Commodities in Dx Insights

8/13/2019 Commodities in Dx Insights

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northerntrust.com | Commodity Index Design | 1 of 12

Insights on...COMMODITY INDEX DESIGN

Jordan Dekhayser, CFAPortfolio Manager,

Global Index Management

[email protected]

Institutional investors generally hold commodities either to diversify their equity and

fixed-income holdings or to protect against inflation. One way to gain this exposure is

through futures-based commodity indexes.

Over the last few years, increasing amounts of assets have been benchmarked to commodity

futures-based indexes1, whose performance is subject to variables such as changing spot prices

and a futures-specific return component called roll yield.

First-generation commodity indexes such as the DJ-UBS Commodity Index and S&P

Goldman-Sachs Commodity Index (GSCI) were innovative when they were conceived because

they provided investors with a broad, measurable and investable benchmark for a relatively

inaccessible asset class. They were developed using methodology similar to that of prevailing

equity or fixed-income indexes: define the universe; choose a metric to weight each commoditybased on its relative importance in the marketplace; and create an index. Additionally, com-

modity indexes hold futures contracts that expire periodically, presenting another decision

factor when creating an index. First-generation indexes generally did not explicitly incorporate

other sources of return in commodity futures, such as momentum and alternative roll meth-

odologies. Considering these features collectively, we arrive at a set of key variables to analyze a

commodity index: commodity selection and weighting, dynamic versus static allocation and

roll methodology.

In recent years, a number of commodity indexes were created that seek to improve upon the

design of first-generation indexes. One example is the ABCI, which is constructed to maintain

exposure to the desirable characteristics of commodities and to provide a high correlation to first-

generation commodity indexes. The latter feature may be important for investors using either the

DJ-UBS or S&P GSCI as their stated commodities benchmark. Furthermore, the ABCI is designedto minimize exposure to undesirable

characteristics of commodity indexes and

to incorporate new and desirable features.

The actual, in-sample results including

risk-adjusted returns, volatility and down-

side protection compare favorably with

first-generation indexes.

C O M M O D I T Y I N D E X E S : D E S I G N M A T T E R S

ALTERNATIVE BENCHMARK COMMODITY INDEX

Northern Trust uses the Alternative Benchmark Commodity Index (ABCI) to

offer clients exposure to commodities. This index, which tracks 19 different

energy, metals and agricultural commodities, is well-aligned with our proprietary

Intelligent Indexingprocess that preserves wealth by managing risks, liquidity

and transactions costs.

Pursuant to an exemption from the Commodity Futures Trading Commission in connection with accounts of qualified eligible persons, this brochure is not required t o be, and hasnot been filed with the Commission. The Commodity Futures Trading Commission does not pass upon the merits of participating in a trading program or upon the adequacy oraccuracy of commodity trading advisor disclosure. Consequently, the Commodity Futures Trading Commission has not reviewed or approved this trading program or this brochure.
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COMMODITIES: KEY TERMS FOR INVESTORS

Total return:The risk-free rate (typically the three-month U.S. Treasury bill rate) plus an

excess return. Excess return:The spot return plus the roll yield.2

Spot return:The return of the active futures contract. During a roll period, the active

futures contract changes to the contract being rolled into.*

Roll yield: The return generated from moving out of an expiring contract and into a new

contract. This may be either positive or negative and is affected by borrowing costs, storage

costs and convenience yield.

Borrowing and storage costs: Charges related to holding the physical commodity. Also

known as the cost-of-carry. All else being equal, futures prices will trade higher than spot

prices due to these costs.

Convenience yield:The benefit of having supplies available for commercial purposes.

When supplies are tight, this benefit tends to be high. When supplies are ample, this

benefit tends to be low. The convenience yield interacts with borrowing and storage

costs to determine whether the futures curve is in contango or backwardation.

Contango: A curve shape where the commodity futures price is higher than the spot

price (Chart 1).

Backwardation:A curve shape where the futures price is lower than its spot price

(Chart 1).

