For institutional investor use only. Not to be reproduced or disseminated. The Low-Risk Anomaly Ryan D. Taliaferro, Ph.D. Acadian Asset Management 31 May 2012 This presentation may not be reproduced or disseminated in whole or in part without the prior written consent of Acadian Asset Management, (UK) Limited.

For institutional investor use only. Not to be reproduced or disseminated. What Is the Low-Risk Anomaly? Finance theory says that investors who buy higher risk stocks will be compensated with higher returns Empirical reality is that risk and return are unrelated 80+ years in the U.S. Around the world Simple conclusion: Combine lower risk stocks into a low-risk portfolio

For institutional investor use only. Not to be reproduced or disseminated. Low-Risk Anomaly: U.S. Example Annualized average monthly returns, (%) Source: Acadian Asset Management LLC, CRSP,CRSP®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. crsp.uchicago.edu. For illustrative purposes only. This is not intended to represent investment returns generated by an actual portfolio. They do not represent actual trading or an actual account, but were achieved by means of using the CRSP universe of securities as a whole. Results do not reflect transaction costs, other implementation costs and do not reflect advisory fees or their potential impact. Simulated results used to create this example are not indicative of actual future results Every investment program has the opportunity for loss as well as profit.

For institutional investor use only. Not to be reproduced or disseminated. Low-Risk Anomaly is Everywhere Risk (standard deviation %) Return (%) Monthly returns , EM BenchmarkSimulated minimum variance (least risky) portfolio Source: Acadian Asset Management LLC, Acadian Asset Management LLC, *MSCI World, MSCI Europe, MSCI EAFE, MSCI EM, MSCI US, MSCI Canada, MSCI JP and MSCI Australia, ** EM simulation begins January For illustrative purposes only. This is meant to be an example and is not intended to represent investment returns generated by an actual portfolio. The simulated results do not represent actual trading or an actual account, but were achieved by means of retroactive application of a model designed with the benefit of hindsight for the period specified above. Results are gross and would be reduced by advisory fees. Results do not reflect transaction costs, other implementation costs and do not reflect advisory fees or their potential impact. Reference to the benchmark is for comparative purposes only. Simulated performance is not indicative of actual future results. Every investment program has the opportunity for loss as well as profit. Index Source: MSCI Copyright MSCI All Rights Reserved. Unpublished. PROPRIETARY TO MSCI.

For institutional investor use only. Not to be reproduced or disseminated. Why a Low-Risk Anomaly? Behavioral explanations have two ingredients 1.Investor psychology 2.Limits to arbitrage 1.Psychology: investors are attracted to risky stocks Lottery preferences Overconfidence Categorization and representativeness 2.Limits to arbitrage: institutional investors are constrained Handcuffed to index benchmarks Buying a low-beta stock creates tracking-error risk Stable effects: suggests anomaly will persist

For institutional investor use only. Not to be reproduced or disseminated. Good News for Investors An equity strategy that has Returns similar to the aggregate market, with Lower risk Lower correlation with benchmark-tied strategies …Can be used in many ways. For example, as a potential Risk reducer Return enhancer Hedge fund alternative Equity diversifier

For institutional investor use only. Not to be reproduced or disseminated. Good News, But We Should Dig Deeper Risk Is the definition correct? I.e., are the stocks and portfolios identified as “low-risk” truly low-risk? Novelty Could we have “rediscovered” a known pattern? Is the low-risk anomaly just a repackaging of an existing strategy?

For institutional investor use only. Not to be reproduced or disseminated. Are Low-Risk Stocks Actually Low-Risk? In extreme market downturns, stocks are more correlated Yes, they are low-risk. Curvature is a small effect, far outweighed by slope. Market return (%) Low beta stocks U.S Stock return (%) High beta stocks U.S Stock return (%) Source: Acadian Asset Management LLC, CRSP,CRSP®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. crsp.uchicago.edu. For illustrative purposes only. This is not intended to represent investment returns generated by an actual portfolio. They do not represent actual trading or an actual account, but were achieved by means of using the CRSP universe of securities as a whole. Results do not reflect transaction costs, other implementation costs and do not reflect advisory fees or their potential impact. Simulated results used to create this example are not indicative of actual future results Every investment program has the opportunity for loss as well as profit.

