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Prepared for professional clients only
Alternative UCITS Equity FundsIs the investment case still valid?
Andrew Cawker Portfolio Manager, Head of Specialist Equities at Insight Investment
22
Agenda
● Growth in Alternative UCITS Funds
● Search for uncorrelated returns
● Absolute Insight UK Equity Market Neutral Fund
― Investment process
― Isolating the alpha
― Team
― Risk management
● BNY Mellon Absolute Return Equity Fund
― Comparison with Absolute Insight UK Equity Market Neutral Fund
● Summary
● Appendices
3
Alternative UCITS hedge fundsMarket size and growth
● Number of funds has exploded and is forecast to continue…
● … despite the bad press and mixed performance
● Investors continue to look for uncorrelated investments and improved risk adjusted returns
Source: Insight. UCITS Alternative Index Quarterly Industry Report – Q4 2011 – Alix Capital
Many absolute return funds fail to deliver‘Figures from the Financial Services Authority show that more than
half of the funds in the absolute return sector failed to provide a positive return in 2011. Once inflation is taken into account, just a handful managed to provide investors with any real return...And
there are only a handful of funds that manage to generate a return consistently’.
Elaine Moore, FT, April 27 2012 From alpha to smart beta - the industry’s language is changing“We know we used to promise “absolute returns” (i.e., that you would make money regardless of market conditions) but this pledge has proved impossible to honour. Instead we’re going to give you “risk-adjusted” returns, or failing that, “relative” returns”.
Zilch Capital LLC, The Economist, February 18 2012
4
The search for uncorrelated returnsPost 2007, asset prices have become increasingly dominated by ‘Risk on/Risk off” trade
Achieving portfolio diversification increasingly difficult – correlation heat map, 2005 - 2012
-
Source: Insight. HSBC. 30 April 2012.
5
The search for uncorrelated returnsHedge funds - beta still dominates
Source: Lipper, 31 March 2012. Past performance is not a guide to future returns.
900
1,000
1,100
1,200
1,300
1,400
1,500
Mar-05 Sep-05 Mar-06 Aug-06 Feb-07 Jul-07 Jan-08 Jul-08 Dec-08 Jun-09 Nov-09 May-10 Nov-10 Apr-11 Oct-11 Mar-12300
350
400
450
500
550
600
650
700
750
HFRX Equity Hedge HFRX Global Hedge MSCI AC World TR (LCY)
From 31 March 2005 - 31 March 2012
6
Are high correlations here to stay?Economic deleveraging = lower trend growth, shorter cycles and increased macro volatility
0
2
4
6
8
10
12
14
16
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1951 1961 1971 1981 1991 2001 2011
Macro vol (5 yr Std Dev of real US GDP) (LHS)
US Earnings yield (using Schiller P/E) (RHS)
Source: Insight. Barcap as at 31 March 2012
7
The search for uncorrelated absolute returns Absolute Insight UK Equity Market Neutral Fund (€890.26 million)
Source: Insight, as at 31 March 2012. Absolute Insight UK Equity Market Neutral Fund returns shown net of fees in GBP. * Maximum drawdown statistics calculated using monthly returns since inception. Past performance is not a guide to future performance.
May 2005 – March 2012
● Pair trades to isolate alpha
● Net exposure ≤ +/-10% of the NAV
● Beta ≤ +/- 0.15
● Stop loss triggers help protect capital
Returns for the Fund are shown net of fees in GBP
90
100
110
120
130
140
150
May
-05
Dec-
05
Jul-0
6
Jan-
07
Aug-
07
Mar
-08
Oct
-08
May
-09
Dec-
09
Jul-1
0
Feb-
11
Sep-
11
Mar
-12
1500
2000
2500
3000
3500
4000
4500
AI UK Equity Market Neutral Fund (LHS)FTSE All Share (capital only, RHS)FTSE All Share (total return, RHS)
(%)
Return (p.a.) 4.79%
Percentage of positive months 75%
Volatility (p.a.)* 1.95%
Sharp ratio (p.a.) 0.83
Max drawdown* -1.66%
Isolating the alphaInvestment process - performance focus at all stages
Fundamental analysis
Hedge identification
Portfolio
Real-time monitoring and risk management
Tacticalbuy/sell decision
Fund manager/ analyst ideas
Quantitative screening
Idea generation is key: no maintenance
research
Long term research, short term market
awareWhat risks to
strip out?What is the
company worth?
Stop-loss(15bp of NAV)
8
Market Direction
Sector/Style factors
Stock Specifics
Pair-trade approach allows “alpha” isolationFocus on the risks we want, minimise the risks we don’t want
Pair trades
Stockvs.
Market/Sector/Stock
Stock vs.
Market indices
Stockvs.
Sector/Stock(s)
Hedgeprecision
Looser
Tighter
Drivers of share prices
9
1010
Isolating the alpha – a tight hedgeShort “weak” versus “strong” in automotive sector
Lead idea: Fiat (short)
● Bias towards weaker end markets: Mediterranean, low margin, mass-market product
● Weak balance sheet; unfunded pension liabilities worsened at Chrysler
● Valuation not “cheap” enough on our analysis
Hedge: Daimler (long)
● Better end markets: high margin luxury cars (with good exposure to emerging market growth) and trucks
● Strong balance sheet
● Insufficient valuation premium on our analysis
Fiat and Daimler
Short Fiat versus long Daimler
25
30
35
40
45
50
55
60
2
3
4
5
6
7
8
9
Jan-11 Mar-11 Jun-11 Sep-11 Nov-11 Feb-12Fiat (lhs) Daimler (rhs)
6.06.57.07.58.08.59.09.5
10.010.511.0
Jan-11 Mar-11 Jun-11 Sep-11 Nov-11 Feb-12P
rice
ratio
Positionopened
Position closed
Source: Insight/Bloomberg as at 16 February 2012. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.