CurrentSpot Price

Time to Expiration

Futures

Price

CurrentSpot Price

Time to Expiration

Futures

Price

Source: Northern Trust

CONTANGO: FUTURES > SPOT BACKWARDATION: FUTURES < SPOT

CHART 1: TERM STRUCTURE: CONTANGO VS. BACKWARDATION

*In commodity indexes the spot return generally refers to a futures contract and not the commodity for immediatedelivery. This is unlike indexes in other asset classes where the spot return typically refers to the physical securities.
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FUTURES CURVE SHAPES

The futures curves shape is important to investors because it can create a hurdle that the spot

return must overcome to create positive excess return. In some instances, the curve can be so steep

that it is unlikely that the spot return will exceed this hurdle, making it questionable whether onewants to hold that specific commodity at full index weight. Furthermore, futures curves can change

their shapes, moving from contango to backwardation (sidebar, p. 2) or vice versa, creating a key

risk to certain strategies that seek to capitalize on the current shape of the curve.

The spot markets outlook also is critical. In fact, the correlations between the spot return and

the roll yield tend to be negative, indicating that a commodity with a negative roll yield tends to

have a positive spot return and vice versa (Table 1). Lastly, in addition to the curves slope, the

degree of its concavity or convexity is important in determining where on the curve is the optimal

point to hold futures positions in order to maximize roll yield. Merely holding longer-dated futures

contracts does not necessarily increase investor roll returns. Regardless of whether a strategy

is algorithmically positioned to maximize the roll yield or simply holds longer-dated futures

contracts, the greatest liquidity and open interest generally concentrate in the front months,

potentially reducing the size of roll-yield positioning opportunities.For investors, this ultimately means that the way a commodity or commodity index invest-

ment is made can significantly affect final investment results. For example, in 2012, the roll yield

of natural gas was 42% in the DJ-UBS Index.3

An index with a static allocation would be

unable to incorporate this information into the

commoditys weighting in the index. However,

an index that is designed to incorporate this

information contemporaneously can help

investors reduce the impact from a negative

roll yield (high hurdle rate).

COMMODITIES DIVERSIFICATIONAND INFLATION PROTECTION

The two commonly cited reasons for commodi-

ties investing are diversification and inflation

protection. Diversification is provided through

low correlations to other asset classes (equity

and fixed income, Table 2). For example, the

commodity indexes in Table 2 have a correlation

between 0.36 and 0.49 to the Standard & Poors

(S&P) 500. This diversification can help improve

the efficient frontier of a multi-asset-class portfolio.

TABLE 1: CORRELATION OF SPOT RETURN VS. ROLL YIELD (DJ-UBS INDEX)

Agriculture Energy

Industrial

Metals Livestock

Precious

Metals

0.30 0.16 0.07 0.48 0.13

Sources: S&P Dow Jones, Bloomberg, Northern Trust.

Correlations reflect 10-year monthly return data thru 12/31/2012.

TABLE 2: COMMODITY INDEX CORRELATIONS TO OTHER ASSET CLASSES

10-Year Correlation Matrix

ABCI DJ-UBS S&P GSCI S&P 500

Barclays

US Agg

ABCI 1.00 0.93 0.94 0.36 0.03

DJ-UBS 0.93 1.00 0.89 0.49 0.06

S&P GSCI 0.94 0.89 1.00 0.42 0.03

S&P 500 0.36 0.49 0.42 1.00 0.04

BarclaysUS Agg

0.03 0.06 0.03 0.04 1.00

Sources: S&P Dow Jones, AIA, Bloomberg, Northern Trust.Correlations reflect 10-year monthly return data thru 12/31/2012.


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Furthermore, individual commodity sectors have relatively low correlations to each other,

underscoring the importance of maintaining broad-based commodity exposure in an index. As a

frame of reference, the average pair-wise correlation between the five commodity sectors detailed

in Table 3 is 0.25, as opposed to a value of 0.61 for S&P 500 sectors.

