A presentation for:
Aviva
26th February 2015
MERRION INVESTMENT MANAGERS
ABOUT US
Ireland’s leading independent pension and investment fund manager
Operating since 1986 – formerly Oppenheim Investment Managers
Culturally oriented towards client interests
Independently owned, not a subsidiary of a Bank or Life company
Our portfolios have consistently outperformed both the underlying markets and the
returns of our competitors over the long-term
Investment team has 15+ years average industry experience
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SECURITY OF ASSETS
Full separation from client assets (No Balance Sheet exposure)
Assets held in safekeeping by top A-1/P-1 rated custodian (Northern Trust
$4.2T AUM)
Portfolio Oversight
• Independent Custodian appointed with responsibility for the safekeeping
of assets
• Independent Trustee reviews portfolios to ensure management in
accordance with constitutional documentation
Independent Administrator calculates NAV of portfolios
MERRION INVESTMENT MANAGERS
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Active management is essential to maximising investment return
Over the long term equity market performance reflects valuation but over the short
term reflects sentiment
Our three-pillar investment process captures these drivers
A flexible approach to asset allocation is more appropriate than rigid allocations
In an increasingly global economy sector exposure is as important as regional
weighting
We are not tied to a single investment strategy such as value or growth
INVESTMENT PHILOSOPHY MERRION INVESTMENT PHILOSOPHY
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Valuation Analysis
• Capital efficiency & valuation
Technical Analysis
• Price movements & momentum
Macro-EconomicAnalysis
• Economic growth dynamics
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PERFORMANCE BASED ON A ROBUST INVESTMENT PROCESS
TWO EXAMPLES OF THE PROCESS AT WORK
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Reduced emerging market exposure in Q4 2010
Emerging Equity Market Relative
Increased Healthcare exposure in Q1 13
Healthcare relative to Global Equity Market
EXAMPLE 1:REDUCED EMERGING MARKET EXPOSURE IN Q4 2010
Macro - Emerging market economies were the main engine of global growth
Valuation - Emerging market equities looked expensive on valuation grounds
Technical analysis suggested Emerging market equities were tiring
Switch to Japan - 50% of Japan’s exports to emerging markets
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Emerging Market Valuation Relative to World Mkt.
Japanese Market Valuation Relative to World Mkt.
MSCI Emerging Markets relative price performance
Approaching resistance on weak momentum
Emerging Market Technical Analysis Relative to World Mkt.
EXAMPLE 2:INCREASED HEALTHCARE EXPOSURE IN Q1 2013
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Macro – aging populations globally mean structural increase in healthcare spending
Valuation - analysis highlighted positive structural position not recognised
Technical analysis - suggested the beginning of a sustained period of outperformance
MACRO ANALYSIS VALUATION ANALYSIS
TECHNICAL ANALYSIS
No. of countries with >30% of the population aged 60+)
FDSAGG World Healthcare (Price/Book)
Healthcare relative to Global Equity
WHAT’S CURRENTLY PRICED INTO MARKETS ?
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REAL EXCESS RETURN USA EURO JAPAN
Equity Yield 3.14% 3.69% 3.37%
Inflation Protected Bond Yield 0.17% -0.68% -0.56%
Real Excess Return 2.97% 4.37% 3.93%
VALUATIONS – EQUITIES ATTRACTIVE VERSUS BONDS
GERMAN BUND YIELDS
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WORLD EQUITY MARKET VALUATION
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CARRY, ROLL-DOWN AND SPREAD COMPRESSION
Yield Curves are very steep (due to global
zero interest rate policy)
Curves should continue to flatten ECB QE
pushes down future rate expectations
Steepest part of the curve is 7 to 15 year –
this is where roll-down is most attractive
Spreads have tightened from extremes, but
carry remains attractive, and spreads should
tighten further
Bond portfolios currently positioned to benefit from: Carry; Roll-down; Spread Compression; Flatter Yield Curve
Italian Yield CurveSpanish Yield CurveIrish Yield CurveGerman Yield Curve
Italy: Spread to BundsSpain: Spread to BundsIreland: Spread to Bunds
US RELATIVE TO GLOBAL EQUITIES
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US Market valuation vs. World Equities Central Bank Balance Sheets
S&P RelativeUS market valuation is stretched relative to global market
US Federal Reserve is near the end of its balance sheet expansion, Bank of Japan and European Central Bank only beginning
Negative divergence indicates waning appetite for US equities relative to rest of world
BoJ balance sheet target
ECB balance sheet target
Price relative: new high not confirmed by momentum
VALUATIONS RELATIVE TO THE WORLD MARKET
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Europe Equity Market vs. World Equities Japan Equity Market vs. World Equities
European and Japanese equities trade at a significant discount to global equities
ACTION FROM THE ECB TO IMPROVE FUNDING FOR SME’s
Eurozone inflation far below ECB target – and falling
But Money Supply growth should lead to improving business confidence
And loan demand is finally beginning to expand
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Money Supply and Business ConfidenceEU Inflation
Eurozone Headline Inflation
Eurozone Core Inflation
ECB Bank Lending Survey – Demand for loans
Loan Demand:
EnterprisesHousingConsumer Credit
IS ECB ACTION STARTING TO HAVE AN IMPACT?
