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Nicolas Robin
Threadneedle Investment ConferenceThreadneedle Enhanced Commodity Strategy
9 February 2012
Agenda
01 Threadneedle Philosophy
02 Commodities at Threadneedle – a strong fund management team
03 The Threadneedle enhanced commodities strategy
04 Commodity market overview – risk back on the agenda
05 Why invest in commodities?
06 How to access commodities?
AP Appendix
2PT/12/00902
3
01Threadneedle Philosophy
Investment philosophy – out-think, out-perform
� We are stronger collectively than as individuals
� Our investment process is structured to reflect this belief
� We have a global approach and cover all asset classes
Teamwork defines us
out-think
teamwork
out-perform
All asset classes
Globalapproach
4PT/12/00902
Investment process – out-think, out-perform
Economic background
Sectors and themes
Asset allocation
Valuation framework
Asset and sectorallocation models
Themes / analysis and debate
Bottom-up security selection across capital structure
Equity
Multi-asset
Fixed income
Absolute return
Debate Execution / deliveryIdea generation
+ +
2. Team work 3. Out-perform1. Out-think
out-think
teamwork
out-perform
All asset classes
Globalapproach
This sets the agenda for our specialist teams
Collectively we form a global investment view on
� The central case for economies
� The valuation of asset classes
5PT/12/00902
Commodities at Threadneedle – a strong fund management team
02
Commodities at Threadneedle
� An integral component of the Threadneedle Investment Platform
� Building commodities as the fourth asset class
� A team drawn from the Commodities Markets
Leveraging the resources of the Fixed Income Group …
� Making the most of the group’s trade-flow information
� Participating if formulation of the Macro and Fundamental views
… and Threadneedle’s extensive strength in equities
� Sharing investment ideas and broadening our perspective on commodity markets
� Meeting with resources companies’ management teams provides unique insights into supply and demand and technological developments across commodity markets
7PT/12/00902
CommoditiesLeveraging the wider Threadneedle investment expertise
Source: Threadneedle as at 31 December 2011
An experienced commodities team
Advantage of single location
Strong interconnection
Team incentivised to pool ideas
Emerging Market Equity Team10 fund managers / analysts
Government Bond Team6 fund managers / analysts
Investment Grade Bond Team8 fund managers / analysts
High Yield Bond Team7 fund managers / analysts
Global Equity Team8 fund managers / analysts
US Equity Team7 fund managers / analysts
Emerging Market Debt Team5 fund managers / analysts
David DonoraHead of Commodities29 years experience
Nicolas RobinCo-Fund Manager10 years experience
Daniel BelchersInvestment Analyst9 years experience
8PT/12/00902
Commodities at Threadneedle – the investment team
A wealth of expertise covering all aspects of commodity trading
� More than 40 years of combined investment and trading experience
� From physical and futures commodity trading to commodity related equities investment
� Strong expertise in macro, volatility, forward curve and relative value trading
Products to capitalise on generating outperformance
� A strong track record in both absolute returns and long only
� Hedge fund experience since late 2008
� Threadneedle Enhanced Commodity Fund launched June 2010
9PT/12/00902
The Threadneedle enhanced commodities strategy
03
Threadneedle Enhanced Commodity Fund Product highlights and features
� Target outperformance of 3–6% with tracking error up to 6%
� Benchmark: DJUBS TR Commodity Index
� Actively managed long-only fund investing in commodity derivatives
� No leverage
� No shorting
� Fully invested
� UCITS qualifying fund with daily liquidity
� Exposure created through Commodity Index swaps margined daily, (futures and physical not permitted by regulator)
� Diversified exposure across the commodity futures spectrum
� Collateral invested in US T-bills with maturities to 1 year
� Hedged Share Classes: Euro, Sterling, Swiss Franc and Singapore Dollar
11PT/12/00902
Threadneedle Enhanced Commodity Fund
� Universe of investable commodities include both S&P GSCI and DJUBS index components
Note: Diagram for illustrative purposes only