For institutional investor use only. Not to be reproduced or disseminated. Beta, Alpha, and Returns 18%72%10% U.S Beta Market excess returns (monthly %) Systematic excess returns (monthly %) Total excess returns (monthly %) Alpha (monthly %) Beta Source: Acadian Asset Management LLC, CRSP,CRSP®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. crsp.uchicago.edu. For illustrative purposes only. This is not intended to represent investment returns generated by an actual portfolio. They do not represent actual trading or an actual account, but were achieved by means of using the CRSP universe of securities as a whole. Results do not reflect transaction costs, other implementation costs and do not reflect advisory fees or their potential impact. Simulated results used to create this example are not indicative of actual future results Every investment program has the opportunity for loss as well as profit.

For institutional investor use only. Not to be reproduced or disseminated. A Rediscovery? Most common suggestion: low-risk strategy is value (or size, etc.) in disguise But strategy holds up well in standard factor regressions (c. 250bp/year alpha) Annualized standard deviation of returns (%) Annualized average return, (%) Size and value portfolios Source: Acadian Asset Management LLC, CRSP,CRSP®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. crsp.uchicago.edu.For illustrative purposes only. This is not intended to represent investment returns generated by an actual portfolio. They do not represent actual trading or an actual account, but were achieved by means of using the CRSP universe of securities as a whole. Low-risk is a hypothetical portfolio constructed using a statistical model with the benefit of hindsight. Results do not reflect transaction costs, other implementation costs and do not reflect advisory fees or their potential impact. Simulated results used to create this example are not indicative of actual future results Every investment program has the opportunity for loss as well as profit.

For institutional investor use only. Not to be reproduced or disseminated. Conclusions We believe, low risk stocks do not earn lower returns Instead, about the same (or higher) returns compared to riskier stocks Around the world, over long time periods Surprising, but… Survives many tests (e.g., for novelty) Admits a coherent, intuitive explanation The anomaly is likely to persist Investor psychology Benchmarking Potentially, a promising opportunity Reduce risk without reducing returns Distinct, unrelated to other strategies: complementary to many existing strategies

For institutional investor use only. Not to be reproduced or disseminated. Hypothetical Performance Disclosure The hypothetical examples provided in this presentation are provided as illustrative examples only. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual performance results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

For institutional investor use only. Not to be reproduced or disseminated. Legal Disclaimer The presentation material was prepared by Acadian Asset Management (UK) Limited (“AAM- UK”) with information it believes to be reliable and contains Acadian’s confidential and proprietary information. The views expressed in the presentation and presentation material are those of Acadian and are subject to change with market conditions. This presentation is for informational purposes only and should not be construed as investment advice, or an offer to sell or a solicitation of an offer to buy any security. The presentation material has not been updated since it was published and may not reflect the current views of the author(s) or recent market activity. Market conditions are subject to change. Historical economic and performance information is not indicative of future results. This document may not be reproduced or disseminated in whole or part without the prior written consent of Acadian Asset Management (UK) Limited. ACADIAN ASSET MANAGEMENT LLC ONE POST OFFICE SQUARE BOSTON, MA TELEPHONE FAX ACADIAN ASSET MANAGEMENT (UK) LIMITED CORNHILL LONDON, EC3V 3NG UNITED KINGDOM TELEPHONE FAX ACADIAN ASSET MANAGEMENT (SINGAPORE) PTE LTD 8 SHENTON WAY #37-02 SINGAPORE TELEPHONE FAX Company Registration No.: D ACADIAN-ASSET.COM