Nikko AM Pulse - Q1 2013 April 24 Edit

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Nikko AM PulseQ1 2013

This information is for professional investors only. Not for redistribution.For more information, visithttp://en.nikkoam.com/worldseriesfundplatform

Quarterly Comment from the Investment Team of Nikko AMsWorld Series Fund Platform.

In response to client feedback we have altered thiscomment from the Investment Team of Nikko AMsWorld Series Fund Platform

to be a quarterly

newsletter. This enables us to better discern trends in

investor demand, both from our standpoint as fundproviders as well as market observers. The slightlylonger period of comment also gives us a chance tomonitor longer term shifts in market direction andsentiment.

The newsletter is now in two sections the firstcovers recent market performance, dynamics andmanager performance which are observationsgleaned from our insights as advisors to a range ofinvestors, therefore capture our view of theenvironment faced by investors today. The secondsection contains our own insights on the pattern of

investor demand, including direct feedback from ourmain distributor and client bases. This section may beof interest to investors and fund providers alike.

The World Series Fund Platform

of Nikko AMprovides specialist investment solutions to a range ofinstitutional and retail clients in J apan, Australia andthroughout Asia. Totalling over $27 bn in AUM itrepresents a diverse range of strategies and third partymanagers, and is continuously evolving to cater toclient demand. Please contact us at the details printedat the end of this letter to learn more about our productrange.

Market update: A quarter of temperedoptimism, a Cypriot surprise, a tech rout,and gold failing to glitter

It is said that the month of March comes in like a lionand out like a lamb, but this might equally have appliedto the entire first quarter of 2013. An ebullient monthof J anuary was characterised by a surge in demand for

equities, and global markets roared (the S&P 500 rose5.2% in J anuary and 10.6% for the quarter, while theFTSE 100 rose 6.5% in J anuary and 10% for the

quarter). Investors shrugged off the passing of thefiscal cliff deadline in the US, and were equallynonplussed as the US failed to avoid sequestration.An abundance of positive data and indicators lead to a

surge in liquidity as well as a dampening of volatility, incontinuation of a multi-year trend.

Volatility only spiked once during the quarter, in a mid-February wobble caused by the nearing of thesequester deadline in the US, as well as ubiquitousreminders (in France, the UK and Italy) of thestructural problems in Europe. The Cypriot surprisebank levy of mid-March spooked markets keen toshake off the cloak of austerity, but did not entirelyderail them.

In the US equity markets were further boosted by a

pickup in corporate activity. February was thestrongest month for LBO activity since J uly 2007, withover $55 bn in transactions, while a series of goingprivate transactions (e.g. Dell) and shareholderactivism (Apple) coincided with a pickup in buybackactivity, with buyback announcements hitting theirhighest level in 20 months in February. This trend islikely to lead to higher dividend payouts, which bodeswell for those investors that have poured into highdividend funds of every description.

In April, the tragic events in Boston have re-introduceda sense of jitters as was witnessed by the brief market

dip in response to a rogue (hacked) tweet on April 23.The S&P fell 0.8%, only to recover minutes later, whilethe VIX spike from 13.6% to a high of 14.8%, whichwas also reversed minutes later.

Elsewhere, J apans star continued to shine over thequarter, and was given a further boost by themonetary revolution put in place by the new governorof the BoJ in early April. Markets there rose 7.9% inMarch alone (Nikkei), bringing the quarters return to20.1%. This was followed by a 2.2% spike in the dayfollowing the BoJ announcement.

Asian markets were sluggish, leading them tounderperform developed markets again in what hasbeen an extended 27 month streak (the Hang Seng


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and the Shanghai Composite lost 1.2% and 1.4%,respectively, in the quarter). A mid-February lull forthe lunar New Year stalled a lack lustre quarter inwhich concerns focused on the impact of tighteningmeasures in China and the trickle down impact on realestate valuations. Persistent tensions in the Koreanpeninsula, as well as a growing scepticism towardstech stocks did little to shore up sentiment elsewhere.Growth remained under the microscope, which causeda deterioration in the momentum for commodities.Precious metals in particular saw precipitous pricedeclines from February on, and the gold spot price lost4.6% over the quarter, followed by a significant fall inmid-April, leading some commentators to speculatethat 2013 will mark the first year the metal postsnegative annual returns since 2000.

