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8/9/2019 The Zest Machine
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“Braving the Storm”
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Outline
Economic outlook
Portfolio Allocation
Backup strategy
Implementing our backupstrategy
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Economic Outlook
EquityMarkets
FixedIncome Commodities
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Equity Selloff? Fact or Fiction
790795800805810815820825830835840
Dow Jones Industrial Average
Hurricane Camille17/8/1969
DJIA 1% increase
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24502500255026002650
2700275028002850
Dow Jones Industrial Average
Hurricane Hugo22/9/1989
DJIA 3% increase
Equity Selloff? Fact or Fiction
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10200
10300
1040010500
10600
10700
10800Dow Jones Industrial Average
Hurricane Katrina30/8/2005
DJIA 2% increase
Equity Selloff? Fact or Fiction
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02468
1012141618
5254565860
6264666870
Entergy CorpTetra
Equity Selloff? Fact or Fiction
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Equities Outlook
Selective, dependant on industry Hurricane Katrina wiped out 12% US oiloutput Advantaged overseas oil companies Disadvantaged insurance companies
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Equities Outlook
Mining1%
Construction4%
Manufacturing5%
TradeTransport
Utilities17%
Financial &Professional
Services23%
Hospitality8%
Education &Health20%
Others23%
New York Economy, USD$
Overweight
• USconstruction,infrastructurecompanies
Underweight
• US financialinstitutions
• New Yorkutilities,transport
Verdict
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Fixed Income Outlook
We see spreads for CDS on New Yorkassets to increase slightly.
Risk premium to increase marginally,bond yields increase and price decrease
Verdict: Slightly Underweight
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Commodities Outlook - Metals
Demand
• Increasedthroughconstruction,infrastructurerebuilding
Supply
• Decreased,US miningindustry$93.6 billionUSD
Verdict: Overweight
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Commodities Outlook - Gold
0200400600800
100012001400
J a n
- 0 0
O c t - 0 0
J u l - 0 1
A p r - 0
2
J a n
- 0 3
O c t - 0 3
J u l - 0 4
A p r - 0
5
J a n
- 0 6
O c t - 0 6
J u l - 0 7
A p r - 0
8
J a n
- 0 9
O c t - 0 9
U S D $
Gold Price USD / OzDot ComBubble Crash
Sub PrimeMortgage Crisis
LehmanCollapse &Euro DebtCrisis
HurricaneKatrina
• Higher inflationaryoutlook expectedgold prices increase
• Destruction of hard
assets is inflationary• Fed to loosenmoney supply tospur recovery
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Asset Allocation
Equities90%
Bonds10%
Aberdeen GEMSchroder GSCLionGlobal SG Bond
United Gold & General
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Markowitz Optimization
Created Variance-Covariance matrixbetween securities from historical returns Set target returns to 10% Set minimum 5% allocation to eachsecurity for diversification Using Excel Solver, objective function to
minimize variance
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Markowitz Optimization
AberdeenGEM5%
Schroder GSC
37.2925%
LionGlobalFixed Income
10%
United GoldFund
47.7075%
-10%
-5%
0%
5%
10%
15%
20%
25%
0 0.1 0.2 0.3 0.4 0.5 0.6
E x p e c
t e d R e t u r n
Standard Deviation
Portfolio Allocation
Mean = 10%
S.D = 7.8681%
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3 Pronged Approach
ActivePortfolioMonitoring
and Control
Pre-EmptiveControl
Value at RiskLimit Loss
andRebalancing
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Pre-Emptive Control
Aim to forecast economy 6 months inadvance Use 10 leading economic indicators Forecast natural disasters usingmeteorological service
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Value at Risk
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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Assessing the Risk of Holdings
Access exposure to disaster Estimate expected loss
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Aberdeen GEM
Main holdings in Asia, South America Only 8% US Little effect on returns Correlation 28.7% Africa
9%
Asia48%
Europe15%
US8%
SouthAmerica
20%
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Schroder GSC
High allocation to US and Canada High allocation to financials – 20% Significant effect on returns Correlation 65.4%
Others0%
Asia25%
North America41%
Europe34%
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Lion Global Singapore Bonds
Mainly to Singapore bonds Sovereign, HDB Credit spreads not affected
Singapore58%
Others42%
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United Gold and General
Gold prices expected to peak duringuncertainty Metals prices expected to peak
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Value at Risk
-8% -7% -6% -5% -4% -3% -2% -1% 0%
United Gold and General
LionGlobal Bond
Aberdeen GEM
Schroders GSC
Returns over 1 m onth after disaster 95% CI
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Rebalancing
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 constructioncompany in US 46 offices in US large presence in NewYork Government contracted to clean up WorldTrade Center 10.6bn, expected to increase
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Rebalancing - USS
Largest domestically owned steel maker Benefit from increase steel demand 16.873bn, mainly from the US
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Rebalanced Portfolio
AberdeenGEM5%
Schroder
GSC27%
LionGlobalBond10%
United Gold &General
48%
Turner Stock5%
USS5%
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Q&A
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