12
Threadneedle Enhanced Commodity Strategy
� Live cattle / Feeders� Lean hogs� Corn� Soybeans� Soybean oil� Wheat – CHI / KW / MN� Cocoa� Coffee� Cotton� Sugar
Agriculture
� Aluminium� Copper� Lead� Nickel� Tin� Zinc
Industrial metals
� Gold� Silver� Platinum� Palladium
Precious metals
� Brent� WTI� Heating oil� Unleaded gasoline� Natural gas� Gasoil
Energy
PT/12/00902
Threadneedle Enhanced Commodity FundActive management of Commodities
Fundamentally driven investment process which aims to generate outperformance
Active Weights
� Driven by investment process
� Active rebalancing of weights
Proactive curve positioning
� Positioning of individual commodity weight along the term-structure
� Timing of moving allocations along the curve
� Seeking to capture curve volatility and uncorrelated alpha
13PT/12/00902
Investment process – overview
14
� Active Weights� Proactive curve positioning
Portfolio Construction
� Market contacts� Trading experience� Analysis� Interpretation
Research, Experience and Expertise
� Independent Risk Management and Analytics
� FMs actively manage positioning
Risk Management
Bottom UpAnalysis
Market Structure & TechnicalsFundamentals
Seasonals
� Economic Research� Macro Economic Analysis� Investment Themes� Implications for Commodity Markets
Macro Overview
PT/12/00902
Bottom up – the engine room of idea generation
15
Source: Threadneedle
� Proprietary Database
� Underlying markets
� Sectors
� Indices
� Supply / production� Demand� Inventory / stocks / storage� Logistics� Weather� Technological development
� Investment flows� Speculative positioning� Hedger Activity� Algo / rules traders impact� Futures Exchange Rules� Options activity and Vols� Market positioning
TradeIdeas
Market Structure and Technicals
Fundamentals
Seasonals
PT/12/00902
Portfolio construction
� Overweight� Underweight� Off Benchmark Investments� Reflects conviction and
liquidity
Allocation
� FMs monitor position and risk in real time� Independent Risk Management and analytics
Risk management
Refine
Debate
Discuss
� Intra sector� Inter sector� Positioning along the curve� Timing of curve allocation
Relative value
� Correlation� Volatility� Tracking implications� Maximise risk adjusted
relative / absolute returns
Construction MetricsPortfolio
� Relative and absolute commodity views� 18-25 commodities� Swap or futures� Collateral in T-bills
� ISDA + CSA� Regular review
16PT/12/00902
NY Harbour Gasoline v. Henry Hub Natural Gas
17
Relative Value
Market Structure and
TechnicalsFundamentals
Seasonals
� NG seasonals negative through summer
� RBOB seasonal most positive ahead of US summer and winter changeover
� Natural Gas storage constraint� Robust supply +16,800 wells in ‘11 � Little infrastructure to export� NGL’s & wet gas increase margins� Gasoline tight with Middle East
supply disruption� Logistics impaired / affects refining� US refiners reducing EC capacity
� NG producers actively hedge affecting front of curve
� US NG is a domestic market
� RBOB inclined to backwardation
50
70
90
110
130
150
170
Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11
Reb
ased
= 1
00
Dow Jones – UBS Natural Gas Sub-Index
S&P GSCI Unleaded Gasoline Official Close Index
Strong seasonal
Lower 48 Inventory surplus (deficit) to other years
Source: EIA, Citi Investment Research and Analysis
PT/12/00902
Curve trading and relative value in Crude Oil grades and term structure
18
Relative Value
Market Structure and
TechnicalsFundamentals
Seasonals
� Early 2011 tightness in Brent exacerbated by Middle East unrest
� WTI price and structure both weak due to strong domestic production and storage constraints at Cushing
� Allocated to Brent v WTI in Feb ‘11� Front of curve for Brent only � DJ added Brent in Jan 2012
� WTI price was beginning to fail as a global benchmark and Brent would more accurately reflect the market
� Brent structure would stay strong with loss of Libyan oil
� WTI structure would struggle with limited shipping to Gulf Coast
70
80
90
100
110
120
130
140
Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11
Reb
ased
= 1
00
Dow Jones – UBS Crude Oil Sub-IndexDow Jones – UBS Crude Oil Sub-Index 3-mth forwardS&P GSCI Brent Crude Official Close Index
Weak WTI Structure early in 2011
� Seasonal weakness in WTI term structure due to refining maintenance in the first quarter
