Simon Brennan Director Private Wealth Management Deutsche Ban PFS Yorkshire Regional Conference March 2012 Simon Brennan Director

Gap/Knowledge Filling 66-68 Investment Principles & Risks Methods of Evaluating Portfolio Performance Performance Measurement Performance Attribution Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Investment Principles/Objectives Growth Derive an income Capital security Liquidity Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Classification of assets Financial behaviour of assets Investment Markets Classification of assets Financial behaviour of assets Correlation of assets Fiscal impact of assets Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Basics of Risk Risk Tolerance The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. Risk Capacity Financial risk capacity can be measured in many different ways, including time horizon, liquidity, wealth and income. People who have a high liquidity requirement (they could need access to their money at any time) are constrained to how much risk they can take.  Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Understand investment markets Assess the investment and composition Past Performance Understand investment markets Assess the investment and composition Look at Manager competence Reward for management Predicting the outcomes Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Measurement- returns made over a period Performance Measurement- returns made over a period Evaluation Whether manager added value How the manager added value Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Money weighted return MWR Calculating returns Money weighted return MWR A measure of the overall return on capital invested over a specific period may include allowance for income introduced or withdrawn Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

V0= value at the start of the portfolio Money Weighted return R= D+V1-V0 V0 R= rate of return V0= value at the start of the portfolio V1=value of the portfolio at the end of the period D= income during the period Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Income (generated) paid out £1,000 £1,000 + £28,000 - £25,000 £25,000 Money Weighted Return V0= £25,000 V1= £28,000 Income (generated) paid out £1,000 £1,000 + £28,000 - £25,000 £25,000 =0.16 MWR=16% Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Money Weighted Return (income withdrawn/added) MWR= D+V1-V0- C V0+(C x n/12) Where N is the number of months C = Cashflow Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Money Weighted Return (income added and withdrawn) V0= £20,000 V1= £24,000 £3,000 invested in 3rd month £2,000 withdrawn in 9th month £3,000 - £2,000=£1,000 = 24,000 - 20,000 -1,000 20,000+ (3,000x9/12)+(-2,000x3/12) =0.1379 13.79% Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Time weighted return The time-weighted rate of return is the preferred industry standard as it is not sensitive to contributions or withdrawals. It is defined as the compounded growth rate of £1 over the period being measured. The time-weighted formula is essentially a geometric mean of a number of holding-period returns that are linked together or compounded over time (thus, time-weighted). The holding-period return, or HPR, (rate of return for one period) is computed using this formula: Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Time weighted return Eliminates distortions caused by timing of new money Breaking down the return for a particular period Reflects sub periods of withdrawn/added cash Compounding sub periods to get overall return Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

1+R = (1 +r1)(1+r2)(1+r3).......(1+rn) Simple Approach to TWR 1+R = (1 +r1)(1+r2)(1+r3).......(1+rn) R=TWR r1=holding period n= sub periods Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Alpha and Beta   Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

BETA A measure of the volatility, or systematic risk,  of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

BETA 0.5 Beta lower volatile than market 1.0 market performance 1.5 market outperformance/underperformance Historical data Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Alpha Sharpe Ratio Information Ratio Risk adjusted returns Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Alpha A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a security(stock) and compares its risk-adjusted performance to a benchmark index. Difference between what you would expect from a security b and the actual return Cannot be explained by general market movements Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Alpha Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Positive and Negative ALPHA POSITIVE.......value added NEGATIVE...........value detracted Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Demonstration of Alpha Fund A 12% 4% 10% 1.2 12- [4+1.2(10-4)] =0.8% Fund B 10% 4% 0.8 10- [4+0.8(10-4)] =1.2% Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Sharpe Ratio The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility. Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Interpreting Sharpe Ratio The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed Portfolio return 10% Risk free return 4% SD 8% Sharpe= 10 – 4 8 0.75% return over the risk free rate for each unit of risk taken Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Assess risk adjusted performance Information Ratio Assess risk adjusted performance Used to demonstrate consistency of beating benchmark index IR= Ra –Rb Tracking error Ra = portfolio return Rb = benchmark return Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Manager B has returns of 8% and tracking error of 4.5% Information Ratio IR A high IR can be achieved by having a high return in the portfolio, a low return of the index and a low tracking error.  For example:  Manager A might have returns of 13% and a tracking error of 8%  Manager B has returns of 8% and tracking error of 4.5% The index has returns of -1.5% Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Manager B had lower returns but a better information ratio Manager A's IR = [13-(-1.5)]/8 = 1.81 Manager B's IR = [8-(-1.5)]/4.5 = 2.11 Manager B had lower returns but a better IR. A high ratio means a manager can achieve higher returns more efficiently than one with a low ratio by taking on additional risk. Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

