EQUITY RISK CONCENTRATION

Source: Factset, ILIM

FACTORS EXPERIENCED LONG TERM

OUTPERFORMANCE

Source: Data from 1975 – 2015. Source: Factor Indexes in Perspective, Insights from 40 Years of Data, MSCI Research Insight

QUANT STRATEGIES GROUP (QSG) OVERVIEW

• ILIM Quantitative Investment team established in 1996

Quantitative Architecture integral to ILIM’s Investment Solutions

ACTIVE

PROCESSES

• Multi-Factor Active Equity

• Currency / Country Overlay

• Commodities

RISK CONTROL

STRATEGIES

PORTFOLIO MODELLING

SOLUTIONS

• Dynamic Share to Cash

• Low Volatility Equity

• Irish Life MAPS & Model Portfolios

ILIM: A UNIQUE FOCUS ON RISK CONTROL

Source: Factset, ILIM

Volatility is not the same as Risk

ILIM INSIGHTS – THREE KEY PILLARS TO

DRAWDOWN CONTROL

Objective: Reduce medium-term drawdown & preserve return potential

ASSET

DIVERSIFICATION• Aligned with long-term goals

FACTOR

DIVERSIFICATION• Improve portfolio efficiency

DYNAMIC EQUITY

ALLOCATION• Capture drivers of asset risk

ASSET ≠ RISK DIVERSIFICATION

Asset Diversification offered limited protection during Global Financial Crises

Source: Factset, ILIM

May 07 to Feb 09

DIVERSIFICATION WITHIN YOUR

EQUITY PORTFOLIO

EQUITY PORTFOLIO

WHAT ATTRACTS INVESTORS TO

FACTOR INVESTING

Factor Portfolio Performance Characteristics

1990 – 2014 (Gross Returns USD)

Source: Factset, ILIM

IS THIS A FREE LUNCH?

CYCLICALITY IS A KEY DIMENSION

Relative Performance of Factor Portfolios – North America Feb 1990 to Dec 2014

Source: Factset, ILIM

ILIM’s MULTI-FACTOR EXPERIENCE

• ILIM Multi-Factor Fund Range launched in 2005

• Aims to deliver stable outperformance with low benchmark risk

*Global Composite IR = 1.0 from June 2005 to Dec

2014. Source: Factset, ILIM

ILIM’s GLOBAL LOW VOLATILITY EQUITY FUND

EXPERTISE • Extension of ILIMs multi-factor experience

OBJECTIVE • Deliver market return with reduced drawdowns and volatility

RESEARCH • Identified factors and sector tilts to reduce drawdown risk

RESULT • Reduces cumulative drawdown with no loss of return

PURPOSE • Reduce Equity drawdown while maintain long run return

ROBUST • Model tested across multiple markets and time periods

SYSTEMATIC • Systematic process based on range of factors monitored daily

RESULT • Reduces Equity drawdown while maintain long run return

ILIM’s DYNAMIC-SHARE-TO-CASH (DSC)

MODEL PORTFOLIO – CASE STUDY

Client Objective Deliver similar long run growth potential with lower risk

Strategic Allocation Decision What this means for our client?

*Expected outcomes calculated by ILIM using simulated portfolio outcomes

based on return, volatility and correlation assumptions for underlying assets **Historical Backtest window Dec98-Dec14

WHY NOW?

FOCUS NEEDED ON SMARTER RISK CONTROL

Rally now fourth largest since 1932 in

terms of both gain and lengthGlobal Equities marginally above

historical average

Source: Factset, ILIM. *Top US Equity Rallies since 1932 Post 20% Correction Source: Factset, ILIM. *Global 12 month Forward Price/Earnings

IN SUMMARY

• Greater focus on drawdown control

• Diversification across both assets and styles appropriate

• ILIM risk control strategies addresses investor needs

• Prudent to consider approach given market gains

• Investors seek Equity Risk Premium with greater downside

protection

• Equity Market Risk major driver in multi-asset portfolios

• ILIM has undertaken extensive in-house research project

exploring methods to directly manage downside Equity risk

ILIM DYNAMIC SHARE TO CASH PROCESS (DSC)

ILIM DYNAMIC SHARE TO CASH PROCESS (DSC)

• A fully systematic process to manage equity

market risk

• Focus on medium-term absolute drawdown

• Equity weight is adjusted in response to

quantitative multi-factor risk measure

• Fundamentals

• Price movements

• Macro Economy

• Monitored and traded daily (as required)

WHAT IS DSC?