Source: EIA, Citi Investment Research and Analysis
PT/12/00902
Wheat – In an active strategy, it is possible to capture the volatility in the protein spread and the difference in carry
19
Relative Value
Market Structure and
TechnicalsFundamentals
Seasonals
� We allocated to MW wheat Feb 2011 - fundamentals and structure
� MW wheat has high protein content � Grown in different regions of NA� La Nina effect severely impacted
MW production in 2011� Logistics impaired shipment of
2010 crop
� Minneapolis, Kansas and Chicago wheat all have different physical delivery conditions
� Chicago wheat most affected by VSR
� MW more inclined to backwardation/positive roll yield
� Less speculative and index activity
MW in backwardation, W in contango
50
60
70
80
90
100
Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11
Reb
ased
= 100
DJ-UBS Wheat Sub-IndexS&P GSCI Kansas Wheat IndexCiti Minneapolis F3 Custom Index
� MW has stronger Spring and Summer seasonal performance
Source: EIA, Citi Investment Research and Analysis
PT/12/00902
Cotton – Positioned in deferred months, moved to zero weight in June 2011
20
Relative Value
Market Structure and
TechnicalsFundamentals
Seasonals
� Since inception, we were invested in deferred months cotton (mkt wt)
� Physical tight market had run into second growing season, time for supply response to high prices
� Demand affected by high prices and substitution accelerated
� Speculative and Index length all rolling and looking for an exit
� Extreme backwardation weakened during standard roll dates
� Speculative length was beginning to climbing in the first half of 2011
� Agricultural commodities tend to revert to contango (negative roll)
Exit cotton position zero weight
50
75
100
125
150
175
200
225
250
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
DJ UBS Cotton Sub-Index DJ UBS Cotton Sub-Index 3-mth forward
Extreme structure and high prices
Source: EIA, Citi Investment Research and Analysis
� Cotton exhibits weak seasonal performance from May through October
PT/12/00902
Portfolio construction: emphasis on relative value
� Focus on relative value opportunities within the commodity universe
� Intra sector
� Across sectors
� Position size to reflect both conviction and underlying market liquidity
� Portfolio positions constructed with emphasis on:
� Correlation
� Volatility
� Maximise performance outcome within the tracking error budget constraint
� Deliver high risk adjusted relative returns with a portfolio volatility close benchmark
21PT/12/00902
Source: FactSet as at 31 December 2011. Gross performance based on official global close prices adjusted by the TER. Performance figures for periods greater than 1 year are cumulative.1 Since inception at 30 June 20102 Index – Dow Jones-UBS Commodity Index
Threadneedle Enhanced Commodities FundPerformance to Date (in USD)
2010 Jul Aug Sep Oct Nov Dec 2010
Fund (gross) 7.3% -1.2% 6.4% 5.5% -0.1% 10.8% 31.5%
Index2 6.8% -2.5% 7.3% 5.0% -0.4% 10.7% 29.2%
Relative +0.5% +1.3% -0.9% +0.5% +0.3% +0.1% +1.8%
22
2011 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Since inception1
Fund (gross) 1.9% 3.6% 2.4% 4.8% -5.5% -3.3% 3.8% 1.7% -14.0% 6.5% -1.4% -1.6% -2.8% 27.9%
Index2 1.0% 1.3% 2.1% 3.5% -5.1% -5.0% 3.0% 1.0% -14.7% 6.6% -2.2% -3.7% -13.3% 12.0%
Relative +0.9% +2.2% +0.3% +1.3% -0.4% +1.8% +0.8% +0.7% +0.9% -0.1% +0.9% +2.3% +12.2% +14.2%
PT/12/00902
Performance vs. index
Threadneedle Enhanced Commodities FundPerformance to Date (in USD)
23
100105110115120125
130135140145150
Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11
Reba
sed
= 10
0
T-Lux Enchanced Commodities Fund DJ-UBS Commodity (TR) Index
2011 Since inception1
(annualised)Since inception1
(cumulative)Historical Simulation
Volatility / TE3
Fund (gross) -2.8% 17.8% 27.9% 19.6%
Index2 -13.3% 7.9% 12.0% 20.5%
Relative +12.2% +9.2% +14.2% +2.9%Source: FactSet as at 31 December 2011. Gross performance based on official global close prices, Fund data is quoted on a bid to bid basis with gross income re-invested at bid. Fund returns calculated Gross of TER (and Tax) for comparison with index 1 Since inception at 30 June 20102 Index – Dow Jones-UBS Commodity Index3 Factset as at 31 December 2011. Based on monthly observations since inception.