111111
Isolating the alpha - active hedge managementProtecting the P&L as macro risks develop
Lead idea: Mondi
● Vertically integrated paper and packaging group
● Major capex projects finish:
― cash flow increases dramatically
― not reflected in valuation
● Outlook for paper prices improves with industry consolidation
● Strong peer share performance
Hedge(s): FTSE 250 →mining sector →FTSE 250
● FTSE 250 removes markets risk, but Mondi is a cyclical and emerging market exposed stock
● Tightened hedge in early Feb versus the mining sector
● Mid-March switched hedge back to FTSE 250
Emerging markets and materials sector
Source: Insight/Bloomberg as at 31 July 2011. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.
Mondi versus FTSE 250
150
170
190
210
230
250
34,000
38,000
42,000
46,000
50,000
54,000
Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
MSCI EM LCY (lhs) MSCI World Materials LCY (rhs)
0.038
0.040
0.042
0.044
0.046
0.048
0.050
0.052
Mar-10 May-10 Jul-10 Sep-10 Oct-10 Dec-10 Feb-11 Apr-11 May-11
Positionopened
Changed hedge
Changed hedge
Position closed
1212
Isolating the alpha - hedging in a “Risk on/Risk off” worldIdentifying correlated stocks
Source: Insight/Bloomberg as at 16 February 2012. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.
Lead idea: Tesco (short)
● Competitive environment becoming more challenging
― consumer under pressure
― competitors becoming more efficient
● Consensus earnings expectations weakening while share price resilient
● Our analysis suggested shares vulnerable to earnings disappointment
Hedge: AstraZeneca (long)
● Historical close correlation
● Hedge “defensive” style characteristics with lower earnings disappointment risk
Tesco: consensus earnings estimates & share price
Short Tesco versus long AstraZeneca
0.320.330.340.350.360.370.380.390.400.41
Aug-07 Jun-08 May-09 Apr-10 Feb-11 Jan-120
1
2
3
4
5
6
BEst Standard EPS GAAP+ 2012* A (lhs) Share price (rhs)
6.06.57.07.58.08.59.09.5
10.010.5
Dec-10 Mar-11 Jun-11 Sep-11 Nov-11 Feb-12
Pric
e ra
tio Positionopened
Position closed
Isolating the alpha – active hedge managementA hedge that went wrong
Lead idea: BAE Systems (long)
● Global defence and security company
● Downward pressure on defence spending well known and appeared to be discounted into share price
● Management adapted to environment – focus on margins and cash flow versus growing top-line
● Earnings downgrade risk considered low
Hedge: FTSE 250 index
● Investors need to adjust to slower growth world
● Many index constituents more exposed to earnings downgrade risk
Source: Insight/Redburn partners as at 11 November 2011
BAE Systems estimates momentum – EPS & sales
0.024
0.026
0.028
0.030
0.032
Dec-10 Mar-11 May-11 Aug-11 Oct-11 Jan-12
BAE Systems versus FTSE 250 index
Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.
Positionopened
Hedge changed
Source: Insight/Bloomberg as at 13 January 2012.
13
Lead idea: BAE Systems (long)● Remains attractive given low earnings expectations/valuation
● Looking to tighten beta hedge in a “risk-on” market
Hedge: Cobham (short)● Defence and aerospace equipment company
● More exposed to US defence spending cuts
● Following meeting the company, our analysis suggested
cost savings programme insufficient
management change unhelpful
expect earnings disappointment
more expensive than BAE Systems
● However – Cobham’s results proved OK
earnings and dividend upgrade
sharp share price reaction
● Look to close position (no stop-loss)
BAE Systems versus Cobham
Cobham consensus earnings expectations and share price
Source: Bloomberg as at 30 April 2012. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.
1.4
1.6
1.8
2.0
2.2
2.4
2.6
0.18
0.19
0.20
0.21
0.22
0.23
0.24
Dec-10 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
BEst Standard EPS Adjusted+ 2012* A (lhs) Price
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Dec-10 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
Positionopened
Isolating the alpha – active hedge managementA hedge that went wrong
14
Active management of risk exposures and hedges
Gross exposure reducedTightened hedges to reduce factor risk
(decomposition of gross exposure by trade type)
15
3500
3600
3700
3800
3900
4000
4100
4200
4300
4400
50%
55%
60%
65%
70%
75%
80%
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11UKEMN Gross (LHS) FTSE All-Share TR (RHS)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Oct
-11
Sep
-11
Aug
-11
Jul-1
1
Jun-
11
May
-11
Apr
-11
Mar
-11
Feb-
11
Jan-
11
Dec
-10
Stock vs Sector Stock vs Index Stock vs Stock
Source: Insight as at 31 December 2011. Source: Insight estimates as at 31 October 2011.