• Lower historical losses

• Superior Risk-Return profile

• Systematic re-entry avoids behavioural bias

• Signal live since Q4 2012, and incorporated

into retail MAPS funds in May 2013

• €1bn now tracking DSC process

PRODUCT HISTORY

PERFORMANCE OBJECTIVES

WHAT IS FREQUENCY OF 20% DDs?

…and 30% drawdowns every 9 years!

Historically these have happened once every 2-3 years…

VALUATION IS ONE MEASURE OF RISK

Expensive low yielding assets are prone to price correction as outlook changes

JAPAN PROPERTY

MARKET 1989YIELD ~ 1% (cash 4%)

EQUITY 2000 YIELD ~ 2% (cash 3.5%)

IRISH PROPERTY 2007 YIELD ~ 2% (cash 3%)

These crashes prefaced by low absolute, and negative relative yields

MEDIUM TERM EQUITY LOSSES ARE NOT

RANDOMLY DISTRIBUTED

Example: How are 3 year negative outcomes distributed versus initial normalised earnings yield?

3 YEAR S&P 500 INDEX RETURNS EXCESS TO CASH

VALUATION AND MOMENTUM:

COMPLEMENTARY PROTECTION

• Valuation (E/P): a fundamental

measure of ability to deliver return

• Momentum (Moving Average)

Serial correlation in markets is well

established

Bad news emerges piece-meal

• Both factors provide drawdown

protection over many cycles (since

1900)

• Test: Reduce equity weight in linear

fashion when signal is negative

(100% US Equity Benchmark)

DYNAMIC SHARE TO CASH MODEL INPUTS

• Simple Valuation and Technical Factors offer drawdown protection,

independently, and over numerous market cycles

• Expand fundamental component beyond simple valuation

• Incorporate Macro Drivers that demonstrate drawdown protection

DSC – VARIABILITY IN MODEL WEIGHT

Model at full equity weight c.60% of the timeAverage Annual Turnover 66%; Highest

calendar year turnover is 202%

Model weight consistent with the view that equities represent a reasonable investment most of the

time, with concentrated periods of negative performance

DSC HISTORICAL DRAWDOWN PROTECTION

(GLOBAL EQUITY BENCHMARK)

DSC HISTORICAL DRAWDOWN PROTECTION

(GLOBAL EQUITY BENCHMARK)

• Drawdown reduced by an

order of magnitude

• No evident loss of return

• Increased long-run Risk /

Return Ratios

RECENT DSC SIGNAL EVOLUTION

• Process has kept funds at maximum equity exposure since inception, through a strong bull market

• Closest to de-risking in October 2014 drawdown

CONCLUSION

• At times of market stress asset diversification offers limited protection

• The best risk objective is to limit drawdown, and protect capital

• A multi-factor approach sensitive to fundamental, technical and

macro risk is more robust than simple volatility measures

• ILIM DSC model demonstrated highly significant Equity downside

protection without giving up long run Equity return

Donie O’Brien

• Launched in July 2014

• Has grown to €709m AUM

• Integral part of our flagship MAPS range

• Delivering on its objective of similar returns to MCSI World with

lower volatility and reduced drawdowns

ILIM’s GLOBAL LOW-VOLATILITY

ACTIVE EQUITY FUND

WHY INVEST IN LOW VOLATILITY EQUITIES?

• Increased investor focus on volatility and drawdown management

• Cross-asset diversification offered limited protection through the 2008-09

financial crisis

• Yields on liquid defensive assets at historic lows

However: Low volatility stocks have delivered higher average returns than high volatility stocks

WHAT IDENTIFIES LOW RISK STOCKS?

