N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Investment Opportunities within the UCITS III fund framework Alistair Sayer Investment Director, Multi-Strategy Equities

1 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Points to cover What is UCITS III all about? A framework for portfolio construction within UCITS III What can an investment manger do? –Equitised long /short –Portable alpha –Absolute return Why would you be interested? Risk Examples

2 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt But what does UCITS III allow? UCITS III – releasing manager constraint

3 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Much more choice for your clients UCITS III brings a whole new dimension to portfolio construction? Equitised long / short Portable alpha Absolute return Increasing flexibility Increasing choice Increasing YOUR tools Derivatives Leverage Risk Measurement ProductsComplexityRelevance

4 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Efficient conversion of risk to return Equitised long / short 160% invested Beta = 1 Removes the short constraint Enabling new investment techniques Allowing high conviction position sizes Increases exposure to a manager’s alpha generation Retains risk control to equity market Source:Henderson Global Investors 130/30 active equity ProductRelevance

5 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Flexibility to pick best alpha generators Portable alpha 100% exposure to ANY market Beta = 1 No regional restrictions to alpha generation You can deconstruct a global portfolio to have the more alpha generated in Europe and Asia Possible to construct very tailored portfolio for you clients Market Neutral ProductRelevance Source:Henderson Global Investors

6 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Absolute return Market neutral long / short X% long X% short No market exposure; Beta = 0 Downside protection Predominantly long exposure Flexible short exposure Variable exposure to the market; Beta = 0 to 1 Competition for hedge funds?

7 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Why choose a UCITS III fund over a hedge fund? The benefits of sophisticated hedge fund strategies within a regulated environment Can invest smaller amounts TRANSPARENCY A financial adviser’s point of view The ability to buy a geared fund for the adventurous client Or A limited loss fund for the cautious client fits with your obligation to risk profile your clients Regulated

8 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt UCITS III Badge Standard Powers – “non - sophisticated UCITS” Traditional “long-only” funds with primarily physical assets Derivative usage only for EPM Cannot be used for symmetry No disclosure on derivatives required in Investment Objectives Risk measurement Not required to agree risk framework with regulators Additional capabilities: Asset types/classes Derivatives Money markets Closed ended investment companies Greater derivatives usage permitted Symmetry, hedging and other derivative strategies permitted Required to disclose derivatives usage in Investment Objectives Risk measurement using Value at Risk Required to agree risk framework with regulators Not all UCITS III funds will use their full powers Enhanced Powers – “sophisticated UCITS”

9 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt UCITS III Risk Measurement – VaR Definition Estimate maximum potential loss that a UCITS portfolio could suffer within a certain time horizon and certain degree of confidence Detail 99% confidence level Holding period of one month Recent volatilities ie no more than one year from the calculation date Riskmetrics used to calculate on a daily basis Stress testing on a monthly basis eg 9/11, black Monday Works on multiple levels from the position specific micro level to the portfolio based macro level NOTE: no mention of gross exposure limit Sophisticated UCITS must apply Value at Risk –VaR

10 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Does it work in practice? Examples Risk control Portfolio construction Alternative investments NOTE: no mention of gross exposure limit

11 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Equitised long / short – risk control Risk reduction Releasing short constraint Allows a manager to take active bets where they have information Removes restriction to underweight only large-caps Can significantly reduce tracking error for the same return target Brings in alternative investment techniques Long only constrained * Source:Henderson Global Investors * Note:Based on UK FTSE All Share Barra optimisation targeting 3% excess return Unconstrained * large small 4% tracking error * 2 % tracking error *

12 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Carnival Corp -0.30% -0.70% Equitised long / short – alternative sources of return Theoretical example: Carnival Corp Source:Henderson Global Investors Carnival UK (Short) Carnival UK Carnival US Carnival’s US listing was trading at a 5% discount to its UK listing Bringing together Enhanced Index and Absolute Return strategies 0.30% 2% -2% 1.00% -0.30%

13 N:\UK\2007\!p\Gen07\NorthernMktsForum-0207.ppt Conclusion How UCITS III benefits you Increases diversity of products on the market –Long only to absolute return Alternative investment techniques –Hedge fund style investment techniques But it comes at a price Increased complexity More onerous due diligence What UCITS III means for the investment manager Increase in derivatives expertise Significant restructure and upgrade of risk systems Potential to demonstrate and segregate alpha capability Symmetry - the ability to add value in up and down markets and to equally use positive and negative research

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