Quarterly Client BRIEFING...2015/10/07 · page 1 Prerequisite Capital Management Pty Ltd (ABN 27 141 060 933) is an Authorised Representative of AIW Dealer Services Pty Ltd (ABN

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Prerequisite Capital Management Pty Ltd (ABN 27 141 060 933) is an Authorised

Representative of AIW Dealer Services Pty Ltd (ABN 59 153 322 420), AFSL 414256.

www.prerequisite.com.au

7th Oct 2015 // Quarterly Client BRIEFING

Dear Valued Client,

– A Global Regime Change? –

Regime (definition): ‘a system or ordered way of doing things’.

Global money flows, or capital flows, have a tendency to settle into ‘regimes’ or

a settled order of things for multi-year (sometimes multi-decade) periods.

Each ‘regime’ tends to have a particular set of investments that do really well,

and they will continue to do well whilst-ever the ‘regime’ remains intact.

When a regime changes, however, those investments that typically did well

during the regime will tend to reverse and do quite poorly as the old regime falls

away and a new regime is established (with new investments to do well). The old-

regime investments have usually been taken to extremes that could never have

been sustained unless the ‘regime’ of capital flows underpinning it was able to be

sustained.

But one of the surer precepts of global capital flows is that as sure as day

follows night, capital that flows into a country must one day flow out of a country (or

be destroyed and written-off).

Such a multi-decade regime-shift is what we believe we are potentially

witnessing today.

Institute of International Finance: “We now expect that net capital flows

to emerging markets in 2015 will be negative for the first time since 1988.” ...as reported in The Guardian, 2nd October 2015.

General Information: This document has been prepared for the general information of clients only and as

such does not constitute direct or specific advice to anyone. Should you require more information, please

contact your Prerequisite Advisor. Past performance is not necessarily indicative of future performance.

See page 5 for Portfolio Results

The red line

falling below zero

indicates Net

Capital Outflows

http://www.prerequisite.com.au/

page 2

Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064


Literally $trillions have flowed into the Emerging Markets over the last few

decades, with one of the central dynamics being the rise of China. (For a multi-

decade understanding of China, we recommend you review our analysis published

April 2015 found here: www.prerequisite.com.au/research)

Here is an updated chart from our last Quarterly Client BRIEFING, showing

rolling 9 month expansion (or contraction if negative reading) in China’s total

foreign assets at their central bank – further indicating a multi-decade reversal of

capital flow dynamics...

When we step back to take a broader perspective, we can see that even the

cyclical regime of the last 7 years is unwinding. Just in the last 12 months we’ve

witnessed the following events which collectively give rise to the probability that

we’ve seen an ‘inflection point’ and therefore a decisive regime shift.

Falling oil & commodities

Strengthening USD

Collapsing USD-pegs and Emerging market instability

Escalating credit spreads

Increasing volatility across all asset classes

Falling equity participation measures ‘breadth’ across most major developed market economies

Collapsing Chinese share-market and renewed Yuan devaluations

Reversal of Chinese FX reserve accumulation

Escalating geopolitical instability with generally ‘competitive’ dynamics (rather than cooperative) defining major country interactions.

Etc The above suggests the reflationary ‘asset-bid & global search for yield’

liquidity regime that has defined the 2009 to 2014 periods is likely beginning

to ‘unwind’.

Proxy of the magnitude of China’s

artificial expansionary policies,

(Now uncontrollably kicking into

reverse)

Long-term price of Australia’s

non-rural commodities

Iron Ore Price Index

http://www.prerequisite.com.au/research

page 3



When it comes to the US share market, the increased volatility over the last

three months appears to have been presaged by an array of dynamics that may

suggest further volatility is highly likely. Two of the symptomatic dynamics are

presented here:

(1) A decisive shift in monetary policy perceptions (& a shift in liquidity) –

as symptomatically evidenced by changes in Fed Fund COT Commercial

net positioning...

(2) A break-down in the relative out-performance of the ‘buyback’

narrative, suggesting another one of the share market’s big supports of the

last 7 years is being taken away...

S&P 500 (US Share Market)

Commercial Net Positioning

in Fed Funds Futures...

S&P 500 (US Share Market)

Proxy of Share ‘Buyback’ Narrative

(Ratio of Buyback ETF to S&P500... a rising line means

that ‘buybacks’ are generally being rewarded by the

market, a falling line means that they are being punished)

page 4



All of the above paints a picture that we are witnessing both a multi-decade

regime change in global capital flows AND a cyclical shift in liquidity dynamics.

What does this all mean for our PCM Portfolios?

