Finance Pros: The Insights 1 | BNP Paribas IP: Structured Products

Workshop KUL 19-02-2014

Investing in practice

Searching for the winning combination


Content

1. Introduction to Asset Management

2. Asset classes

3. Key concepts

4. Fund management

5. ETFs and Index funds

6. Examples of fund & fund styles

7. Conclusion and Q&A


1. Introduction to Asset Management


4

BNP Paribas Investment Partners within BNP Paribas Group

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BNP Paribas Real Estate

BNP Paribas Investment Partners

BNP Paribas

Assurance

BNP Paribas Wealth

Management

BNP Paribas SecuritiesServices

Retail Banking Investment Solutions Corporate and Investment Banking

BNP Paribas


5

Who are we?

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Backed by BNP Paribas Group, one of the best rated banks in the world (A+)(4) Key features: financial stability, transparency, rigorous risk and compliance controlBacked by BNP Paribas Group

Fitch Ratings(2) Asset Manager rating: Highest Standards, Stable Outlook ISAE Type II Report (previously SAS-70 certification) (3) A rigorous investment approach

Around 600 client facing staff serving institutional clients and distributors in 70 countries, with five core markets in Europe (Belgium, France, Italy, Luxembourg, the Netherlands)Client focused organisation

A global network of investment experts -’Partners’- offering one of the broadest and deepest ranges of solutions in the industry with some 60 investment centres and boasting around 700 investment professionals

A multi specialist model

Competency focus and performance-driven culture with an international multicultural employee base. Around 3 200(1) staff in 40 countries in Europe, Asia and the AmericasStrong, diverse geographic presence

The 6th largest European asset manager with EUR 479 billion(1) in assets under management and adviceGlobal asset management leader

(1) So31/12/2013urce: BNPP IP, per 30 June 2013(2) Source: Fitch Ratings April 2013: scope for IP includes BNPP AM, FundQuest Advisory and FFTW(3) Source : Deloitte July 2012(4) Source: Standard & Poor’s October 2012


6

Who are we?International, multi-cultural: Around 3 200 employees(1) in 40 countries

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(1) Source : BNPP IP as 31 December 2013(2) EEMEA: Eastern Europe, Middle East and Africa

MoroccoKuwaitBahrainTurkeyRussia

IP Investment CentresDistribution Centres

JapanChinaHong KongSingaporeTaiwanSouth KoreaIndonesiaMalaysiaBruneiIndiaAustralia

New YorkBostonChicagoToronto

BrazilMexicoChileArgentinaColombiaUruguay

FranceBelgiumUKNetherlandsLuxembourgGermanyItalySpainSwitzerlandAustriaPortugalGreece

Europe (57%)North America (5%)

Latin America (4%)EEMEA(2) (3.5%)

Asia-Pacific (26%)

Nordics (4.5%)

SwedenNorwayFinlandDenmark


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A full circle of expertise

A core satellite model capitalising on both specialist

and partnership capabilities

BNP Paribas Asset Management, the largest BNPP IP Partner, encompasses the major asset classes with

investment teams operating around the globe.

Specialists in a particular asset class or field (mainly alternative and multi management), operating as boutique-

like structures.

Local asset managers covering a specific geographical region and/or clientele (the majority in emerging markets).

Multi-expertise investment

Local solution providers

Specialist investment partners


Our clients: investors’ profiles

8


9

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Production “Managing the

investments” (BNPP IP)

Administration“Performing

back-office activities” (BPSS)

Distribution“Selling products/services” (BNPP networks)

• Trade support (clearing settlement)

• Accounting and administration • Performance analytics

• Weighting asset classes

Research

Asset allocation

• Investment decisions• Trading orders

• Information gathering• Performance analysis• Recommendations

Trading

Portfolio manage-

ment

• Trade execution

• Value propositions • Advertising/

campaigns

• Branches• Agents• Telemarketing/

direct mail• Etc

• Response to consumer inquiries

InstitutionalRetail

• Product development

• Pricing• Marketing support

for clients

• Clients presentations

• Prospects generation

• Client relationships management

• Reporting and strategy discussions

Marketing

Sales

Client service

Main players


• An Umbrella Fund invests its assets in different types of securities according to an investment policy defined prior to the inception date.

• The total assets are made up of various sub-

funds; each one of them is an independent fund with its own management objectives, portfolio of securities, net asset values and specific conditions in which it may function.

• The shareholders can buy and sell shares from the umbrella fund every day, based on the real value of the assets which determines the value of the shares (net asset value - NAV).

Segregated account: Mandate or dedicated fund: contract signed between an Institution and the Asset Manager for a bespoke portfolio.

–The client delegates of the assets to an external manager

–The investment objectives, conditions, restrictions and legal framework are defined in the Investment Management Agreement.

