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Alternative Investments Alternative Investments in Down-Cycle Marketsin Down-Cycle Markets
LLEHEHMM NNAA BBRROOTTHHEERRSS
Ron LubashRon Lubash
Februrary 4, 2001Februrary 4, 2001
LLEHEHMM NNAA BBRROOTTHHEERRSS
““The economic landscape has changed dramatically over the last few The economic landscape has changed dramatically over the last few months and the local market now faces a new reality of significantly months and the local market now faces a new reality of significantly diminished prospects for future growth.”diminished prospects for future growth.”(Jerusalem Post, 01/03/2001)
Executive SummaryExecutive Summary
Decreasing capital market growthDecreasing capital market growth Decline in Israeli high-tech growth Decline in Israeli high-tech growth Consumer slowdown in the U.SConsumer slowdown in the U.S Geo-Political instability Geo-Political instability
Can investors increase their capital gains in such a down-cycle Can investors increase their capital gains in such a down-cycle market?market?
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Year 2000 - Global Market OverviewYear 2000 - Global Market Overview
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Year 2000 – Highlights Year 2000 – Highlights
Total of 384 IPOs with average first day return of 55.6%, Total of 384 IPOs with average first day return of 55.6%, compared to 466 IPOs in 1999 with first day return of 69.9%compared to 466 IPOs in 1999 with first day return of 69.9%
Total capital raising in IPOs was $66 billion compared to $64.7 Total capital raising in IPOs was $66 billion compared to $64.7 billion in 1999billion in 1999
Major investments in telecom and computer software sectorsMajor investments in telecom and computer software sectors Scientific breakthroughs encouraged investment in the Scientific breakthroughs encouraged investment in the
biotechnology sector biotechnology sector High returns on NIS investmentsHigh returns on NIS investments
Source: SDC
LLEHEHMM NNAA BBRROOTTHHEERRSS
Year 2000 - Capital MarketsYear 2000 - Capital Markets
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
NASDAQ NYSE LSE TOKYO
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
NASDAQ NYSE LSE TOKYO
00
5050
100100
150150
200200
250250
NASDAQNASDAQ NYSENYSE LSELSE TOKYOTOKYO
19991999 20002000
Data in $ millions except numbers of IPOs
Source: Autex
$ Amount Raised Number of IPOs
LLEHEHMM NNAA BBRROOTTHHEERRSS
Dow Jones Historical Index Dow Jones Historical Index
0
2,000
4,000
6,000
8,000
10,000
12,000
1928 1940 1952 1964 1976 1988 2000
Source: Dow Jones web Site
Down-cycle Period
1929Down-cycle
1987Down-cycle
2000Down-cycle
LLEHEHMM NNAA BBRROOTTHHEERRSS
Year 2000 Wake Up Call Year 2000 Wake Up Call
Decreasing expectations in the global high-tech industry lead to Decreasing expectations in the global high-tech industry lead to a decline in most major capital markets a decline in most major capital markets
Indications of slower growth in the U.SIndications of slower growth in the U.S
Political turmoil and security concerns in IsraelPolitical turmoil and security concerns in Israel
Deceleration in Israeli economy’s growth rate Deceleration in Israeli economy’s growth rate
LLEHEHMM NNAA BBRROOTTHHEERRSS
Year 2000 Decline in Major U.S Indices Year 2000 Decline in Major U.S Indices On December 31, the NASDAQ was down 39.3% year-to-date, and On December 31, the NASDAQ was down 39.3% year-to-date, and
Israeli technology stocks showed a 26% average dropIsraeli technology stocks showed a 26% average drop
2000 was a record year for Israeli high-tech’s public and private 2000 was a record year for Israeli high-tech’s public and private funding, but a poor period on a return on investment basisfunding, but a poor period on a return on investment basis
-10%-6%
-39%
16%11%
-4%
6%2%
21%
7% 9% 10%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
S&P 500 DJIA
NASDAQ
S&PMidCap
400
S&PSmallCap
600 Russell2000
2000 Jan 2001
LLEHEHMM NNAA BBRROOTTHHEERRSS
Lehman Brothers’ 2001 ForecastLehman Brothers’ 2001 Forecast
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Lehman Brothers’ forecast for 2001Lehman Brothers’ forecast for 2001
Global growth will decrease from 3.9% to 3.4%Global growth will decrease from 3.9% to 3.4% DecelerationDeceleration of U.S growth of U.S growth Expected drop in U.S consumer pricesExpected drop in U.S consumer prices Price targets for the S&P 500 and DJIA are 1,675 and 13,000 respectivelyPrice targets for the S&P 500 and DJIA are 1,675 and 13,000 respectively Expected returns are 21% for stocks, 8% for Lehman’s bond portfolio and Expected returns are 21% for stocks, 8% for Lehman’s bond portfolio and
