For internal use only Simon Brennan Director PFS Yorkshire Regional Conference March 2012 Private...

For internal use only

Simon BrennanDirector

PFSYorkshire Regional ConferenceMarch 2012

Private Wealth ManagementDeutsche Ban


Gap/Knowledge Filling 66-68

Investment Principles & Risks Methods of Evaluating Portfolio Performance Performance Measurement Performance Attribution

Simon BrennanPFS London Regional ConferencePrivate Wealth Management

Deutsche Bank


Investment Principles/Objectives

Growth Derive an income Capital security Liquidity

Private Wealth Management

Deutsche Bank Simon BrennanPFS London Regional Conference


Investment Markets

Classification of assets Financial behaviour of assets Correlation of assets Fiscal impact of assets




Basics of Risk

Risk Tolerance The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.

Risk Capacity Financial risk capacity can be measured in many different ways, including time horizon, liquidity, wealth and income. People who have a high liquidity requirement (they could need access to their money at any time) are constrained to how much risk they can take.




Past Performance

Understand investment markets Assess the investment and composition Look at Manager competence Reward for management Predicting the outcomes




Performance

Measurement- returns made over a period

Evaluation Whether manager added value

How the manager added value




Calculating returns

Money weighted return MWR

A measure of the overall return on capital invested over a specific period may include allowance for income introduced or withdrawn




Money Weighted return

R= D+V1-V0

V0

R= rate of return V0= value at the start of the portfolio V1=value of the portfolio at the end of the period D= income during the period




Money Weighted Return V0= £25,000 V1= £28,000 Income (generated) paid out £1,000

£1,000 + £28,000 - £25,000

£25,000=0.16

MWR=16%




Money Weighted Return (income withdrawn/added)



MWR= D+V1-V0- C V0+(C x n/12)Where

N is the number of months

C = Cashflow


Money Weighted Return (income added and withdrawn)

V0= £20,000 V1= £24,000 £3,000 invested in 3rd month £2,000 withdrawn in 9th month £3,000 - £2,000=£1,000 = 24,000 - 20,000 -1,000 20,000+ (3,000x9/12)+(-2,000x3/12)=0.137913.79%




Time weighted return

The time-weighted rate of return is the preferred industry standard as it is not sensitive to contributions or withdrawals.

It is defined as the compounded growth rate of £1 over the period being measured.

The time-weighted formula is essentially a geometric mean of a number of holding-period returns that are linked together or compounded over time (thus, time-weighted).

The holding-period return, or HPR, (rate of return for one period) is computed using this formula:




Time weighted returnEliminates distortions caused by timing of new money

Breaking down the return for a particular period

Reflects sub periods of withdrawn/added cash

Compounding sub periods to get overall return



For internal use onlyPrivate Wealth Management


Simple Approach to TWR

1+R = (1 +r1)(1+r2)(1+r3).......(1+rn)R=TWRr1=holding periodn= sub periods

For internal use onlyFor internal use only

Alpha and Beta




BETA

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.




BETA

0.5 Beta lower volatile than market

1.0 market performance

1.5 market outperformance/underperformance Historical data




Risk adjusted returns

Alpha

Sharpe Ratio

Information Ratio




Alpha

A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a security(stock) and compares its risk-adjusted performance to a benchmark index.

Difference between what you would expect from a security b and the actual return

Cannot be explained by general market movements




Alpha




Positive and Negative ALPHA

POSITIVE.......value added

NEGATIVE...........value detracted





Demonstration of Alpha

Fund A

12%4%

10%1.2

12- [4+1.2(10-4)]=0.8%

Fund B

10%4%

10%0.8

10- [4+0.8(10-4)] =1.2%


Sharpe Ratio

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk.

This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk.

A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility.




Interpreting Sharpe Ratio

The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed

Portfolio return 10% Risk free return 4% SD 8%

Sharpe= 10 – 4 80.75% return over the risk free rate for each unit of risk

taken




Information Ratio

Assess risk adjusted performance Used to demonstrate consistency of beating

benchmark index IR= Ra –Rb

Tracking error

Ra = portfolio return

Rb = benchmark return




Information Ratio IR

A high IR can be achieved by having a high return in the portfolio, a low return of the index and a low tracking error.