Mandate/UCITS

10

MANDATE


Parvest

11


2. Asset Classes


Individual securities vs investment funds● Individual securities

– Issuer-linked / credit risk– Liquidity risk– Market risk / performance risk– Return / risk– Choice of security: buy & sell– Transaction tax– Custody fee– Minimum subscription amount– Limited access

● Investment funds– Pooled assets– Managed by specialists– Advice / action related– Transaction tax– Management fee– Custody fee– Available form small amounts– Regulated– Transparency– Easy access– Advanced risk/return profile


Can anyone buy ?● MIFID

– Investor profile– Investment experience

● Minimum capital required

● UCITS– European legislation– Funds registered for public offering


15

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INVESTMENT HORIZON

TAR

GET

RIS

K-R

ETU

RN

Money Markets

Fixed Income

Equities

Alternatives

Diversified

1 D to 1 Y 1Y to 3 Y 3 Y to 5 Y

Six main types of investment funds

Risk profile and investment horizon


Traditional Vs Alternative Asset Classes

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Alternative Strategies

Relative Strategies

Traditional Assets


17

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European Fund Market Calendar AuM (ex Fof in €Bn)

European Investment funds market

Market size : € 6 220 Bn

Source: Lipper FMI - May 2013


3. Key concepts

Workshop KUL 19-02-2014 19

What is risk?● Risk is generally interpreted as the uncertainty of future outcomes

● Uncertainty becomes greater as the variability of returns increases

Which is the riskiest asset class?

12-month rolling volatility – June 2003 – June 2012

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0%

10%

20%

30%

40%

50%

60%

Jun 2

003

Dec 2

003

Jun 2

004

Dec 2

004

Jun 2

005

Dec 2

005

Jun 2

006

Dec 2

006

Jun 2

007

Dec 2

007

Jun 2

008

Dec 2

008

Jun 2

009

Dec 2

009

Jun 2

010

Dec 2

010

Jun 2

011

Dec 2

011

BUND S&P500 MSCI EM ENERGY Precious Metals EUR ICG Euro HY


Volatility● Measures the dispersion of returns for a given security or market index. Volatility can

be measured by using the standard deviation or variance between returns from that same security or market index.

● It’s used to measure the risk A higher volatility implies higher potential returns but also greater potential loss.

● Examples:– A share X has a stable price around EUR100. The company announces good quarterly results. The price rises

to EUR105 then is stabilized around EUR103. The share is thus not very volatile. – A share Y has a valuation of EUR100. The same benefits are published. The share has a rise of 25% and thus

gets to EUR125 and is stabilized to EUR120. The security Y is described as volatile. 20

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0

5

10

15

20

25

30

35

40

45

50

1 2 3 4 5 6 7 8

LOW VOLATILITY HIGH VOLATILITY

Workshop KUL 19-02-2014 21

Which is the riskiest asset class?

Barclays Capital US Aggregate Gov't Jan 2000-October 2011

-100200300400500600700800900

1,000

-2.0

%

-1.6

%

-1.2

%

-0.8

%

-0.4

%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

UBS Convertible Global Focus* Jan 2000-October 2011

-

100

200

300

400

500

600

700

800

-2.0

0%

-1.6

0%

-1.2

0%

-0.8

0%

-0.4

0%

0.00

%

0.40

%

0.80

%

1.20

%

1.60

%

2.00

%

*Hedged in EUR

Source: Bloomberg, BNP Paribas Investment Partners

MSCI USA indexJan 2000-October 2011

-

50

100

150

200

250

300

350

400-2

.00%

-1.6

0%

-1.2

0%

-0.8

0%

-0.4

0%

0.00

%

0.40

%

0.80

%

1.20

%

1.60

%

2.00

%

Volatility does not measure fat tail risks (i.e. the risk of extreme and unanticipated events)!

● Volatility is measured through the standard deviation of the returns

● Standard deviation is the measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance (the sum of squared differences of each individual return from the average return).

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Risk is not only about the volatility of returns…

Greek Bond returnRisk free return Bond return

Term premium

Loan return

Liquidity premium

Equity return

Equity Premium

Default premium

● There are many different sources of risk: market risk, credit risk, illiquidity risk, manager risk etc.

● All returns over cash exploit a sort of risk premium:


The importance of diversification● From year to year, there’s no telling which asset classes will be the best performers

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Source: Allianz Global Investors and Morningstar Direct. Data as of 12/31/12.

Best to worst performing asset classes from top to bottom for the years 2002 to 2012.