161616
Specialist investment team Individual accountability for positions allows focus
Data as at 31 December 2011( ) denotes years of industry experience* Founding managers
● Founding managers have worked together since May 2005
● Research targets a small number of high conviction ideas
● Collaborative culture
● Individual accountability for positions
● Supported by:
dedicated dealer
quantitative risk analysts
experienced income manager
+
Absolute Return Team
Andrew Cawker* (23yrs) Iain Brown* (25yrs) Richard Howarth* (17yrs)
David Headland (13 years) Russell Wright (15yrs) Matthew Cooke (7yrs)
Absolute Return Team
Andrew Cawker* (23yrs) Iain Brown* (25yrs) Richard Howarth* (17yrs)
David Headland (13 years) Russell Wright (15yrs) Matthew Cooke (7yrs)
Tim Rees(28yrs)
Income Fund Manager
Tim Rees(28yrs)
Income Fund Manager
Stephen Quantrell(20yrs)
Dealer
Stephen Quantrell(20yrs)
Dealer
Matthew McKelvey (25yrs)
Product Manager
Matthew McKelvey (25yrs)
Product Manager
Julien Lederer (11yrs)Vladimir Sovetkin (5yrs)
Quantitative Risk Analytics+
171717
Insight’s risk management processEliminating unwanted factor exposures and ensuring transparency
Source: Insight, as at 31 March 2012
• Independent supervisory risk function; operates at arm’s length
Stop/think levels
• Performs detailed risk analyses; formal monthly discussions with underlying portfolio managers
• Portfolio managers ensure adherence to investment guidelines
• Stop loss review triggers (40bps of NAV)
Absolute Return Investment Committee
Investment Risk Team
Quantitative Strategy Team
• Overall responsibility and oversight of internal investment guidelines
Fund Management Teams
Reza Vishkai
HEAD OFSPECIALIST
INVESTMENTS
Abdallah Nauphal
CIO INVESTMENTS
Andrew Giles
CIO SOLUTIONS
Adrian Grey
HEAD OF FIXED INCOME
Matthew Merritt
HEAD OF MULTI ASSET
STRATEGY
Andrew Stalker
HEAD OF INVESTMENT
RISK
Julien Lederer
HEAD OF QUANTITATIVE
STRATEGY
Sonja Uys
PRODUCT MANAGER
Absolute Return Investment Committee
Absolute Insight UK Equity Market Neutral Fund“The search for uncorrelated investments and improved risk-adjusted returns”
Monthly since inception (11 May 2005)
1. FTSE All-Share Index (GBP) Total Return2. HFRX Equity Hedge Index (USD) 3. JP Morgan Global Government Bond Index Hedged GBP TR 4. BarCap Global Agg Corporate Index (GBP hedged) 5. IPD UK Monthly Property Index (GBP hedged). Returns are based on an inception date of 31 May 2005 as this index is priced monthly.
Absolute Insight UK Equity Market Neutral
– Net UK equities1Hedge funds2
Government bonds3
Corporate bonds4 Property5
MSCI World Total Return
(GBP Hedged)
Compound return 38.03% 57.08% -6.18% 42.71% 43.50% 24.25% -7.51%
Volatility 1.95% 15.43% 8.99% 3.18% 5.14% 5.92% 17.23%
Maximum drawdown -1.66% -41.09% -29.52% -2.98% -10.65% -36.73% -52.13%
Source: Lipper as at 31 March 2012. The net returns are based on an annual management charge of 1% and a performance fee of 10%, the calculation of the latter as defined in the fund prospectus. No charges are applied to the comparisons. Calculations have used the prices from the Absolute Insight Plus UK Equity Market Neutral Fund until 28 February 2007. This fund was domiciled in Cayman and run in the same way as the Absolute Insight UK Equity Market Neutral Fund, an Ireland domiciled fund whose performance we show from 28 February 2007 to 31 March 2012. The Cayman fund’s performance has been incorporated to show performance since inception of Insight Investment’s capability.
18
Many absolute return funds fail to deliver
‘In the past year, a small number of funds have provided investors with positive returns, including the Absolute Insight UK Equity Market
Neutral Fund.’Elaine Moore, FT, April 27 2012
The one fund doing absolutely what it says on the tin
‘The Absolute Insight UK Equity Market Neutral Fund, managed by Andrew Cawker along with three co-managers, is the only fund in the IMA Absolute Return Sector to have posted positive returns over every 12-month rolling period from 31 March 2008 to 29 February 2012...That is 36 out of
36 periods, 100% delivery, top marks.’Esther Armstrong, Portfolio Adviser, March 22 2012
19
Absolute Insight UK Equity Market Neutral Fund
Key facts● Fund launch: 28 February 2007 (strategy launch May 05)
● Aim: to generate returns with low levels of volatility, irrespective of broad market direction
● Specialist asset manager: Insight
● Experienced investment team with established track record
● Domiciled: Dublin
● Available currencies: GBP and EUR
Investment policy/guidelines ● Market neutral approach
● Low risk
– Low volatility
– Low drawdowns
– Stop loss triggers
BNY Mellon Absolute Return Equity Fund
Key facts● Fund launch: 31 January 2011
● Performance aim: The performance aim of the Fund is to deliver cash (1-month GBP LIBOR) + 6% to 8% p.a. over a market cycle (typically 5 to 7 years) before fees. The performance aim is not a guarantee, may not be achieved and a capital loss may occur. Funds which have a higher performance aim generally take more risk to achieve this and so have a greater potential for the returns to be significantly different than expected.
● Specialist asset manager: Insight
● Experienced team with established absolute return track record
● Domiciled: Dublin
● Available currencies: GBP, USD and EUR
Investment policy/guidelines● Lead ideas consistent with market neutral strategy with scope for:
− Larger positions
− Dynamic management of hedge size (full, partial, unhedged)
● Seek to participate in rising markets but demonstrate low participation in falling markets
− Stop loss triggers
● Invests in companies primarily in Europe (including the United Kingdom and countries which may be considered emerging markets within Europe)
Addressing different risk return appetites2 Funds: Same investment ideas, different implementation
20
Comparisons across strategiesPrimary investment parameters
Source: Insight. As at 30 March 2012. Past performance is not a guide to future performance.
1 Limits are those specified in the prospectus or internal where appropriate
212121
BNY Mellon Absolute Return Equity Fund Evolution of gross & net exposures since inception
Source: Insight, Bloomberg, as at 31 March 2012. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations. Past performance is not a guide to future performance.