PT/12/00902
Threadneedle Enhanced Commodities StrategyProduct update
� Strong inflows over the first year – $300 million in AUM, highly diversified client base
� US clone fund (futures based) launched at the end of July 2011 by Columbia AM
� Long / short, market neutral product to launch in Q1
24PT/12/00902
Risk control and monitoring
� Multiple controls inside and outside the process ensure that risks are intended and appropriate
� Within the process
� Adherence to risk budgeting discipline
� Daily review of exposures
� Weekly review of all trades vs. targets and market developments
� Robust external controls
� Blend of proprietary and third-party analytics provide comprehensive view of portfolio risk (Threadneedle uses Advanced Portfolio Technologies, Inc. (APT) as a risk model provider)
� Ongoing portfolio monitoring and challenge of fund managers by dedicated (and independent) investment risk team
� Formal reviews by Head of Fixed Income and Head of Risk Management
25PT/12/00902
Managing risk for investment return
� Investment risk: daily reports provide insight into portfolio exposures and risks
� Positions, number of holdings, net and gross exposures
� Tracking error, value-at-risk, breakdowns by commodity, sector and size
� Scenario analysis/stress tests
� Sensitivity analysis
� Operational risk: Safeguards and analysis
� Dedicated unit within risk management team conducts on-going analysis of counterparty risk
IRIS, Threadneedle’s risk reporting system
For illustrative purposes only
26PT/12/00902
Threadneedle Enhanced Commodities Fund
27
� Physical commodities and futures or options on a commodity are NOT permitted in UCITS funds.
� Derivatives on commodity indices are permitted
� 5/10/40% limit� Ensures diversity in the fund
� Not more than 40% of the fund can have holdings of between 5 and 10%
� No holding can exceed 10% of the fund
� 20/35% correlated group limit� Ensures diversity in the fund
� Applied to correlated commodities (80%)
� Max 35% in one correlated commodity group
� Max 20% in the other correlated groups
� 10% Issuer limit
� 200% Gross Exposure
Applicable UCITS limits� The fund manager could be overweight or
underweight +/-5% per commodity sector
� The fund manager could be overweight or underweight +/-7% per specific commodity
� The fund manager could be overweight 12 months future contract by 100% of the index weight in that commodity type
Investment Risk Guidelines1
1 Investment risk guidelines are not limits. The guidelines are deliberately set at levels which will are likely to be exceeded on a reasonably regular basis. The guidelines are only used as management information for both. Risk and Fund Management regarding the level of risk being run in the funds.