24

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The importance of Asset Allocation

● Asset Allocation is the single most important driver of returns

The asset allocation decision explains up to 90% of portfolio returns*

91.5%

2.1% 1.8%4.6%

Asset allocation Security selection Market timing Other factors

Factors Explaining Dynamics of Returns over Long Horizons

*Based on the study by Ibbotson and Kaplan, 2000

Source: BNP Paribas Investment Partners, Ibbotson and Kaplan


25

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● 3 types of asset allocation differentiated by investment horizon:– Strategic Asset Allocation: define risk budget (long-term horizon)– Dynamic Strategic Asset Allocation (“Smart Benchmark”): optimised use of risk budget (5-7 yr horizon) – Tactical Asset Allocation: benefit from short-term market opportunities (3-12 months)

● The shorter the time horizon, the more flexible the asset allocation should be…

Types of asset allocation

Source: BNP Paribas Investment Partners

Tactical

Asset

Allocation

DynamicStrategicAllocation

Strategic Asset Allocation

Investment horizon

Tactical

Asset

Allocation

DynamicStrategicAllocation

Strategic Asset Allocation


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Strategic asset allocationDetermining the appropriate risk level of the portfolio

Investment Horizon

The shorter the investment horizon the less risk should

be taken

Risk Aversion

Maximum annual loss tolerance i.e. the investor will not accept an annual

loss greater than x%

Key considerations

Return target

What is the minimum level of return required over the

investment horizon?


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Benchmark● Benchmark: A standard allowing risk/return comparisons and against which the

performance of a mutual fund or investment manager can be measured. Either:– An Index (ie. Dow Jones, CAC 40, S&P 500, etc.)– Combination of several indices: synthetic index or composite (ie: BRIC)– A reference rate (ie. EONIA, EURIBOR, LIBOR…)

● Tracking-error: the divergence between the performance of a portfolio and that of the associated benchmark. Higher tracking error means higher risks taken by the portfolio manager.

'04 '05 '06 '07 '08 '09 '10

200

175

150

125

100

75

BNP PARIBAS L1 Equity Best Selection Europe (Classic)

117.59

CUMULATIVE PERFORMANCE

'04 '05 '06 '07 '08 '09 '10

200

175

150

125

100

75

MSCI Europe Net Return Index (v)

117.22

BNP PARIBAS L1 Equity Best Selection Europe (Classic)

117.59

CUMULATIVE PERFORMANCE


Performance● Beta Vs Alpha: Distinction between performance coming from structural

exposure to the market and active management from the portfolio manager

● Net Asset Value (NAV): A fund's price per share: – The per-share amount of the fund is calculated by dividing the total value of all the securities in

its portfolio, less any liabilities, by the number of fund shares outstanding. – The performance is measured according to the historical series of NAV.– NAV per share is computed in general once a day based on the closing market prices of the

securities in the fund's portfolio. All mutual funds' buy and sell orders are processed at the NAV of the trade date. However, investors must wait until the following day to get the trade price.

28

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= +Beta () Alpha ()

PortfolioMarket

ExposureActive

Management


Standard Investment Process

29

Strategy Team

- Macroeconomic Outlook

- Research and Analysis

Fund Manager

- Portfolio implementation- Risk Management- Placement of orders

Dealing Desk

- Concentration of orders- Negotiation of prices- Best-execution policy

Broker

- Execution of the orders- Information and

research provider

Investment Process

Asset Manager External Providers

Risk control in every step of the process

● Various parties involved in the investment process:– Strategists and research analysts, portfolio managers, traders, brokers

● Consecutive steps in the portfolio construction and placement of orders:

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4. Fund management


Fund management● Many styles exist, many methodologies for fund management have been

developed:– Active / passive– Benchmark tilted / free– Systematic-Quantitative / Qualitative– Manager styles– Investing in synthetic instead of ‘real’ underlyings

● BUT alpha-diversification is key !– Style performances depend on market situation– Combining manager skills and methodologies increase potential performance


Synthetic products vs ‘real’ underlyings● Many synthetic products are used for risk hedging or portfolio positioning, e.g. in

fixed income

Fixed Income risks Hedging

If derivatives are used for hedging purposes, they can also be used to take directional exposures or to implement relative value strategies.

CreditCredit

Interest ratesInterest rates

Credit Default Swap (CDS) protect investors from credit events on specific companies (or countries) against a stream of fixed payment.

Interest rate swaps (IRS) are contracts where floating payments can be received in exchange of pre-defined fixed amounts.

Bond futures are used to purchase or sell government bonds on a given forward date at predetermined price.

FX forwards enable investors to buy or sell on a forward date a given currency against another currency at a predetermined rate.