Net exposure Gross exposure
-2%
0%
2%
4%
6%
8%
10%
12%
14%
31-J
an-1
1
07-M
ar-1
1
11-A
pr-1
1
17-M
ay-1
1
21-J
un-1
1
26-J
ul-1
1
31-A
ug-1
1
05-O
ct-1
1
09-N
ov-1
1
15-D
ec-1
1
19-J
an-1
2
23-F
eb-1
2
30-M
ar-1
2
(%)
480
500
520
540
560
580
600
620
BNY Mellon Absolute Return Equity - Net Exposure (lhs)
MSCI AC World TR LCY (rhs)
-15%
10%
35%
60%
85%
110%
135%
31-J
an-1
1
07-M
ar-1
1
11-A
pr-1
1
17-M
ay-1
1
21-J
un-1
1
26-J
ul-1
1
31-A
ug-1
1
05-O
ct-1
1
09-N
ov-1
1
15-D
ec-1
1
19-J
an-1
2
23-F
eb-1
2
30-M
ar-1
2
(%)
480
500
520
540
560
580
600
620
BNY Mellon Absolute Return Equity - Gross Exposure (lhs)
MSCI AC World TR LCY (rhs)
22222222
BNY Mellon Absolute Return Equity FundPerformance as at 31 March 2012
Source: Lipper Hindsight . Fund performance calculated as total return, including annual management charge, but excluding initial charge, income reinvested gross of tax, expressed in share class currency. Indices used are the Local Currency versions of the MSCI World and HFRX Hedge Indices. The impact of the initial charge, which may be up to 5%, can be material on the performance of your investment. Performance figures including the initial charge are available upon request. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. Past performance is not a guide to future performance.
Percentage Growth Total Return, In Local Currency Since Inception To 31/03/2012
-15.75%
3.78%
1.97%
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12BNY Mellon Absolute Return Equity T EUR HdgMonthly Share Class
1.12 0.21 0.34 0.33 -0.01 -1.11 0.47 -0.27 0.08 0.33 0.49 0.27 -0.22
2323
Summary
● Absolute Insight UK Equity Market Neutral Fund
– 7 year record of consistent low volatility, uncorrelated absolute returns
– Pair trade approach and investment process focuses on isolating alpha
– Stop loss policy and active hedging helps limit drawdowns
● BNY Mellon Absolute Return Equity Fund
– launched January 2011, targeting higher returns
– Aims to capture some market upside
– Uses existing process to help limit drawdown experience
Biographies
Iain Brown – Absolute Return Portfolio Manager, Specialist EquitiesIain joined the UK equity team at Insight in July 2002 and is responsible for the management of equity long/short portfolios. Before joining Insight, he spent six years at Norwich Union Investment Management, latterly as Head of Institutional Investment. Prior to this he spent eight years at CIN / Goldman Sachs as a portfolio manager. Iain began his career as an investment analyst with Credit Lyonnais in 1987 following a number of short-term roles, including two years with stockbroker, Charlton Seal. Iain holds a MA degree in Geography from Fitzwilliam College, Cambridge University.
Andrew Cawker – Absolute Return Portfolio Manager, Head of Specialist EquitiesAndrew joined the UK equity team at Insight in April 2003. He is Head of Specialist Equities and has portfolio management responsibility for equity long/short portfolios. Prior to Insight, Andrew was an Associate Partner at Invesco Global Asset Management (Amvescap plc) where he was involved in developing specialist UK equity business alongside the management of a range of UK and global equity portfolios. He was also responsible for pan-European analysis for the retail, food, beverages and tobacco sectors. Andrew began his investment career at Prudential Portfolio Managers in 1988, ultimately becoming a Director, with responsibility for UK equities. He holds a BA honours degree in Business Studies from the City of London Polytechnic.
Richard Howarth – Absolute Return Portfolio Manager, Specialist EquitiesRichard joined the UK equity team at Insight in January 2002 and is responsible for the management of equity long/short portfolios. Prior to Insight, he held a fund management role at Brewin Dolphin for five years. He began his career as trainee portfolio manager with Capel-Cure Myers Capital in 1994. Richard holds a BA honours degree in Economics from the University of Nottingham and is an Associate of the CFA Society of the UK.
David Headland – Absolute Return Portfolio Manager, Specialist EquitiesDavid joined Insight in August 2010 as a portfolio manager within our equity long/short team. This followed a brief spell with a European equity research boutique after his previous role at Insight from 2002 to November 2009 as co-portfolio manager for a European equity market neutral fund. David started his career at Norwich Union in 1998 and later became a highly successful portfolio manager at Morley Fund Management. He graduated from Leeds University with a BA honours degree in Economics and is an Associate of the CFA Society of the UK.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute
24
Biographies (continued)
Matthew McKelvey – Head of Product Management, Specialist InvestmentsMatthew joined Insight in June 2007. He is responsible for business development and reporting to clients on investment strategy and performance. Prior to joining Insight, Matthew held the position of Investment Director for global equities at Fidelity International. There he was responsible for reporting to clients and intermediaries on investment strategy and performance, as well as developing their global equity business. Matthew began his industry career at Merrill Lynch Investment Managers, (formerly Mercury Asset Managers and now BlackRock) in 1986 where he held various roles within their equity division, latterly as a Director and Business Manager for global equities. Matthew is an Associate of the CFA Society of the UK.
Matthew Cooke – Absolute Return Portfolio Manager, Specialist EquitiesMatthew joined Insight in September 2005 as a graduate trainee and completed rotations in fixed income before joining the equity team in 2005 as a UK investment analyst. He became a UK small cap portfolio manager in 2007 before transitioning to focus on absolute return in 2009. Matthew holds a BSc honours degree in Economics with Accounting from Loughborough University, as well as the Investment Management Certificate from the CFA Society of the UK. He is a CFA charterholder.
