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From PWM Research / Sub-Advisory December 1, 2006

Getting more out of equity portfolios

Loosening the constraints How do some equity fund managers make more money than others? The essential principle is easy to understand: buy the right stocks at the right time and you should generate outperformance. But how do managers structure these multiple stock bets to create equity portfolios with the ability to access the highest potential returns? Traditionally the approach has been to take fewer bigger bets, constructing a more concentrated portfolio. This means a fund with just the stocks the fund manager really likes – their high conviction ideas with the strongest upside potential. However, the concentrated nature of these portfolios also means that they experience high levels of volatility due to the increased level of risk. Is there an alternative which can be offered to meet the demand for strong fund performance but with potentially less risk exposure? Can’t high returns be created from a more diversified portfolio?

From PWM Research / Sub-Advisory November 1, 2006

Breaking the long-only barrier

loosening the constraints Investment managers face many different constraints, usually in the form of investment guidelines. Some constraints are necessary and desirable, like having a risk budget for an investment mandate. Others are less desirable such as those imposed by the markets themselves. Perhaps the most restrictive of these various constraints is the no shorting rule, as it dramatically reduces a fund managers opportunity set for investment. It is likely that investors can realise a potentially large alpha benefit by relaxing the long-only constraint, i.e. no shorting in an equity portfolio. This benefit arises from the market-cap weightings of standard equity benchmarks and the long-only portfolio manager’s inability to profit from negative views on companies with low index weights.

From PWM Research / Sub-Advisory October 1, 2006

Managing the mix for best results

Best in class Last month we discussed the challenge of building the correct asset allocation structure. This month we discuss how those assets can be managed to provide the best service for your clients. In the UK, over the last three to five years, open-architecture delivery of investment through third-party distribution of mutual funds and sub-advisory relationships has revolutionised access for investors to top-performing managers and funds. It provides access to one-stop shopping and enables more consistent and robust product due to the ability to change investment content. However, it is surprising that the associated benefits are still not universally accepted. The investment decision is crucial to the investor and eclipses the value of most other forms of advice given to clients – even taxation, given consistent reduction of tax benefits across investment products. Yet, despite the importance of this decision, investment remains a small part of the advice given to clients, with the majority of time spent on advising which wrapper to use – be it an Isa, bond or unit trust rather than which fund can best meet their investment needs.

From PWM Research / Sub-Advisory September 1, 2006

Limiting risk and boosting returns

Benefits of diversification When constructing a portfolio, two main challenges present themselves – picking the right asset classes and then picking the best managers to run those assets. Choosing an asset allocation strategy can help protect you from downside risk as well as helping to ensure that you maximise the benefit from potential upside. Interestingly, diversification is one of the few elements in a portfolio that is also free. A strong investor can optimise their approach using the diversification tool. The last few weeks have exposed how quickly the direction of the markets can change, and investors’ risk appetite with it. It is moments like these that highlight the importance of protecting your client’s assets by holding as diversified a portfolio as possible. For example, while equities remain an attractive asset class with a return premium (over cash) of around 3 per cent per annum, they carry with them an annual volatility of 15 per cent, which can make your portfolio returns highly variable. It therefore makes sense to branch out into asset classes that don’t all behave alike, but can provide similar levels of return expectation. This is indicated by the correlation. For instance, if you add North American equity to a UK equity portfolio, the correlation is relatively high at 0.74; they behave in almost the same way (complete correlation being 1.0). Choose global high yield bonds instead (correlation of 0.36) and there is less likelihood of the two moving in sync and more likelihood of the combination working together to yield more robust returns. Combining multiple asset classes with a low correlation to each other has the potential to result in a more efficient portfolio, limiting your total risk and providing better opportunity for positive returns.

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From PWM Research / Sub-Advisory September 1, 2006

Quantitative funds: a clear decision

The rise of quantitative managers
Since the late-1990s, there has been substantial growth in the amount of assets managed by quantitative managers and using quantitative investment strategies in the institutional fund management arena. In the last several years this rapid growth has continued, as client demand has bifurcated between higher octane high alpha products and lower tracking error index plus products. Fund buying professionals are clearly looking for well-managed quantitative equity funds to put at the core of their client portfolios. Such funds enable fund buyers to reliably put in place what they hope are consistent asset class returns, often outperforming index tracking products, to construct successful portfolios and investment products.

From PWM Research / Sub-Advisory June 1, 2006

Boldly entering the alpha universe

From PWM Research / Sub-Advisory May 1, 2006

The four powerhouses of the future

Dr David Curtis, head of GSAM’s European Sub-Advisory business, discusses investment solutions

From PWM Research / Sub-Advisory April 1, 2006

Taking advantage of the opportunity to add commodities to your portfolio

Portfolio challenges It has long been recognised that investing in commodities can offer several benefits to a portfolio, including negative correlation to stocks and bonds and historically higher index returns. However, due to past legislation, such investments were only available to institutional investors. With the advent of Ucits III this has now changed and a more widespread investor base is able to consider the benefits of investing in commodities.

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