In one word, it means ‘opportunity’.

Already with this increased volatility over the last three months we have seen

the Australian Share market fall by -6.40% (S&P/ASX 200 total return)... whilst

during the same timeframe our two portfolios, PCM Core & PCM Strategic

Opportunities, have risen by +1.08% and +5.34% respectively.

Although we have relatively high cash levels at the moment in both portfolios,

the changes occurring in worldwide currency, bond, commodity and equity markets

are presenting us with an awesome array of investment opportunities that we look

forward to investing in throughout the seasons to come.

As such, we have a veritable ‘shopping list’ of investments we are patiently

monitoring, waiting for the conditions and trends to ripen such that we can

decisively re-allocate away from cash.

“Patience is power. Patience is not an absence of action; rather it is timing;

it waits on the right time to act, for the right principles and in the right way.” ...Fulton J. Sheen (1895-1969)

Every 5 to 10 years, economies tend to go through their cycles, and on the

downswing when capital flows are decisively re-organised (old regimes are shifting

into new regimes) if you can retain your money and portfolios broadly intact –

having cash and liquidity when others don’t – inevitably you are well positioned as

the economic reorganisation unfolds to be able to buy high quality assets and

investments at great valuations, positioning yourself brilliantly for the next upswing

in the cycle.

It is into these sorts of ‘reorganisation’ conditions that we believe the

probabilities suggest we are continuing into – and as such our portfolios are quite

defensively positioned – but as volatility is increasing in the world, our shopping list

of potentially high-quality investments is growing.

We most definitely live in interesting times.

On the next page we provide our PCM Investment Portfolio results to date.

We appreciate that not everyone will look at some of the data and graphs

presented and recognise the fullness of the context, risks and opportunities of what

they are portraying. Should you wish to have Darren walk you through any of this

presentation or have any questions about this report, your portfolios, or your

financial situation generally, please feel free to give Darren Brind a call (0498 671

505) or email, [email protected]. Additionally, feel free to pass on this

report to friends and family who might appreciate another perspective.

Sincerely,

The Directors, PCM.

mailto:[email protected]

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0%

20%

40%

60%

80%

100%

Jul-

13

Au

g-1

3Se

p-1

3O

ct-1

3N

ov-

13

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4M

ay-1

4Ju

n-1

4Ju

l-1

4A

ug-

14

Sep

-14

Oct

-14

No

v-1

4D

ec-1

4Ja

n-1

5Fe

b-1

5M

ar-1

5A

pr-

15

May

-15

Jun

-15

Jul-

15

Au

g-1

5Se

p-1

5

Allocation Mix: PCM 60/40 PortfolioCommodities

Equities - International

Equities - Domestic

Precious Metals

Bonds - Intl. (Sovereign)

Bonds - Aust. (Sovereign)

Cash & T-Bills

$480,000

$500,000

$520,000

$540,000

$560,000

$580,000

$600,000

$620,000

$640,000

PCM Portfolios on Linear (growth of a typical $500,000 account)

CORE Portfolio

Strategic OpportunitiesPortfolio

PCM 60/40 Portfolio (60% Core,40% Strategic)

S&P/ASX 200 (Total Return)

Daily, Since inception to 30th September 2015

-3.0%

-1.0%

1.0%

3.0%

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Monthly Return Profile: PCM 60/40 Portfolio

% Positive Months: 81%

To 30th September 2015 - Net of Investment Management Fees -- Inception date from 31st July 2013 for comparative purposes. Correlation to Beta to Average % Positive

1 Mth 3 Mth 6 Mth 1 Yr 2 Yr (p.a.) Inception Cumulative Return (p.a.) Volatility (p.a.) S&P/ASX 200 (TR) S&P/ASX 200 (TR) Cash Holding % Monthly Returns

PCM 60/40 Portfolios (60% Core, 40% Strategic Opportunities)

0.48% 2.77% -0.70% 11.30% 9.58% 18.66% 8.21% 5.36% 0.33 0.14 32% 81%

Conventional 60/40 Portfolio (60% S&P/ASX200, 40% UBS Treasuries Index)

-1.49% -2.88% -7.72% 2.75% 4.24% 11.72% 5.25% 7.94% 0.99 0.63 0% 65%

PCM Over(Under)-Performance 1.97% 5.65% 7.02% 8.55% 5.34% 6.94% 2.97% 2.58% 0.66 0.49 32% 0.15

PCM Core Portfolio 0.29% 1.08% -1.89% 7.70% 6.63% 13.09% 5.84% 4.62% 0.54 0.20 28% 73%