Russell Wright – Absolute Return Analyst, Specialist EquitiesRussell joined Insight in September 2004 as an equity analyst with responsibility for recommending ideas for a wide range of mandates. He now focuses on generating trade ideas for absolute return mandates primarily in the industrial and property sectors, and is involved in the implementation and management of those trades. Before joining Insight he worked for HSBC as an analyst where he was responsible for leisure sector analysis. Prior to HSBC, Russell worked at Baring Asset Management, which he joined in 1987, as an investment analyst covering leisure, construction, chemicals and retail sectors. Russell holds a BSc honours degree in Business and Japanese from the University of Cardiff and is a CFA charterholder.
25
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute
Appendix – Fund information
26
Appendix
Absolute Insight UK Equity Market Neutral Fund
27
28B0078
Absolute Insight UK Equity Market Neutral FundPerformance since capability inception*
Annualised volatility¹ 1.95%
Historic beta² 0.01
Sharpe ratio 0.83
Maximum drawdown³ -1.66%
Data as at 31 March 2012. *Calculations use fund prices from the Absolute Insight Plus UK Equity Market Neutral fund from 11 May 2005 to 28 February 2007. This Fund was domiciled in Cayman Islands and run in the same way as the Absolute Insight UK Equity Market Neutral Fund, an Ireland-domiciled Fund, the performance of which we show from 28 February 2007 onwards. The Cayman Fund’s performance has been incorporated to show performance since inception of Insight Investment’s capability. All performance data is GBP and net of fees; ¹ Annualised volatility calculated using monthly data since inception; ² Beta measured using weekly returns since inception 11 May 2005 against FTSE All Share; ³ Maximum drawdown statistics calculated using monthly returns since inception
100
110
120
130
140
150
May 05 Sep 06 Feb 08 Jun 09 Nov 10 Mar 12
Cum
ulat
ive
retu
rn
AI UK Equity MN capability 3 Month GBP Libid
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD2012 0.2 0.2 -0.1 0.32011 0.5 -0.1 1.0 0.2 0.2 0.4 -0.1 -0.4 0.3 -0.1 0.0 0.3 2.22010 0.5 -0.1 0.1 0.2 -0.1 -0.2 0.2 0.2 0.0 0.6 0.1 0.2 1.82009 0.3 0.2 1.2 0.3 1.1 0.3 0.2 0.1 0.1 0.2 -0.3 -0.1 3.52008 0.7 0.3 -0.3 1.0 0.7 1.2 0.9 -0.2 -0.1 0.8 0.8 0.3 6.32007 0.6 0.7 0.5 0.6 0.8 0.8 0.3 0.7 -0.1 1.4 -1.1 0.4 5.62006 0.8 1.2 0.9 -0.0 -1.0 -0.6 -0.0 1.3 0.5 1.2 2.3 1.5 8.22005 - - - - 0.1 1.1 0.8 1.6 0.5 -0.0 0.4 0.6 5.2
Performance indexed to 100* Returns (%)*
Fund risk statistics* Monthly performance*
0.28
2.17 1.77
3.54
6.30
2.02
4.793.16
0.72
5.51
1.090.580.750.230
2
4
6
8
10
2012 YTD 2011 2010 2009 2008 3yr pa Sinceinception
(pa)*
%
Fund 3 Month GBP Libid
29B0078
Absolute Insight UK Equity Market Neutral FundPerformance since inception of Ireland listed UCITS Fund
Performance indexed to 100
Data as at 31 March 2012. Inception date: 28 February 2007. All performance data is GBP and net of fees; 1 Annualised volatility calculated using monthly data since inception; ² Beta measured using weekly returns since inception 28 February 2007 against FTSE All Share; ³ Maximum drawdown statistics calculated using monthly returns since inception
100
105
110
115
120
125
Feb 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12
AI UK Equity MN (Dublin) 3 Month GBP Libid
Annualised volatility¹ 1.63%
Historic beta² 0.01
Sharpe ratio 0.62
Maximum drawdown³ -1.22%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD2012 0.2 0.2 -0.1 0.3
2011 0.5 -0.1 1.0 0.2 0.2 0.4 -0.1 -0.4 0.3 -0.1 0.0 0.3 2.2
2010 0.5 -0.1 0.1 0.2 -0.1 -0.2 0.2 0.2 0.0 0.6 0.1 0.2 1.8
2009 0.3 0.2 1.2 0.3 1.1 0.3 0.2 0.1 0.1 0.2 -0.3 -0.1 3.5
2008 0.7 0.3 -0.3 1.0 0.7 1.2 0.9 -0.2 -0.1 0.8 0.8 0.3 6.3
2007 - - 0.5 0.6 0.8 0.8 0.3 0.7 -0.1 1.4 -1.1 0.4 4.3
Returns (%)*
Fund risk statistics* Monthly performance*
0.28
2.171.77
3.54
6.30
3.59
2.58
5.51
1.090.580.75
0.230
1
2
34
5
6
7
2012 YTD 2011 2010 2009 2008 Sinceinception
(pa)*
%
Fund 3 Month GBP Libid
30B0078
70
80
90
100
110
120
130
140
150
160
170
May 05 Jan 06 Sep 06 Jun 07 Feb 08 Oct 08 Jun 09 Mar 10 Nov 10 Jul 11 Mar 12
%
AI UK Equity MN capability FTSE All Share (total return) FTSE All Share (capital only)
Data as at 31 March 2012. *Calculations have used the prices from the Absolute Insight Plus UK Equity Market Neutral fund from 11 May 2005 to 28 February 2007. This fund was domiciled in Cayman and run in the same way as the Absolute Insight UK Equity Market Neutral fund, a Dublin domiciled fund whose performance we show from 28 February 2007 to 31 March 2012. The Cayman fund’s performance has been incorporated to show performance since inception of Insight Investment’s capability. UKEquity Market Neutral capability returns shown gross of fees
Absolute Insight UK Equity Market NeutralAbsolute returns
31B0078
Volatility calculations have used the prices from the Absolute Insight UK Equity Market Neutral (Dublin) from 3 December 2007 to 31 March 2012. Volatility is defined as the annualised standard deviation of the latest rolling 20-day returns. Fund return analysis shown gross of charges. The FTSE 100 index is a total return index with income reinvested. Source: Insight Investment & Rimes; Currency: GBP