For example: Manager A might have returns of 13% and a tracking error of 8%

Manager B has returns of 8% and tracking error of 4.5%

The index has returns of -1.5%




Manager B had lower returns but a better information ratio

Manager A's IR = [13-(-1.5)]/8 = 1.81

Manager B's IR = [8-(-1.5)]/4.5 = 2.11

Manager B had lower returns but a better IR.

A high ratio means a manager can achieve higher returns more efficiently than one with a low ratio by taking on additional risk.





What are benchmarks?

Appropriateness, what are we trying to prove Asset allocation Performance: active/passive/tracker Deviation of benchmark Income generated/dividends/costs of management Tracking error




Industry benchmarks

APCIMS FTSE MSCI Russell RAFI




Creating Benchmarks

Synthetic

Individual

Simple





Performance v benchmarks

Drill into benchmark Industry Composite Absolute/target returns


Bond benchmarks

Look at bond indices ....sovereign v corporate

Corporate financials




Use of benchmarks

Analysis Asset allocation Risk and return Added value, demonstrate returns Performance fee




Selection Process

Fund Collective approach, FoFs Models Manager(s)




Selection of funds/manager/DFM



Industry ratings

Historical data

Survivorship

Size of funds



Risk controls



Assessing fund manager

Considering strategy

PedigreeResearch process



Number of clients



Personality

Security

Added benefits/tools

Review and report process

Internal nesting

Statistics


Returns

Time frame Risk appetite Requirement of client Over engineering




Long term view

Asset Allocation Is the Key

The belief has its origins in a study by Brinson, Hood and Beebower entitled "Determinants of Portfolio Performance" (Financial Analysts Journal, July/August Issue, 1986).

The study concluded that 93.6% of the variation of returns in a diversified portfolio is

explained by the asset allocation policy.

The key term here is "diversified", but we will address that in a moment.




'Strategic Asset Allocation’

A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation.

'Tactical Asset Allocation - TAA’

An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors. Dynamic Asset Allocation‘

‘Dynamic Asset Allocation’

A portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark.




Simple attribution

Asset Class Manager asset Index Contribution

allocation performance to return

% for each class %

%

UK Equities 45 20 9.00

Overseas equities 25 15 3.75

Fixed Interest 20 10 2.00

Cash 10 5 0.50

Overall contribution to return 15.25


Highly disciplined and committed

Invests without emotion

Always up to date with the market

Possesses a realistic outlook on investing

Always has a plan



Five traits of a successful investor


Important Information – Intermediary

This presentation has been prepared for private circulation and is not intended for clients categorised as private customers under the rules of the Financial Services Authority.

This is not a solicitation, or an offer to buy or sell any security. Recommendations do not necessarily imply their suitability for individual portfolios or situations in respect of which further advice should be sought. The price of securities and the income from them can go down as well as up and the amount originally invested may not be received back in full. The

past performance of a security or market is not necessarily indicative of future trends. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice, however this does not

exclude any duty or liability to a customer which Tilney Investment Management has under the Financial Services and Markets Act 2000. Information contained in this publication has been compiled from sources believed to be reliable but is

not warranted to be accurate or complete. Tilney Investment Management and/or companies connected with it may within the last 12 months have provided investment advice or services in connection with any securities referred to or

relatedsecurities and those companies or their officers and employees may have a position or engage in transactions in such

securities.

Deutsche Bank Private Wealth Management is a trading name of Tilney Investment Management.Tilney Investment Management is a Member of the London Stock Exchange and is authorised and regulated by the

Financial Services Authority. FSA Register No: 124255.

Registered Office: Royal Liver Building Pier Head Liverpool L3 1NY Tel: 0151 255 3000 Fax: 0151 236 1252 www.dbpwm.co.uk

Tilney Investment Management is a member of the Deutsche Bank Group.

http://www.tilney.com/

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