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

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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measure of the overall return on capital invested over a specific period may include allowance for income introduced or withdrawn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

9. 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

10. 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

11. 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

12. 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 -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

13. 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

14. 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

15. 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

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

17. 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

18. 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

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

20. 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

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

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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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 = 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

29. 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

30. Private Wealth Management
Deutsche Bank
Simon Brennan
PFS London Regional Conference

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

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

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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

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

41. 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

42. '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: 
Private Wealth Management
Deutsche Bank
Simon Brennan
PFS London Regional Conference

43. Simple attribution Asset Class Manager asset Index Contribution
allocation performance to return
% for each class % %
UK Equities
Overseas equities
Fixed Interest
Cash
Overall contribution to return

44. 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

45. 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 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: Registered Office: Royal Liver Building Pier Head Liverpool L3 1NY Tel: Fax: Tilney Investment Management is a member of the Deutsche Bank Group.