Manager performanceHedge funds as a whole performed strongly inJ anuary, although in February and March returns weremore muted. Long/short equity funds performedstrongly sector (the HFRX Equity Hedge was up 5.14%for the quarter) while relative value and event drivenstrategies were both strong (the HFRX SpecialSituations Index outperformed other sectors, returning7.36% for the quarter). Credit strategies continued toeke out compelling returns, despite the regularclamour for an end to the bubble. CTAs struggledwith the trend reversal in mid-February, and along withglobal macro managers were the laggards of thesector.

Fixed income as an asset class was underpinned bystrong technicals as inflows into EMD and high yieldand corporate bond funds continued. Safe havenasset such as government bonds saw losses inJ anuary with some reversal in February, although theongoing strength in the government bond sectorsuggests that the desire for safety remains strong.Returns in fixed income trailed equities throughout thequarter, with the brightest spots in high yield debt, andcorporate debt the most disappointing

Demand Dynamics: A quarter of greatrotation and muted inflation concerns

The quarter started with chatter of a pending greatrotation into equities as investors would seek toremedy underweight positions that arose from an

abundance of caution in the fourth quarter of last year.The ongoing spread compression and weak outlook forfixed income has further supported this.

In our last letter we mentioned Nikko AMs ownexperience in raising a fund focused on US economicrevival the fund was hugely popular amongJ apanese retail investors and raised $2.5 bn in its firstweek of launch. In March, US equity funds attracted$4.9 bn in the first week, which is the most inflows inover a month, continuing a strong technical trend thathas been in place since the start of the year.

In our engagement with clients we have seen strongdemand for income based products in particular socalled flexible income solutions solutions that havean open mandate to allocate between fixed incomeand equity and can be essentially opportunistic inorder to seek the best risk/reward solution. Thesearch for income has extended to MLPs as a play onthe energy and resource sector that has seen seismicshifts in demand as the energy independence themecontinues to run in the US. The uncertainty regardingthe tax treatment of such investments for non-USinvestors does not seem to have affected this surginginterest.

The decline of gold in recent months has createdsomewhat of a quandary for investors. The use of themetal as a hedge against monetary debasementseems to be established, but previous physicalhoarding and potential liquidation of ETFs present realtechnical headwinds. Inflation also seems to ebb andflow as a concern, and the recent spread widening inUS Tips (in mid-April the US 10 Year TIPS breakevenrate had its largest daily fall since November 2011,dropping -9 bps to 2.27%) suggests that fear ofinflation has become less acute as commodity priceshave fallen and macro data appears softer.

As always we welcome your comments and feedback.

The Investment Team

Nikko AM World Series Fund PlatformApril 2013


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Further Information

Fund Managers Distributors

If you are a fund manager that can add value with specialistexpertise in strategies which Nikko AM does not have in-house, please contact us we may be interested inappointing you as sub-advisor to a new product launch forour 300 intermediaries across Asia.

If you are a distributor and are looking for a specialistinvestment solution for your clients, please contact us aboutour world-wide third party fund manager research.

E: [email protected] E: [email protected]

Important InformationDistributors

This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments andshould not be regarded as investment advice. In making any investment decision, prospective investors must rely on their own examination of themerits and risks involved.

This document has been prepared and issued by Nikko Asset Management Europe (Nikko AME), on the basis of publicly available information,internally developed data and other sources believed to be reliable. Whilst reasonable care has been taken to ensure that the information isaccurate and any assumptions made or simulations used are fair and reasonable, neither Nikko AME, nor any director, officer or employeethereof, shall in any way make guarantee, representation or warranty of and be responsible for the accuracy or completeness of this document.Any opinions expressed in this document may be subject to change without notice. Nikko AME is authorised and regulated by the FinancialServices Authority and is registered in England No. 1803699. Registered address: 1 London Wall, London, EC2Y 5AD.

Investors

If you are an institutional investor and looking for investmentresearch, insights or solutions including single manager andmulti-manager offerings across a range of investment types,please contact us about our world-wide third party fundmanager research and product range.

E: [email protected]

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Nikko AM Pulse - Q1 2013 April 24 Edit