PT/12/00902
28
04Commodity market overview
Market outlook
Fundamentals good, Macro mixed
Fundamentals
� Inventory levels across sectors are at low levels throughout supply chain
� Supply response – limits to near term production increases
� Cost of supply response is escalating – Mine building cost is 5 x 2002 levels
� Geopolitical risk puts oil supply at risk and increases costs
Macro
� China and EM are now easing and reducing the risk of a hard landing
� Uncertainty around European sovereign debt crisis
� US recovery appears to be gaining momentum
29PT/12/00902
Commodity risk: geopolitics, weather and natural disasters
� Last two years have seen the resurgence of commodity specific risk
� Geopolitics: Middle-East and other oil producing countries
� Weather: Droughts in US and South America
� Natural disasters: Earthquake in Japan, Floods in Australia
� Commodity price risk is skewed to the upside
� Longer term, positive on commodities – energy is our preferred sector
30PT/11/00749
� Libyan production has been recovering faster than anticipated…
Energy and the return of geopolitical risk
OPEC crude production (million barrels per day)
Source: International Energy Agency as at 18 January 20121 Capacity levels can be reached within 30 days and sustained for 90 days2 Includes half of Neutral Zone production3 Nigeria’s current capacity estimate excludes some 200kb/d of shut-in capacity4 Includes upgraded Orinoco extra-heavy oil assumed at 470kb/d in September
Supply Sustainableproduction capacitiy1
Spare capacity vs. December 2011
supply
2011 AnnualAverage
Volume Change2011 vs 2010Oct 2011 Nov 2011 Dec 2011
Algeria 1.29 1.29 1.29 1.30 0.01 1.28 0.02
Angola 1.72 1.69 1.75 1.90 0.15 1.64 -0.09
Ecuador 0.50 0.50 0.48 0.51 0.03 0.50 0.03
Iran 3.53 3.55 3.45 3.51 0.06 3.58 -0.13
Kuwait2 2.65 2.67 2.62 2.84 0.22 2.50 0.21
Libya 0.35 0.55 0.80 0.75 -0.05 0.46 -1.09
Nigeria3 2.02 2.10 2.06 2.48 0.42 2.18 0.10
Qatar 0.81 0.82 0.82 0.90 0.08 0.80 0.02
Saudi Arabia2 9.45 9.75 9.85 12.00 2.15 9.34 0.95
UAE 2.51 2.52 2.58 2.74 0.16 2.50 0.19
Venezuela4 2.55 2.53 2.50 2.55 0.05 2.52 -0.01
OPEC-11 27.38 27.97 28.20 31.47 3.27 27.30 0.20Iraq 2.69 2.68 2.69 3.21 0.53 2.67 0.31
Total OPEC 30.07 30.64 30.89 34.68 3.80 29.98 0.51Excluding Iraq, Nigeria and Venezuela 2.85
31PT/12/00902
Energy and the return of geopolitical risk
32
� … demand continues to strengthen, driven by Asia / Pacific
Global oil demand – 2010–2012 (million barrels per day)
Source: International Energy Agency as at 18 January 2012
2010 2011 2012
Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total
Africa 3.3 3.4 3.4 3.4 3.4 3.4 3.3 3.3 3.4 3.3 3.4 3.5 3.5 3.6 3.5
Americas 29.5 30.0 30.5 30.2 30.1 30.0 29.8 30.2 29.6 29.9 29.8 29.7 30.3 30.0 30.0
Asia / Pacific 27.2 26.9 26.7 28.3 27.3 28.6 27.3 27.4 28.7 28.0 29.2 28.3 28.1 29.5 28.8
Europe 15.0 14.9 15.6 15.5 15.3 14.9 14.8 15.4 15.0 15.0 14.5 14.5 15.2 15.0 14.8
FSU 4.4 4.3 4.6 4.6 4.5 4.5 4.6 4.8 4.9 4.7 4.6 4.6 4.8 4.9 4.7
Middle East 7.4 7.8 8.3 7.7 7.8 7.6 8.0 8.5 7.9 8.0 7.9 8.3 8.7 8.1 8.3
World 86.8 87.4 89.0 89.7 88.2 89.0 87.9 89.5 89.5 89.0 89.5 89.0 90.7 91.1 90.0
Annual change (%) 2.6 3.2 3.4 3.4 32. 2.5 0.5 -0.3 0.8 0.8 0.6 1.2 1.3 1.7 1.2
Annual change (mb/d) 2.2 2.7 2.9 3.0 2.7 2.2 0.4 -0.3 0.7 1.0 0.5 1.1 1.2 1.5 1.1
Changes from last OMR (mb/d) 0.01 0.00 0.01 0.00 0.00 0.02 0.05 0.11 -0.31 -0.03 -0.51 -0.26 -0.06 -0.06 -0.22
PT/12/00902
US Natural Gas: it’s about shale gas, still….
