Multi-Asset Solutions · theory in the 1950s and the use of mean variance optimisation, which effectively combined the concept of diversification with risk management, giving investors

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Multi-Asset SolutionsInvesting for purpose

– We help our clients achieve their goals through our expertise in the fields of asset allocation, portfolio management, asset/liability management, portfolio construction and risk management.

– Our investment solutions range across the continuum of styles demanded by our clients, from more traditional asset allocation, through the investment spectrum to benchmark-unconstrained, absolute-return strategies.

– We make investment decisions with the ultimate goal of consistently delivering a particular return outcome while minimising the chance of not meeting objectives.

For institutional/professional investors and adviser use only

Multi-Asset Solutions

Investing for purposeIn collaboration with our clients, the Multi-Asset Solutions (MAS) team designs and implements tailored risk-managed multi-asset portfolios. We help our clients achieve their goals through our expertise in the fields of asset allocation, portfolio management, asset/liability management, portfolio construction and risk management.

Our investment platform has been designed to deliver on our clients’ wide-ranging requirements. In short, we invest for purpose.

Meeting our clients’ needs requires diversity of thought, a coherent investment processes and diligent execution.

Investment philosophy and processInvestment philosophy

Our investment philosophy is based on the following beliefs:

− Fundamental valuations will ultimately assert themselves to be the most important driver of long-term returns.

− Markets are not completely efficient in the short term due to investor behaviour. This provides opportunities to increase the alpha potential for our clients.

− Investment decisions should be taken with respect to the portfolio’s overall objective, recognising the complex linkages between short and long term.

Investment process

Our investment process is designed to consistently add value and deliver on established return objectives via the following:

− Designing the asset allocation to reflect economic climate expectations and responsively adjusting portfolios based on market developments.

− Systematically exploiting market inefficiencies by focusing on five key fundamental drivers of returns; value, momentum, carry, macro and technical.

− Using disciplined judgement to blend quantitative underpinnings with qualitative expertise across a broad opportunity set.

Team and experienceA truly global team based in Singapore, Sydney and London, we have extensive experience working with institutional asset owners, which includes some of the world’s largest strategic

investors, pension and insurance funds and sovereign wealth funds. The senior portfolio managers of our team have an average of 20 years of experience, with first-hand exposure to various economic climates.

Our experienced team members come from a variety of academic backgrounds, including Mathematics, Economic History and Aerospace Engineering. Each team member brings unique perspectives and collaborates across the organisation to provide solutions to our clients. Varied problems require diversity of thought and the courage to challenge conventional wisdom, traits we seek in our team members.

Our portfolios are managed using a team-based approach even though the assigned senior portfolio manager has the responsibility for the asset allocation design and exposures. We further draw on the broad expert specialist resources across our firm to inform our views across all asset classes.

How we deliver for our clients

− Deep understanding of clients’ needs and an emphasis on fostering partnerships

− Focus on delivering tailored solutions, not generic products

− Access to a large breadth of capabilities across various asset classes

− Global market knowledge married with optimised execution

− Nimble decision-making within a strong risk management culture

− An objective-based mindset, unconstrained by conventional benchmarks

Why multi-asset investing?It has been well documented that strategic asset allocation decisions are the dominant driver of overall portfolio returns. Furthermore, investment challenges are rarely addressed with a single asset class. For these reasons, skill in asset allocation and multi-asset investment is of paramount importance.

With Harry Markowitz came the advent of modern portfolio theory in the 1950s and the use of mean variance optimisation, which effectively combined the concept of diversification with risk management, giving investors a more scientific way to determine their asset allocation. Thus began the standard balanced portfolio of 60% stocks and 40% bonds, or a 60/40 balanced portfolio. While history has shown an improvement over a static allocation to one asset class, this approach has often fallen short, particularly over short to medium time horizons because markets deliver returns unevenly through the business cycle.

To address the issue of timing, multi-asset investing has evolved to incorporate both longer-term asset allocation shifts (often referred to as Strategic Asset Allocation) and shorter-term, or tactical, asset allocation changes (often referred to as Dynamic Asset Allocation). Flexibility to rotate into and out of asset classes means that a skilled investor can achieve both increased returns and reduced risk.

This involves balancing factors, exposures, risks, correlations and thematic thinking over an entire portfolio. Every idea is tested in its risk-return impact to the portfolio. This ‘one portfolio’ approach offers a unique oversight into true risk exposures, whilst also allowing investors to have impact with thematic positions.

