F:\The Zest Machine

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THE ZEST MACHINE

“Braving the Storm”

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Outline

Economic outlook

Portfolio Allocation

Backup strategy

Implementing our backup strategy

2

Economic Outlook

Equity Markets

Fixed Income Commodities

Economic Outlook


Backup Strategy Implementation

3

Equity Selloff? Fact or Fiction

790795800805810815820825830835840

Dow Jones Industrial Average

Hurricane Camille 17/8/1969

DJIA 1% increase

Economic Outlook



4

2450

2500

2550

2600

2650

2700

2750

2800

2850


Hurricane Hugo 22/9/1989

DJIA 3% increase

Economic Outlook




5

10200

10300

10400

10500

10600

10700

10800


Hurricane Katrina 30/8/2005

DJIA 2% increase

Economic Outlook




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0

2

4

6

8

10

12

14

16

18

52

54

56

58

60

62

64

66

68

70

1/8/2005 1/9/2005 1/10/2005 1/11/2005 1/12/2005

Entergy Corp

Tetra

Economic Outlook




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Equities Outlook

Selective, dependant on industry

Hurricane Katrina wiped out 12% US oil output

Advantaged overseas oil companies

Disadvantaged insurance companies

Economic Outlook



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Equities Outlook

Mining1%

Construction4%

Manufacturing5%

Trade Transport Utilities

17%

Financial & Professional

Services23%Hospitality

8%

Education & Health

20%

Others23%

New York Economy, USD$

Overweight

• US construction, infrastructure companies

Underweight

• US financial institutions

• New York utilities, transport

Verdict

Economic Outlook



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Fixed Income Outlook

We see spreads for CDS on New York assets to increase slightly.

Risk premium to increase marginally, bond yields increase and price decrease

Verdict: Slightly Underweight

Economic Outlook



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Commodities Outlook - Metals

Demand

• Increased through construction, infrastructure rebuilding

Supply

• Decreased, US mining industry $93.6 billion USD

Verdict: OverweightEconomic Outlook



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Commodities Outlook - Gold

0

200

400

600

800

1000

1200

1400

Jan

-00

No

v-0

0

Sep

-01

Jul-

02

May

-03

Mar

-04

Jan

-05

No

v-0

5

Sep

-06

Jul-

07

May

-08

Mar

-09

US

D $

Gold Price USD/ Oz

Dot Com Bubble Crash

Sub Prime Mortgage Crisis

LehmanCollapse & Euro Debt Crisis

Hurricane Katrina

•Higher inflationary outlook expected gold prices increase

•Destruction of hard assets is inflationary

•Fed to loosen money supply to spur recovery

Economic Outlook



12

Asset Allocation

Economic Outlook



Equities90%

Bonds10%

Aberdeen GEMSchroder GSCLionGlobal SG BondUnited Gold & General

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Markowitz Optimization

Created Variance-Covariance matrix between securities from historical returns

Set target returns to 10%

Set minimum 5% allocation to each security for diversification

Using Excel Solver, objective function to minimize variance

Economic Outlook



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Markowitz Optimization

Aberdeen GEM5%Schroder GSC

37.2925%

LionGlobal Fixed Income

10%

United Gold Fund

47.7075%

-10%

-5%

0%

5%

10%

15%

20%

25%

0 0.1 0.2 0.3 0.4 0.5 0.6

Exp

ecte

d R

etu

rn

Standard Deviation


Mean = 10%S.D = 7.8681%

Economic Outlook



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3 Pronged Approach

Active Portfolio

Monitoring and Control

Pre-Emptive Control

Value at RiskLimit Loss

and Rebalancing

Economic Outlook



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Pre-Emptive Control

Aim to forecast economy 6 months in advance

Use 10 leading economic indicators

Forecast natural disasters using meteorological service

Economic Outlook



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Value at Risk

Economic Outlook



0% 5% 10%

Corporate Scandal

Economy Falters

Terrorist Attack/ Sep 11

Flight to Quality

Black Monday

Value at Risk 95% CI

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Limit Loss and Rebalancing

Economic Outlook



Assess the expected loss vs. transaction costs

Rebalance if benefits exceed cost

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Assessing the Risk of Holdings

Economic Outlook



Access exposure to disaster

Estimate expected loss

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Aberdeen GEM

Economic Outlook



Main holdings in Asia, South America

Only 8% US

Little effect on returns

Correlation 28.7% Africa9%

Asia48%

Europe15%

US8%

South America

20%

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Schroder GSC

Economic Outlook



High allocation to US and Canada

High allocation to financials – 20%

Significant effect on returns

Correlation 65.4%Others

0%

Asia25%

North America41%

Europe34%

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Lion Global Singapore Bonds

Economic Outlook



Mainly to Singapore bonds

Sovereign, HDB

Credit spreads not affected

Singapore58%

Others42%

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United Gold and General

Economic Outlook



Gold prices expected to peak during uncertainty

Metals prices expected to peak

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Value at Risk

Economic Outlook



-8% -7% -6% -5% -4% -3% -2% -1% 0%

United Gold and General

LionGlobal Bond

Aberdeen GEM

Schroders GSC

Returns over 1 month after disaster 95% CI

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Rebalancing

Economic Outlook



Only Schroder GSC meets criteria for rebalancing

Initial 37.2925%

Reduce to 27.2925%

Rebalance to stocks

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Rebalancing – Turner Construction Large infrastructure construction company in

US

46 offices in US large presence in New York

Government contracted to clean up World Trade Center

10.6bn, expected to increase

27

Rebalancing - USS

Largest domestically owned steel maker

Benefit from increase steel demand

16.873bn, mainly from the US

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Rebalanced Portfolio

Aberdeen GEM5%

Schroder GSC27%

LionGlobal Bond10%

United Gold & General

48%

Turner Stock5%

USS5%

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Q&A

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Documents

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