� Shale gas expansion continues to be the driving force behind US natural gas weakness
� The domestic nature of the US market and the difference in pricing mechanism withinternational LNG markets is the key to understand the current price dislocation
� The situation is likely to endure until US producer curtail production and/or export capacity comes online
33
Since 2000, U.S shale gas production has increased 17-fold and now comprises about 30%of total U.S. dry production
Source: Lippman Consulting, Inc. gross withdrawal estimates as of November 2011 and converted to dry production estimates with EIA-calculated average gross-to-dry shrinkage factors by state and/or shale play. Note: 2011 is annual for first 10 months.
Annual shale gas production (dry) trillion cubic feet
PT/12/00902
… and the mild weather this winter has exacerbated the glut
� Mild temperatures in the US so far this winter are to blame for the sharp decline recorded so far this year
� Inventories are now trending close to 20% above averages and may lead to containment issues later this year
� The situation is particularly acute in the producing region and could potentially lead to price dislocation in the spot market
34
Producer Region Natural Gas Inventories
Source: IEA / Threadneedle
300
500
700
900
1,100
1,300
1,500
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52Average High Low2010 2011 2012 (till week 3)
PT/12/00902
Oil products remain our conviction trades: distillates are tight….
� Despite mild temperatures, US distillates inventories have tightened significantly
� Demand has been driven by non-OECD countries dermand growth
� Jet/Kerosene (+8.3%) and Gasoil/Diesel (+4.1%) have been the key drivers behindrising refined products demand
35
US Distillates inventories
Source: EIA / Threadneedle
90,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52Average High Low2010 2011 2012 (till week 3)
PT/12/00902
… and US Gasoline will get tighter as we prepare for the driving season
� US motor gasoline inventories are alreadytighter than last year
� Several closures of refineries in the East Coast will make continues to put pressure on inventories leaving the US North East market much tighter this summer
� After Petroplus’s bankruptcy, Europeanexports look less likely to fill the gap
36
US Motor Gasoline inventories
Source: EIA / Threadneedle
180,000
190,000
200,000
210,000
220,000
230,000
240,000
250,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52Average High Low2010 2011 2012 (till week 3)
PT/12/00902
Why invest in commodities?
05
What are commodities?
Commodities differ from other capital assets (bonds, equities and real estate)
� Commodities do not generate income and cannot be valued as a NPV of future cash flows
� Commodities are consumable, perishable, and transformable
� A store of economic value
� Traded on a global basis
� Subject to significant supply / demand pressures
38PT/12/00902
Why invest in commodities?
� Portfolio diversification – uncorrelated to equities and bonds
� Commodities are positively correlated to inflation
� Commodities are a store of value against currency debasement
� Absolute returns – new ‘super cycle’ with the development of emerging economies and emergence of strong supply constraints in the last decade
� Commodities as a hedge to geopolitical risk
39PT/12/00902
The evolution of commodities as an asset class
� Commodities have evolved into a major asset class
� Idea of investing in futures introduced as a portfolio diversification tool in 1978
� Leading indices created in the 1990’s – GSCI (1991), DJ-AIG CI (1999)
� 2000–present – accelerating adoption by investors with AUM growing from $10 billion to in excess of $300 billion
� Development of investment vehicles – swaps, MTNs, ETPs, Enhanced return, UCITs III funds
40PT/12/00902
Commodities as an effective inflation hedge
� High unexpected inflation occurs when the actual rate of inflation exceeds the normal inflation rate given the risk free rate of return1
� Periods of high unexpected inflation have occurred approximately 44% of the time since 1960
� Over these periods, excess returns from commodity futures have been significantly higher than equities and bonds
Average excess return over 6-month period from 1960 through 2009
Period Equities Bonds Commodities % Occurrence
Low unexpected inflation 3.8% 5.1% 0.0% 56.1%
High unexpected inflation 0.8% -0.3% 6.1% 43.9%
Source: Bloomberg, Ibbotson, UBS1 For the purpose of this analysis, a normal level of inflation was determined by applying a linear regression model of percentage change in CPI of All Urban Consumers over a 6 month period on the return of one month T-Bills over the same six month period. Note: Data from July 1959 to December 2004 represents the Equally-Weighted Collateralized Futures Index (as calculated by Gary Gorton and K. Geert Rouwenhorst, February 2005, and described in their paper, Yale ICF Working Paper No.04-20, Facts and Fantasies about Commodity Futures). From January 2005 through June of 2009, this index was constructed by UBS using the same approach as described in this paper and the same basket of commodities as held at the end of December 2004. From July 1959 to December 2008, Stocks are represented by the Ibbotson Large Company Stocks and Bonds are represented by the Ibbotson Long-Term Corporate Bonds Indices. From January 2009 to June 2009, Stocks are represented by the S&P 500 and Bonds are represented by the Citigroup BIG Long Term 10+ Years Index. The risk premium is the average return of an asset in excess of U.S. T-Bills. Historical results should not and cannot be viewed as an indicator of future performance. Source: UBS AG, Bloomberg, Ibbotson Associates; Yale ICF Working Paper No.04-20, Facts and Fantasies about Commodity Futures, Gary Gorton, K. Geert Rouwenhorst, February 2005.