0
10
20
30
40
50
60
70
80
90
Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12
Vol
atili
ty (%
)
AI UK Equity Market Neutral capability FTSE 100
Absolute Insight UK Equity Market NeutralLow volatility: an important product feature
32B0078
Absolute Insight UK Equity Market Neutral Fund An uncorrelated source of return
Correlation analysis
Data as at 31 March 2012. *Calculations use fund prices from the Absolute Insight Plus UK Equity Market Neutral Fund from 11 May 2005 to 28 February 2007. This Fund was domiciled in Cayman Islands and run in the same way as the Absolute Insight UK Equity Market Neutral fund, a Dublin fund whose performance we show from 28 February 2007 to 31 March 2012. The Cayman fund’s performance has been incorporated to show performance since inception of Insight Investment’s capability. All figures are quoted in GBP Note: Figures represent gross performance data
AI UK equity market neutralUK Equity Market Neutral Fund 1.00
HFR Global Hedge Fund USD 0.22
HFR Equity Market Neutral USD 0.05
HFR Absolute Return USD 0.20
HFR Macro USD 0.23
FTSE All Share 0.10
S&P 500 (USD) 0.05
Corporate Bonds -0.01
Gilts -0.11
Emerging Market Debt 0.06
Property -0.04
Commodities 0.10
33B0078
Portfolio constructionPair trade type
Data as at 31 March 2012Absolute Insight Plus UK Equity Market Neutral Fund (Cayman domiciled fund) until October 2009 and Absolute Insight UK Equity Market Neutral/Dublin domiciled fund since then
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jun-
05
Sep
-05
Dec
-05
Mar
-06
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
% o
f gro
ss e
xpos
ure
Stock versus Stock Stock versus Index Stock versus Sector
34B0078
Exposure analysis: sectorsPortfolio position
Data as at 31 March 2012. Absolute Insight UK Equity Market Neutral Fund (Ireland domiciled fund). Min and max levels refer to the range experienced over the period 31 January 2008 to 31 March 2012
0%5%
10%15%20%25%30%35%40%
Consumerdiscretionary
Consumerstaples
Energy Financials Health care Industrials Informationtechnology
Materials Telecommunicationservices
Utilities
% of gross equity exposure Min Max
-6%-4%-2%0%2%4%6%8%
Consumerdiscretionary
Consumerstaples
Energy Financials Health care Industrials Informationtechnology
Materials Telecommunicationservices
Utilities
% of NAV Min Max
Net exposure (% of NAV)
Gross exposure (% of equity assets)
35B0078
Exposure analysis: market capPortfolio position
0%
20%
40%
60%
80%
Large cap(>£2.5bn)
Mid cap(>£500m)
Small cap(<£500m)
% of gross equity exposure Min Max
Data as at 31 March 2012Absolute Insight UK Equity Market Neutral Fund (Ireland domiciled fund)
Net exposure (% of NAV)
Gross exposure (% of equity assets)
-8%-6%-4%-2%0%2%4%6%8%
Large cap(>£2.5bn)
Mid cap(>£500m)
Small cap(<£500m)
% of NAV Min Max
36B0078
Absolute Insight UK Equity Market Neutral Fund The evidence of fund’s investment parameters
-4
-2
0
2
4
6
8
10
May-05 Oct-06 Feb-08 Jul-09 Nov-10 Mar-12
1.0%
2.0%
3.0%
4.0%
5.0%
Jun-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12
ex-ante Volatility Realised since inception annualised volatility
Net exposure (%)
Volatility Beta
-0.06
-0.02
0.02
0.06
0.10
0.14
Jun-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12ex-ante Beta Realised since inception beta
Gross exposure (%)
20
40
60
80
100
May-05 Oct-06 Feb-08 Jul-09 Nov-10 Mar-12
Data as at 31 March 2012. Data refers to AI Plus UK Equity Market Neutral (Cayman domiciled fund) to end October 2009 (month before Cayman Fund closure) and Absolute Insight UK Equity Market Neutral (Dublin domiciled fund) since then. Realised volatility and beta use gross of fees returns
37B0078
Volatility2
Absolute Insight UK Equity Market Neutral2 3.5%
FTSE 100 69.1%
FTSE All-Share 65.5%
Return
Absolute Insight UK Equity Market Neutral* +0.9%
FTSE 1001 -11.7%
FTSE All-Share -13.0%
* Source: Citco Return based on daily Ireland fund prices to 31 October 20081Source: Thomson Reuters 2 Annualised volatility calculated as the standard deviation of the previous 36 daily returnsData to 31 October 2008
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1st
2nd
3rd
6th
7th
8th
9th
10th
13th
14th
15th
16th
17th
20th
21st
22nd
23rd
24th
27th
28th
29th
30th
31st
October 08
Absolute Insight UK Equity Market Neutral*
FTSE All-Share
Market volatility in October 2008The fund maintained low volatility while delivering positive returns
AppendixBNY Mellon Absolute Return Equity Fund
38
39
Evolution of position type
Classified in accordance with largest component of the hedge, with the exception of naked longs or shorts Source: Insight as at March 2012
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
% o
f Gro
ss E
quity
Exp
osur
e
Stock vs Stock Stock vs Sector Stock vs Index Naked Long Naked Short
Decomposition of gross exposure by type of position
4040
BNY Mellon Absolute Return Equity Fund Exposure analysis – sectors
Source: Insight Investment, as at 30 March 2012. Note: The max/min data is source Insight and from end March 2011. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.