Foreign ExchangeForeign Exchange


Synthetic products vs ‘real’ underlyings

● Synthetic products need to be treated carefully:– Volatility / risk possibly higher focused risk– Leveraging– Not accessible to all investors

● But in the hands of specialists they are crucial instruments … in fund management and risk hedging

● Synthetic products can also be used in the management of ETFs and indexed funds and are used in the light of structured funds (with capital protection)


5. ETFs and Indexed funds


35

Indexed Funds vs. ETFsIndexed Fund ETF

First vehicle launched in 1976 1993

Trading -Daily creation and redemption at NAV -Trade any time during the stock exchange opening hours

Price information -Daily NAV -Real time price, quoted in the stock market

Bid/Offer spread -No -Yes

Strategy -Strategic allocation, suitable for core investment-Tactical flexibility possible: short selling, transition management, intra-day trading, cash management, etc.- Advanced trading strategies: options on ETFs

Fees

- Different share classes and fee levels- Total cost of ownership of institutional share classes

not always higher than for ETFs

- Management fee: same for institutional and retail clients

Adapted to:

•Large investments with medium to long term horizons

•Retail investors who do not need intraday liquidity

• Tactical allocation• Short-term views• Gain quick exposure


36

Cash Replication Synthetic Replication

Full replication Optimized replication

Simple and straightforward implementation

High level of transparency

Investable underlying / Market access

Important minimal size

Not always cheaper than full replication

Tracking error potentially higher

Performance and TE depend on a model

Fiscal constraints (stamp duties, PEA)

Reduced TE

Enlarged choice of replicated indices (e.g.: emerging equities, commodities, double-short)

Requires an OTC market

Disadvantages

Advantages

Constraints

Allows cash replication of large indices

Rebalancing costs

Comparison of the 3 replication methods

Investable underlying / Market access

Less flexible: swap to be rolled at maturity

Cost of the swap, impacts fund performance

Risks

Risks associated to the underlying exposure

Counterparty risks linked to securities lending (limited to 25% of the assets for PEA* funds)


Model risk

Counterparty risks linked to securities lending (limited to 25% of the assets for PEA* funds)


Limited and well identified counterparty risk: swap value limited to a maximum of 10% of the NAV

Collateral risk


37

Expert in all replication management methodsFull

Replication

Index

Optimised Replication

The fund manager buys all the securities within the underlying index in respective proportions

Rigorous rebalancing, corporate actions & FX risk management

Various enhancement techniques allows to offset part of the costs

Securities lending

Dividend optimization

The fund manager buys a sample of the securities within the underlying index in order to replicate the index as closely as possible

Model based

Various enhancement techniques allows to offset part of the costs

Securities lending

Dividend optimization

Money Marketor

Basket of stocks

Synthetic Replication

Swap:- asset+ index

Index Perf.Inventory Semi-Index…

=

37

The fund manager enters into a transaction with a swap partner

Depending on whether the index is stock or bond index, the fund manager buys a basket of shares or bonds and then swaps its performance for that of the index

Counterparty risk is limited to 10% of the total Assets of the ETF

Index


Swap features● Open architecture, MIFID ● Maximum maturity: 12 months● Limited counterparty risk (reset at any time + early

termination option at any time)● Minimum rating for the counterparties: A1- P1● Strictly controlled counterparty list

Inventory available upon request

Synthetic replication process

Transparent Inventory

Max. 10%

Money market

instruments –

Euro zonestocks

Derivatives

Index

PerformanceSwap

Inventory of synthetic structures

Inventory

• US or EUR money market instruments (min. AA rating, average 3 months duration)

or Euro zone stocks• Derivatives and mutual funds up to 10%

ETF Counterparty

The ETF pays the performance of the basket

The ETF gets the performance of the replicated index


Risk Mitigation on synthetic funds

39

Open architecture swap bidding process, including multiple counterparties

Strict eligible counterparty list monitored by the Risk Management department BNPP IP’s counterparty risk management process requires careful counterparty selection, monitoring and review Particular focus is given to the creditworthiness, operational efficiency, best execution capacities, and liquidity

providing capacities of the counterparty

Leverages on the qualified expertise and extensive resources of the Structuring team to negotiate swap terms

Swap renegotiated every 6 to 12 month

Early termination options (without any notice period) allows to rapidly withdraw exposure to a given counterparty

Funds holdings composed of UCITS eligible securities with high liquidity : For Equity EasyETFs, the funds invest in Eurozone large capitalization stocks (stocks of the Euro Stoxx 50 index) For Commodity EasyETF, the fund invests in 3-months US treasury bills

Fund holdings and counterparty list available upon request

• The SWAP replication structure introduces counterparty risk, limited to 10% of fund assets under the UCITS regulation• The ability to negotiate swap terms is a matter of utmost importance, the swap being an OTC instrument