• Manageable debt

• Low leverage

• Low P/E

• High EBITDA/EV

• Low volatility

FACTORS

• Overweight defensive sectors

such as Utilities, Consumer

Staples and Pharma

• Underweight Technology,

Financials, Consumer

Cyclicals

SECTORS

Our findings are consistent across multiple regions and over

multiple time frames throughout the last 30 years

OUR APPROACH

Combine fundamental factor and sector tilts which

have demonstrated greatest cumulative

drawdown protection through multiple market

cycles

Construct portfolio by incorporating additional risk

control constraints (diversification, liquidity, size, turnover, country deviations, etc.)

Control equity drawdown without foregoing long run return premia

OPTIMAL LOW RISK PORTFOLIO

CONSTRUCTION PROCESS

…Portfolio Construction maximises exposure to Low Risk Metric while minimising Volatility, accounting for transaction costs and targeting desired Low Risk Sector Tilts

Stock buy list selected based on

Multi-Factor Low Risk Metric...

...Portfolio tilted toward drawdown

defensive sectors...

-60%

-50%

-40%

-30%

-20%

-10%

0%

Feb

-87

Ap

r-8

8

Jun

-89

Au

g-9

0

Oct

-91

Dec

-92

Feb

-94

Ap

r-9

5

Jun

-96

Au

g-9

7

Oct

-98

Dec

-99

Feb

-01

Ap

r-0

2

Jun

-03

Au

g-0

4

Oct

-05

Dec

-06

Feb

-08

Ap

r-0

9

Jun

-10

Au

g-1

1

Oct

-12

Dec

-13

MSCI World Global Low Volatility Active Equity

BACKTEST

PERFORMANCE

• Significant reduction in cumulative

drawdowns

• Reduced maximum drawdown

• Lower volatility

• Higher annualised returns

• Participate in most of the market

upside while significantly reducing

downside

0.9

9

Feb

-87

Mar

-88

Ap

r-8

9

May

-90

Jun

-91

Jul-

92

Au

g-9

3

Sep

-94

Oct

-95

No

v-9

6

Dec

-97

Jan

-99

Feb

-00

Mar

-01

Ap

r-0

2

May

-03

Jun

-04

Jul-

05

Au

g-0

6

Sep

-07

Oct

-08

No

v-0

9

Dec

-10

Jan

-12

Feb

-13

Po

rtfo

lio V

alu

e (

Lo

g-s

ca

le)

Cumulative Returns - Global Low-Volatility Active Equity

MSCI World Global Low Volatility Active Equity Alpha

ANNUAL RETURNS (BACKTEST)

-40%

-20%

0%

20%

40%

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

Annual Returns (1987 - 2014, in USD)

MSCI World Global Low Volatility Active Equity

• Significant improvement in bear markets

• While capturing most of the upside in bull markets

PORTFOLIO SNAPSHOT

*Risk forecasts based on 5 year covariance matrix

LIVE PERFORMANCE

• Launched in July 2014

• €709m AUM

• Integral part of our flagship MAPS range

• Delivering on its objective of similar returns to MCSI World with lower volatility and reduced drawdowns

CONCLUSION

Key differentiators of the ILIM Global Low Volatility Active Equity Fund:

1. focus on multiple factors

2. to minimise the cumulative drawdown

3. use of a 30 year history incorporating multiple market scenarios

We believe this is an excellent product for investors wishing to remain fully exposed

to the equity risk premium, while aiming to deliver lower volatility and reduced

drawdowns during market crashes.

If you would like to find out more, come and speak to us.

Irish Life Investment Managers Limited is regulated by the Central Bank of Ireland

Past performance, forecasts and simulated performance may not be a reliable guide to future performance

Investments may go down as well as up

Changes in currency exchange rates may have an adverse effect on the value, price or income of the product

This material is for information only and does not constitute an offer or recommendation to buy or sell any

investment and has not been prepared based on the financial needs or objectives of any particular person. It is

intended for the use of institutional and other professional investors

Irish Life Investment Managers, Beresford Court, Beresford Place, Dublin 1

Tel: (01) 704 1200 Fax: (01) 704 1918 Web: www.ilim.com