4

Low sector correlations incommodities are due to the disparate risk exposures of each commodity sector, as well as the lack

of a unifying source of return across all commodities such as exists for equities (market beta). For

example, agricultural prices are driven by, among other factors, weather in their specific growing

regions.5The price of gold, however, relates more to global macroeconomic factors such as real

interest rates and expected inflation rather than industrial demand and thus can help diversify

against the risk of depreciating and potentially devalued currencies. Having a meaningful exposure

to each commodity sector can thus add desirable diversification properties to an investors overall

asset allocation and within the commodity allocation.

Inflation protection is particularly relevant, given

concerns that loose U.S. monetary policy and highcommodities demand from developing countries could

spur inflation. Commodity indexes have a high correla-

tion to inflation, currently around 0.61 0.68 (Table 4),

providing some level of protection against higher prices.

The reason for this is rather straightforward. The U.S.

Consumer Price Index (CPI) includes exposure to many

of the raw commodities that comprise commodity bench-

marks. For example, food and energy make up around

25% of CPI on a value-weighted basis but can account for

more than half of the indexs volatility.6Holding exposure

to some of the inputs to CPI via a commodity index can

help mitigate the deleterious impact of inflation on pur-chasing power, or more directly, on CPI-linked liabilities.

TABLE 3: COMMODITY SECTOR CORRELATION MATRIX (SPOT RETURNS FOR DOW JONES-UBS

COMMODITY SECTOR)

Spot ReturnCorrelations Agriculture Energy

Industrial

Metals Livestock

Precious

Metals

Agriculture 1.00 0.28 0.41 0.04 0.42

Energy 0.28 1.00 0.44 0.07 0.30

Industrial Metals 0.41 0.44 1.00 0.12 0.42

Livestock 0.04 0.07 0.12 1.00 0.11

Precious Metals 0.42 0.30 0.42 0.11 1.00

Sources: S&P Dow Jones, Bloomberg. Correlations reflect 10-year monthly return data 12/31/2002 12/31/2012.

TABLE 4: INDEX CORRELATIONS

TO CPI

CPI

ABCI 0.65

DJ-UBS 0.61

S&P GSCI 0.68

S&P 500 0.27

Barclays US Agg 0.00

Sources: S&P Dow Jones, AIA, BLS, Bloomberg,Northern Trust. Correlations reflect 10-yearmonthly return data 12/31/2002

12/31/2012. CPI lagged 1 month.


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COMMODITY SELECTION AND WEIGHTING

Every benchmark methodology, regardless of asset class, must specify which positions to hold

and in what weights. For equities and fixed income, there is a general consensus on construction

of a beta index. The instruments included are representative of the asset class and are sufficientlyliquid to maintain a substantial amount of assets that may be benchmarked to them. In this vein,

commodity indexes look to include commodities that are economically significant and have

enough open interest and trading volume to build investable benchmarks. However, commodity

indexes differ dramatically from their equity and fixed-income brethren in that they can have

substantially different weights for specific commodities and commodity sectors (Chart 2) while

still claiming to represent the asset class.

An individual stocks weight in an equity index is typically driven solely by the stocks free-float

market capitalization as a percentage of the entire indexs free-float market cap (static weighting).

However, to determine an individual commoditys weight within a commodity index, most indexes

use some combination of production and liquidity measures (static weighting). Furthermore, some

commodity indexes impose artificial caps on the weight assigned to commodities and commodity

sectors. These measures can result in drastically different commodity weights depending on howthey are incorporated. For example, depending on which commodity index they choose, an investor

would receive an energy allocation of either 69% (S&P GSCI) or 32% (DJ-UBS).

0%

10%

20%

30%

40%

50%

60%

70%

80%

Agriculture Energy Industrial Metals Precious Metals Livestock

31%

16%

23%

32%

69%

42%

19%

7%10%

13%

4%

19%

6% 5% 5%

DJ-UBS S&P GSCI ABCI (Max)

Sources: S&P Dow Jones, AIA, Bloomberg, Northern Trust. Data as of 12/31/2012.

CHART 2: COMMODITY SECTOR WEIGHTS

Investors can

receive drastically

different exposure to

commodities, depending

on the benchmark.


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The construction of the ABCI incorporates some of the uniqueness of commodities. Though the

weight of a commodity in, for example, the S&P GSCI depends solely by its relative production,

the weight of an individual commodity in the ABCI hinges not only on production and liquidity

but also on recent momentum. Table 5 highlights key distinctions between index methodologies.