6% for cash6% for cash Technology sector should outperform the market over the next several Technology sector should outperform the market over the next several
years years Expected devaluation of up to 5% in NIS/$ - ($1= 4.22NIS)Expected devaluation of up to 5% in NIS/$ - ($1= 4.22NIS)
Source: Lehman Brothers` Research Reports
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Asset Allocation for Year 2001Asset Allocation for Year 2001
Global asset allocation should consist of 60% Equities, 35% Global asset allocation should consist of 60% Equities, 35% Bonds and 5% cashBonds and 5% cash
Increasing exposure to Cyclical Stocks (Oil, Gas and Healthcare) Increasing exposure to Cyclical Stocks (Oil, Gas and Healthcare) Though still underweight, increasing technology exposure, Though still underweight, increasing technology exposure,
mainly in the under-valued telecom sectormainly in the under-valued telecom sector Prospects of a stronger EURO hence, increasing exposure in Prospects of a stronger EURO hence, increasing exposure in
continental Europecontinental Europe
Source: Lehman Brothers` Research Reports
LLEHEHMM NNAA BBRROOTTHHEERRSS
Down-Cycle Historical PerspectiveDown-Cycle Historical Perspective
LLEHEHMM NNAA BBRROOTTHHEERRSS
Dow Jones - 1929 Down-Cycle Dow Jones - 1929 Down-Cycle
Source: Dow Jones web Site
0
50
100
150
200
250
300
350
1896 1909 1922 1935
1929Down-cycle
LLEHEHMM NNAA BBRROOTTHHEERRSS
Dow Jones – 1987 and 2000 Down-CyclesDow Jones – 1987 and 2000 Down-Cycles
Source: Dow Jones web Site
0
500
1,000
1,500
2,000
2,500
3,000
1970 1974 1978 1982 1986 1990
1987Down-cycle
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1990 1992 1994 1996 1998 2000
2000Down-cycle
LLEHEHMM NNAA BBRROOTTHHEERRSS
General Trends in Down-Cycle Behaviour General Trends in Down-Cycle Behaviour Total of 14 down-cycles between the years 1944-1995 with an Total of 14 down-cycles between the years 1944-1995 with an
average downturn duration of 14 months and index decrease of average downturn duration of 14 months and index decrease of 19.5% 19.5%
An estimated 5% of stock assets were redeemed 6 weeks after the An estimated 5% of stock assets were redeemed 6 weeks after the beginning of down-cyclesbeginning of down-cycles
Shareholders’ response to a down-cycle period tend to be spread Shareholders’ response to a down-cycle period tend to be spread over timeover time
Shareholders react moderately, enhancing their long-term Shareholders react moderately, enhancing their long-term investment objectives and horizonsinvestment objectives and horizons
Source: Investment Company Institute -(Mutual Fund Shareholders Activity During U.S Stock Market Cycles 1944-1995)Note: Information includes 30 large Mutual funds which at that time held 80% of equity fund assets
LLEHEHMM NNAA BBRROOTTHHEERRSS
Case Study - October 1987Case Study - October 1987
On average, monthly basis outflow was $7.5 billionOn average, monthly basis outflow was $7.5 billion Approximately 70% of the outflow occurred on the first 3 days of Approximately 70% of the outflow occurred on the first 3 days of
down-cycledown-cycle Share redemption was mainly in the second half of October, Share redemption was mainly in the second half of October,
representing an approximately $8.2 billion outflowrepresenting an approximately $8.2 billion outflow Only 5% of the stock-fund shareholders had redeemed shares Only 5% of the stock-fund shareholders had redeemed shares
during and since the market breakduring and since the market break Net outflow moderated and tapered off in November and Net outflow moderated and tapered off in November and
December 1987December 1987
Note: Information includes 30 large Mutual funds which at that time held 80% of equity fund assets Source:Investment Company Institute -(Mutual Fund Shareholders Activity During U.S Stock Market Cycles 1944-1995)
LLEHEHMM NNAA BBRROOTTHHEERRSS
““Alternative Investment Opportunities” Alternative Investment Opportunities”
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Return Per Asset Class (1926-1998)A
nn
ual R
an
ges o
f R
etu
rn
-100%
Highest Annual Return
Lowest Annual Return
Average Return
14.7%
29.1%
142.9%
54.0%
40.4%
-5.1%
-43.3%
-9.2%
-58.0%
0.0%
-50%
0%
50%
100%
150%
Small Company
StocksLarge
CompanyStocks
Long-TermGovernment
Bonds
Medium Term Government
Bonds
Cash
12.4% 11.2% 5.3% 5.3% 3.8%
Source: Ibbotson Associates. Note: Each bar shows the range of annual total returns for each asset class over the period 1926-1998.