Min Max
Min Max
4141
BNY Mellon Absolute Return Equity Fund Exposure analysis – market cap
Source: Insight Investment, as at 30 March 2012. Note: The max/min data is source Insight and from end March 2011.
0%
10%
20%
30%
40%
50%
60%
70%
Large cap (> £2.5bn) Mid cap (> £500m) Small cap (< £500m)
Gro
ss E
xpos
ure
(as
% o
f gro
ss e
quity
exp
osur
e) Min Max
-10%
-5%
0%
5%
10%
Large cap (> £2.5bn) Mid cap (> £500m) Small cap (< £500m)
Net
Exp
osur
e (%
of N
AV)
Min Max
Investment review 2011
42
43B0078
Investment environment
• ECB LTRO together with US Fed policy commitments reduced “tail risk”
– volatility and correlations between stocks fell sharply over Q1
– this presented a more rewarding environment for stock selection
– we increased position sizes and gross investment levels to capitalise on the opportunities we see
• We are hopeful that current conditions will be sustained but a number of risk factors remain
– Eurozone debt issues have not gone away
– election cycles (e.g. France, US)
– China: slowdown or hard landing
• Risk on/off market behaviour may persist as perceptions around these issues evolve
• We believe we have the tools to manage through this environment
– we are not wedded to a structural view
– within industries there will be relative “winners” and “losers” in any economic environment
– shifts in investor sentiment normally present exploitable anomalies
44B0078
Risk aversion spiked as Eurozone sovereign debt crisis escalated
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11Citi Macro Risk Index
Citi Macro Risk Index
Source: Bloomberg as at 31 December 2011
0
10
20
30
40
50
60
Oct-09 Mar-10 Sep-10 Feb-11 Jul-11 Dec-11VIX Index
VIX Index
45B0078
Equity markets suffered sharp drawdown in acute stress
FTSE All-Share
Source: Bloomberg as at 31 December 2011
S&P 500 rolling returnsSummer sell-off third sharpest in recent history
2500
2600
2700
2800
2900
3000
3100
3200
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11FTSE All-Share
Source: Datastream, Citi Investment Research and Analysis, as at 30 August 2011
46B0078
Correlation between stocks rose to extreme levels
Large-capitalisation stocks average daily return correlations averaged over six-month windows from 1926 through 2011
Source: Empirical Research Partners Analysis
S&P 500 stock return dispersion and correlationTrailing 12 months, through 28 Oct 2011
Source: FactSet, Bernstein analysis
0%
20%
40%
60%
80%
66 70 74 78 82 86 90 94 98 02 06 10Return correlation Return dispersion
47B0078
“Safe haven” assets becoming more expensive
Source: Insight/Bloomberg as at 31 December 2011
US 10 year government bond yields (1900 – present) shown with long cycles
48B0078
Current strategyThemes reflected by underlying positions
• Investment environment requires flexibility – positions may evolve rapidly from here
• Long bias towards
– growth (specific product / market or geographic end markets)
– companies exposed to nascent recovery in private sector activity in specific industries
– niche beneficiaries of austerity measures (outsourcing)
– companies with low earnings downgrade risk
• Short bias towards
– companies highly exposed to earnings downgrades
– companies exposed to margin squeeze
– companies reliant on spending by highly indebted nations
• Capitalise on opportunities presented by
– anomalies created by “risk rally”
– winning versus losing business models
49B0078
Pair trade exampleLong growth
Lead idea – moneysupermarket.com
• Leading provider of price comparisons for a wide range of financial products
• Structural market share gain as customer “recruitment” is outsourced
• Nascent recovery in credit cycle expected to provide additional growth support
Hedge: media sector
• Manages down “media” sector risk
• Some companies in the sector will be net “losers” from shift to internet advertising
moneysupermarket.com: consensus earnings estimates & share price
moneysupermarket.com versus FTSE 350 Media IndexSource: Bloomberg as at 18 April 2012
0.015
0.020
0.025
0.030
0.035
Dec-10 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
Moneysupermarket.com vs. FTSE 350 Media Index
Source: Bloomberg as at 18 April 2012
0.0600.0620.0640.0660.0680.0700.0720.0740.076
Dec-10 Apr-11 Jul-11 Oct-11 Jan-12 Apr-120.60.70.80.91.01.11.21.31.4
BEst Standard EPS Adjusted+ 2012* A Price
Positionopened
Position reduced
Positionincreased
Important Information
50
This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional clients and/or distributors and should not be relied upon by retail clients.
All information relating to Insight Investment Management (Global) Limited (Insight), BNY Mellon Absolute Return Equity Fund and Absolute Insight UK Equity Market Neutral Fund has been prepared by Insight for presentation by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained in this document are those of Insight at the time of going to print and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied.
This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. When you sell your investment you may get back less than you originally invested. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.
The Prospectus or Simplified Prospectus should be read before an investment is made. The investment objectives and policies for each sub-fund are outlined in the Supplements to the Prospectus. This document can be obtained from BNY Mellon Global Management Limited, 33 Sir John Rogerson’s Quay, Dublin 2, Ireland. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Tax treatment will depend on the individual circumstances of clients and may be subject to change in the future.
ICVC investments should not be regarded as short-term and should normally be held for at least five years. Fund Ratings represent an opinion only, not a recommendation to buy or sell.
