For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 1
In association with
23rd October 2014 | ASX Auditorium
For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
Speaker:
David Bassanese
Betashares
Tactical Strategies Using ETFs
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
4
Disclaimer
The information contained in this document is general information only and does not constitute
personal financial advice. It does not take into account any person’s financial objectives, situation
or needs. It has been prepared with all reasonable care by BetaShares Capital Limited (ABN 78
139 566 868, Australian Financial Services Licence No. 341181) (“BetaShares”). The information
is provided for information purposes only and should not be construed as a recommendation to
invest in any particular strategy or financial product. Past performance is not indicative of future
performance. Investments in BetaShares Funds are subject to investment risk and investors may
not get back the full amount originally invested. Any person wishing to invest in BetaShares Funds
should obtain a copy of the relevant PDS from www.betashares.com.au and obtain financial
advice in light of their individual circumstances. Future results are impossible to predict. This
presentation may include opinions, estimates and other forward-looking statements which are, by
their very nature, subject to various risks and uncertainties. Actual events or results may differ
materially, positively or negatively, from those reflected or contemplated in such forward-looking
statements. Opinions and other forward-looking statements are subject to change without notice.
Any opinions expressed are not necessarily those of BetaShares.
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
5
Agenda
• The case for tactical strategies
• Valuation based tactical asset allocation
• Equity/Bond Sector Rotation
• Buy/write income strategies
• Momentum investing
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
6
Agenda
• The case for tactical strategies
• Valuation based tactical asset allocation
• Equity/Bond Sector Rotation
• Buy/write income strategies
• Momentum investing
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
7
Tactical Strategies
• ETFs/Index funds provide extra choice in terms of which sources of “alpha” you can
concentrate on
• Traditional long-only equity managed funds concentrate on stock selection
• ETFs allow you to concentrate on sector/country and/or tactical asset allocation exclusively
• ETFs just replace certain decision rules (buy low PE stocks) with others (low PE ETFs and/or
ETFs with better relative performance).
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
8
Macro approach & 80/20 rule
Company return
Sector Return
Market return
Share of Returns Share of research effort
10-15%
15-30%
70-85% 10-15%
70-85%
15-30%
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
Significant tactical opportunities with ETPs
•Broad
•Small Cap
•Large Cap
•Financials
•Resources
•REIT
•Other sectors
Equity – Domestic
•High Interest Cash
•Corporate Bond
•Government Bond
•Semi-Government
•Inflation Linked
Cash & Fixed Income Commodities
•Gold (A$ Hedged)
•Gold (Unhedged)
•Silver
•Platinum & Palladium
•Crude Oil
•Agriculture
•Copper
•Diversified Basket
Currencies
•US Dollar
•British Pound
•Euro
International
•Broad world & region
•Country Specific
•Emerging Markets
•Global Sector
Strategy
•High Dividend
•Value
•BEAR
•Geared
9
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
10
Agenda
• The case for tactical strategies
• Valuation based tactical asset allocation
• Equity/Bond Sector Rotation
• Buy/write income strategies
• Momentum investing
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
11
A simple equity valuation model
0
50
100
150
200
250
Mar-74 Mar-82 Mar-90 Mar-98 Mar-06 Mar-14
Real Share Prices vs.. GDP
Real Share Prices
Real GDP
Long-run average = 100
*MSCI Australia Equity Index
deflated by national output prices
Sep qtr '87
Sep Qtr' 07
Mar Qtr
' 09
Source: Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
12
Expected equity returns favourable
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%-5
-4
-3
-2
-1
0
1
2
3
4
5
Mar-74 Mar-82 Mar-90 Mar-98 Mar-06 Mar-14
Equity Market Returns Model
Share price to GDP Ratio [LHS]
% Std dev. from average
Source: Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
13
Bonds: interest rates very low
0
1
2
3
4
5
6
7
8
9
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
Australian Interest Rates
UBS Composite Bond IndexYield
%
Source: RBA, PennyWise Financial
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
14
Expected bond returns low
0
1
2
3
4
5
6
7
8
9
10
Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
Bond Returns Model*
Actual
Predicted
*5-year rolling