DYNAMIC VS. STATIC ALLOCATION: THE CASE FOR MOMENTUM IN COMMODITIES

Momentum is important to all asset classes but is uniquely important to commodities because

many commodities are consumable assets with both a limited shelf life and a limited supply.

For example, adjusting wheat production to counter a supply shortage is impossible until the

following years harvest. Thus, the price of wheat can be persistently strong in a market that is

undersupplied in the short- to intermediate-term. Another example would be a market that is

oversupplied, which could lead to a large amount of contango as supplies are placed in inven-tory. During 2012, this was the situation in the natural gas market, which had a highly negative

roll yield. Depending on ones outlook for the natural gas market, an investor could reasonably

conclude that the expected return on a long futures position in natural gas may be negative.

The momentum approach of the ABCIs commodity-by-commodity dynamic allocation is a

look-back strategy. To determine the sign of a momentum signal, the ABCI methodology looks

to a futures index series incorporating the excess return (spot plus roll) of each commodity. The

strategy will compare each indexs current value to three trailing periods and create an index position

with a target weight equal to 40%, 60%, 80% or 100% of the maximum weights in Chart 2.

The economic rationale discussed here for momentum in commodities is not relevant to, say,

equity investors whose expectedreturns are generally positive. When commodity market dynamics

create a hurdle rate that is either insurmountable or extremely high, less exposure to that particular

commodity may make sense. The spot dynamics, however, must also be considered to determinewhether to increase or decrease exposure to a commodity futures contract. By using thefutures

index series to determine the momentum signals, which ultimately determine the weight of

individual commodities, the ABCI captures the interaction of spot return and roll yield. The

index does not distinguish which source of return is dominant, but the result will be an index that,

all else equal, will allocate away from commodities with negative roll yields (contango) and toward

TABLE 5: INDEX METHODOLOGY HIGHLIGHTS

Commodity Weighting

Method Exposure Caps

Resulting Energy Weight as

of 12/31/2012

DJ-UBS Static. Liquidity (2/3weight) and production(1/3 weight)7

Exposures capped at thecommodity group, sectorand single commoditylevel (33%, 25% and15%, respectively

32%

S&P GSCI Static.Production-weighted

None 69%

ABCI Dynamic. Liquidity (2/3weight) and production(1/3 weight) determinemaximum weights

Sector minimum andmaximum exist, but nonecurrently affect weights

42%

Sources: S&P Dow Jones, AIA, Bloomberg, Northern Trust.

Momentum in

commodities is unlike

that of other investable

asset classes due to supply

and demand dynamics.


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commodities with positive spot returns. Relying on only spot orroll ignores the relationship of the

two and can lead to a sub-optimal commodity allocation.

The ABCI incorporates these momentum signals, acknowledging fundamental and technical

reasons for the persistence of momentum in the short- to intermediate-term in spot and futuresmarkets (Gunzberg and Kaplan [2007], Schneeweis et al. [2008]). From a technical standpoint,

momentum is a popular strategy employed by active managers (Asness et al. [2012]). The ABCI

seeks to capture the return associated with momentum in a rules-based approach, which may

result in a more cost-effective solution for investors trying to capture this source of return.

Incrementally, the dynamic asset allocation strategy that ABCI employs has added 2.5% to

annual returns with a factor volatility of 3.6% (Sharpe Ratio of 0.75).8Furthermore, the return

attributed to dynamic weighting has been positive for 17 of the 19 commodities included in the

index, suggesting these results are significant (Chart 3).

Importantly, the dynamic asset allocation of the index is implemented concurrently with a cash

position. At the aggregate level, the dynamic asset allocation and defensive cash position in the

ABCI result in an index expected to have a long-run average of 70% exposure to commodities

and 30% exposure to cash. Since 2005, ABCI has had an actual allocation to commodity futures

and cash averaging 72% and 28%, respectively. Two-thirds of the time, the commodity exposure

was between 58% and 85%. Rarely does the index go above 90% or below 50% (Chart 4, p. 8).