BNY Mellon Absolute Return Equity Fund is a sub-fund of BNY Mellon Global Funds, plc an open-ended umbrella type investment company with variable capital (ICVC) and segregated liability between sub-funds, incorporated with limited liability under the laws of Ireland. It qualifies and is authorised in Ireland by the Central Bank of Ireland as an undertaking for collective investment in transferable securities pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (SI. No. 352 of 2011), as amended. The Manager of BNY Mellon Global Funds, plc is BNY Mellon Global Management Limited. BNY Mellon Global Management Limited, 33 Sir John Rogerson’s Quay, Dublin 2, Ireland. The Manager is approved as a management company and regulated by the Central Bank of Ireland under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (SI. No. 352 of 2011), as amended. The Global (ex. US) Distributor of BNY Mellon Global Funds, plc is BNY Mellon Asset Management International Limited. In Germany, the Prospectus is available from JP Morgan AG, Junghofstrasse 14, 60311 Frankfurt Am Main German. In Austria, the current Prospectus and the Simplified Prospectus are available free of charge from Raiffeisen Zentralbank Österreich Aktiengesellschaft, Am Stadtpark 9, A-1030 Vienna. In Switzerland, BNP Paribas Securities Services, Paris, succursale de Zurich acts as representative agent and paying agent for BNY MGF. The Prospectus, Simplified Prospectus, Articles of Association, Annual Report and Semi-Annual Report may be obtained free of charge from their offices at Selnaustrasse 16, 8002 Zurich, Switzerland.
Changes in the rates of exchange may affect the value of investments. The BNY Mellon Absolute Return Equity Fund can invest in overseas securities which may also generate profits overseas and pay dividends in foreign currencies, which means the fund is exposed to changes in currency rates.
The BNY Mellon Absolute Return Equity Fund may invest in emerging markets. It should be noted that these markets have additional risks associated with local custody and registration practices that may be less developed than more mature markets.
Certain share classes employ a hedging strategy to attempt to eliminate the currency risk between the currency of the share class and the base currency of the BNY Mellon Absolute Return Equity Fund. There is no guarantee that the hedging strategy applied will entirely eliminate the effects of changes in the currency rate between the share class currency and the base currency of the Fund. The costs and expenses associated with the hedging strategy will accrue solely to this share class.
The BNY Mellon Absolute Return Equity Fund may invest in structured products. Structured products are synthetic investment instruments specially created to meet specific needs that cannot be met from standardised financial instruments. The investment return are highly sensitive to changes in the value of the underlying asset. It is possible that adverse movements in underlying asset valuation could lead to the loss of the entire principal of a transaction. Structured products in general are also exposed to the credit risk of the issuer.
50
Important Information
The BNY Mellon Absolute Return Equity Fund may invest in smaller companies. Smaller companies may be riskier and less liquid than larger companies. This means that their share prices may be more volatile.
The BNY Mellon Absolute Return Equity Fund may invest in illiquid securities, which means that there is a possibility that they cannot be readily converted into cash when required. The value of these securities is subject to greater fluctuation if they are not regularly traded.
The BNY Mellon Absolute Return Equity Fund may use derivatives for efficient portfolio management (EPM) purposes. EPM restricts the use of derivatives for the reduction of risk, the reduction of cost and the generation of additional capital or income with no or an acceptable low level of risk. EPM transactions must be economically appropriate and the exposure fully covered. In addition to EPM, the BNY Mellon Absolute Return Equity Fund uses derivatives in pursuit of its investment objectives.
The BNY Mellon Absolute Return Equity Fund takes its charges from the income of the Fund. The impact of Fund charges may be material on the value of any income you receive from your investment. There is potential for future capital erosion if insufficient income is generated by the Fund to cover these charges.
All of these factors may affect the performance of the BNY Mellon Absolute Return Equity Fund.
Absolute Insight UK Equity Market Neutral Fund is a sub-fund of Absolute Insight Funds p.l.c., an investment company with variable capital (ICVC) incorporated in Ireland under registered number 431087 and authorised by the Central Bank of Ireland. Insight Investment Funds Management Limited is the Investment Manager. Insight Investment Funds Management Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 01835691. Authorised and regulated in the UK by the Financial Services Authority. The sub-investment manager of the Absolute Insight UK Equity Market Neutral Fund is Insight Investment Management (Global) Limited.
In Austria, the current Prospectus and the Simplified Prospectus are available free of charge from Raiffeisen Zentralbank Österreich Aktiengesellschaft, Am Stadtpark 9, A-1030 Vienna.
In Switzerland, BNP Paribas Securities Services, Paris, succursale de Zurich acts as representative agent and paying agent for BNY MGF. The Prospectus, Simplified Prospectus, Articles of Association, Annual Report and Semi-Annual Report may be obtained free of charge from their offices at Selnaustrasse 16, 8002 Zurich, Switzerland.
BNY Mellon Global Funds, plc is a collective investment vehicle ("Institución de Inversión Colectiva") that is duly registered by the Comisión Nacional del Mercado de Valores on the Register of foreign Collective Investment Institutions commercialised in Spain ("Registro de Instituciones de Inversión Colectiva extranjeras comercializadas en España") under the number 267.
Absolute Insight Funds is a collective investment vehicle (“Institución de Inversión Colectiva”) that is duly registered with the Comisión Nacional del Mercado de Valores (“CNMV”) on the Register of foreign Collective Investment Institutions commercialised in in Spain (“Registro de Instituciones de Inversión Colectiva extranjeras comercializadas en España”) under the number 1039.
This document is issued in the UK and in mainland Europe (excluding Germany) by BNY Mellon Asset Management International Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority.
BNY Mellon Asset Management International Limited, BNY Mellon Global Management Limited (BNY MGM), Insight and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation.
51
CP8328-04-05-2012 (1W).