6. Examples of fund & fund styles


Best Selection Equity Europe


Three key pillars

• A long-term stock picker– 3 to 5 year holding period– ‘Straw hats in winter’ idea generation

• Play to our strengths – fundamental research– In-depth fundamental research undertaken by a large and experienced team– Peer review decision making process– Risk budget allocated appropriately

• A focus on industry structure– Identify and invest in companies offering a sustainable competitive advantage in well-

structured industries

A differentiated approach to fundamental long term investment


Investment philosophy

● The key to assessing the strength and sustainability of a company’s earnings profile is to understand the structure of that company’s industry. Companies that operate in well-structured industries have a greater ability to generate attractive and sustainable excess returns, and can do so with less risk

● The European Equity Select team uses the Herfindahl-Hirschman Index (HHI*) to assess the quality of an industry’s structure. This index is used by the US Department of Justice to help “properly define and measure industry concentration”

*HHI is defined as the sum of the squares of the market shares of each individual firm and can range from <1 to 10,000, moving from a very large number of very small firms jostling for market share to a single monopolistic producer dominating the market.

The importance of industry structure in practice: the Herfindahl-Hirschman Index

“A merger is unlikely to create or enhance market power or to facilitate its exercise unless it significantly increases concentration and results in

a concentrated market, properly defined and measured”

US Department of Justice Horizontal Merger Guidelines


44

Investment philosophyPractical application of the HHI

Global beer industry structure and profit margins of market leaders by country

Source: BoA Merrill Lynch and BNP Paribas Asset Management, January 2012

For illustration purposes only.


45

Investment processOverview

*‘Straw hats in winter’ = a contrarian approach, focusing on out-of-favour industries.

HHI industrystructure

BNPP IPglobal

research

Portfolio construction

Idea generation

Impl

emen

tatio

n

Stock riskmanagement

Stock knowledgeIndustry structure

Peer scrutinyDCFs / models

Portfolio riskmanagement

Risk mgt systems

Sector limit

Stock limit

Industry analysis

Company analysis

Peer review process

‘Straw hats’ in winter *

Risk Management

screens


46

Parvest Equity Best Selection Europe cumulative performance from February 2008 to January 2014

Overall performance

Parvest Equity Best Selection Europe cumulative performance (gross of fees)

Source: BNP Paribas Asset Management (Gross of fees performance, end January 2014, In Euro) Past performance is not indicative of current or future performance•Benchmark applicable from 01 January, 2009: MSCI Europe (NR) Index (€). Previous benchmark : MSCI PAN-EURO (NR) Index

•On May 17th 2013, BNP Paribas L1 Equity Best Selection Europe was transferred into a sub-fund of the PARVEST Luxembourg SICAV, creating PARVEST Equity Best Selection Europe•All performance and risk indicators numbers presented in this document prior to May 17th 2013 are those of the former BNP Paribas L1 Equity Best Selection Europe

*

-3%

2%

7%

12%

17%

22%

27%

32%

40

60

80

100

120

140

160

févr

.-08

avr.

-08

juin

-08

août

-08

oct.

-08

déc.

-08

févr

.-09

avr.

-09

juin

-09

août

-09

oct.

-09

déc.

-09

févr

.-10

avr.

-10

juin

-10

août

-10

oct.

-10

déc.

-10

févr

.-11

avr.

-11

juin

-11

août

-11

oct.

-11

déc.

-11

févr

.-12

avr.

-12

juin

-12

août

-12

oct.

-12

déc.

-12

févr

.-13

avr.

-13

juin

-13

août

-13

oct.

-13

déc.

-13

Perf

orm

ance

Inde

xed

to 1

00

Cumulative excess return (RHS)

Best Select Europe (LHS)

MSCI Europe NR (LHS)

Outperformance in both declining and

rising markets


Quantitative fixed income


Uses the full fixed income universe, from money market to high yield and convertible bonds

Fund of funds, open architecture

Regular rebalancing's, dynamic asset allocation

Purely based on a quantitative strategy : tracking momentum whilst controlling risk

Risk in line with a classic fixed income fund, flexibility much higher

48

Example : BNPP B Control Quam Dynamic Bonds

DYNAMIC BONDS PORTFOLIO

What is it ?