PCM Strategic Opportunities Portfolio 0.78% 5.34% 1.06% 16.82% 14.07% 27.31% 11.79% 7.46% 0.09 0.05 37% 77%

RBA Cash Interest Rate 0.17% 0.50% 1.03% 2.25% 2.39% 5.30% 2.41% 0.06% 0.32 0.00 100% 100%

S&P/ASX 200 (Total Return) -2.76% -6.40% -12.52% -0.49% 2.67% 10.42% 4.68% 12.48% 1.00 1.00 0% 62%

Aust. iShares UBS Treasury ETF (Total Return) 0.42% 2.34% -0.37% 7.19% 6.20% 12.68% 5.66% 2.96% 0.31 0.07 0% 73%

Since Inception Annualised

Portfolio Performance:


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Past performance is no guarantee of future returns. Different accounts may produce better or worse results due to different individual account fee structures or security compositions. Prerequisite Capital Management Pty Ltd ABN 27 141 060 933, is an Authorised Representative of AIW Dealer Services Pty Ltd. ABN 59 153 322 420, an Australian Financial Services Licensee with its registered office at Level 1, 155 Baroona Road Rosalie Qld 4064

A

B

= A – B

The degree to which returns are related to the Share Market – i.e. a correlation of 1.00 means returns will move in lock-step with

equities, -1.00 means it moves in an opposite manner (so if shares

go up the returns will go down), close to 0.00 means that there is no

relationship between returns and the direction of the share market.

Similar but slightly different to

correlation, close to 0.00

means essentially ‘unrelated’.

Totally transparent SMA

direct-securities structure.


page 6




-

2

4

6

8

10

>5

>4 <

5

>3 <

4

>2 <

3

>1 <

2

>0 <

1

>-1

<0

>-2

<-1

>-3

<-2

>-4

<-3

>-5

<-4

<-5

PCM Strategic Opportunities Portfolio

Monthly Return Distribution >> (i.e. number of monthly returns within certain positive or negative %

return ranges... so “>0 <1” means “monthly return was greater than 0% but less than 1%”). 26 months

in total since inception with returns distributed as follows...

Portfolio Risk vs. Reward >> since inception annualised returns vs. since inception annualised

volatility:

-

2

4

6

8

10

12

>5

>4 <

5

>3 <

4

>2 <

3

>1 <

2

>0 <

1

>-1

<0

>-2

<-1

>-3

<-2

>-4

<-3

>-5

<-4

<-5

PCM Core Portfolio

Australia, iShares UBS Treasury ETF, Total Return

Australian Sharemarket (S&P/ASX 200 Total Return)

60/40 Portfolio (ASX Equities/UBS Treasuries)

PCM 60/40 Portfolio

4%

5%

6%

7%

8%

0% 2% 4% 6% 8% 10% 12% 14%

Ret

urn

(p

.a.)

Risk (Volatility, p.a.)

Return vs. Risk (31 Jul 2013 to 30 Sep 2015)

Month

s

Month

s

Monthly % Return Monthly % Return


page 7



ABOUT PCM >> Results-driven investing for Australian Families & Individuals...

We designed these portfolios for OUR own family & friends, we think you will like them too...

PCM manages several portfolios well suited for Australian Investors within their

Superannuation Funds (either SMSF or retail).

The PCM Portfolios are designed for those seeking to preserve capital and

generate respectable returns, irrespective of the ups and downs the economy

might experience.

GENERATE RESPECTABLE RETURNS: Targets consistently positive returns

over any rolling two year period, well above term deposit interest rates.

TAKE LESS RISK: Take less risk than a typical share market investment

portfolio (greater asset class diversification, lower volatility and greater holdings

of cash)

CONSERVATIVE INVESTMENTS: PCM’s Portfolios use no debt/leverage, do

not use derivatives, and do not sell short securities.

LIQUID & SIMPLE: PCM’s Portfolios only using big, boring, liquid exchange

traded investments (so it’s easy for you to convert some or all or your portfolio

to cash in a timely manner if you wanted to)

INCENTIVE ALIGNED: PCM designed these portfolios first and foremost as an

investment solution for our own family and friends. As a result, our own family

and friends will be invested just like you will be, meaning that at PCM we really

do ‘eat our own cooking’.

FULL ACCESS TO YOUR INVESTMENTS AT ALL TIMES: Totally transparent

portfolios held in your name, whereby you can login online to view your holdings

and their latest valuations 24 hours a day.

DIRECT SECURITIES: PCM does not touch your money, but it is safeguarded

by a platform with a responsible entity (ASIC regulated & licensed) and your

investments are held transparently in your name by an independent Custodian

(that is also regulated & licensed by ASIC).

