Are traditional Cautious Managed funds still relevant?

Andrew Blair, SIG Head of Business Development

Bankhall – 3rd November 2009

for financial advisers only

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Agenda

• The traditional Cautious Managed fund

• Introduction to alternative asset classes

• “4 Pillars” of a strong, modern multi-asset fund

• Conclusion

• Skandia Diversified fund

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IMA Cautious Managed Sector

• Funds investing in a range of assets with the maximum equity exposure restricted to 60% of the fund

• The fund will have at least 30% invested in fixed interest and cash.

• There is no specific requirement to hold a minimum % of non UK equity within the equity limits.

• Assets must be at least 50% in Sterling/Euro and equities are deemed to include convertibles.

Source: IMA Cautious Managed Sector definition3

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Example of a traditional Cautious Managed fund

Source: Skandia Investment Group; Skandia Cautious fund asset allocation 31/03/2003

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Example of a traditional Cautious Managed fund

Source: Financial Express; Gartmore Cautious Managed fund asset allocation 30/06/2006 – 30/06/2009 5

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IMA Cautious Managed Sector

Source: Financial Express IMA Unit Trust/OEIC/ Cautious Managed sectors, 5 years to 30 September. Bid to bid basis. Past performance is not a guide to future performance.

5 years to 30 September 2009

-10

10

20

30

40

50

60

0

Per

form

ance

P

erce

nta

ge

(%)

IMA Cautious Managed

66.73% differential between best and worst performing

funds

+64.04%

-2.69%

22.28% Sector Average

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6

7Source: Financial Express IMA Unit Trust/OEIC/ Cautious Managed sectors, 1 year to 30 September 2009. Bid to bid basis. Past performance is not a guide to future performance.

IMA Cautious Managed

-10

-0

5

10

15

20

25

-5

Per

form

ance

P

erce

nta

ge

(%)

-15

+28.56%

-12.53%

7.62% Sector Average

41.09% differential between best and

worst performing funds

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1 year to 30 September 2009

IMA Cautious Managed Sector

7

8Source: Lipper Hindsight IMA Unit Trust/OEIC/ Cautious Managed sectors, 5 years to 30 September 2009. Bid to bid basis. Past performance is not a guide to future performance.

IMA Cautious Managed

8.13% Sector Average

14.79%

3.92%

Ann

ualis

ed V

olat

ility

P

erce

nta

ge

(%)

0

4

6

8

10

12

14

2

16

5 years to 30 September 2009

IMA Cautious Managed Sector

8

9Source: Financial Express IMA Unit Trust/OEIC/ Cautious Managed sectors, 1 year to 30 September 2009. Bid to bid basis. Past performance is not a guide to future performance.

IMA Cautious Managed

0

10

15

20

25

30

5

13.46% Sector Average

27.21%

1.56%

Ann

ualis

ed V

olat

ility

P

erce

nta

ge

(%)

1 year to 30 September 2009

IMA Cautious Managed Sector

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Cautious Managed Fund

Exposure to Equities

Exposure to Fixed Interest

Strategic Asset Allocation

Tactical Asset Allocation

Exposure to Commodities

Exposure to Private Equity

Exposure to Hedge Fund like strategies

Structure of a traditional Cautious Managed fund

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Introduction of Alternative Asset Classes

• Regulation expanded– UCITS III– COLL Sourcebook

• Alternative asset classes used for investment purposes and not just Efficient Portfolio Management

• More choice from alternative fund vehicles other than Property & BlackRock Gold & General:

– Market Neutral – Infrastructure – Water

– Volatility – Currency – Timber

– Commodities – Hedge fund – Tactical

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Benefits of Alternative Asset Classes

• Add further diversification

• Low correlation to existing asset classes

• Low correlation within Alternative asset classes

• Enhance risk control across the fund

• Aiming to provide positive risk adjusted returns

• Strong potential to dial-down risk without reducing returns

• Further enhances the efficient frontier

12

13

Efficient portfolio frontier

For Illustrative purposes only Standard Deviation

Exp

ecte

d R

etur

n

Cautious

Diversified

13

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JPM Highbridge Statistical Market Neutral

• The fund aims to generate a positive return regardless of the direction of the stock market.

• Utilises a market neutral long/short equity strategy

• Strategy based on mathematical modelling to exploit small market inefficiencies

• Derives returns from equities regardless of market fluctuations giving low correlation and volatility

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• Boutique asset management of former Goldman Sachs partner and Downing Street Policy Advisor Gavyn Davies

• Designed to provide the same benefits as hedge fund investment in transparent and liquid form

• The Fulcrum Hedge Fund Replacement is a UCITS III fund which invests in currency, equity, commodity, fixed income and credit markets in a similar manner to hedge funds.

• Designed to outperform the overall hedge fund universe.

Fulcrum Alternative Beta Plus

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• Benefits of Hedge Funds– Superior Risk-adjusted return– Low correlation with traditional asset classes– Have an Absolute Return flavour

• Fulcrum’s Hedge Fund Replacement is:– Much lower cost than fund of hedge fund exposure

because there is only one layer of fees and does not charge a performance fee

– Highly liquid– Regulated (UCITs III)– Transparent

Fulcrum Alternative Beta Plus

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Correlations between asset classes

Asset Classes

Alternatives UK EquitiesInternational

EquitiesCorporate

BondsGilts

Alternatives 0.43 0.58 0.06 0.02

UK Equities 0.43 0.92 0.33 -0.13

International Equities 0.58 0.92 0.24 -0.07

Corporate Bonds 0.06 0.33 0.24 0.52

Gilts 0.02 -0.13 -0.07 0.52

Source: Financial Express, 30/09/1999 – 30/09/2009. Credit Suisse Tremont Hedge Fund Index, FTSE All Share Index, MSCI AC World Index, IBOXX Sterling Corporate Bond All Maturities Index & IBOXX Sterling Gilts All Maturities Index. Past performance is not a guide to future performance.