AS

SET A

LLO

CA

TIO

N

Simulations

Flexible Adaptable Control

0%

20%

40%

60%

80%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012MoneyMarket Medium-Short Term Absolute returnGlobal Long duration ConvertibleCorporate High Yield Emerging Markets

Money Market

Medium- Short Term

Absolute return

Global Long Term Convertibles Corporate High YieldEmerging Markets

Max 100.00% 29.08% 42.83% 5.13% 96.64% 55.16% 43.15% 82.83% 67.46%Average 6.35% 1.69% 4.69% 0.37% 34.51% 7.47% 3.94% 18.83% 22.14%

Min 1.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%


-10%

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Short/Medium Term Inflation linked Long TermGovernment Absolut Return Dynamic BondsBNP Paribas B Fund II QuAM Bonds

DYNAMIC BONDS UNIVERSETRADITIONAL FI UNIVERSE rolling 3 yr returns

Consistentency AsymmetryConcentration

Vs. dispersion

3 Y

EA

R R

OLLIN

G R

ETU

RN

-1.3%

24.4%

5.1%

42.0%

14.6%

6.0%

Dynamic BondsBNP Paribas B Fund

II QuAM BondsShort/

Medium TermInflation linked

Long Term GovernmentAbsolut Return

Max 41.98% 14.63% 17.67% 23.74% 23.81% 24.39% 23.56%Min 5.05% 5.99% 3.98% -1.27% 0.03% 2.20% 4.43%

Bron: ETS


Dynamic BondsBNP Paribas B Fund

II QuAM BondsEmerging Markets

Corporate High Yield Convertibles

Max 41.98% 14.63% 60.58% 37.77% 84.04% 40.03%Min 5.05% 5.99% -6.99% -11.33% -25.63% -20.10%

-30%

20%

70%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Emerging Markets Corporate High YieldConvertibles Dynamic Bonds BNP Paribas B Fund II QuAM Bonds

51

DYNAMIC BONDS UNIVERSEHIGHER RISK FI UNIVERSE rolling 3 yr returns

Consistency AsymmetryConcentration

Vs. dispersion

3 Y

EA

R R

OLLIN

G R

ETU

RN

-25.6%

84.0%

42.0%

14.6%

6.0%

5.1%

* Results Dynamic bonds based on simulations


The GURU methodology


GURU methodology and construction: The investment process

Uniform methodology for all regions: Combining the advantages of both active and passive investments

Profitability●Is the companyprofitable?

Prospects●Is the companygoing the right way?

Valuation●Is the companya good bargain?

LiquiditySelection of the most liquid securities in every region

● Europe● US● Asia (ex Japan)● Global Emerging● Global Developed● All Countries

Simplicity●Profitability, perspectives and valuation are of equal importance in the company selection process

1 CompanySelection

UniverseSelection

PortfolioConstruction2 3

1/3

1/3

1/3

Liquidity●Monthly rebalancing of a fraction of the portfolio

Risk Control●Volatility controlmechanism

‘Long Only’ GURU indices

●US●Europe●Asia ex Japan●Global Emerging●World Developed●All Country

‘Long/Short’ GURU indices

●US●Europe●Europe + US

The GURU Strategy

Advantage of Active Investments:

Selection of companies

Advantage of Passive Investments:

Transparency andsystematic approach

BA

CK

TO

TH

E B

ASI

CS:

GU

RU

MET

HO

DO

LOG

Y


GURU “Long only” approach

Example company scores (as of end of December 2013)

● A balanced approach based on analyzing companies’ fundamentals according to three groups of criteria: – Profitability– Prospects– Valuation

*A “1” in the GURU Europe column means that the stock has been selected for the month, if there is a “0”, it means that the stock has not been selected for the monthly selection.Sources: BNP Paribas and Bloomberg. For illustrative purpose only, subject to change. Scoring scale from 0 to 10 for columns RoEA to Valuation

RoEA ProfitabilityEPS

mom.Pricemom.

Inforatio

Prospects PEGEV/EBITto Gth

P/FCF ValuationGURU Score

6-mth VolGURU

Europe*Fresenius 10 10.0 9 10 9 9.3 6 5 9 6.7 8.67 21.0% 1Roche Holding 10 10.0 8 10 9 9.0 8 5 7 6.7 8.56 15.3% 1Reed Elsevier 10 10.0 10 9 9 9.3 6 3 10 6.3 8.56 19.7% 1Next 10 10.0 10 9 10 9.7 7 2 8 5.7 8.44 20.0% 1Anheuser-Bush Inbev 10 10.0 8 10 10 9.3 6 3 9 6.0 8.44 21.8% 1Distribubidora Intnac. de Alimentacion

10 10.0 9 8 8 8.3 7 7 5 6.3 8.22 32.5% 1

Grifols 9 9.0 9 10 10 9.7 9 7 2 6.0 8.22 32.6% 1Novo Nordisk 'B' 10 10.0 10 10 10 10.0 7 3 3 4.3 8.11 21.4% 1Intercontinental Hotels Group

10 10.0 8 10 9 9.0 3 3 9 5.0 8.00 24.8% 1

William Hill 8 8.0 9 10 10 9.7 3 9 6.0 7.89 22.2% 1

"To me, it's obvious that the winner has to bet very selectively. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people."