EASY & AUTOMATED ADMIN: your accountant will love you come tax time as

your portfolios have simple yet comprehensive reporting capabilities.

SUPERANNUATION FRIENDLY: Whether you have as little as $25,000 in your

personal superannuation account, or whether you have a substantial nest egg

in a SMSF; PCM’s portfolios can be tailored to your circumstances.

Alternatively, if you have money outside of super (like savings or a windfall from

a property or business sale), PCM’s portfolios are highly useful to help

compound your savings at a higher return than many other portfolio

management services.

ACTIVE: Active common-sense investment management decisions directed by

PCM to help make sure your investment portfolio is well-positioned throughout

the different stages in the cycle across various asset classes that may include:

Shares, Bonds, Cash, Precious Metals, Commodities, Currencies, REITS and

the like.

PCM manages investment portfolios, provides research and is a trusted advisor

within a variety of contexts. We serve private individuals, financial advisors,

companies and professional investment managers in order to help them achieve

better investment results within a dynamically evolving world.

PCM is privately owned by four Australian families with a combined 77 years’

experience within the investment and financial services industry.

“I would highly recommend the team at PCM to anyone who is seeking professional financial advice and peace of mind

around their investments and financial future.

Their “All-Weather” approach to investing is what you would expect of an adviser focussed on results and outcomes for

both me and my family. It is reassuring to know that they stand completely behind what they do, and that their

own family and friends are invested in similar ways that I am.

It is rare to find a team so committed to the principles of transparency, integrity and discretion – in all my years I have yet

to come across a team as passionate (and as family orientated) as those at PCM.” …D.Raisin, Business Owner, QLD

page 8



All contents Copyright © 2015 Prerequisite Capital Management Pty Ltd, Australia. All rights reserved. Reproduction, retransmission or redistribution in any form is illegal and strictly forbidden, as is continuous and regular dissemination of specific forecasts or strategies. The information this document contains is confidential and is provided in commercial confidence. The document may not be implemented or reproduced in whole or in part, nor may any of the information it contains (including without limitation its name, theme, or concepts) be used or disclosed without prior written consent. Upon request, the document and any other material relevant to it must be immediately returned (or in the case of electronic copies: destroyed/deleted). Disclaimer: Neither Prerequisite Capital Management Pty Ltd nor any of its employees, or any person(s) or firm who is represented within this publication shall have any liability for any direct or consequential loss sustained by anyone who has relied on the information contained in this publication. At no time does Prerequisite Capital Management Pty Ltd make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. This publication has been prepared by Prerequisite Capital Management Pty Ltd on behalf of itself and its affiliated companies solely for the general information of clients of Prerequisite Capital Management Pty Ltd. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views expressed are the views of Prerequisite Capital Management Pty Ltd through the period ending at the date of publication and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security or investment product and should not be construed as such. Prerequisite Capital Management Pty Ltd does not advocate the violent over-throw of any government. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Investing in any financial instrument carries risk of losses, and trading derivatives is especially risky because these instruments are highly leveraged and the amount you may lose is potentially unlimited. If you are uncomfortable with the possibility of unlimited losses you should not trade financial securities or undertake investment activities of any form. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Prerequisite Capital Management Pty Ltd makes no representation as to its accuracy or completeness. Prerequisite Capital Management Pty Ltd is not responsible for any errors, including typographical errors in printing or downloading from our spreadsheets, software or external sources. The information contained herein is subject to change without notice. The investment research and forecasting service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Ask your licensed financial advisor to explain all risks to you before making any trading and investing decisions. An investment in emerging markets can involve significant risk. Any investment referred to herein is not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any securities referred to herein may fluctuate and/or be affected by changes in exchange rates. Employees and associates of Prerequisite Capital Management Pty Ltd may at times have positions in securities referred to in this publication and may make purchases or sales of these securities while the publication is in circulation. Past performance is not indicative of future results.

Contact Information:

Daniel J. Want (Director)

[email protected]

Darren A. Brind (Director)

[email protected]

m. 0498 671 505

Prerequisite Capital Management Pty Ltd

ABN 27 141 060 933

Authorised Representative of

AIW Dealer Services Pty Ltd

AFSL 414256

a PO Box 144 Morningside QLD 4170

Documents

Quarterly Client BRIEFING...2015/10/07 · page 1 Prerequisite Capital Management Pty Ltd (ABN 27 141 060 933) is an Authorised Representative of AIW Dealer Services Pty Ltd (ABN