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F:\The Zest Machine F:\The Zest Machine Presentation Transcript

  • “Braving the Storm” THE ZEST MACHINE 1
  • Outline Economic outlook Portfolio Allocation Backup strategy Implementing our backup strategy 2
  • Economic Outlook Equity Fixed Income Commodities Markets Economic Portfolio Backup Strategy Implementation Outlook Allocation 3 View slide
  • Equity Selloff? Fact or Fiction Dow Jones Industrial Average 840 835 830 825 820 815 810 805 Hurricane Camille 800 17/8/1969 795 DJIA 1% increase 790 Economic Portfolio Backup Strategy Implementation Outlook Allocation 4 View slide
  • Equity Selloff? Fact or Fiction Dow Jones Industrial Average 2850 2800 2750 2700 2650 2600 2550 Hurricane Hugo 2500 22/9/1989 2450 DJIA 3% increase Economic Portfolio Backup Strategy Implementation Outlook Allocation 5
  • Equity Selloff? Fact or Fiction Dow Jones Industrial Average 10800 10700 10600 10500 10400 10300 Hurricane Katrina 30/8/2005 10200 DJIA 2% increase Economic Portfolio Backup Strategy Implementation Outlook Allocation 6
  • Equity Selloff? Fact or Fiction 70 18 68 16 66 14 64 12 62 10 Entergy Corp 60 8 Tetra 58 6 56 4 54 2 52 0 1/8/2005 1/9/2005 1/10/2005 1/11/2005 1/12/2005 Economic Portfolio Backup Strategy Implementation Outlook Allocation 7
  • Equities Outlook  Selective, dependant on industry  Hurricane Katrina wiped out 12% US oil output  Advantaged overseas oil companies  Disadvantaged insurance companies Economic Portfolio Backup Strategy Implementation Outlook Allocation 8
  • Equities Outlook New York Economy, USD$ Construction Mining 1% 4% Manufacturing Verdict 5% Others 23% Trade Transport Overweight Underweight Utilities 17% • US • US financial institutions construction, infrastructure • New York companies utilities, transport Education & Health Financial & 20% Professional Services Hospitality 23% 8% Economic Portfolio Backup Strategy Implementation Outlook Allocation 9
  • Fixed Income Outlook We see spreads for CDS on New York assets to increase slightly. Risk premium to increase marginally, bond yields increase and price decrease Verdict: Slightly Underweight Economic Portfolio Backup Strategy Implementation Outlook Allocation 10
  • Commodities Outlook - Metals Demand Supply • Increased through • Decreased, US mining construction, infrastructure industry $93.6 billion USD rebuilding Verdict: Overweight Economic Portfolio Backup Strategy Implementation Outlook Allocation 11
  • Commodities Outlook - Gold •Higher inflationary Gold Price USD/ Oz outlook expected gold 1400 USD $ prices increase Dot Com Bubble Crash Sub Prime 1200 Mortgage Crisis •Destruction of hard 1000 Hurricane assets is inflationary 800 Katrina 600 •Fed to loosen money 400 Lehman Collapse & Euro supply to spur 200 Debt Crisis recovery 0 Sep-01 Jul-07 Nov-00 Jan-05 Sep-06 Jul-02 Mar-04 Nov-05 May-08 Jan-00 May-03 Mar-09 Economic Portfolio Backup Strategy Implementation Outlook Allocation 12
  • Asset Allocation Aberdeen GEM Bonds 10% Schroder GSC LionGlobal SG Bond United Gold & General Equities 90% Economic Portfolio Backup Strategy Implementation Outlook Allocation 13
  • Markowitz Optimization  Created Variance-Covariance matrix between securities from historical returns  Set target returns to 10%  Set minimum 5% allocation to each security for diversification  Using Excel Solver, objective function to minimize variance Economic Portfolio Backup Strategy Implementation Outlook Allocation 14
  • Markowitz Optimization Portfolio Allocation 25% United Gold 20% Fund 47.7075% 15% Mean = 10% Expected Return Aberdeen S.D = 7.8681% 10% LionGlobal GEM Fixed Income Schroder GSC 5% 5% 10% 37.2925% 0% 0 0.1 0.2 0.3 0.4 0.5 0.6 -5% -10% Standard Deviation Economic Portfolio Backup Strategy Implementation Outlook Allocation 15
  • 3 Pronged Approach Pre-Emptive Control Active Portfolio Monitoring and Control Limit Loss and Value at Risk Rebalancing Economic Portfolio Backup Strategy Implementation Outlook Allocation 16
  • Pre-Emptive Control  Aim to forecast economy 6 months in advance  Use 10 leading economic indicators  Forecast natural disasters using meteorological service Economic Portfolio Backup Strategy Implementation Outlook Allocation 17
  • Value at Risk Value at Risk 95% CI Black Monday Flight to Quality Terrorist Attack/ Sep 11 Economy Falters Corporate Scandal 0% 5% 10% Economic Portfolio Backup Strategy Implementation Outlook Allocation 18
  • Limit Loss and Rebalancing  Assess the expected loss vs. transaction costs  Rebalance if benefits exceed cost Economic Portfolio Backup Strategy Implementation Outlook Allocation 19
  • Assessing the Risk of Holdings  Access exposure to disaster  Estimate expected loss Economic Portfolio Backup Strategy Implementation Outlook Allocation 20
  • Aberdeen GEM  Main holdings in Asia, South America  Only 8% US  Little effect on returns  Correlation 28.7% Africa 9% Asia 48% South America 20% US 8% Europe 15% Economic Portfolio Backup Strategy Implementation Outlook Allocation 21
  • Schroder GSC  High allocation to US and Canada  High allocation to financials – 20%  Significant effect on returns Asia 25% Others  Correlation 65.4% 0% Europe 34% North America 41% Economic Portfolio Backup Strategy Implementation Outlook Allocation 22
  • Lion Global Singapore Bonds  Mainly to Singapore bonds  Sovereign, HDB  Credit spreads not affected Others 42% Singapore 58% Economic Portfolio Backup Strategy Implementation Outlook Allocation 23
  • United Gold and General  Gold prices expected to peak during uncertainty  Metals prices expected to peak Economic Portfolio Backup Strategy Implementation Outlook Allocation 24
  • Value at Risk Returns over 1 month after disaster 95% CI Schroders GSC Aberdeen GEM LionGlobal Bond United Gold and General -8% -7% -6% -5% -4% -3% -2% -1% 0% Economic Portfolio Backup Strategy Implementation Outlook Allocation 25
  • Rebalancing  Only Schroder GSC meets criteria for rebalancing  Initial 37.2925%  Reduce to 27.2925%  Rebalance to stocks Economic Portfolio Backup Strategy Implementation Outlook Allocation 26
  • Rebalancing – Turner Construction  Large infrastructure construction company in US  46 offices in US large presence in New York  Government contracted to clean up World Trade Center  10.6bn, expected to increase 27
  • Rebalancing - USS  Largest domestically owned steel maker  Benefit from increase steel demand  16.873bn, mainly from the US 28
  • Rebalanced Portfolio USS Aberdeen GEM Turner Stock 5% 5% 5% Schroder GSC 27% United Gold & General 48% LionGlobal Bond 10% 29
  • Q&A 30