Taken together, these features historically have resulted in lower volatility and improved risk-

adjusted returns (Table 6, p. 10). Investors who make asset allocation decisions on a risk-weighted

basis may find benefits because they can increase risk-based allocations to other strategies.

2

0

2

4

6

8

10

C

omposite

Energy

BrentCrude

Gasoil

HeatingOil

Na

turalGas

Unleaded

W

TICrude

Metals

A

luminum*

Copper

Gold

Nickel*

Silver

A

griculture

Cattle

Coffee

Corn

Hogs

Soybeans

Cotton

Sugar

Wheat

3.9

2.5

4.7

3.7

2.7

6.7

2.9

3.6

2.01.9

4.4

8.4

0.1

0.9

1.2

0.7

2.01.8

2.5

0.6

1.3

4.7

0.7

January 1991 May 2012; *January 2002 May 2012

Source: AIA.

CHART 3: DYNAMIC ASSET ALLOCATION INVESTMENT RESULTS

The ABCI provides

access to additional

sources of return, such as

momentum and relative

roll, beyond traditional

commodity indexes.


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ROLL METHODOLOGY

Roll yield is a very important concept for commodity index investors since the rolling of futures

contracts directly affects their total return. Over short periods of time, the spot return tends to

dominate due to its higher volatility. However, over long time periods, the rolling of futures can

significantly affect the total return of a commodity portfolio. Therefore, understanding the roll

methodology employed, as well as its effect on risk and return, is critical.

DJ-UBS and S&P GSCI roll their contracts from the expiring contract to the next active

contract during a concentrated five-day window near the beginning of the month. The index

provider specifies these periods; therefore, with an accurate estimate of assets benchmarked toeach index, one can predict the volumes that passive indexers must trade in order to track the

benchmark. This feature can be a double-edged sword. On one hand, this volume advertising

can allow for other participants to enter the market to offset the index supply and demand. On

the other hand, non-index market participants may incorrectly forecast anticipated trade volumes

and either exacerbate or even invert the expected index effect. Regardless, the fewer days in the

roll period, the more impact a price event that unevenly affects contracts being rolled on one

of those days will have on the index. The ABCI employs a daily roll methodology designed to

completely allocate exposure away from the nearby futures contract before some of the common

indexes start their rolls. Furthermore, by rolling a small amount of the position held each day,

investors tracking the ABCI may have less market impact than with a concentrated roll cycle.

The other result of the ABCI daily roll is that the index has a longer average maturity than

an index that holds similar contracts. In other words, the ABCI relative to its peers becomes

underweight the contract that is most active in other commodity benchmarks and overweight

the next contract month. Historically, ABCIs relative roll strategy has added 1.5%9to its annual

returns versus indexes with roll cycles like DJ-UBS or S&P GSCI. The volatility around this

factor is 1.0%, leading to a Sharpe Ratio of 1.58 for the relative roll factor. The positive relative

roll factor in 18 of the indexs 19 commodities indicates that this factor as well as the

momentum factor is significant.

1/2/2006 1/2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 12/31/12

40%

50%

60%

70%

80%

90%

100%

Futures Allocation Average Allocation

Sources: AIA, Northern Trust.

Two thirds of the time, the %allocation to commodities isbetween the green lines.

CHART 4: PERCENT OF ABCI HELD IN COMMODITIES (VERSUS CASH)Over long time periods,

the rolling of futures can

significantly affect the total

return of a commodity

portfolio. Therefore,

understanding the roll

methodology employed,

as well as its effect on risk

and return, is critical.


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DYNAMIC ALLOCATION AND ROLL METHODOLOGY MANAGING TURNOVER

The interaction of dynamic allocation and roll methodology plays a unique role in the ABCI.