annualised returns for
UBS Composite Bond Index
%
Source: PennyWise Financial
5-yr projection
if yields
return to 5%
"fair-value"
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
15
Agenda
• The case for tactical strategies
• Valuation based tactical asset allocation
• Equity/Bond Sector Rotation
• Buy/write income strategies
• Momentum investing
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
16
Separating Alpha from Beta using ETFs
Cash 20%
Bonds 20%
Equity Fund 1
20%
Equity Fund 2
20%
Equity Fund 3
20%
Traditional Equity Allocation
Cash 20%
Bonds 20%
Equity ETF 45%
Equity Fund 1
5%
Equity Fund 2
5%
Equity Fund 3
5%
Core/Satellite Equity Allocation
Source: PennyWise Financial
Illustrative only, not a recommendation to adopt any particular investment strategy
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
17
Resource Sector
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
20
40
60
80
100
120
140
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
Resources Sector & Commodity Prices
RBA Non-Rural Commodity Price Index (SDR terms) [LHS]
Ratio: S&P/ASX 300 Material Index to S&P/ASX 300 Index [RHS]
Index
Source: Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
18
Financial Sector
0
2
4
6
8
100.2
0.7
1.2
1.7
2.2
2.7
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
Financial Sector & Interest Rates
Ratio: S&P/ASX 200 Financials ex A-REITs to S&P/ASX 200 [LHS]
180 day bank bill yield [RHS] - inverse axis
%
Source: UBS, Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
19
Small Caps
25
50
75
100
125
0
100
200
300
400
500
600
Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13
Small Caps Relative Total Return Performance
S&P/ASX 200 [LHS]
ASX Small Ord. [LHS]
Small vs Large Relative Index [RHS]
Index Dec'95=100
Source: UBS, Thomson Reuters Source: UBS, Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
20
Income strategies in weak markets
In range trading equity market, investors might opt to seek
enhanced yield through various income strategies
•High dividend yield ETFs
•Buy/write option based ETFs
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
21
Global Equities
0.6
0.8
1
1.2
1.4
1.6
1.8
40
60
80
100
120
140
160
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
World vs. Australian Equity Performance
$A-terms - unhedged [LHS]
Local currency-hedged [LHS]
World vs $A exchange rate index [RHS]
Index Dec'95 = 100 MSCI All Country Index vs. S&P/ASX 200
Source: Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
22 Source: Bloomberg
Example: Asset Class Exposures
Commodity ETFs (QCB) - hedged
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
23 Source: Bloomberg
Example: Asset Class Exposures
Agriculture ETFs (QAG) - hedged
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
24
Source: UN Food and Agriculture Organisation (FAO)
Past performance is not an indicator of future performance
FAO Food Price Index (Monthly January 1990 – April 2014)
0
50
100
150
200
250
Jan-
90
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Food Price Index
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
25
Credit Spreads
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12
Interest Rate Spread over UBS Treasury Bond Index
UBS Semi-Govt Bond index
UBS Composite Bond Index
%
Source: UBS, Thomson Reuters Source: UBS, Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
26
Indexed Bonds
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12
Implied Market Inflation Expectation %
Yield difference between the UBS Non-indexed and Indexed Government Bond Index
Source: UBS, Thomson Reuters
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
27
Agenda
• The case for tactical strategies
• Valuation based tactical asset allocation
• Equity/Bond Sector Rotation
• Income strategies
• Momentum investing
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
28
A simple market timing rule Equities vs. Cash
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Jul-05 Jul-07 Jul-09 Jul-11 Jul-13
S&P/ASX 200 Index
S&P/ASX 200200-day moving average
Source: Thomson Reuters, BetaShares
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
29
Helps mainly during downturns
60
80
100
120
140
160
180
200
Jul-05 Jul-07 Jul-09 Jul-11 Jul-13
Relative Performance - 200 day moving average signal
S&P/ASX 200
Timing Portfolio
Relative performance
Source: BetaShares
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
30
Asset Momentum Strategies
0
100
200
300
400
500
600
Asset Allocation Trend & Momentum Models
Equal weighted buy & hold
Trend filter
Momentum filter
Trend & momentum filter
Index Sep'96=100
Source: Thomson Reuters
Performance Indices
Rotation between Cash, Bonds, Aust. Equities & Gold
Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group
31
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