Invesco perpetual

Failing conventionally and succeeding unconventionally in asset allocation

R. Scott Hixon, CFAPortfolio Manager,Head of Investment ResearchInvesco Global Asset Allocation

This presentation is for Professional Clients only and is not for consumer use. The CFA® designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

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Sources: Invesco analysis and DataStream. Stocks are represented by the MSCI World Index. Bonds are represented by the FTSE All Government Stocks Bond Index. For illustrative purposes only. *Alternatives within the risk contribution chart above are represented by a combination of hedge funds, commodities and managed futures.

Asset AllocationUNDERSTANDING RISK CONTRIBUTION

0%

20%

40%

60%

80%

100%

Stocks

Bonds

We

igh

t %

Weight

Bonds

Stocks

Risk Contribution

Traditional Portfolio

(The Bicycle Seat)

Weight Risk Contribution

0%

20%

40%

60%

80%

100%

Investment Grade Bonds High Yield Emerging Market Bonds Developed Market Equities

REITs Commodities Inflation Linked Securities Managed Futures

Hedge Funds Emerging Market Equities Cash *Alternatives

We

igh

t %New

Balanced(The Dorky Pants)

Weights drive risk allocation

Weights drive risk allocation

Portfolio ConstructionRISK, RETURN & CORRELATION ASSUMPTIONS

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• Private Equity: Cambridge U.S. Private Equity Index

• Developed Equity: MSCI World Index

• Emerging Equity: MSCI Emerging Equity Index

• Hedge Funds: HFRI Fund of Funds Composite Index

• Commodities: S&P GSCI Index

• Inflation-Linked Bonds: Barclay’s Global Real Bond Index

• G7 Long Bonds: Barclay’s G7 Long Treasury Index

• Emerging Debt: JP Morgan EMBIG Index

• High Yield Debt: Merrill Lynch High Yield Master II

Index

Source: Invesco Analysis. Based upon data covering the period 31 March 1986 through 30 June 2012. For illustrative purposes only.

Asset Risk

Private Equity

Developed Equity

Emerging Equity

Hedge Funds (HFRI)

CommoditiesInflation-Linked Bonds

G7 Long Bonds

Emerging Debt

High Yield Debt

Private Equity 17.3% 1.000 0.659 0.530 0.344 0.183 0.031 -0.168 0.402 0.435

Developed Equity 30.5% 1.000 0.720 0.081 0.125 -0.006 -0.061 0.490 0.631

Emerging Equity 47.4% 1.000 0.028 0.125 -0.072 -0.188 0.608 0.630

Hedge Funds (HFRI) 12.9% 1.000 0.268 -0.028 -0.031 -0.085 0.055

Commodities 41.6% 1.000 0.111 -0.197 0.178 0.158

Inflation-Linked Bonds 6.2% 1.000 0.562 0.236 0.152

G7 Long Bonds 16.5% 1.000 0.048 -0.014

Emerging Debt 23.2% 1.000 0.516

High Yield Debt 16.9% 1.000

Risk is multi-dimensional. Our goal is to construct practically optimal portfolio structures that consider both Sharpe Ratio and risk concentration.

Risk, Return & Correlation Assumptions

Equal-WeightedSolutions

Balanced-RiskSolutions

OptimizedSolutions

Portfolio ConstructionRISK, RETURN & CORRELATION ASSUMPTIONS

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For illustrative purposes only.

Known Unknown

Risk

Return

Correlation

Known Unknown

Risk

Return

Correlation

Known Unknown

Risk

Return

Correlation

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Source: Invesco analysis. For illustrative purposes only.

Portfolio ConstructionDIVERSIFICATION FRAMEWORK

Growth Assets

Deflation Hedges

Inflation Hedges

Non-Inflationary Growth

• Developed Equities

• Emerging Equities

• Private Equity

• High Yield

• Emerging Debt

• Hedge Funds

Recession

• Long-Term Government Bonds (hedged)

Inflationary Growth

• Commodities

• Inflation-Linked Bonds

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Hedge Funds, Private Equity & Equity Beta

• Skill is defined by both a high Information Ratio as well as independence from market returns (Beta)

• Though often considered “Alpha” strategies, both hedge funds and private equity have a high Beta component

• Hedge funds and private equity, on average, struggle during equity market turmoil

Sources: Invesco analysis. Performance returns shown are from 1/31/90 through 12/31/11. Hedge fund returns are represented by HFRI Fund of Funds Composite Index. Private equity returns are represented by The Cambridge Associates LLC U.S. Private Equity Index. Past performance does not guarantee comparable future performance; an investment cannot be made directly into an index.

RETURNS BY EQUITY MARKET ENVIRONMENT

Lowest 20%

60th to 80%

40th to 60th

20th to 40th

Highest 20%

-15

-10

-5

0

5

10

15

20

25

30

35

Hedge Funds Private Equity

Annualiz

ed R

etu

rn

S&P 500 Return by Quintile

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Credit Spread & Equity Beta

• Credit risk is equity risk that masquerades as fixed income risk.

• Credit asset classes, on average, struggle during periods of equity market turmoil.