41PT/12/00902
Commodities are a store of value against currency debasement
S&P 500 in terms of Gold has lost > 80% of its value (2000–2010)
Source: Bloomberg as at 22 March 2010
Inflation adjusted – monthly crude oil prices (1946–2010)
Source: www.inflationdata.com. Chart in January 2010 in $
42
0
1
2
3
4
5
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Close SMAVG on Close(50)
0
20
40
60
80
100
120
140
1946 1954 1962 1970 1978 1986 1994 2002 2010
($)
Nominal Oil price Inflation adjusted Oil price
June 2008Monthly average Oil
price $125.10 in January 2010 dollarsDecember 1979
Monthly average peak $107.35 in
January 2010 dollars
Nominal peak $38 (monthly average
price) intraday prices peaked much higher
PT/12/00902
How to access commodities?
06
How to access commodities?
� Access through CTAs and Hedge Funds since the 1980s
� Commodities have gradually become an asset class through the development of commodity indices since the late 1990’s
� Early entrants – S&P GSCI and DJ-AIG (now DJ-UBS)
44PT/12/00902
Commodity indices – the landscape
� S&P GSCI and DJ UBS still represent the bulk of the market along with single commodity ETFs
� A wide variety of product currently available, from plain vanilla to algorithm based strategies
� Recently, main area of focus has been to reduce the impact of contango
45PT/12/00902
Backwardation, contango and roll yield
� The slope of the futures / forward curve indicates the state of available, deliverable inventory relative to market demand
� Commodities with abundant supply are typically in contango – short-dated futures prices are lower than longer-dated ones. Precious metals are usually in contango because of the significant stocks available and therefore the low metal lease rates
� Commodities with tight supply are typically backwardated – short-dated futures prices are higher than longer-dated ones
� Maintaining long positions in commodity futures necessitates replacing maturing futures contracts with longer dated futures. For a commodity market in contangothe investor will suffer an erosion of return by replacing cheap futures with more expensive futures further along the curve. Conversely, for a market in backwardation the investor will benefit from improvement in the return
Contango – negative roll return
Commodity indices – roll return impacting performance
Backwardation – positive roll return
� Roll return has historically eroded 50% of the returns of the spot returns for S&P GSCI and 55% of the spot returns for DJ-UBSCI
Pric
e
Maturity
Maturity
Pric
e
Source: JP Morgan
46PT/12/00902
Hypothetical cumulative roll return
Commodity indices – from ‘roll return’ to ‘roll drag’
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
S&P GSCI S&P GSCI Light Energy DJ-UBSCI
� Excess return = price return + roll return
� Price return – change in contracts’ prices
� The roll return is the incidental cost or benefit of tracking the price index and is inherent to commodity investing
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Commodity indices – answers to contango? (cont’d)
More diversified indices� More even distribution across commodity sectors� Reduce weight of contango prone markets� Extend breadth to new markets
Enhanced roll strategies� Outside of traditional roll window� Further out on the futures curve� Seasonal roll
Algorithmic strategies� Algorithmic rolls� Algorithmic weights� Long / short indices
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Commodity indices – answers to contango? (cont’d)
What about tracking error?