Intuitively, one associates dynamic strategies as having higher turnover. One important feature

of all commodity benchmarks is that due to the expiration of their holdings, high turnover is

common and expected. ABCI is designed with a unique feature, however, to keep turnover at

a manageable level to control transaction costs. To accomplish this, the index incorporates the

changing asset allocations with the daily rolls of futures contracts. For example, on a given day,

the index may be rolling five contracts of WTI crude oil futures out of the nearby contract and

into the next active contract. On the same day, crude prices drop, requiring a smaller position inWTI crude oil. In this case, the index may roll out of the five nearby contracts but not buy five

contracts in the next active month. In addition to this feature, not being a fully invested index

also reduces the overall turnover of the ABCI, all else equal. A comparison of index turnover

shows that ABCI has turnover in line with its peers and falls in between the turnover of DJ-UBS

and S&P GSCI. ABCI historically has had about 10% more turnover than DJ-UBS and around

30% less turnover than the S&P GSCI.

COMMODITY INDEXES RESULTS

Over the last five years as of December 31, 2012, the ABCI outperformed DJ-UBS by 6.4% and S&P

GSCI by 9.3% per annum while delivering lower risk over the same period (15.5% versus 21.9%

for DJ-UBS and 27.4% for S&P GSCI). Taken together, this led to a Sharpe Ratio of 0.07 for ABCI

versus 0.24 for DJ-UBS and 0.30 for S&P GSCI. Table 6 shows a snapshot of risk and return

characteristics as of December 31, 2012, and Table 7 details historic returns beginning in 2002.10

-1

0

1

2

3

4

5

6

Composite

Energy

BrentCrude

Gasoil

HeatingOil

NaturalGas

Unleaded

WTICrude

Metals

Aluminum*

Copper

Gold

Nickel*

Silver

Agriculture

Cattle

Coffee

Corn

Hogs

Soybeans

Cotton

Sugar

Wheat

1.5

1.10.8

0.5

1.4

0.10.2

1.5

4.3

0.6

1.2

0.3

2.01.7

2.0

5.4

0.4

2.0

0.6

1.71.7

0.0

1.8

1.3

January 1991 May 2012; *January 2002 May 2012

Source: AIA.

CHART 5: RELATIVE ROLL FACTOR INVESTMENT RESULTSOne important feature of

all commodity benchmarks

is that due to the expiration

of their holdings, high

turnover is common and

expected. ABCI is designed

with a unique feature,

however, to keep turnover

at a manageable level to

control transaction costs.

ABCI has delivered higher

annual returns on both an

absolute and risk-adjusted

basis over the past five

years, outperforming

DJ-UBS and S&P GSCI

by 6.4% and 9.3% per

annum, respectively.


10/12


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END NOTES

Asness, C. et al. (2012) Value and Momentum Everywhere, preprint.

Gunzberg, J., and Kaplan, P., 2007, The Long and Short of Commodity Futures Index Investing: The Morningstar Commodity Index Family, in H. Till and J. Eagleeye (eds)

Intelligent Commodity Investing: New Strategie s and Practical Insights for Informed Decision Making, pp 241 274 (Risk Books).Greer, R. J., 2012, Intelligent Commodity Indexing: A P ractical Guide to Investing in Commodities, McGraw-Hill.

Schneeweis, T., Kazemi H., and Spurgin, R., 2008. Momentum in Asset Returns: Are Commodity Returns a Special Case? The Journal of Alternative Investments, 10 (4).

Spurgin R., Schneeweis, T., Kazemi, H., and Martin, G., (Revised 2012), The Alternative Benchmark Commodity Index: A Factor-based Approach to CommodityInvestment, AIA Research Report.

Jordan Dekhayser, CFA, is a member of t he Index Advisory Committee (IAC) of the ABCI.

The methodology of, and intellectual property rights in, the Alternative Benchmark Commodity Index is owned by Alternative Investment Analytics LLC, and may be coveredby one or more pending patent applications.

FOOTNTOES

1 As of 8/31/2012, there was $287 billion and $209 billion in gross and net notional index investment, respectively

http://www.cftc.gov/ucm/groups/public/@marketreports/documents/file/indexinvestment0812.pdf.2 For a detailed recap of the history of commodity research and how it relates to roll yield, see Intelligent Commodity Investing: New Strategies and Practical Insights

for Informed Decision Making, Section 2: Research Perspective, H. Till and J. Eagleeye.

