Investing like an Endowment 21.06.2019 (short)...A desire for liquidity 3. A shortening of the time horizon (including extrapolation of current trends) 4. Heightened unwillingness

Investing like an Endowment

Pictet Wealth Management | See disclaimer on last pages | Investing like an Endowment

June 2019

Hamburg

«Compound interest is the eight wonder of the world. He who understands it, earns it…he who doesn’t pays it.» Albert Einstein

2 / 23Pictet Wealth Management | See disclaimer on last pages | Investing like an Endowment

PUBLIC EQUITIES 18.5%

PRIVATE EQUITY 33.0%

LONG/SHORT EQUITIES

FIXED INCOME & CASH 6.5%

ABSOLUTE RETURN HF

EQUITIES51.5%

CREDIT6.5%

Yale Endowment – Asset Allocation (June 30, 2018)

26.0%HEDGE FUNDS

26.0%

REAL ASSETS16.0%

NATURAL RESOURCES 6.5%

REAL ESTATE 9.5%

Source: Yale Endowment Management, September 2018

10 YEAR ANNUALIZED RETURN

7.4%

20 YEAR ANNUALIZED RETURN

11.8%

Long term investors with….

…a long-term investment horizon

… limited liquidity constraints

… and high tolerance for short-term drawdowns


Endowment’s investment philosophy

Behavioural risks– the Value Function

4 / 23Pictet | Private client | See disclaimer on last pages | Investment Governance Review

The Value Function (utility) that passes through the reference point is s-shaped and asymmetrical. The value function is steeper for losses than gains indicating that losses outweigh gains and can lead to irrational decision making.

*Source: Kahneman and Tversky.s (1979) Prospect theory : An analysis of decision under risk.

Value

Outcome

Gains

Reference point

Losses

Behavioural risks – Probability Function

5 / 23Pictet | Private client | See disclaimer on last pages | Investment Governance Review

Certain Loss - 0 Certain Gain - 1

100%

O%

50%

Probability p

Perc

eiv

edp(e

vent)

Probability vs. Perceived p (Event)

” highly unlikely events are either ignored or overweighted”*

*Source: Kahneman and Tversky.s (1979) Prospect theory : An analysis of decision under risk. (p. 282-83)

The Probability Function - categorical distinction between certainty and uncertainty.

Behavioural risks – preparing for crisis behaviour

6 / 23Pictet | Private Wealth Management | See disclaimer on last pages | Investment Governance Review

Crisis behaviour

1. Increased Risk Aversion

2. A desire for liquidity

3. A shortening of the time horizon

(including extrapolation of current

trends)

4. Heightened unwillingness to be

contrarian

'1

'10

'100

1'000

10'000

100'000

1962 1965 1967 1969 1971 1974 1976 1978 1980 1983 1985 1987 1989 1992 1994 1996 1998 2001 2003 2005 2007 2010 2012 2014 2016

Oil Crisis (-50%)

Black Monday (-63%)

Gulf War (-38%) Asian Crisis (-49%)

Global Financial Crisis (-50%)

The journey ma�ers but risk ≠ volatility

7 / 23

Source: Bloomberg

-

AVERAGE ANNUAL RATE OF RETURN OF

20.7%SINCE JANUARY 1ST

1963 (55 YEARS)

Berkshire Hathaway share price

As long as a company creates value, over the long-term its share price will converge to its fair value, and short-term price fluctuations become irrelevant. Risk is the possibility of permanent loss of capital.

“The essence of investing.. lies in the management of risks, not the management of returns”, Benjamin Graham


Three pillars of strong governance when managing large wealth


Partnerships3GrowInvestment governance

1 ProtectFamily

governance

2Control

Operational governance

Three pillars of strong governance when managing large wealth


Partnerships3GrowInvestment governance

1 ProtectFamily

governance

2Control

Operational governance

Grow - Investment Governance


ENTERPRISEPROTECTION ENDOWMENT

Manage, grow & pass

on family businesses / interests

Current lifestyle maintained in all market situations

Progressive growth through a global

investment portfolio

ASPIRATIONS

Aspirational Investments and

Philanthropy

PORTFOLIOS

Source: Pictet, Ashvin B. Chhabra, «Beyond Markowitz: A Wealth Allocation Framework for Individual Investors», The Journal of Wealth Management 7, n° 4 (Spring 2005): 8-34

Endowments share characteristics with family offices

Pictet Wealth Management | See disclaimer on last pages | Investing like an Endowment 11 / 23