RETURNS BY EQUITY MARKET ENVIRONMENT

Lowest 20%

60th to 80%

40th to 60th

20th to 40th

Highest 20%

-40

-30

-20

-10

0

10

20

30

40

50

High Yield Debt Emerging Debt

S&P 500 Return by Quintile

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Sources: Invesco analysis. Performance returns shown are from 1/31/90 through 12/31/11. High yield returns are represented by Bank of America Merrill Lynch High Yield Master II Index. Emerging debt returns are represented by the J.P. Morgan EMBI Global Composite Index. Annualized returns are excess returns versus the Barclays US Treasury Index. Past performance does not guarantee comparable future performance; an investment cannot be made directly into an index.

Annualiz

ed E

xcess

Retu

rn(v

s. B

arc

lays

US

Tre

asu

ry In

dex)

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Risk Parity

Weight MCR

Private Equity 8.41% 0.91%

Developed Equity 4.59% 0.91%

Emerging Equity 3.30% 0.91%

Hedge Funds 17.52% 0.91%

Commodities 5.12% 0.91%

Inflation-Linked Bonds 29.81% 0.91%

G7 Long Treasuries 16.71% 0.91%

Emerging Debt 6.25% 0.91%

High Yield Debt 8.28% 0.91%

TOTAL 100.00% 8.19%

Source: Invesco analysis. MCR refers to Marginal Contribution to Risk. For illustrative purposes only.

Risk Parity Implementation – Example “A”CAPITAL & RISK ALLOCATION WITHOUT A DIVERSIFICATION FRAMEWORK

Risk Parity

Weight MCR %MCR

Non-Inflationary Growth 48.35% 5.48% 66.67%

Inflationary Growth 34.94% 1.83% 22.22%

Recession 16.71% 0.91% 11.11%

TOTAL 100.00% 8.19% 100.00%

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Risk Parity

Weight MCR

Private Equity 6.07% 0.44%

Developed Equity 3.13% 0.44%

Emerging Equity 2.54% 0.44%

Hedge Funds 11.05% 0.44%

Commodities 7.31% 1.33%

Inflation-Linked Bonds 33.01% 1.33%

G7 Long Treasuries 27.83% 2.67%

Emerging Debt 3.75% 0.44%

High Yield Debt 5.30% 0.44%

TOTAL 100.00% 8.00%


Risk Parity Implementation – Example “B”CAPITAL & RISK ALLOCATION INCLUDING A DIVERSIFICATION FRAMEWORK

Risk Parity

Weight MCR %MCR



Recession 27.83% 2.67% 33.33%

TOTAL 100.00% 8.00% 100.00%

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Risk Parity ImplementationCAPITAL & RISK ALLOCATION

Risk Parity Example “B”

Weight MCR %MCR

31.84% 2.67% 33.33%

40.33% 2.67% 33.33%

27.83% 2.67% 33.33%

100.00% 8.00% 100.00%

Risk Parity Example “A”

Weight MCR %MCR



Recession 16.71% 0.91% 11.11%

TOTAL 100.00% 8.19% 100.00%

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Source: Invesco analysis. For illustrative purposes only.

Strategic Risk Parity ImplementationONLY A STARTING POINT

Engineer for ReturnPrepare for risk

Strategic allocation

Design a portfolio ofrisky assets with positive long-term return expectations

Pair risky assets with long-term government bonds

Adjust tomarket

conditions

Tactical allocation

Evaluate market conditions and adjust portfolioallocations


Recession Inflationary Growth

0%

10%

20%

30%

40%

50%

Ris

k (%

)

33% strategic allocation

Tactical

0%

2%

4%

6%

8%

10%

8.0%

Ris

k (%

)

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Tactical Range

Source: Invesco analysis. Above figures do not represent specific time periods or actual portfolio results. For illustrative purposes only. Asset classes are subject to change and are not buy/sell recommendations.

STRATEGIC VS. TACTICAL ASSET ALLOCATION


Recession Inflationary Growth

0%

11%

22%

33%

Ris

k (%

)

Composition of Risk

Strategic

Strategic

0%

2%

4%

6%

8%

10%

8.0%

Ris

k (%

)

Level of Risk

Strategic

Tactical Range

• Strategic Allocation

is calculated

through volatility

and correlation

estimates

• Active positioning

allows the asset

weights to deviate

from the long-term

strategic allocation

Risk Parity Implementation

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Additional Information

Any simulation presented here was created to consider possible results of a Risk Parity Strategy (not previously managed by Invesco for any client). These performance results are hypothetical (not real) and were achieved by using a balanced risk optimization model. It may not be possible to replicate these results. The hypothetical results were derived by back-testing using a simulated portfolio. There can be no assurance that the simulated results can be achieved in the future. While the balanced risk optimization model was used to reflect the investment process for a Risk Parity Strategy, this model does not factor in all the economic and market conditions that can impact results.

Important information

This presentation is for Professional Clients only and is not for consumer use.

Where R Scott Hixon has expressed views and opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals.

Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell.

Further information on our products is available using the contact details shown.

Invesco Perpetual is a business name of Invesco Asset Management LimitedPerpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UKAuthorised and regulated by the Financial Services Authority.

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