For internal use only Private Wealth Management Deutsche Bank IMPORTANT NOTES WHEN WORKING WITH SCREENSHOW'S SAVE AS.PPTX ONLY PRINTING INSTRUCTIONS In order to print correctly, ensure the following print settings are used: — Color/grayscale:Color (regardless of printing in b/w) — Scale to fit paper:ON — Print hidden slides:OFF WORKING WITH CHARTS: BEST PRACTICE Charts should use MS Graph. Note there are still printing issues when trying to print in greyscale. The best way to work with charts is: — Copy MS graph objects off the edge of the slide — Open charts by right-clicking on the MS Graph object and select: Chart Object > Open — Make required edits — Copy the MS Graph object and paste as a picture : Home > Clipboard > Paste > Paste Special > Picture (Enhanced metafile) — Position the chart on the slide and ungroup (Ctrl + Shift + G). This enables printing in greyscale DISCLAIMER A disclaimer is not usually required for screenshows. However, it may be required depending on the presentation's contents/use. Users should consult Legal/Compliance as required. For internal use only Asset Allocation Why Dynamic Asset Allocation is winning the race? Arnaud de Servigny

For internal use only Private Wealth Management Deutsche Bank IMPORTANT NOTES WHEN WORKING WITH SCREENSHOW'S SAVE AS.PPTX ONLY PRINTING INSTRUCTIONS In order to print correctly, ensure the following print settings are used: — Color/grayscale:Color (regardless of printing in b/w) — Scale to fit paper:ON — Print hidden slides:OFF WORKING WITH CHARTS: BEST PRACTICE Charts should use MS Graph. Note there are still printing issues when trying to print in greyscale. The best way to work with charts is: — Copy MS graph objects off the edge of the slide — Open charts by right-clicking on the MS Graph object and select: Chart Object > Open — Make required edits — Copy the MS Graph object and paste as a picture : Home > Clipboard > Paste > Paste Special > Picture (Enhanced metafile) — Position the chart on the slide and ungroup (Ctrl + Shift + G). This enables printing in greyscale DISCLAIMER A disclaimer is not usually required for screenshows. However, it may be required depending on the presentation's contents/use. Users should consult Legal/Compliance as required. A review of the current Asset Allocation paradigm. Modern Portfolio Theory R.I.P.!

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 On The Efficient Frontier, there is a high degree of certainty and therefore a high degree of concentration! 2

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 The efficient frontier usually relies on a limited number of support assets 3

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 There is very little year on year stability of the Efficient Frontier 4

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Out-of-sample, the efficient frontier usually drifts to much more modest & sub-optimal performance 5

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Over the past 20 years there has been a trend of growing out-of-sample under performance of the MPT 6

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 The Market portfolio (CAPM) & the MPT portfolios are equally not doing well 7

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Why doesn’t it work? There is no variance stability of main asset classes! 1 The critical values for the 90%, 95% and 99% level tests are respectively below 1.22, 1.36 and 1.63, for an rejection (21”0 of no break. 8

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 A test to see if we face a fat tail problem or a regime switching problem? 9

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 « Through the cycle » correlation and covariance do not exist! 10

For internal use only Private Wealth Management Deutsche Bank IMPORTANT NOTES WHEN WORKING WITH SCREENSHOW'S SAVE AS.PPTX ONLY PRINTING INSTRUCTIONS In order to print correctly, ensure the following print settings are used: — Color/grayscale:Color (regardless of printing in b/w) — Scale to fit paper:ON — Print hidden slides:OFF WORKING WITH CHARTS: BEST PRACTICE Charts should use MS Graph. Note there are still printing issues when trying to print in greyscale. The best way to work with charts is: — Copy MS graph objects off the edge of the slide — Open charts by right-clicking on the MS Graph object and select: Chart Object > Open — Make required edits — Copy the MS Graph object and paste as a picture : Home > Clipboard > Paste > Paste Special > Picture (Enhanced metafile) — Position the chart on the slide and ungroup (Ctrl + Shift + G). This enables printing in greyscale DISCLAIMER A disclaimer is not usually required for screenshows. However, it may be required depending on the presentation's contents/use. Users should consult Legal/Compliance as required. Let us try to look at the world differently!

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Regime Switching models in a nutshell 12

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Out-of-sample performance of a 3 asset Regime Switching model 13

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Time Regime 1 Recession Regime 2 Growth An “all weather” mean-variance optimisation fails to capture regime changes and therefore fat tails & the dynamics of fat tails “Through the Cycle “ Average Fat tailed “through the cycle” distribution 14

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Time Regime 1 Recession Regime 2 Growth EWMA Estimation of monthly mean / covariance matrix An Unknown complex multi-regime environment can be approximated by a regularly re-estimated Mean-Variance framework updated with latest information (EWMA estimation) Monthly mean variance process Unit of time delta ( t) 15

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July A Case Study A full out-of-sample Analysis In one case 4 asset classes (CashTB, IG Bond, HY Bond, US Equity ), in the other 9 (CashTB, Gov Bond, IG Bond, HY Bond, Dev Equity, EM Equity, Commodities, Real Estate, Hedge Funds) The targeted volatility level in the portfolio is 8% 4 methodologies: Equally weighted Mean-Variance reestimated every year based on a 10-year sliding window Mean-Variance reestimated every year using a memory decay estimation method (EWMA) Mean-Variance reestimated every month using a memory decay estimation technique (EWMA)

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Who better copes with the 8% target vol out-of-sample? 17

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 What is the true level of asset diversification in each approach? 18

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 Tail Risk 19

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July The Return Dynamics

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 A clearer picture!!! 21

For internal use only Private Wealth Management Deutsche Bank Arnaud de Servigny CFA – 4 th July 2012 What is the degree of stability in the portfolios? 22

For internal use only 23 Data as of Market Prices: Long-term results