Why CFSGAM/FSI for multi-asset?State-of-the-art quantitative tools blended with qualitative decision making

Our investment strategy blends the qualitative views and experience of the team with the discipline and rigor of quantitative underpinnings. Purely quantitative models tend to occasionally suffer sharp drawdowns, while abandoning the discipline of a structured approach and becoming entirely qualitative leads to irreproducible results. We recognise that some things will never be quantifiable but can have a major impact on asset class returns, for example central bank personnel changes or political events. In order to generate alpha, we require the use of both macro and microeconomic inputs.

Truly objective-based strategy, not ‘balanced in disguise’

Traditionally, multi-asset portfolios have been managed with a ‘set-and-forget’ strategic asset allocation philosophy, for example 60% equity/40% bonds. Objective-based investing seeks to overcome these limitations to enhance the traditional balanced approach. However, we believe many investors neither have the skills nor desire to actively manage to an end objective, and instead manage portfolios similar to balanced strategies. In contrast, our approach is truly objective-based.

Internally generated research

Research spans all elements of our teams’ activities and is the basis of portfolio design and implementation. We believe that all research should be developed internally and not be dependent on third party black boxes or processes. As such, all our tools and models are proprietary, and our scientific research process is designed to leverage our edge.

Fully discretionary, not ‘fund wrapping’

Our approach focuses on efficient implementation across a diversified mix of asset classes. There is a wide scope of instruments available today such as managed funds, exchange-traded funds, futures, options and swaps to name a few. This opens the door to efficient dynamic asset allocation, providing high liquidity and low transaction costs along with efficient basket trades to tailor exposures. We have access to the firm’s wider investment capabilities, but typically utilise the active management budget for asset classes that are less efficient, rather than in every sleeve of the portfolio.


Ensuring that every action we take, every investment decision we make and every piece of advice we give, ultimately ties back to our client’s investment purpose is key.


Objective-based investingTraditionally, multi-asset portfolios have been managed with a strategic asset allocation philosophy. This ‘set-and-forget’ approach tends to follow a particular benchmark and only adds value through fund selection and rebalancing. Indeed, a typical balanced portfolio often exhibits a close relationship with underlying financial markets, including large performance swings.

Objective-based investing seeks to overcome the limitations inherent in a traditional balanced approach. A particular outcome is targeted through a bespoke investment strategy that aims to realise an investor’s objectives. Objective-based investing is designed to reflect a client’s interests in terms of ambition and risk, and adopts an absolute-return mindset.

We make investment decisions with the ultimate goal of consistently delivering a particular return, while minimising the chance of failing to meet objectives. While returns can never be certain when taking investment risk, we seek to balance the trade-off between upside potential (meeting our investment objectives) and downside risk (not meeting our investment objectives), which we believe can generate consistent results.

The asset allocation strategy of our portfolios depends on two inter-linked processes: one a medium-term strategic asset allocation process that derives core portfolio positions and the other a dynamic asset allocation process to consistently extract alpha from shorter-term market dislocations. Depending on the desired style, we leverage one or both of these asset allocation engines. Examples of our objective-based portfolio include the following:

− Real return − Cash plus − Absolute return − Diversified growth − Global tactical asset allocation (GTAA)

BalancedPortfolios

Beta Alpha

Objective-based investing

Traditionalasset allocation

Benchmark unconstrained,absolute return

Cash Plus

RealReturn

DiversifiedGrowth

Global TacticalAsset Allocation

We believe the proven ability to marry multiple, sometimes conflicting, client objectives is a true differentiator and competitive advantage for our team.

Broad investment platformWe offer investment solutions across the continuum of styles demanded by our clients, from more traditional asset allocation, through the investment spectrum to benchmark-unconstrained, absolute-return strategies.


Additional service capabilities In addition to portfolio implementation, we can assist across the entire spectrum of the asset allocation universe, including expert investment guidance and implemented services.

Thought leadershipMarket researchClient engagement Thematic portfolios

Lifecycle modellingAsset/liability matchingTailored exposuresRisk reduction

Multi-sector portfoliosReal returnDiversified growthCash plusAbsolule returnObjective-based portfolios

Expert investment guidance

Implemented services

Portfolio management

Clientpurpose

Expert investment guidance

Our team has considerable intellectual property that we seek to share with our clients. We have extensive experience of working with institutional asset owners, including some of the world’s largest strategic investors, pension and insurance funds and sovereign wealth funds. This has given us significant insight and practical appreciation of the challenges they face, which may include:

− ensuring sufficient funding of pension or insurance liabilities; − meeting spending objectives or income needs; − incorporating tailored notions of risk and ways to de-risk; and − ensuring consistency of day-to-day management with the

long-term investment strategy.