Ability to invest long-

term

Institution Key Stakeholders Liability profile Riskappetite

Decision makingstructure/agency

concerns

Family Offices Family In perpetuity High Low

Endowments/Foundations

Non-Profit beneficaries In perpetuity withspending policy/spend down

High Low

Sovereignwealth funds

Government/Nations

In perpetuity Moderate Moderate

Defined benefitpension funds

Members/Shareholders

Average duration 12-15yrs

Low High

Life insurers(general account)

Policy holders/Shareholders

Average duration7-15 yrs

Low High

Source: SWF Institute, NACUBO study, harvard Kennedy School’s Hauser Institute for Civil Society (Global Philanthropy Report), PWC (The rising attractivess of alternative asset classes for Sovereign Wealth Funds), The Future of Long-term Investing – a World Economic Forum report in collaboration with Oliver Wyman (New York, 2011), NACUBO,

Determine Return Target


RISK

Volatility

Statistical drawdown(VaR 99%)

< 4% < 6% < 9% < 12%

< 8% < 14% < 20% < 28%

Wit

h pr

ivat

e as

sets

LIQ

UID

ITY

PREF

EREN

CE

Inflation +3-4%

Inflation +2-3%

Inflation +2.5-3%

Inflation +1.5-2%

Inflation +1-1.5%

Inflation +4-5%

CONSERVATIVE BALANCEDMODERATE DYNAMIC

Inflation +3-4%

Two ways of improving expected returns: Market risk Vs Liquidity risk

W/O

pr

ivat

e as

sets

Assuming LT inflation: 2.1% (US), 1.5% (EU), 1.1% (CH), 2.0% (UK). Historical data range: 1999-2017.Past performance should not be taken as a guide to or guarantee of future performance. No warranty expressed or implied is made regarding future performance.Past risk s only provide an indication of future risks. No warranty expressed or implied is made that future risks will not exceed past risks.Private assets are only suited for large or professional investors with a long term investment horizon (>10 yrs) , no liquidity requirements, and understanding of risks linked to these asset classes.

University Endowments Return targets

13 / 23

Source: Nabuco-Commonfund Study of Endowments 2018, PWM


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

<5% 5.0-5.9% 6.0-6.9% 7.0-7.9% 8.0-8.9% >9% No objectives

Total Institutions (dollar weighted) > $1bn $501mln-$1bn $251-$500mln $101-$250mln $51-$100mln $25-$50mln <$25mln

~Inflation + 5%

Comparing Asset Allocation Endowments & Family Offices


Note: Due to the rounding, totals may not add up to 100%; Source: The UBS/CAMPDEN WEALTH GLOBAL FAMILY OFFICE REPORT 2018; NACUBO Study 2018, PWM* Private Investments includes PE funds,direct PE, VC, PERE funds, direct RE, Energy and natural resources, and distressed debt

%ag

e as

set a

lloca

tion

60/40

80/20

FI & Cash

10%

HFs

19%

Private Invest.

39%

Equities

32%

US Endowment>USD1b

100.0

30.0

Comparing Asset Allocation Endowments & Family Offices


25.023.0

10.015.0 16.0

20.0

3.0

1.0 1.0

1.0

10.06.0

19.0

18.0 18.0 12.0

35.0 39.039.0

22.0 19.0

14.0

30.0 29.032.0

44.0 46.0

53.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

PIO Family Office >1bn 501m-1bn 251-500m 101-250m

Equities

Private Investments

Hedge Funds

Commodities

Fixed Income & Cash

Equities

PrivateInvest.

FixedIncome& Cash

Note: Due to the rounding, totals may not add up to 100%; Source: The UBS/CAMPDEN WEALTH GLOBAL FAMILY OFFICE REPORT 2018; NACUBO Study 2018, PWM* Private Investments includes PE funds,direct PE, VC, PERE funds, direct RE, Energy and natural resources, and distressed debt

70/30 Equity/Bonds risk allocation

Pictet Family Offices US Endowment US Endowment US Endowment US EndowmentInvestment Office Report (Campden) >USD1b 500m-1b 250m-500m 100m-250m

%ag

e as

set a

lloca

tion

Public Equities

PrivateInvest.

