Global Asset Allocation and Stock Selection Assignment #1 Comparison of Investment Styles along Tactical Trading Strategies Gold Asset Management Artima Suraphongchai Genzo Kimura Andrew (Jing) Liu Joseph Sun Stefan Prawitz

AGENDA Methodology Overview Forecasting Model Strategy Evaluation Key Take-Aways

Country-based Investing Sector-based Investing Methodology Overview: 3 Investment Styles Country-based Investing US UK JP DE Sector-based Investing Financial Health Utilities Material Mixed Investing US DE Financial Health

Each Investment Style Evaluated Across 6 Tactical Trading Strategies Description Strategy 0: Buy-and-hold Buy & Hold sub-strategies assume equal weights for all 4 asset classes. Strategy 1A: Long-or-Cash (No Filter Rule) Compares highest forecasted return to the 1-month Eurodollar deposit return If forecasted returns exceed the deposit return, go “Long” in the asset class with highest forecasted return. Strategy 1B: Long-or-Cash (Filter Rule) Same as strategy 1A, but highest forecasted return must exceed 1-month Eurodollar deposit return by at least 0.01% on a monthly basis Only then will we go “Long” on the asset class. Strategy 2A: 2-Long-Positions (Equal Weights) Compares two highest forecasted returns to 1-month Eurodollar deposit return If both forecast returns exceed deposit return, then go “Long” If only one asset exceeds deposit return, go only “Long” in one asset and deposit the rest Equal weights for both positions (50%-50%) Strategy 2B: 2-Long-Positions (Weights 2:1) Same as Strategy 2B, but asset with highest forecast twice that of the second highest forecast Strategy 3: Long-and-Short Go “Long” in asset with highest positive forecast and “Short” in the lowest negative return forecast Positive forecast must also exceed deposit return. If there are no positive forecasts, then deposit. If there are no negative forecast, no short position is taken

Country-based Forecasting Model Variables US Germany Japan UK Oil Price Change Spread Change Dividend Yield Price-Book Price-Earnings Relative Change to Term Structure (3) (4) (5) Should we add more description of the variables? (1) (1) (2) (6) Note: P/E ratio of US equities P/E ratio of UK equities Change in spread of 10-year German Bunds over 10-year US Treasuries Dividend Yield of Japanese equities Price-Book Ratio of Japanese equities UK term structure

Sector-based Forecasting Model Finance Health Utilities Material Oil Price Change Yield Change in 10Y US-Treasuries US Price-Earnings Change of Relative US Term Structure Should we add more description of the variables?

Historical Efficiency Frontier (Strategic View)

Predicted Efficiency Frontier (Tactical View)

Investment Style Comparison (Return) MSCI World Return 0.0071

Investment Style Comparison (Standard Deviation) 0.0424 MSCI World Std Dev

Investment Style Comparison (Sharpe Ratio) MSCI World Sharpe Ratio 0.1672

Two way comparison: Ranking System for Combination Evaluation (I) Standard Deviation Rank of Standard Deviation Sharpe Ratio Rank of Sharpe Ratio % of non-negative Rank of % of non-negative Maximum Return Rank of Maximum Return Minimum Return Rank of Minimum Return

Two way comparison : Ranking System for Combination Evaluation (II)

Key Take-Aways Investment Style Comparison Overall score shows Mixed Strategy is the best Plot of efficiency frontier favors country-only strategy Poor sector returns probably due to high inter-correlation Tactical trading Strategy Comparison Overall score shows 1b: Long-or-Cash (Filter Rule) is the best Little difference between 2-Long and Long-Short trading strategies Buy & Hold strategy has the lowest performance (But still beat MSCI World) Best combinations is to have Combined asset classes and implement Long-Cash (with Filter) trading strategy

Global Asset Allocation and Stock Selection Assignment #1 Any Questions? Gold Asset Management Artima Suraphongchai Genzo Kimura Andrew (Jing) Liu Joseph Sun Stefan Prawitz

Regression Summary: Solid Adj-R2 and High Predicting Power Adjusted R square Correct Direction Count Total Observations Percentage Buy & Hold Country-based US 10.28 % 134 192 70% 63% Germany 5.78 % 126 60% 58% Japan 4.32 % 104 180 46% UK 5.13 % 118 61% 57% Sector-based Finance 9.18 % 168 262 64% 66% Health 7.63 % 175 67% 65% Utility 4.72 % 127 Material 16.57 % 77 108 71% 59%

GARCH model (Expected variance)

Investment Style Comparison Table

Strategy Comparison (Maximum Return)

Strategy Comparison (Minimum Return)

Global Industry Classification (GICS) Sector Description Financials Sector Banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs. Health Care Sector Two main industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products Utilities Sector Electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This sector includes both nuclear and non-nuclear facilities. Materials Sector Encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel. Note: 10 Sectors (Other 6 sectors are Energy, Industrial, Consumer Staples, Consumer Discretionary, IT and Telecom) 24 Industry Groups 62 Industries 132 Sub-industries Source: MSCI website