� Outperformance leads to increased tracking error
� How much is acceptable?
Bespoke benchmark?
� Benefits?
� Lead time to win approval?
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Commodity indices – answers to contango? (cont’d)
Active management = flexibility
� Liquidity remains uneven along the forward curve and across markets
� Algorithmic strategies suffers from the same ills as indices� Rules transparency� Lack of flexibility
� Markets are continuously evolving
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Appendix
AP
Source: Threadneedle as at 30 December 2012
Bridging the gap towards theoretical spot returns?
52
90
100
110
120
130
140
150
160
Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11
Reb
ased
= 1
00
DJUBSSP Index DJUBSTR Index DJUBSF3T Index T-Lux Enchanced Commodities Fund
� Since inception, the strategy has tracked spot returns closer than a passive forward exposure
� Trading the curve actively allows to seek forward exposure to minimise contango while taking advantage of the curve volatility to generate outperformance
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Source: Threadneedle as at 30 September 2011
Gold vs. gasoline – is gold really your inflation hedge?
53
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011SPGCHUTR Index SPGCGCTR Index
� In spite of recent precious bull market, gold continues to underperform gasoline over the long-term
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Source: Threadneedle as at 30 September 2011
Long term gasoline returns: structural positive roll yield?
54
� The long-term strong gasoline performance is still driven by term structure� Strength of term structure allows gasoline to outperform since the start of the year
0
1,000
2,000
3,000
4,000
5,000
6,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
SPGCHUP Index SPGCHU Index SPGCHUTR Index
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Important information
For Investment Professionals use only, not to be relied upon by private investors.Past performance is not a guide to future returns. The value of investments can fluctuate and any income from them can go down as well as up.Threadneedle (Lux) is an investment company with variable capital (Société d’investissement à capital variable, or "SICAV") formed under the laws of the Grand Duchy of Luxembourg. The SICAV issues, redeems and exchanges shares of different classes, which are listed on the Luxembourg Stock Exchange. The management company of the SICAV is Threadneedle Management Luxembourg S.A, who is advised by Threadneedle Asset Management Ltd. and/or selected sub-advisors.The SICAV is registered in Austria, France, Germany, Hong Kong, Italy, Luxembourg, The Netherlands, Portugal, Spain, Switzerland, Taiwan and the UK; however, this is subject to applicable jurisdictions and some sub-funds and/or share classes may not be available in all jurisdictions. Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local legislation.The Portfolio invests in commodity indices comprised of futures contracts on physical commodities in certain sectors. As these futures contracts approach expiration, they are replaced by contracts that have a later expiration. Depending on the prevailing prices in the underlying market, this could positively or negatively impact the portfolio. Commodity prices may change unpredictably, affecting the index and the level of the index and the value of the Portfolio in unforeseeable ways. The portfolio invests in single commodity indexes which may be particularly susceptible to fluctuation and may fluctuate rapidly based on numerous factors. The commodities underlying the Index components may be produced in a limited number of countries and may be controlled by a small number of producers, political, economic and supply related events in such countries could have a disproportionate impact on the prices of such commodities and the value of the index.Subscriptions to a fund may only be made on the basis of the current Prospectus or Simplified Prospectus and the latest annual or interim reports, which can be obtained free of charge upon request from the SICAV's registered office at 69, route d'Esch, L-1470 Luxembourg, Grand Duchy of Luxembourg. Investors should note the ‘Risk Factors’ section of the Prospectus in terms of risks applicable to investing in any fund and specifically this FundThe research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Any opinions expressed are made as at the date of publication but are subject to change without notice.This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request.Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242, 74, rue Mühlenweg, L-2155 Luxembourg, Grand Duchy of Luxembourg.Threadneedle Asset Management Limited Registered Office: 60 St Mary Axe, London EC3A 8JQ. Registered in England and Wales, No. 573204. Authorised and regulated in the UK by the Financial Services Authority.Threadneedle Investments is a brand name, and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies. www.threadneedle.com
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