While we explore different aspects of designing and implementing investment strategies, the underlying question we seek to answer remains the same; how do we best serve the underlying purpose of the assets? Since we believe the dominant determinant of a long-term outcome is the strategic asset allocation, it is critical that we get this right from the

outset of the investment planning process. Our investment guidance can be broadly broken down into three main areas:

− thought leadership − market intelligence, and − client engagement

Implemented services

Our implemented services capability is based on a suite of proprietary models which provide us with great flexibility. This allows the team to offer clients a wide range of tailored solutions, including:

− thematic portfolios − suites of consistent wholesale investment frameworks − inflation protection and risk reduction strategies − lifestyle/lifecycle modelling with ‘targeted benefit’

approach, and − diversified portfolios of alternatives

The last decade has delivered the full spectrum of highs and lows in global markets and the most recent years in particular will be remembered for increasing uncertainty and lackluster returns. While many have prematurely aged as a result of these experiences, the benefits are that institutional investors are dedicating fewer resources to searching for the theme du jour and are instead revisiting what is the appropriate mix of exposures to achieve their long-term objectives. It has been well documented that strategic asset allocation is the predominant determinant of total returns in the long run. Although strategic asset allocation has come back under the spotlight, determining the optimal long-term investment strategy can be a mine field given the plethora of investment options available today. This paper introduces the building blocks to designing a robust strategic asset allocation with a focus on consistency of process, comprehensiveness of analysis and the distillation of important ramifications on the implementation.

Jan BaarsPetr KocourekEpco van der LendeKej Somaia

Strategic Asset Allocation

Issue

6September 2013

Multi-Asset Solutions Research Papers

FOR PROFESSIONAL/INSTITUTIONAL INVESTORS ONLY

Jan Baars Petr Kocourek Epco van der Lende

Integrated Approach to ALM, Risk Budgeting and Alpha

Issue

2June 2012


Determining an appropriate risk budget for active management has historically taken place without much regard to the determination of the investment strategy. Yet adding active management to the strategy has implications for the absolute risk/return trade-off that lies at the heart of finding the right long-term asset mix in the first place. In this paper we show how the risk budget can be determined as integral part of an ALM study, providing internal consistency between the long and short term aspects of investment policy. The analysis also allows for separation of α and β exposures.

Many investors, both institutional as well as retail, have investment objective functions formulated in terms of exceeding a target relative to inflation. Building a portfolio that maximises the probability of meeting such objectives needs to take a different tack than pure asset-only portfolios. In this paper we consider the constrained set of liquid investments only with a view to selecting portfolios whose return objectives are inflation-relative. The risk criteria are also expressed in these terms, leading to a trade-off in risk/return space that is different from traditional asset-only portfolio selection.

Jan Baars Petr Kocourek Epco van der Lende

Inflation-linked Investment Objectives with Liquid Asset Portfolios

Issue

3June 2012


All investment portfolios have an asset allocation; whether intentional or not. However, dogmatically relying on any static long-term strategic asset allocation to ensure that investment objectives are achieved can be detrimental, especially where investors have multi-faceted objectives across a continuum of timeframes. Market dynamics are continually changing and short-term risks can dominate news headlines and market volatility. Dynamic asset allocation continuously evaluates the investment market landscape to deliver additional returns and abate portfolio risks; such as tail events. In this paper we delve into conceptual frameworks underlying dynamic asset allocation and put these in context. We also elaborate on the methodology we employ and why we believe that a disciplined qualitative approach is best suited to ensure quality of implementation and consistency with client objectives.

Andrew HarmanEpco van der LendeKej SomaiaPetr Kocourek

Dynamic Asset Allocation

Issue

7February 2014


FOR PROFESSIONAL/INSTITUTIONAL INVESTORS ONLY

Thought leadership examples:


DisclaimerThis document is directed at persons of a professional, sophisticated, institutional or wholesale nature and not the retail market.

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere.

Past performance is not a reliable indicator of future performance.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. Commonwealth Bank of Australia (the “Bank”) and its subsidiaries are not responsible for any statement or information contained in this document. Neither the Bank nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.

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In Hong Kong, this document is issued by First State Investments (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First State Investments (Singapore) whose company registration number is 196900420D. First State Investments and First State Stewart Asia are business names of First State Investments (Hong Kong) Limited. First State Investments (registration number 53236800B) and First State Stewart Asia (registration number 53314080C) are business divisions of First State Investments (Singapore).

Australia

In Australia, this document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311.

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In the United Kingdom, this document is issued by First State Investments (UK) Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

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Documents

Multi-Asset Solutions · theory in the 1950s and the use of mean variance optimisation, which effectively combined the concept of diversification with risk management, giving investors