LLEHEHMM NNAA BBRROOTTHHEERRSS
Annual Returns By Region (1970-1998)A
nnual R
anges
of
Ret
urns
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
United States
International
Europe37.4%
69.9%79.8%
107.5%
-26.5% -23.2% -22.8%-34.3%
Pacific
13.5% 12.7% 13.7% 12.1%
Average Return
Source: Ibbotson Associates (Highs and Low. From 1970-1998)
LLEHEHMM NNAA BBRROOTTHHEERRSS
Contributing Factors of Portfolio Performance
Asset Allocation91%
Security Selection5%
Transaction and Other Costs
2%Market Timing2%
LLEHEHMM NNAA BBRROOTTHHEERRSS
Lehman Brothers’ Investing SynergiesLehman Brothers’ Investing SynergiesAverageAnnualReturn
20% Stocks, 80% Bonds
Minimum Risk Portfolio:10% Stocks, 90% BondsBonds
100% U.S. Government Bonds
Standard Deviation (Risk)
100% U.S. Stocks
An additional 5-10% of non-correlated alternative investments to the portfolio can substantially reduce the standard deviation on the expected return
• The goal of modern Portfolio theory is to maximize return at a given risk
• An efficient portfolio will always have the highest expected return for a given level of risk
LLEHEHMM NNAA BBRROOTTHHEERRSS
Alternative Investments’ Opportunities Alternative Investments’ Opportunities GrowthGrowth
LLEHEHMM NNAA BBRROOTTHHEERRSS
Alternative Assets - Sector Overview
Alternative investments implement various financial instruments (such as: Hedging tools, Bonds, Options)
Over $12 billion were invested in European hedge funds in 1999 by European and US Institutions and high net worth individuals, bringing total assets to $28 billion
Close to 60 new European hedge funds were launched in 1999, bringing the total number of hedge funds to approximately 200
The US market has over 2000 hedge funds. It is expected that over 300 funds will be launched in Europe over the next 3 years
LLEHEHMM NNAA BBRROOTTHHEERRSS
0
100
200
300
400
500
600
700
800
900
$ B
illion
s
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
*
19
99
*
20
00
*
Alternative Assets - A Growing Asset Class
Alternative Assets - Industry Overview
Source: Hedge Fund Research, LLC
* - estimates
LLEHEHMM NNAA BBRROOTTHHEERRSS
Alternative investment example: Alternative investment example: Lehman Brothers’ Offshore Multi-strategy Lehman Brothers’ Offshore Multi-strategy
Fund IIFund II
LLEHEHMM NNAA BBRROOTTHHEERRSS
Major Financial ObjectivesMajor Financial Objectives
Take advantage of investment opportunities around the worldTake advantage of investment opportunities around the world Implement a variety of financial instruments (such as: beta Implement a variety of financial instruments (such as: beta
hedging, convertible arbitrage and event oriented analysis), in hedging, convertible arbitrage and event oriented analysis), in order to achieve a superior total return with moderate order to achieve a superior total return with moderate volatility over the long termvolatility over the long term
Employ a multi-manager investment approachEmploy a multi-manager investment approach Leverage the capabilities of a global investment bankLeverage the capabilities of a global investment bank
LLEHEHMM NNAA BBRROOTTHHEERRSS
Risk vs. Return ProfileRisk vs. Return Profile
0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20%
Risk (Standard Deviation)
Retu
rn
Lehman’s Offshore Multi-Strategy Fund II provides a substantially higher return compared to traditional fixed income investments at a given risk level
Multi Strategy Fund II
S&P 500
Aggregate Lehman Bond Index
LLEHEHMM NNAA BBRROOTTHHEERRSS
Fund Performance
Accumulated Performance Measured in U.S. Dollars
-2%0%2%4%6%8%
10%12%14%
J an-
00
Feb-
00
M ar -
00
A pr -
00
M ay-
00
J un-
00
J ul -
00
A ug-
00
Sep-
00
Oc t-
00
Nov-
00
Multi-Strategy Fund II Agg. Lehman Bond Index
LLEHEHMM NNAA BBRROOTTHHEERRSS
Conclusions Conclusions
In a down-cycle market, an investor should strive for a In a down-cycle market, an investor should strive for a diversified portfolio with a world wide perspective diversified portfolio with a world wide perspective
Alternative investments opportunities are designed to Alternative investments opportunities are designed to outperform the market utilising various financial outperform the market utilising various financial instrumentsinstruments
Today, more and more investors consider alternative Today, more and more investors consider alternative investment opportunities as a material part in their investment opportunities as a material part in their portfolioportfolio
LLEHEHMM NNAA BBRROOTTHHEERRSS
Thank You Thank You