Alphaville - Affinity Private Wealth

Alphaville
November 2014
Agenda
Welcome
Back to the Future
Alpha and Liquid Alternatives
Affinity’s Alpha Strategy
Closing remarks
2
1980’s fashion and music
3
Back to the Future
4
1980’s markets
UK inflation peaked at 18% in May 1980
UK interest rates peaked at 16% in July 1980
10-year Gilts yield peaked at 16% in
September 1980
Gold price was $850/oz (Jan 1980)
GBP/USD peaked at 2.42 in
November 1980
5
2009’s fashion and music
6
2009’s markets
UK inflation peaked at 3.2% in
February
UK interest rates peaked at
1.5% in January
10-year Gilts yield peaked at
4.1% in December
Gold price reached $1,215/oz
in December
GBP/USD peaked at 1.70 in
August
7
Today’s fashion and music
8
Today’s markets
UK inflation peaked at 1.9% in June (now 1.3%)
UK interest rates remain at 0.5%
10-year Gilts yield peaked at 3% in January (now 2%)
Gold price reached $1,383/oz in March (now $1,199)
GBP/USD peaked at 1.72 in July
9
Back to the future?
10
Our outlook
Increased uncertainty and heightened geopolitical risk
Muted growth and inflation
Rising volatility and yields
11
Implications for portfolio construction
Scarce value and lower returns (financial repression)
Flexibility
Defined outcomes
Alternative sources of “alpha”
12
Alpha and Liquid Alternatives
13
Defining “alpha”
“The first one;
the beginning”
The excess return of a fund, relative to the return of
the benchmark, is a fund’s alpha
14
Market challenge
Investors are cautious as equities
reach new all-time highs…
… UK rates may rise
Source: Bloomberg, Goldman Sachs ECS Research and GSAM as of 30-Sep-14
15
At times like these
Low yields and rising equity volatility
Investors find themselves at a cross roads
How to pursue returns without taking undue risk?
Is there an alternative solution?
16
Introducing liquid alternatives
Often defined by what they are not:
Alternative to mainstream investments in stocks, bonds and cash
No ties to traditional benchmarks
Characteristics of a hedge fund in a UCITs format:
Reliable sources of uncorrelated returns
With accessibility, governance, regulatory oversight and daily/weekly liquidity
17
The fastest growing segment of the mutual fund industry
Alternative UCITs Universe AUM ($ millions)
Source: SimFund, as of 31-July-14
18
How do liquid alternatives address the current market challenges?
Rising rates, bear equity market  less correlated source of returns
“Alternative investors are typically seeking to employ a piston in their investment
engine capable of chugging along even when other parts of the portfolio prove
unresponsive”
Source: GSAM, Bloomberg, PerTrac Indices Database, performance period Jan 1997 – Sept 2013
19
So where do they fit?
Alternative bucket or simply and allocation to bonds, equities, etc?
Volatility = alternatives, equity long/short = equities, strategic bond funds =
bonds
Increased flexibility to dynamically manage market exposure
20
Affinity’s Alpha Strategy
21
History
August 2013 – intermediary request for a market neutral portfolio
Designed to be uncorrelated with risk markets
“Made in Edinburgh”
Alpha Strategy
22
What role can Alpha play?
MC
“If the only tool you have is a hammer…
^
Jimmy
…then you tend to see every problem as a nail”
^
23
Gold – 10 years
High 02/09/2011: $1,883
Down 36%
Current: $1,200
Low 04/02/2005: $415
24
US Governments – 10 years
High 23/06/2006: 5.2%
Current: 2.3%
Low 01/06/2012: 1.45%
25
Our alternative solution: Alpha Strategy
Objective:
Capture returns from manager skills, low sensitivity to
risk markets
Target return:
US dollar cash +3% over a market cycle
Volatility range:
Mid single digits
Sharpe ratio:
1.00 or better over a market cycle
26
Fund selection and portfolio construction
Open architecture
Manager diversification (style, geography and sectors)
Long-short bond strategies and multi-asset solutions included
Predominantly daily or weekly dealing funds
Awareness of underlying costs
Ideally, minimum of 2 years performance history
Leverage up to 300% max
Equity funds: maximum beta of 0.30 to relevant index
Maximum weighted beta of the portfolio: 0.20 to the MSCI AC World Index
Maximum drawdown of 10% during past 3 years
No single fund allocation to exceed 20%
27
Portfolio
Fund Name
Allocation
Asset Class
Geography/Sector Style
Aviva Global Convertibles Absolute Return
11.50%
Equities
Global
Convertible arbitrage
Aviva Multi Strategy Target Return
15.00%
Multi-asset
Global
Multi-strategy
GAM Emerging Alpha
15.00%
Equities
Emerging Markets
Long/short, non-directional
JPMorgan Tech Long Short
7.50%
Equities
Technology
Long/short, non-directional
Julius Baer Absolute Return Europe
7.50%
Equities
Europe
Market neutral, pair trading
Kames Absolute Return Bond
10.00%
Bonds
Global
Market neutral
Morgan Stanley Diversified Alpha Plus
10.00%
Multi-asset
Global
Multi-strategy
Bonds
Credit
Long/short, directional
Equities
Global
Systematic
Cash
-
-
Muzinich LongShortCreditYield
Old Mutual Global Equity Absolute Return
Cash
7.50%
15.00%
1.00%
100.00%
28
Sources of alpha
Source of return by asset class
Source of return by geography & sector
Cash
1%
Credit
8%
Cash
1%
Tech
7%
Multi-asset
25%
EU
7%
Bonds
17%
Equities
57%
EM
15%
Global
62%
29
Performance – including back-tested data
30
Live performance – starting 30th August 2013
Blended beta: 0.15 (vs. MSCI AC World) / Volatility over period: 2.98% / Sharpe over period: 1.03
31
Shock absorber feature – performance during October sell-off
MSCI: c.-10%
32
How to use Alpha
33
Portfolio construction
Past 12 months, the alpha blend has outperformed with lower volatility
34
To conclude
To quote VFTD November 2014:
“ Managing money requires us to balance the need to ignore short-term noise,
whilst being cognisant of signs that a structural shift is afoot. We believe:
Lower inflation will persist
At a time of decreased liquidity, volatility is on the rise, providing a rich
environment for uncorrelated strategies to perform
The US$ will continue to strengthen.”
35
“Forever Young” (Alphaville’s debut album 1984)
36
The small print
Affinity Private Wealth is a trading name for APW Investors Limited, which is regulated by the Jersey
Financial Services Commission. Registered office 24 Seale Street, St Helier, Jersey JE2 3QG.
This document is for discussion purposes only and is not an advertisement and does not constitute an
offer to sell or a solicitation of an offer to buy shares in any fund. This document has been provided to
you in a private and confidential manner and may not be reproduced or disseminated to third parties
without APW Investors Limited’s prior written consent.
This document concerns certain investment strategies and does not purport to disclose details about
any particular existing investments. This document is accordingly provided for informational purposes
only and does not constitute investment advice. This document does not give exhaustive details about
the parties, structures or investment processes. The information herein is not intended to provide, and
should not be relied upon for, accounting, legal or tax advice or investment recommendations. Please
consult independent tax, legal, accounting or other advisors in the course of assessing any strategies
mentioned in this document.
Risk Warnings
APW Investors Limited does not guarantee the performance of any investments. The price of
investments may go up or down and the investor may not get back the amount invested. Your income
is not fixed and may fluctuate. Past performance is not a reliable indicator of future results. The value
of the investment involving exposure to foreign currencies can be affected by exchange rate
movements. We remind you that the levels and bases of, and reliefs from, taxation can change.
37