Periphery bond yields have fallen, and bank lending rates are now following
Consumer confidence is consistent with more retail and durable goods spending
Easing bank lending conditions has a notable impact on investment
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Italian Credit Conditions and Investment
Italian and Spanish Lending Rates Eurozone Economy Stabilising
EUROPEAN RECOVERY POTENTIAL
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US vs. European Earnings Europe – Technical Analysis
MSCI Europe ex UK vs MSCI World:Price lows in 2012 were not confirmed by momentum, a pattern that has been repeated in recent months
WHY JAPAN? ATTRACTIVE VALUATION, MACRO & TECHNICAL
“Abenomics” is all about ending deflation
The labour market is tight, and getting tighter
This should lead to wage hikes, boosting domestic demand
Currency weakness is having an impact on exports
Jobs-Applicants ratioAverage Earnings yoy
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Value of Exports:Total; China; EU; US
TECHNICAL ANALYSIS - JAPAN
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Japanese equities – technical support
JPY/USD FX Rate:Long-term downtrend broken
And currency should add momentum
CENTRAL BANKS AND EQUITY MARKETS
JAPAN
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US
Fed Balance Sheet SizeS&P Index
BoJ Balance Sheet SizeTopix Index
Fed’s Balance Sheet will flat-line from here, the BoJ’s will continue to expand rapidly, and the ECB’s will also expand
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MERRION EQUITY PORTFOLIO 31.07.2011MERRION MANAGED FUND 31.01.2015
SECTORAL DISTRIBUTION OF EQUITIES ASSET ALLOCATION
Source: Pooled Pension Funds Surveys 31.01.2015
MERRION MANAGED FUND
Ireland’s number one performing multi-asset pension fund
over the long-term, outperforming peers consistently over
the short and long-term.
Multi-asset structure (Equities, Bonds, Alternatives, Property
and Cash)
Over the last 20 years, €100,000 invested in the MET
Managed fund would have grown to €625,477 compared to
€457,540 in the average managed/consensus fund.
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Merion Managed Fund MoneyMate Pooled Fund Average
PERFORMANCE UPDATE AT 31.01.2015
Managed Average
1 Month 5.4% 3.9%
1 Year 23.2% 17.6%
3 Years p.a. 16.9% 12.8%
5 Years p.a. 11.7% 10.2%
10 Years p.a. 6.8% 5.3%
15 Years p.a. 5.0% 3.7%
20 Years p.a. 9.6% 7.9%
Performance since inception to 31.01.2015
Merrion Managed Fund Returns are significantly ahead of other asset classes:
Total Return since Managed inception ( 20/10/93) Annualised Return
Merrion Managed Fund 819% 11.0%
S&P 500 Index 548% 9.2%
Euro Stoxx Index 405% 7.9%
Euro Govt Bond Index 349% 7.3%
Gold 242% 5.9%
MERRION MANAGED FUND SUMMARY STATISTICS
Summary Stats compared to typical Structured Product Investment Horizon of 6 years
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RETURNS (31st Jan 2015)
Annualised 6 Year Return: Maximum 25.19% p.a
Annualised 6 Year Return: Minimum -0.65% p.a
Annualised 6 Year Return: Average 7.41% p.a
Percentage of Time 6 Year Return > 0% 96.74%
APPENDIX
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MERRION HIGH ALPHA FUND
The Merrion High Alpha investment strategy aims to deliver absolute returns to investors
The fund leverages the most attractive ideas and themes across Merrion’sinvestment process
Absolute returns in the High Alpha fund are generated using:
1. Transparent stock selection
2. Dynamic asset allocation decisions (0-100%) between asset classes
Dynamic asset allocation allows investors to benefit from rising markets but also to preserve capital in down markets
Our philosophy and process aims to add value in four key areas, namely active asset allocation, stock selection, fundamental analysis and technical analysis
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MERRION HIGH ALPHA FUND
The fund aims to deliver returns of at least 7% per annum
Capital preservation – We actively manage asset allocation
between asset classes to help protect against capital loss.
In 2008 the fund delivered a positive 5.3% return in the
midst of the global financial crisis.
