Citywire forum.pptx natixis global associates (final presentation - 20.10.11)

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Transcript of Citywire forum.pptx natixis global associates (final presentation - 20.10.11)

  • Citywire Forum

    Milan, Thursday 27th October 2011

  • The framework1. Investment philosophy

    2. Arbitrage rather than directional strategies

    3. The benefits of diversification

    Recent portfolio performance1. From value to deep value

    2. Diversification on strike

    3. Market dislocation

    Strategies and portfolios1. Deep value pushes macro-scenarios to the backseat

    2. while bringing views on correlations to the fore

    3. Current risk allocation

    H2Os Investment Process and Strategies

  • The framework: investment philosophy

    Over the long term, value investment offers a strong and stable success ratio

    Diversification creates value and it is the best way to absorb short & medium term volatility

    Risk is always an input, never an output in order to generate an absolute return profile

    Value diversification is a robust and stable alpha source

  • The framework: arbitrage rather than directional strategies

    Bonds Currencies Credit Equities

    Global exposure

    Regional allocation

    Country /sector allocation

    USEMU

    UK JAPAN

    (US dollar)

    EUR bloc EMU UK

    US

    JPY bloc

    Commodity fx bloc

    EMU countries

    EURbloc

    JPYbloc

    Com. bloc

    EMUNorth

    America

    UK JAPAN

    Countries SectorsCorpo. Emg

    Directional(< 1/3)

    Relative( > 2/3)

    Other

    Average number

    of strategies

  • The framework: quantifying diversification

    -60%

    -40%

    -20%

    0%

    20%

    40%

    60%

    USD

    Credit

    Equities

    30 vs. 5 Year German

    NOKvs.

    SEK

    EURvs.

    GBP

    AUDvs.

    NZD

    AUDvs.

    CAD

    Venezuelavs.EM

    Turkeyvs. EM

    US vs. EMequities

    Directional Relative strategies

    Correlation of bonds with

    Source: H2O AM, weekly data, 10 year history, exponential smoothing (half life of 2 years)

    Diversifying additions to

    bonds

  • The framework: the benefits of diversification

    No stop-loss, as diversification means that some strategies are flat or positive when an individual strategy is underperforming

    Improved success ratio of individual strategies, as time is earned for value to generate performance

    Less stress for the investment manager means better decisions

    Diversification is the engine of alpha generation

  • The framework1. Investment Philosophy

    2. Arbitrage rather than directional strategies

    3. The benefits of diversification

    Recent portfolio performance1. From value to deep value

    2. Diversification on strike

    3. Market dislocation

    Strategies and portfolios1. Deep value pushes fundamentals to the backseat

    2. while bringing views on correlations to the fore

    3. Current risk allocation

    Review of performance

  • From value to deep value

    The CHF has reached extreme overvaluation in August

    source: Bloomberg

    PPP

    2 standard-deviation

    2 standard-deviation

  • From value to deep valueEquity vs. Bonds

    source: Bloomberg

    buy Equity

    buy Bonds

  • Diversification on strike

    In July and August, risky commodity currencies like the Australian dollar had a negative correlation with European equities

    source: Bloomberg

  • Market dislocation

    Liquidation in sequence

    source: Bloomberg, H2O calculation , logarithm

    Core EMU

    CreditEM Fx

  • Very poor performance during the Summer

    source: H2O AM

    Liquidation vs. valuation and the lack of ex-post diversification explain the poor performance from early July to mid-September

  • The framework1. Investment philosophy

    2. Arbitrage rather than directional strategies

    3. The benefits of diversification

    Recent portfolio performance1. From value to deep value

    2. Diversification on strike

    3. Market dislocation

    Strategies and portfolios1. Deep value pushes the macro-scenario to the backseat

    2. while bringing views on correlations to the fore

    3. Current risk allocation

    Review of performance

  • Strategies less dependent on the macro-scenario

    Deep-value strategies are multi-scenario

    Vvalue strategies ranked along the sequence of liquidation

    Prefer assets de-rated early in the crisis (EMU) to those liquidated recently (EM FX)

    Deep-value means that the worst economic outlook is already priced in some assets

  • Expect shifts in correlations

    Crisis-mode correlations are the most transitory state of affairs in risk measure

    Normalisation of correlations precedes market reversal

    Universal expensive hedges are the most at risk (German bonds, US Treasuries)

    Now that correlations have shifted to crisis-mode, the risk of reverting to the mean is significant

  • Expect shifts in correlationsNo more protection in bonds

    600

    700

    800

    900

    1000

    1100

    1200

    1300

    1400

    1500

    1600

    Apr-0

    8

    May

    -08

    Jun-0

    8Ju

    l-08

    Aug-0

    8

    Sep-0

    8

    Oct-0

    8

    Nov-0

    8

    Dec-0

    8

    Jan-0

    9

    Feb-0

    9

    Mar

    -09

    Apr-0

    9

    May

    -09

    Jun-0

    9Ju

    l-09

    Aug-0

    9

    Sep-0

    9

    Oct-0

    9

    Nov-0

    9

    Dec-0

    9Ja

    n-10

    Feb-1

    0

    Mar

    -10

    2

    2.5

    3

    3.5

    4

    4.5

    S&P (total return index)US 10-Year Treasuries (yield)

    Sharp move up in yields during the last leg dow

    on equities

    Remember Q1 2009: your best protection can turn into a nightmare

    n

    source: H2O AM

  • Current risk allocation

    Balanced across asset classes Less directional strategies

    Yielding and value strategies

  • Current risk allocation

    Main H2O views

    Bonds Portugal 1-Year and Greece distressed bonds Specific

    FX Euro-bloc versus commodity bloc (AUD, NZD) Relative

    Credit Emerging sovereign debt (Argentina & Venezuela) Direct. & Specif.

    Equity Continental Europe vs. Rest-of-the-World Relative

    Bonds All G3 bond markets Directional

    Equity US Tech vs. Defensive & Insurance vs. Industrials Relative

    Equity Extreme under-valuation Directional

    FX Short CHF vs. other euro-bloc currencies Relative

    Equity Private equity, financial advisors, M&A targets Relative

    Bond Curve flattening in Germany (2-10Y) & US (10-30Y) Relative

  • 19.

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  • Additional NotesThis material has been provided for information purposes only to investment service providers or other Professional Clients or Qualified Investors. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third party investment services to its clients complies with the relevant national law.In Italy This material is provided by Natixis Global Associates S.A., an investment management company (Societa di Gestione del Risparmio), or its branch office Natixis Global Associates S.A. Succursale Italiana, registered into the special annex to the Register of the Italian Asset Management Companies kept by the Bank of Italy under no 23458.3. Natixis Global Associates S.A. is a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of Natixis Global Associates S.A.: 51, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg. Registered office of Natixis Global Associates S.A. Succursale Italiana: Via San Clemente, 1 - 20122, Milan, Italy. The above referenced entity is a business development unit of Natixis Global Associates and a subsidiary of Natixis Global Asset Management, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management and distribution subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. Although Natixis Global Associates believes the information provided in this material to be reliable, it does not guarantee the accuracy, adequacy, or completeness of such information. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer