
31-Dec-08
31-Mar-09
30-Jun-09
30-Sep-09
31-Dec-09
UK Equity Overseas Equity Cash/Other Alternatives UK Bonds Overseas Bonds Property
%
21
Baring Dynamic Asset Allocation FundAnnualised Performance since inception: +7.5% p.a.
Source: Barings as at 31st December 2009, net of feesFund inception date: 16th January 2007
Past performance is not a guide to future performance
60
70
80
90
100
110
120
130
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
Dynamic Asset Allocation Fund FTSE All Share LIBOR +4% Objective FTSE World
22
Current Portfolio & Themes (as at 31st December 2009)
Source: Barings as at 31st December 2009Risk = standard deviation of annualised return from asset allocation
Predicted Risk* 8.36%
Current portfolio themes:
Value in UK Equities
Inflation protection
Gold, Index Linked, Property
Asia Growth
Less value in credit
Sterling to weaken
23
Dynamic Asset Allocation Fund Track Record
Fund Inception date: 16th January 2007. Chart shows net returns for the Fund, the IMA Cautious Managed sector and the MSCI World Index from earliest available data on 19th Jan 2007 to 31st December 2009. All in sterling terms.
-40
-30
-20
-10
0
10
20
30
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Dec-09
Baring Dyn Asset Alloc I GBP IMA OE Cautious Managed MSCI World Net Divs
Past performance is not a guide to future performance
24
Performance Chart of Multi Asset Fund
Past performance is not a guide to future performance
%
Nov 09
A
Apr 09 May 09 Jun 09 Jul 09 Sep 09Aug 09
20
15
10
5
0
-5
25
Oct 09 Dec 09
B
A – Baring – Multi Asset TR in GB (22.80%) B – UT Cautious Managed TR in GB (22.17%)
Source: Financial Express as at 31.12.09, Net returns, Bid To Bid.Fund inception date: 16th January 2007
25
Barings Multi Asset Fund
Barings have been running Multi Asset Investment Solutions since 2000
Launched Multi Asset Fund in March 2009
Cautious Managed Sector
Available via all major platforms
26
Biographies
Andrew is a member of the Targeted Solutions Portfolio Construction Group responsible for the management of multi asset portfolios. He is lead manager for the Baring Multi-Asset Fund and for a number of segregated portfolios. Andrew was appointed to the Strategic Policy Group (SPG), the company’s global macro research and asset allocation team in 2005. He is chair of the SPG Risk Sub Group and is a member of the Economic Group. Both groups provide key inputs to the debate of the monthly SPG meetings. Andrew joined the Fixed Income department at Baring Asset Management in 1986. He was appointed a Director in 1994 and joined the Multi-Asset portfolio team in 1995.
Andrew Cole
Investment Manager, Baring Multi-Asset Fund
Location: LondonInvestment Experience: 29 Years
27
Important Information
Compliance (London): 11h January 2010
For Professional Investors/Advisers only. This document is approved and issued by Baring Asset Management Limited and in jurisdictions other than the UK it is provided by the appropriate Baring Asset Management company/affiliate whose name(s) and contact details are specified herein. The information in this document does not constitute investment, tax, legal or other advice or recommendation. It is not an invitation to subscribe and is for information only. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance is not a guide to future performance. Quoted yields are not guaranteed. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact on income and capital value. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth We reasonably believe that the information contained herein from 3rd party sources, as quoted, is accurate as at the date of publication. The information and any opinions expressed herein may change at any time. Companies and employees of the Baring Asset Management group may hold positions in the investment(s) concerned. This document may include internal portfolio construction guidelines. As guidelines the fund is not required to and may not always be within these limits. These guidelines are subject to change without prior notice and are provided for information purposes only.This document must not be used, or relied on, for purposes of any investment decisions. Before investing in any product, we recommend that appropriate financial advice should be sought and all relevant documents relating to the product, such as reports and accounts and prospectus,( which specify the particular risks associated with a product, together with any specific restrictions applying and the basis of dealing) should be read. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available in respect to any Offshore Fund. Research MaterialBaring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions expressed herein may change at anytime.For data sourced from Morningstar: © Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.Version 03/2009
