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  1. 1. Baring Dynamic Asset Allocation Fund Focusing on absolute risk and return Baring Asset Management Limited 155 Bishopsgate London EC2M 2XY JUNE 2010 Tel: +44 (0)20 7628 6000 FOR INSTITUTIONAL INVESTORS ONLY Fax: +44 (0)20 7638 7928
  2. 2. Asset allocation-led investment from Baring Asset Management Baring Dynamic Asset Allocation Fund Focusing on absolute risk and returns We believe in the equity risk premium; that investors are compensated for the higher risk of holding equities by higher real returns over the long term. We believe that a multi-asset approach to investing can deliver equity-like returns with less risk than holding an equity-only portfolio and that returns with those characteristics would be desirable for any long-term investor. We define a long-term equity-like return as LIBOR +4%. The critical skill set in achieving this is asset allocation and a willingness to move portfolios dynamically between different diversifying assets. Our starting point in 2001, when we created multi-asset portfolios targeting an absolute return, was to refocus investment on the goals of pension schemes and charities: meeting the future liabilities of the scheme. Redefining our goals as a cash plus target and managing a wide set of assets within defined risk parameters was the key to realigning manager and trustee objectives. It also satisfied other requirements: Lower volatility portfolios: since the introduction of new accounting rules and Financial Reporting Standard (FRS) 17, the sponsors behind DB schemes need greater stability in their scheme returns and better control over funding gaps. Myners report recommendations: since the Myners report refocused attention on the critical role of asset allocation, there is greater recognition that a more flexible approach than the old strategic benchmark may help schemes to avoid losing significant value in down markets. Market emphasis on Liability Driven Investment (LDI) and diversification: since LDI was first introduced, bonds and swaps have become a regular feature of the landscape. But in a wider context, LDI can incorporate all sorts of multi-asset and other absolute return portfolios which target cash, or inflation plus returns. We advocate a multi-asset targeted return portfolio strategy - also called Dynamic Asset Allocation or Diversified Growth - which invests in both traditional asset classes and alternatives. We believe, as a result of both research and our experience of managing portfolios that you can achieve growth that matches long-term equity returns, but with reduced volatility. 2
  3. 3. Asset allocation-led investment The benefits of strategic and tactical asset allocation Our approach is asset allocation-led. We believe about 75% of Having calculated the likely return, correlation and risk factors for returns come from strategic or tactical asset allocation (diversified each individual asset class, our optimisation software suggests an beta), while the underlying alpha from chosen asset classes, actively asset allocation for the portfolio to meet the objectives which is then managed, contributes about 25% of added value over time. reviewed and adjusted by the Fund Manager. We call this the ten- We have a performance objective, but deliberately no benchmark year optimal strategy. This is not a benchmark but the strategy that and no index. We have no bias towards any asset and rely on solid we believe we could lock away in a drawer for ten years and would research on global asset classes and their future likely returns and have a good chance of achieving the target objective. risk, and the cross correlations of these assets. However, since we know that markets deliver returns unevenly through the business cycle, we tactically adapt the asset allocation to capture returns when they are available and then take risk off the Our investment process table when the environment deteriorates. This helps reduce portfolio volatility compared to equities and achieve the cash plus returns we Start with blank sheet of paper seek to target. Analysts’ underestimation of turning points in earnings cycles is a good example of a tactical opportunity in weakly efficient markets. Identify best asset classes RISK MANAGEMENT Current strategic asset allocation 10 year optimal strategy 10 year optimal strategy Index linked Anticipate and respond to events: bonds Dynamic Allocation 11% Global Property Choose the best investments 11% UK Equity 39% Forward-looking return estimates We begin by analysing each asset class to determine what we believe its trend return will be over the long term. We are forward looking rather than backward looking, and derive our return estimates Alternatives from estimated trend growth, productivity and dividend levels for each 20% major economy. We then analyse individual “riskiness” by measuring the volatility of each asset and then their correlation – or how they perform relative to each other. We look for assets that behave Asia/EM differently from other assets, allowing us to diversify returns. equity 19% 10 year asset class forecasts (GBP) Predicted risk* 10.9% Return (% per annum) 14 Source: Barings as at 11th February 2009. *Risk = standard deviation of annualised return. Emerging 12 Markets FTSE All Property Pacific ex 10 Share Japan Fund of 8 Private hedge US Equity Equity funds 6 Europe ex UK Cash Index- 4 Linked Japan 2 UK Gilts 0 0 5 10 15 20 25 30 Risk* (% per annum) Alternatives Equities Bonds Cash Source: Barings, 1st January 2009 * Risk (standard deviation of annualised returns) 3
