Zenith Investment Research Premium Wealth Management Annual Conference Presented by:David Wright, Director 17 April 2012 Team up with an experienced, independent.

Zenith Investment Research

Premium Wealth Management Annual ConferencePresented by: David Wright, Director

17 April 2012

Team up with an experienced, independent and incisive research provider

Disclaimer

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This presentation has been prepared exclusively for the Premium Wealth Management Conference. The presentation contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the presentation is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice.

Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this presentation. No part of this presentation is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this presentation is not a representation as to future performance or likely return. The material contained in this presentation is subject to copyright and may not be reproduced without the consent of the copyright owner. Zenith usually receives a fee for assessing the fund manager and product(s) described in this document against accepted criteria considered comprehensive and objective.

Agenda

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• The old news – portfolio construction since GFC

• Developments in portfolio construction

• Understanding Portfolio Risk

• Portfolio Construction – where to from here?

Portfolio Construction since the GFC

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Common portfolio construction practices

• A big move from active to passive managers

• A move from managed to direct in Australian equities

• Strong demand for tactical asset allocation approaches

• Investors satisfied with term deposit rates

ACTIVE

PASSIVE

Portfolio Construction since the GFC

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A reduction in portfolio diversification caused by:

• Confusion in the use and allocation of:

• Global Equities & hedged and unhedged weightings

• REITs – Australian & Global

• Polarised use of alternatives asset classes & strategies

• Long / short Australian Equities

• CTA’s & global macro funds

Portfolio Construction since the GFC

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• In conclusion, many advisers continue to build portfolios for “fair weather” investment market conditions waiting for markets to improve.

• Very overweight Australian equities

• High levels of cash and term deposits

• Very low levels of diversification

Market Conditions to Improve

Portfolio Risk

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What is it?

• The potential for capital loss

• The potential not to reach your investment goals (e.g. Underfunded retirement savings)

• Uncertainty of investment outcome

Developments in Portfolio Construction

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• Objective based investing

• Risk targeted investing

• Inflation plus return targets

• Target date / Life stage funds

• Annuity / Insurance policy funds

Developments in Portfolio Construction

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Risk targeted investing

• Objective is to manage portfolio to a specific risk (volatility) target with the return being an “outcome” (e.g. Investment Science SRA 4, 9, 16 Funds)

• Characteristics of this approach

• Tends to provide more certain volatility outcome

• Over long term returns similar magnitude to “old fashioned” diversified funds (e.g. Conservative, Balanced, Growth) but with lower volatility over short term periods

• Outperform in poor market conditions, Underperform in bull market conditions

• Underlying asset allocation ranges are non existent or very wide

Developments in Portfolio Construction

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Inflation Plus target investing

• Objective is to manage portfolio to a specific inflation plus return target (e.g. Schroder’s Real Return Fund – Inflation Plus 4.0% p.a.)

• Characteristics of this approach

• Seeking to retain the real rate of return (investor’s purchasing power) above inflation

• Not a specific absolute return target but linked to level of inflation. When inflation high, absolute return level is high and vice versa

• Tend to outperform traditional diversified funds in high inflation environment, possibly underperform in lower inflation environments

• Underlying asset allocation ranges are non existent or very wide

• The approach lends itself best to a single manager fund

Developments in Portfolio Construction

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Target Date / Lifestage Funds

• Objective is to manage portfolio to a specific risk date

• Characteristics of this approach

• In US typically offered as retirement date or target date in 5yr increments (e.g. 2015, 2020, 2025)

• In UK default age based offerings – switch at birthdays by plan sponsor

• Driven by “glide path” approach to asset allocation. That is, asset allocation is “calibrated” by vintage of fund.

• Can be more easily managed by a single manager rather than multi-manager approach.

OBJECTIVEOBJECTIVEOBJECTIVE

Developments in Portfolio Construction

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Glide Path – Target Date / Lifestage Funds

Developments in Portfolio Construction

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Glide Path - Target Date / Lifestage Funds

Developments in Portfolio Construction

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MySuper Implications

• Pressure on super fund trustees to do more for apathetic members than place them in default “balanced” investment option

• Q-Super looking to collect financial data (salary, super balance, years to retirement) on members to assist in determining appropriate investment option for members

• This is essentially fund level financial planning and is likely to become more common

IMPLICATIONS

Developments in Portfolio Construction

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After Tax returns will become greater focus by the industry

• After tax returns are determined by the asset allocation approach and manager selections

• At the fund research level, Zenith considers the impact of the following factors :

• Portfolio Turnover

• Carried Forward Losses

• Impact of Currency Hedging & derivatives

• TOFA Rules

Portfolio Construction – Where to from here?

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• Attempt to build portfolios with more certain outcomes

• Understand where the risks in the portfolio are

• Demonstrate and report value add to clients

• Increased use of model portfolios

Balanced Model PortfolioForward Looking Annualised Return Projections

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Cash Expectation 3.59%

Balanced Model Portfolio ProjectionsExpected Value of $1 Million investment

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Balanced Model Portfolio ProjectionsProbability of Capital Loss

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Understanding Portfolio RiskBalanced Portfolio Asset Allocation

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Understanding Portfolio RiskBalanced Portfolio Risk Allocation

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Return Forecast Component Example

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0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Risk Free Plus Return Premium Active Management Max Franking Credit Rebate Yield

Reporting for Advisers – Fund Contribution

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Reporting will highlight the individual contributions of each fund to overall portfolio performance

Reporting for Advisers - Portfolio Attribution

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Attribution analysis is different to contribution analysis

Reporting for Advisers - After Tax AnalysisIncome Distribution Yields to June-11

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Portfolio Construction – Where to from here?

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• In an uncertain environment we need to build “all weather” portfolios.

• Increase diversification and seek as many sources of

uncorrelated returns as possible thereby not relying on one or two

engines for growth. This includes active use of:

• A more complete range of asset classes; and

• Alternative investment strategies

Portfolio Construction – Where to from here?

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• If the global environment doesn’t get better, cash rates in Australia will be lower.

• Path dependency a real issue

• Start or re-instate client’s investment strategy by “averaging in” over a period of time

Questions

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Zenith Investment Research

Premium Wealth Management Annual ConferencePresented by: David Wright, Director

17 April 2012

Team up with an experienced, independent and incisive research provider