A high conviction fund – The fund invests in the most
attractive themes and ideas from Merrion’s successful
investment process.
Leverage – There is no leverage employed within the fund.
Low Correlation with Equity Markets – An investment in the
High Alpha Fund can significantly reduce the overall
volatility of an investor’s portfolio.Source: Merrion Investment Managers 31.12.2014
Launched in 2007 to provide an absolute
return platform for Merrion Investment
Managers’ investment process which has a
20 year proven track record in multi asset
funds.
PERFORMANCE UPDATE 31.12.2014
High Alpha Fund Target
1 Year 9.0% 7.0%
3 Years p.a. 9.8% 7.0%
5 Years p.a. 7.1% 7.0%
7 Years p.a. 12.8% 7.0%
Inception 160.6% 64.8%
HIGH ALPHA FUND – DYNAMIC ASSET ALLOCATION
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HIGH ALPHA FUND – DIVERSIFICATION BENEFIT
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The High Alpha Fund compound annualised return of 13.8% since inception compares
favourably versus the compound annualised return of 6.0% for World Equities over the same
period.
High Alpha Fund returns have been significantly better than equity market returns with
extremely low correlation to the main global equity markets.
An investment in the High Alpha Fund can significantly reduce the volatility of an investor’s
portfolio.
Correlation R‐squared
Euro Stoxx 0.22 0.05 S&P 500 0.25 0.06 Nikkei 225 0.10 0.01 MSCI World Index 0.29 0.08
PERFORMANCE STATISTICS - MERRION HIGH ALPHA
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STATISTICAL ANALYSIS SINCE INCEPTION
Merrion HighAlpha
Composite Hedge Fund
Index
Compound Annual Return 13.8% 5.6%
Average Quarterly Return 3.5% 1.5%
Largest Quarterly Gain 30.0% 9.2%
Largest Quarterly Loss (8.7%) (9.6%)
% Positive Quarters 63.3% 66.7%
Average Positive Return 7.8% 3.9%
Average Negative Return (3.8%) (3.9%)
% Negative Quarter 36.7% 30.0%
Annualized Standard dev. 16.0% 9.2%
Max Drawdown (9.0%) (15.5%)
Annualized Standard dev. (5Yr) 9.22% 8.13%
Sharpe Ratio (EONIA) 0.78 0.47
Sortino Ratio (EONIA) 2.55 0.84
QUARTERLY RETURNS
Q1 Q2 Q3 Q4
2014 (6.9%) 2.9% 3.3% 10.1%
2013 (1.0%) (0.8%) 9.2% 5.2%
2012 5.8% (3.8%) (0.5%) 6.3%
2011 (1.5%) (3.5%) 4.2% 0.2%
2010 4.5% 6.9% (4.5%) 0.3%
2009 30.0% 15.1% 13.0% (7.2%)
2008 3.4% (8.7%) 15.8% (3.7%)
2007 2.6% 9.3%
POSITIVE EXAMPLE: TOYO TIRE (JAPANESE AUTO PARTS)26.2% PROFIT
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Macro – BoJ QE means weak currency, strong equity market
Valuation – earnings under-estimated due to yen sensitivity, oil weakness – gives P/E relative to Topix of 0.5 for double digit growth, or 1.5x book value for 20% ROE
Technical analysis – breakout after consolidation
MACRO ANALYSIS VALUATION ANALYSIS
TECHNICAL ANALYSIS
Bank of Japan Balance SheetTopix Index
Toyo Tire Price
NEGATIVE EXAMPLE: MICHAEL KORS (LUXURY BRANDS)7.7% LOSS
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Macro – US employment market improvement suggests retail spending to pick up
Valuation – decline in P/E multiples (both absolute and relative) at odds with gathering strength of US consumer
Technical analysis – trading above key support provided good entry point with clear stop loss level
MACRO ANALYSIS VALUATION ANALYSIS
TECHNICAL ANALYSIS
Unemployment RateWeekly jobless claims
Duration of unemployment
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INVESTMENT PROCESS
Valuation Analysis Macro Analysis Technical
Analysis
Merrion Group
Fixed Income Analyst Macro Analyst Portfolio Managers Research Analysts
Investment Consultants
Quantitative Analysis
MERRION – INVESTMENT TEAM STRUCTURE
Past performance may not be a reliable guide to future performance. Investments may fall as well as rise. Funds may be affected by changes in currency exchange rates. Merrion Capital Investment Managers (Trading as Merrion investment Managers) is regulated by the Central Bank of Ireland.
Merrion Investment ManagersGuild House (2nd Floor)Guild StreetIFSCDublin 1
Phone: 353-1-670 2500 Fax: 353-1-670 2356
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