3 S&P Dow Jones, Bloomberg, Northern Trust.

4 Source: Northern Trust, S&P Dow Jones, Bloomberg

5 U.S. Department of Agriculture, National Agricultural Statistics Service

6 Greer, R. J., 2012, Intelligent Commodity Indexing: A Practical Guide to Investing in Commodities, McGraw-Hill. p. 41.

7 Production data is received from various sources depending on the individual commodity. For example, the source used by DJ-UBS for crude oil production is the IndustrialCommodity Statistics Yearbook (ICSY) see DJ-UBS Commodity Index Handbook. Liquidity is typically defined as open interest of futures contracts.

8 From January 1991 through May 2012 (the period for aluminum and nickel is January 2002 through May 2012).

9 From January 1991 through May 2012 (the period for aluminum and nickel is January 2002 through May 2012). See The ABCI: A Factor-Based Approach to Commodity

Investment, Spurgin, Schneeweis, et al., (2012).

10 Alternative Benchmark Commodity Index returns prior to February 2007 are based on simulated or hypothetical performance that has certain inherent limitations.Unlike the results shown in an actual performance record, all index-related results presented do not represent actual trading performance. Also, because these tradeshave not been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity, trading expenses,management, administrative or other fees or costs associated with actual performance. No representation is being made that any account will or is likely to achieve profitsor losses similar to the ones shown above as past performance is not indicative of future results.


12/12


northern trust 2013

Q 53195 (3/13)

Important Information

There are risks involved in investing including possible loss of principal. There is no guarantee that the investment objectives of any fund or strategy will be met.Risk controls and models do not promise any level of performance or guarantee against loss of principal. This material is directed to eligible counterparties and

professional clients only and should not be relied upon by retail investors. The information in this report has been obtained from sources believed to be reliable,but its accuracy and completeness are not guaranteed. Opinions expressed are current as of the date appearing in this material only and are subject to c hangewithout notice. This report is provided for informational purposes only and does not constitute investment advice or a recommendation of any security or productdescribed herein. Indices and trademarks are the property of their respective owners. All rights reserved.

Information intended for use with institutional investors only.Not to be distributed to or relied upon by retail investors. Past performance is not necessarily a guide to the future. Index performance returns do not reflect anymanagement fees, transaction costs or expenses. One cannot invest directly in an index. Index performance is based upon information provided by the indexproviders. Indexes and trademarks are the property of their respective owners, all rights reserved. There are risks involved with investing, including possible lossof principal. For Asia Pacific markets, this material is directed to institutional investors, expert investors and professional investors only and should not be reliedupon by retail investors. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy orproduct described herein. This information is not intended as investment advice and does not take into account an investors individual circumstances. Opinionsexpressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, but its accuracy andinterpretation are not guaranteed.

Asset management at Northern Trust comprises Northern Trust Investments, Inc., Northern Trust Global Investments Ltd., Northern Trust Global Investments

Japan, K.K., The Northern Trust Company of Connecticut and its subsidiaries, including NT Global Advisors, Inc., and investment personnel of The Northern TrustCompany. Northern Trust Global Investments Japan, K.K. is regulated by the Japan Financial Services Agency. The Northern Trust Company has a branch in Chinamainly regulated by the China Banking Regulatory Commission, Peoples Bank of China and State Administration of Foreign Exchange. The Northern Trust Companyof Hong Kong Limited is regulated by the Hong Kong Securities and Futures Commission. In Singapore, Northern Trust Global Investments Limited (NTGIL),Northern Trust Investments, Inc. and The Northern Trust Company of Connecticut (NTCC) are exempt from the requirement to hold a Financial Advisers Licenseunder the Financial Advisers Act and a Capital Markets Services License under the Securities and Futures Act with respect to the provision of certain financialadvisory services, and fund management activities. In Australia, NTGIL is exempt from the requirement to hold an Australian Financial Services License under theCorporations Act 2001 in respect to the provision of financial services. Issued by NTGIL. NTGIL is authorised and regulated by the Financial Services Authorityunder UK laws, which may differ from Australian laws.
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