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What makes a Multi-Asset fund

• Exposure to all asset types, including alternatives

• Utilising Strategic and Tactical asset allocation

• Aims to outperform benchmark/sector on a risk adjusted basis

• Adaptability to current market conditions

Just changing the fund name is not enough!

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Alternative Asset

Classes

Providing Diversification

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“4 Pillars” of a modern Multi-Asset fund

Adding Alpha

TacticalAsset

Allocation

StrategicAsset

Allocation

Minimising Client Risk

Manager Selection

Single Strategy v

MultiManager

2121

Diversifying asset classes

Source: Financial Express, Total Return, Bid to Bid with net income re-invested, discrete years from 01/01/1999 – 31/12/2008. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up.

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Cautious Managed Fund

Multi-Asset Fund

Exposure to Equities Exposure to Fixed Interest Strategic Asset Allocation Tactical Asset Allocation Exposure to Commodities Exposure to Private Equity Exposure to Hedge Fund like strategies

Traditional Cautious Managed fund v Multi-Asset fund

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2323

Are traditional Cautious Managed funds still relevant?

• Restricted in exposure to asset classes

• Rigid in terms of changing asset allocation

• Not using full investment powers available

• Not fully diversified

2424

Skandia Diversified fund

Key Points

Objective To provide investors with long term capital growth through investment in a diversified range of asset classes

UK IMA Sector

Cautious Managed

Type of fund Multi-Manager

TER* 1.79%

Source: *Skandia Investment Group; as at 31/07/2009

2525Source: Skandia Investment Group; as at 30/09/2009

Min Neutral Max Current

Cash 0% 0% 10% 4.25%

Bonds 30% 30% 40% 30.00%

Equities 40% 50% 60% 52.75%

Alternatives 10% 20% 24% 13.00%

Skandia Diversified fund TAA benefits

2626Source: Skandia Investment Group; as at 30/09/2009

Skandia Diversified fund allocation

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Skandia Diversified fund

Asset Classes and Managers

Fixed Interest + Cash

Alternatives

Morgan Stanley Commodities Fund

Commerzbank UK Premia Fund

JPM Highbridge Statistical Market

Neutral Fund

Fulcrum Alternative Beta

Plus Fund

Aviva Tactical Asset Allocation

Fund

Morgan Stanley FX Alpha RC400 Fund

GSAM Sterling

Liquidity Fund

BlackRock

Royal LondonGSAM

JP MorganPIMCO Inflation

Linked Bond Fund

M&G Optimal Income Fund

Threadneedle

Source: Skandia Investment Group; as at 30/09/2009

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International Equities

(Skandia GlobalDynamic Equity)

Skandia Diversified fund

UK Equities

OriginMirabaud UBS Lazard

Schroders(Skandia Global Dynamic Equity)

BGISkandia UK

Best Ideas Fund

Skandia UK Strategic Best

Ideas Fund

AcadianEpoch

Bernstein

QMAMarsico

State Street* Argonaut Gartmore

MIR FuNNeX**First State

Source: Skandia Investment Group; as at 30/09/2009. * Following the forthcoming departure of Dirk Enderlein from Allianz RCM, State Street have taken control of this mandate and are currently managing it passively.**Please note the Investment Adviser is Dalton Capital (Guernsey) Limited and Dalton Strategic Partnership LLP (Dalton). FuNNeX Asset Management, Inc. provides investment advice on a non discretionary basis to Dalton.

Asset Classes and Managers

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Skandia Diversified fund performance

Source: Financial Express, Data to 30/09/2009, bid to bid with net income reinvested. Past performance is not a guide to future performance. Skandia Cautious fund changed its name on 15 May 2009 to Skandia Diversified fund.

Skandia Diversified fund Performance Quartile

1 month 4.36% 1st

3 months 15.43% 1st

6 months 24.15% 1st

1 year 15.03% 1st

3 years 2.09% 2nd

5 years 25.10% 2nd

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Conclusion

• Cost effective solution for investors seeking long term out-performance with controlled volatility

• Added value from diversified weighting of asset classes and manager selection

• Flexible asset allocation between asset classes, investment styles and regions

• Best in class managers

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Important investment notes• What you get back will depend on investment performance and is therefore not guaranteed. The

value of investments and any income from them can fall as well as rise.• When you cash in your investment you may get back less than you invested, especially in the early

years.• The past performance of an investment is not a guide to future investment performance.• You should appreciate that there are inherent risks in all types of investment. There can be no

guarantee that the objectives of the funds will be achieved.• This Fund includes some exposure to emerging markets, which tend to be less well regulated and

more volatile than more established stock markets, so increasing the potential risk to investors.• Where the fund enters into derivative transactions with counterparties, there is a risk that they may

default on their obligations or become insolvent.• At times, the Fund may invest in smaller companies, which may carry a higher degree of risk and be

more difficult to sell than larger companies.• You should remember that the real value of your investment will be reduced by inflation.• Where the Fund invests in securities designated in a different currency to the Fund, the value of the

Fund may rise and fall purely as a result of exchange rate fluctuations.

Skandia Investment Group is a trading name of Skandia Investment Management Limited. Skandia Investment Management Limited is authorised and regulated by the Financial Services Authority. FSA Registered Number 208543 Registered Number: 4227837 England Registered office: Skandia House, Portland Terrace, Southampton, SO14 7EJ, United Kingdom

This presentation is designed for professional advisers only and should not be relied upon by existing or prospective clients of Skandia.

November 2009

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