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“Citywire Forum”Milan, Thursday 27th October 2011
H2O’s Investment Process and Strategies        The framework         1.   Investment philosophy         2.   Arbitrage ra...
The framework: investment philosophy Value diversification is a robust and stable alpha source            • Over the long ...
The framework: arbitrage rather than directional strategies                    Bonds         Currencies         Credit    ...
The framework: quantifying diversification                                                                                ...
The framework: the benefits of diversification Diversification is the engine of alpha generation            • No stop-loss...
Review of performance        The framework         1.   Investment Philosophy         2.   Arbitrage rather than directio...
From value to deep value             The CHF has reached extreme overvaluation in August                      2 standard-d...
From value to deep value                                   Equity vs. Bonds                      buy Equity               ...
Diversification on strike                      In July and August, risky commodity currencies like the Australian         ...
Market dislocation                                 Liquidation in sequence                   EM Fx                        ...
Very poor performance during the Summer                 Liquidation vs. valuation and the lack of ex-post diversification ...
Review of performance        The framework         1.   Investment philosophy         2.   Arbitrage rather than directio...
Strategies less dependent on the macro-scenario           Deep-value means that the worst economic outlook                ...
Expect shifts in correlations            Now that correlations have shifted to crisis-mode,              the risk of rever...
Expect shifts in correlations                                                                      No more protection in b...
Current risk allocation Balanced across asset classes                  Less directional strategies                        ...
Current risk allocation                                                              Main H2O views         Bonds    Portu...
H20 AM LLP is authorised and regulated by the Financial Services Authority.This document (and any attachments thereto) is ...
Additional NotesThis material has been provided for information purposes only to investment service providers or other Pro...
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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)"

  1. 1. “Citywire Forum”Milan, Thursday 27th October 2011
  2. 2. H2O’s Investment Process and Strategies  The framework 1. Investment philosophy 2. Arbitrage rather than directional strategies 3. The benefits of diversification  Recent portfolio performance 1. From value to deep value 2. Diversification on strike 3. Market dislocation  Strategies and portfolios 1. Deep value pushes macro-scenarios to the backseat… 2. … while bringing views on correlations to the fore 3. Current risk allocation
  3. 3. The framework: investment philosophy Value diversification is a robust and stable alpha source • 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
  4. 4. The framework: arbitrage rather than directional strategies Bonds Currencies Credit Equities Average numberGlobal ofexposure strategies (US dollar) EUR bloc JPY bloc EMU UK North EMU US EMU AmericRegional a Directional UK JAPAN Commodity fx bloc US UK JAPANallocation (< 1/3) EMU Other EUR Com. JPY Corpo. Emg Countries Sectors countries bloc bloc blocCountry /sectorallocation Relative ( > 2/3)
  5. 5. The framework: quantifying diversification Correlation of bonds with…60% Directional Relative strategies40% NOK EUR Venezuela USD Equities vs. vs. vs. SEK GBP EM20% Diversifying 0% additions to bonds-20% Turkey-40% vs. EM AUD AUD 30 vs. 5 Year vs. vs. US vs. EM Credit German-60% NZD CAD equities Source: H2O AM, weekly data, 10 year history, exponential smoothing (half life of 2 years)
  6. 6. The framework: the benefits of diversification Diversification is the engine of alpha generation • 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
  7. 7. Review of performance  The framework 1. Investment Philosophy 2. Arbitrage rather than directional strategies 3. The benefits of diversification  Recent portfolio performance 1. From value to deep value 2. Diversification on strike 3. Market dislocation  Strategies and portfolios 1. Deep value pushes fundamentals to the backseat… 2. … while bringing views on correlations to the fore 3. Current risk allocation
  8. 8. From value to deep value The CHF has reached extreme overvaluation in August 2 standard-deviation PPP 2 standard-deviation source: Bloomberg
  9. 9. From value to deep value Equity vs. Bonds buy Equity buy Bonds source: Bloomberg
  10. 10. Diversification on strike In July and August, risky commodity currencies like the Australian dollar had a negative correlation with European equities source: Bloomberg
  11. 11. Market dislocation Liquidation in sequence EM Fx Credit Core EMUsource: Bloomberg, H2O calculation , logarithm
  12. 12. Very poor performance during the Summer Liquidation vs. valuation and the lack of ex-post diversification explain the poor performance from early July to mid-Septembersource: H2O AM
  13. 13. Review of performance  The framework 1. Investment philosophy 2. Arbitrage rather than directional strategies 3. The benefits of diversification  Recent portfolio performance 1. From value to deep value 2. Diversification on strike 3. Market dislocation  Strategies and portfolios 1. Deep value pushes the macro-scenario to the backseat… 2. … while bringing views on correlations to the fore 3. Current risk allocation
  14. 14. Strategies less dependent on the macro-scenario Deep-value means that the worst economic outlook is already priced in some assets • 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)
  15. 15. Expect shifts in correlations Now that correlations have shifted to crisis-mode, the risk of reverting to the mean is significant • 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)
  16. 16. Expect shifts in correlations No more protection in bonds Remember Q1 2009: your best protection can turn into a nightmare 1600 4.5 1500 S&P (total return index) US 10-Year Treasuries (yield) 1400 4 1300 1200 3.5 1100 1000 3 900 Sharp move up in yields 800 during the last leg down 2.5 700 on equities 600 2 Oc 8 Au 09 Ja 9 Fe 0 M 10 -10 Au 08 Ja 8 Ju 8 Fe 9 No 9 Ap 9 Oc 9 No 8 M 09 Ju 9 M 08 Ju 8 Se 8 M -09 Ju 9 De 9 De 8 Se 9 t-0 c-0 1 0 0 0 -0 0 t-0 c-0 0 -0 0 0 -0 0 0 n- b- l- n- p- p- l- r- n- v- r- n- g- g- v- ar ar ay ay b Apsource: H2O AM
  17. 17. Current risk allocation Balanced across asset classes Less directional strategies Yielding and value strategies
  18. 18. 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. 19. H20 AM LLP is authorised and regulated by the Financial Services Authority.This document (and any attachments thereto) is confidential and for use only bythe intended recipient. Access by others is unauthorised. Its content should notbe relied upon and no liability or responsibility is accepted by us (H20 AM LLP) orassociated companies), without subsequent written confirmation of its contents,signed by an authorized signatory. If you are not the intended recipient, pleasenotify us promptly and delete all copies and note any discloser, copying,distribution or any action taken or omitted to be taken in reliance on theinformation it contains is prohibited and may be unlawful. This message isprovided for information purposes and should not be construed as a solicitationor offer to buy or sell any securities or related financial instruments.Company Name & Registered Offices: H20 AM LLP, 10 Old Burlington Street,London W1S 3AG. Company Number OC356207. 19.
  20. 20. 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 ofeach 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 NatixisGlobal 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 no23458.3. Natixis Global Associates S.A. is a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier and is incorporatedunder 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 ofLuxembourg. 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 adiverse line-up of specialised investment management and distribution entities worldwide. The investment management and distribution subsidiaries of Natixis Global AssetManagement 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 notavailable 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 suchinformation.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 anoffer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully beforeinvesting. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the dateindicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may beforecasted in this material.This material may not be distributed, published, or reproduced, in whole or in part.
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