(Charlie Munger)

Indices GURU US GURU Europe, GURU Asia ex Japan, GURU Emerging GURU Developed, GURU All Country

Number of securities in the final selection 40 30 50


Historical performance and risk analysis of the fund

THEAM Quant Equity Europe Guru vs. traditional benchmarks*

May 09 – December 13 THEAM Quant Equity Europe Guru STOXX Europe 600 Euro Stoxx 50

Cumulative performance 103.54% 82.18% 50.42%Annualised return 16.49% 13.75% 9.17%Volatility 18.93% 17.77% 22.78%Sharpe ratio 0.85 0.75 0.38Information ratio 0.48 - -Beta 1.02 - -Tracking Error 0.06 - -Historical VaR 95% (5 working days) -3.85% -3.59% -4.81%Historical VaR 95% (1 year) -0.12 -0.10 -0.20Max Drawdown -28.46% -24.41% -33.26%

Corresponding period Jan. 2011 - Oct. 2011 Feb. 2011 - Sep. 2011 Feb. 2011 - Sep. 2011Recovery time (in days) 302 236 408

* Source: Bloomberg, BNP Paribas as of 30 December 2013. Historical performances of share A - EUR since May 2009. Past performance is not a reliable indicator of future results. Fund performance is expressed net of management fees. The Fund is launched since 7th of May 2009. Benchmarks: Stoxx Europe 600, Bloomberg code: <SXXR Index>. Euro Stoxx 50, Bloomberg code: <SX5T Index>.

* Source: Bloomberg, BNP Paribas as of 30 December 2013. Fund performance is expressed net of management fees and in EUR. Past performance or achievement is not indicative of current or future performance.

The Fund THEAM Quant Equity Europe Guru based on the strategy index BNP Paribas Guru Equity Europe Long was launched on 7 May 2009.

85

105

125

145

165

185

205

225 THEAM Quant Equity Europe GuruSTOXX Europe 600Euro Stoxx 50


Low Volatility Equity investing


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0.10

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0.70

1 - Low Vol 2 3 4 5 - High Vol

Sharpe Ratio

Sharpe Ratio of stocks ranked by volatility into equally weighted quintilesGlobal Universe: Jan 95 - Dec 10

Global Universe, MSCI World Index – in USD

Excess Return over cash rates (%) 8.6 8.2 9.1 7.9 9.4Volatility (%) 13.9 16.7 18.9 21.5 27.4Sharpe Ratio 0.61 0.49 0.48 0.37 0.34

Low volatility stocks have higher Sharpe ratios than higher volatility stocks

The same applies to other regions: USA, Europe, Japan, Emerging Markets, Asia (ex Japan), etc.

Source : BNPP IP, MSCI, Exshare

Do high risk stocks generate higher returns?Empirical evidence (based on average returns)

Annualised returns


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INDUSTRIALS INFO TECH MATERIALS TELECOM SCVS UTILITIES

Low vol deciles all High vol deciles

The Volatility Anomaly goes beyond defensive sectors

● The low volatility anomaly can be found across the board within global sectorsGlobal universe, developed countries, Jan 95 - Dec 11

Empirical evidence (unpublished results based on average returns)

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CONS DISC CONS STAPLES ENERGY FINANCIALS HEALTH CARE

Low vol deciles all High vol deciles

The least volatile stocks have higher Sharpe ratios in all the 10 GICS sectors

Source: BNPP IP, MSCI, Exshare.

Average Sharpe Ratio across sectorsLowest volatility decile: 0.68 All deciles: 0.45 Highest volatility decile: 0.25

Sharpe ratioSharpe ratio

low vol high vol low vol high vol low vol high vol low vol high vol low vol high volAnnualised return 10.5% 11.1% 13.2% 9.7% 17.4% 18.3% 11.8% 11.9% 12.8% 14.2%Volatility 13.6% 31.4% 10.6% 20.7% 16.3% 41.8% 12.9% 56.3% 12.3% 33.1%

low vol high vol low vol high vol low vol high vol low vol high vol low vol high vol11.6% 5.3% 12.9% 9.0% 12.1% 18.1% 15.8% 11.8% 13.5% 14.5%12.4% 30.3% 17.3% 49.1% 15.7% 32.7% 17.2% 48.6% 12.3% 31.5%


Investment processA systematic investment process, aiming at controlling the tracking error risk rather than minimising absolute volatility

Characteristics Exposure to equities 100% Max. stock weight 2% Risk reduction objective 20% vs. MSCI World Beta ex-ante 0.8 Tracking error 5% to 7% Turnover (monthly) 8% (100% p.a.)