  4. 4. Why tactical asset allocation is critical The right asset class at the right time is key Best and worst performing asset classes 2006 2007 2008 2009 European Equities 19.7 Emerging Equities 37.4 Overseas Bonds 58.1 Emerging Equities 59.4 Property 18.1 Gold Bullion 29.6 Gold Bullion 42.8 Asia Pacific ex Japan 53.3 UK Equities 16.8 Asia ex Japan 29.0 UK Bonds 12.8 UK Equities 30.1 Emerging Equities 16.3 Europe Equities 15.3 Cash 4.7 European Equities 19.4 Overseas Bonds -7.5 Japanese Equities -6.5 Emerging Equities -35.2 Overseas Bonds -9.7 Japanese Equities -7.4 Property -5.5 Asia ex Japan -31.3 Japan Equities -5.9 UK Bonds 0.7 Corporate Bonds 1.8 UK Equities -29.9 UK Bonds -1.2 Corporate Bonds 0.8 Hedge Funds 4.5 European Equities -24.4 Cash 0.5 Source: Barings. Figures above are for the asset class shown in sterling total return terms. As at the end of each calendar year. We positioned the Dynamic Asset Allocation Fund cautiously throughout much of 2008 and this defensive focus served the Fund well. In the final quarter of 2008 and in early 2009, we increased the equity exposure on the basis that equity valuations had become compelling. The second half of 2009 was characterised by the gradual reduction in risk assets, as we booked profits after a strong run-up in equities. Looking into 2010, we believe that our ability to move quickly, and take advantage of tactical asset allocation opportunities as they arise, will be key. The table above shows that the dispersion of returns between different asset classes can be extreme. This reinforces the value of holding the right asset at the right time, i.e. diversified beta is more important than stock selection alpha. Changes in the Baring Dynamic Asset Allocation Fund Current asset allocation since inception (%) 100 Property Cash 4.2% 1% 80 Gold Bullion 8.7% UK Equity Alternatives 27.1% 60 5.0% UK Credit 7.6% 40 Pacific/ Emerging Convertible Equity 20 Bonds 5.1% 5.4% Global Equity 0 Global 9.4% 31-Jan-07 30-Jun-07 31–Sep–07 31-Mar-08 30-Jun-08 31-Dec-08 31-Mar-09 30-Jun-09 31-Dec-09 31-Mar-10 31-Mar-07 31-Dec-07 30-Sep-08 30-Sep-09 Government 16.6% Agricultural Global Index Equity Linked 3.3% 6.5% UK Equity Overseas Equity Cash/Other Predicted risk* 8.58% Alternatives UK Bonds Overseas Bonds Property Source: Barings, as at 31.03.10, Gross Exposure, shown at month end, Source: Barings as at 30th April 2010 inception date 16th January 2007 * Risk= standard deviation of annualised return from asset allocation 4
  5. 5. Taking full advantage of a wide opportunity set The Baring Dynamic Asset Allocation Fund The Baring Dynamic Asset Allocation Fund benefits from a wide Fund Size £1.9 billion opportunity set and flexible guidelines which allow us to increase Inception date 16 January 2007 exposure to growth assets in strong markets and hold more defensive alternatives in weaker markets. At times of uncertainty, Performance target LIBOR +4% or in the event of sustained market weakness, we can increase Minimum £5m tactical exposure to government bonds, cash, funds of hedge investment funds and structured products, with the aim of protecting the value Structure Dublin registered of scheme assets. Managers Percival Stanion / Andrew Cole / A highly-experienced team James Codrington Our Multi-Asset Team was brought together in 2001 by Percival Dealing Weekly Stanion (bottom row second from right), who is Chair of our Characteristics Pragmatic use of active (inc Barings) Strategic Policy Group, the company’s global macro research and managers & ETFs, alternatives asset allocation team, and our Head of Asset Allocation. Percival identified skill sets that already existed in asset allocation, absolute Target Clients DB pension funds, charities and insurance companies return investments and best of breed fund selection. From these, Source: Barings as at 30th April 2010 he built a team which now has eight investment managers, who average over 23 years of investment experience, and one analyst. Baring Dynamic Asset Allocation Fund Track record since launch (% ) 130 120 110 100 90 80 Percival is supported in the day-to-day running of the Dynamic 70 Asset Allocation Fund by Andrew Cole (bottom row second from left) and James Codrington (top row first on left). 60 Andrew is also a member of our Strategic Policy Group, and Jan- 07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 chairman of that group’s risk committee, and has 31 years of Baring Dynamic Asset Allocation Fund investment experience having spent the last 24 years in Barings’ FTSE World Fixed Income and Multi-Asset Teams. FTSE All Share James is also a senior investor at Barings. He has 16 years of LIBOR + 4% Objective investment experience, is a member of the Multi-Asset Team and Past performance is not a guide to future performance. also heads the Charities Team. Source: Barings as at 30th April 2010. These three have managed portfolios together since James joined us in 2002. 5