FixedIncome& Cash

HFs

60/40

80/20

Private Equity Expected to roughly double in 2030

0.4%1.5%

3.3% 3.4%

~6-8%

1992 2003 2010 2018 2030

$ MarketShare $415B$48B $2T $3T

Note: Assumes market growth of 6% annually between 2018-2030E; Estimates are inherently uncertain and subject to change. Actual results may vary.Source: Hamilton Lane, Investment Database (October 2015); NYSE, NYX Data (September 2018); World Federation of Exchanges, 2017 Full Year Markets Highlights (February 2018); TPG Analysis (October 2018)

Global Private Equity Share of total investable assets


Public vs. Private Equity backed number of companies in the US

Source: Pitchbook (September 2017); World Bank (September 2017), Pictet estimate

~6'900

~1'500

US Publicly Listed Companies US PE-Backed Companies

2 0 0 0

~3‘900

~8‘500

US Publicly Listed Companies US PE-Backed Companies

2 0 1 8


Portfolio Construction -Illustration


FIXED INCOME EQUITIES ALTERNATIVE ASSETS25.0% 30.0% 45.0%

Hedge FundsPrivate Equity

Private Equity Real

Estate

10.0% 30.0% 5.0%

EquitiesLarge Cap

World

Equities Small Cap

World

EquitiesEM

25.0% 5.0% 0.0%

A P A A A

S S F S S S

1

2

3

Long-Term Risk allocation 1

Strategic & tactical Asset Allocation2

GlobalGov.

Bonds

Global Corp.Bonds

HighYield

Bonds

EM HC

EMLC

10.0% 10.0% 2.5% 2.5% 0.0%

A A A A

S S F F F

P P

F

A

S

Passive

Funds

Active

Segregated

P

3 Implementation

A

Implementation & Investment Philosophy


Fiduciary Management Investment Office

Target return Inflation+ /nominal Inflation+ /Nominal

Time horizon Long term investor Long term investor

Risk meausure Volatility Avoid permanent loss

Benchmark Benchmarks Benchmark un-constrained

Implementation Active + Passive Active with core positions

Managers Open architecture (3rd party) Inhouse & open (3rd party)

Style diversification Fundamental bottom up approach

Diversification Diversified More concentrated

Private Investments Allocation High/Medium High with direct co-investments

Evaluating Performance


Performance evaluation

1. Nominal return vs. target (inflation+)

2. Relative return vs. market indices (60/40)

3. Relative return vs. peers

Source: Pictet Investment Office / Nacubo, as at 30.06.2018 - end of fiscal year. *PIO Performance from representative account. **Endowment performance figures provided by Nacubo, annual study on US Endowments

Looking ahead – E(R) & 10-year anniversary of the equity bull market


Last 10-year vs. next 10-year expected return for major equity indices

Source: Pictet WM - AA&MR, Factset, Global Financial Data

16.7% 16.6%

14.5%13.7% 13.3%

12.8%

11.2% 11.1% 10.8% 10.7%10.1% 9.9%

5.7% 5.9% 6.0% 5.9% 6.1%

7.3%

5.4% 5.4% 5.1%

7.1%

4.5%5.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

US Equities US smallcaps

Europeansmall caps

MSCI WorldUSD

MSCI ACWorld USD

Asia (Ex-Japan)

Equities

UK equities Europeanequities

Swissequities

EM equities Japaneseequities

Euro Equities

Last 10-year return 10-year expected return in local currency

-34%

-66%

-54%

«Compound interest is the eight wonder of

the world. He who understands it, earns

it…he who doesn’t pays it.»

Albert Einstein

«Chance favors only the prepared mind»,

Louis Pasteur

Disclaimer


This document is not intended for persons who are citizens of, domiciled or resident in, or entities registered in a country or a jurisdiction in which its distribution, publication,

provision or use would violate current laws and regulations.

The information, opinions and estimates in this document reflect an evaluation as of the date of initial proposal and may be changed without notice. The value and income of the

securities or financial instruments mentioned in this document are based on rates from the customary sources of financial information and may fluctuate. The market value may

vary on the basis of economic, financial or political changes, the remaining term, market conditions, the volatility and solvency of the issuer or the benchmark issuer. Moreover,

exchange rates may have a positive or negative effect on the value, the price or the income of the securities or the related investments mentioned in this document. The quantities

and amounts mentioned may be subject to adjustment depending on the actual values of the market at the time of execution.

Past performance must not be considered an indicator or guarantee of future performance, and the addressees of this document are fully responsible for any investments they

make. No express or implied warranty is given as to future performance.

The content of this document is confidential and can only be read and/or used by its addressee. The Pictet Group* is not liable for the use, transmission or exploitation of the

content of this document. Therefore, any form of reproduction, copying, disclosure, modification and/or publication of the content is under the sole liability of the addressee of this

document, and no liability whatsoever will be incurred by the Pictet Group. The addressee of this document agrees to comply with the applicable laws and regulations in the

jurisdictions where they use the information reproduced in this document.

* The Pictet Group includes the entities mentioned in the report published under the following link: www.pictet.com/reports."

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Investing like an Endowment 21.06.2019 (short)...A desire for liquidity 3. A shortening of the time horizon (including extrapolation of current trends) 4. Heightened unwillingness