Beginning Universe

Consumer Discretionary

Energy

Utilities

Finance

Health Care

Industry

InformationTechnology

Materials

Telecommunication

Low Volatility Universe Application of constraints

1. Long- only constraint

2. Weights of stocks

3. Beta constraint

4. Turnover constraint

Portfolio Construction

Screening Optimisation

Final portfolio

Specific event risk

Liquidity

Risk assessment

Monthly rebalancing

Implementation

Execution and controls

Low High

Consumer Staples

Portfolio

10%

10%

10%

10%

10%

10%

10%

10%

10%

10%


Parvest Equity World Low VolatilityPerformance since implementation of the strategy (April 1st 2011)

● Returns are in line with our expectations, in a bullish but uncertain market, mainly driven by macroeconomic data

● Our stock selection based on the least volatile stocks has been profitable

● Since inception of the strategy, the fund has outperformed the market cap index with lower risk

Source: BNPP IP, as of 31/12/2013

Performance gross of fees in EUR. Past performance is not an indicator to the current nor future performance.

Returns gross of fees in euro

Since Trackinginception error

29/11/2013 30/09/2013 31/12/2012 31/12/2012 30/12/2011 31/12/2010 31/03/201131/12/2013 31/12/2013 31/12/2013 31/12/2013 31/12/2013 31/12/2013 31/12/2013

Parvest Equity World Low Volatility 0.98% 5.13% 17.20% 17.20% 14.28% - 12.96% 7.79% - -

MSCI World Net Return Index 0.90% 6.10% 21.20% 21.20% 17.54% - 11.88% 9.07% 5.02% 0.22

1 M 3 M YTD 1 Y

PERFORMANCE RISKCumulated Annualised Monthly annualised

2 Y 3 Y VolatilityInformation

ratio

31/03/2011 - 31/12/2013


GURU and Low Vol combination

An example of alpha-diversification


● Low Vol is a defensive process (less volatile than the benchmark)– It’s over-performance is based on the “Low Vol Anomaly” factor

– Low Vol All country is reconstructed by combining the 2 flagships : Low Vol developed and Low Vol Emerging

● Guru is a high conviction process (more volatile than the benchmark)– It’s over-performance is based on Value, Momentum and Profitability factors

– Guru is the All Country version used in the flagship

● The only common point of the 2 systematic strategies is to consider that classical “benchmarked” investing is sub-optimal.

● A combination of the 2 should however compare favorably to benchmarks, since both are an improvement and of a different type…

Guru and Low Vol offer complementary systematic strategies


A 50% repartition doubles returns of the bench, at similar risk

Based on MSCI All Country, Monthly data from Dec 2002 to Dec 2013, in USD, gross of fees, annualized

Past 10y Risk and Return Profiles

Risk(annual volatility ex-post)

Return(in USD, yearly, gross of fees)


On a yearly basis, years of global underperformance are rareIn the last 10 years, only 2012 would have been underperforming (before fees)

Monthly data from Dec 2002 to Dec 2013, in USD, gross of fees, annualized


7. Conclusion and Q&A


● Investing is more than just equities or bonds only

● Risk profile and investment horizon of the investor are key elements for an investment decision

● Risk of the different asset classes has an important impact on the asset allocation of the investor’s portfolio

– Diversification is key– Both synthetic and ‘real’ underlying instruments can be used to build a portfolio

● Different management styles are complementary

Investing in practice


Disclaimer

14/10/2013

This material has been prepared by LEARN SAS¹ for licensing to BNP Paribas Asset Management S.A.S. (“BNPP AM”)², a member of BNP Paribas Investment Partners (BNPP IP)³ .

This material is produced for information purposes only and does not constitute:

1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or

2. any investment advice.

This material makes reference to certain financial instruments (the “Financial Instrument(s)”) authorised and regulated in its/their jurisdiction(s) of incorporation.

No action has been taken which would permit the public offering of the Financial Instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus, offering document or any other information material, as applicable, of the relevant Financial Instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which such Financial Instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the Financial Instrument(s).

Opinions included in this material constitute the judgment of LEARN SAS at the time specified and may be subject to change without notice. LEARN SAS is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, ac-counting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.

This document is directed only at person(s) who have professional experience in matters relating to investments (“relevant persons”). Any investment or investment activity to which this document relates is available only to and will be engaged in only with Professional Clients as defined in the rules of the Financial Services Authority. Any person who is not a relevant person should not act or rely on this document or any of its contents.

¹ LEARN SAS (www.learn.fr) is a training & consulting company registered in France under number 750 820 037

² BNPP AM is an investment manager registered with the “Autorité des marchés financiers” in France under number 96-02, RCS Paris 319 378 832.

³ “BNP Paribas Investment Partners” is the global brand name of the BNP Paribas group’s asset management services.

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