What are benchmarks? Appropriateness, what are we trying to prove Asset allocation Performance: active/passive/tracker Deviation of benchmark Income generated/dividends/costs of management Tracking error Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

APCIMS FTSE MSCI Russell RAFI Industry benchmarks Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Synthetic Individual Simple Creating Benchmarks Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Performance v benchmarks Drill into benchmark Industry Composite Absolute/target returns Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Look at bond indices ....sovereign v corporate Corporate financials Bond benchmarks Look at bond indices ....sovereign v corporate Corporate financials Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Added value, demonstrate returns Performance fee Use of benchmarks Analysis Asset allocation Risk and return Added value, demonstrate returns Performance fee Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Collective approach, FoFs Models Manager(s) Selection Process Fund Collective approach, FoFs Models Manager(s) Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Selection of funds/manager/DFM Industry ratings Selection of funds/manager/DFM Size of funds Historical data Survivorship Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Selection of funds/manager/DFM Assessing fund manager Risk controls Selection of funds/manager/DFM Considering strategy Pedigree Research process Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Selection of funds/manager/DFM Personality Number of clients Statistics Internal nesting Selection of funds/manager/DFM Security Added benefits/tools Review and report process Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Returns Time frame Risk appetite Requirement of client Over engineering Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Long term view Asset Allocation Is the Key The belief has its origins in a study by Brinson, Hood and Beebower entitled "Determinants of Portfolio Performance" (Financial Analysts Journal, July/August Issue, 1986). The study concluded that 93.6% of the variation of returns in a diversified portfolio is explained by the asset allocation policy. The key term here is "diversified", but we will address that in a moment.  Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

'Strategic Asset Allocation’ A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation. 'Tactical Asset Allocation - TAA’ An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors. Dynamic Asset Allocation‘ ‘Dynamic Asset Allocation’ A portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark. Dynamic Asset Allocation' A portfolio management strategy that involves rebalancing a portfolio so as to bring the asset mix back to its long-term target. Such rebalancing would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general premise of dynamic asset allocation is to reduce the fluctuation risks and achieve returns that exceed the target benchmark. Read more: http://www.investopedia.com/terms/d/dynamic-asset-allocation.asp#ixzz1n1DeXg8N Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Simple attribution Asset Class Manager asset Index Contribution allocation performance to return % for each class % % UK Equities 45 20 9.00 Overseas equities 25 15 3.75 Fixed Interest 20 10 2.00 Cash 10 5 0.50 Overall contribution to return 15.25

Five traits of a successful investor Highly disciplined and committed Invests without emotion Always up to date with the market Possesses a realistic outlook on investing Always has a plan Private Wealth Management Deutsche Bank Simon Brennan PFS London Regional Conference

Important Information – Intermediary This presentation has been prepared for private circulation and is not intended for clients categorised as private customers under the rules of the Financial Services Authority. This is not a solicitation, or an offer to buy or sell any security. Recommendations do not necessarily imply their suitability for individual portfolios or situations in respect of which further advice should be sought. The price of securities and the income from them can go down as well as up and the amount originally invested may not be received back in full. The past performance of a security or market is not necessarily indicative of future trends. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice, however this does not exclude any duty or liability to a customer which Tilney Investment Management has under the Financial Services and Markets Act 2000. Information contained in this publication has been compiled from sources believed to be reliable but is not warranted to be accurate or complete. Tilney Investment Management and/or companies connected with it may within the last 12 months have provided investment advice or services in connection with any securities referred to or related securities and those companies or their officers and employees may have a position or engage in transactions in such securities. Deutsche Bank Private Wealth Management is a trading name of Tilney Investment Management. Tilney Investment Management is a Member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. FSA Register No: 124255. Registered Office: Royal Liver Building Pier Head Liverpool L3 1NY Tel: 0151 255 3000 Fax: 0151 236 1252 www.dbpwm.co.uk Tilney Investment Management is a member of the Deutsche Bank Group.