  6. 6. Measuring and managing risk Composite return & risk: We control asset allocation risk by modelling the impact on total 1st Jan 2003 – 31st March 2010 volatility. We balance risky assets with less volatile assets such as Return annualised (%) cash, funds of hedge funds, or very short-term bonds. We 14 measure risk in different ways, including Value at Risk, the industry’s preferred absolute risk measurement; volatility as measured by standard deviation of monthly returns and by stress 12 11.3 testing. 10.7 In addition, we perform implied alpha analysis to identify the most 9.9 10 volatile elements of the portfolio. We take hedge fund exposure through listed funds of hedge funds or other liquid instruments that 8.5 give us exposure across a broad range of strategies. Likewise, 8 with listed structured products, we are careful to assess any counterparty risk. 6 Our aim: equity returns with less than equity risk 4 Our track record managing multi-asset targeted return portfolios covers good market conditions (2003-2006 and 2009) as well as bad market conditions (2007-2008). This gives us valuable 2 experience of how cross correlations can and have changed, of how predicted and actual risk can differ, and of what tools are needed for asset protection. We have succeeded in meeting the 0 return objective comfortably within our risk parameters on a rolling Total Return Composite Libor +4% 5-year basis. FTSE All Share FTSE All World Equity Index We have achieved our aim of reducing volatility by actively managing our exposure to growth and defensive assets, while still Risk (%) 20 achieving equity-like returns during positive equity markets. For example, in 2009 we delivered the equivalent of global equity returns, with only 50% invested in equities by allocating to gold, corporate bonds and convertibles. 15.3 14.6 15 10 8.2 5 0.5 0 Total Return Composite Libor +4% FTSE All Share FTSE All World Equity Index Past performance is not a guide to future performance Source: Barings as at 31st March 2010 Reference to the index is for comparative purposes only. The composite returns should be considered as supplemental information which complements the Multi Asset GBP Inflation/Cash Targeted Solutions: High Return Composite presentation as shown in appendix. We don’t cap return potential if markets are strong and risks are moderate, but we will restrain portfolios from exceeding their risk parameters when times are hard, rather than risk destroying value. We believe our track record shows that it is possible to deliver returns similar to those available from global equity markets with typically less risk. 6
  7. 7. Composite performance Baring Asset Management: Multi Asset : GBP Inflation/Cash Targeted Solutions: High Return Ending March 31, 2010 Period to date 3 Years per 5 Years per Results shown in GBP (3 Months) 1 Year annum annum Composite Gross of Investment Management Fees 3.80 29.36 7.01 10.46 Benchmark: RPI +4.5% p.a. 2.09 4.98 7.13 7.40 Benchmark: CPI +5% p.a. 2.04 7.34 7.87 7.70 Benchmark: LIBOR +4% p.a. 1.15 4.91 8.07 8.50 For the purpose of GIPS Compliance, the "Firm" is defined as the investment firm Baring Asset Management Limited (and its relevant subsidiaries which are registered with the appropriate regulatory authorities to undertake investment business in those jurisdictions in which they operate) and Baring Asset Management Inc. (together hereinafter referred to as "the Firm"). The Composite is comprised of multi-asset accounts managed for Sterling based clients, which can invest across a broad spectrum of assets with an absolute return target. The investments strategy is to take an extended degree of risk in order to seek to achieve a return in line with the accounts investment objectives. The individual portfolios within the composite have the following current target objectives: 3mth LIBOR +2.5%; 3mth LIBOR +3%; 3mth LIBOR +4%; CPI +4.5%; CPI +5%; Produce Income; RPI + 4% (net of fees), RPI +4.5%; RPI +5%; RPI +6%; RPI +7%; To protect Capital & Produce Income; Total Return 7.5%, Total Return 8%. With effect from 1st April 2007 the Composite was renamed from 'Multi Asset Targeted Solutions GBP RPI +4.5% to + 5.5%'. Prior to 1st July 2006 the Composite was named 'Extended Risk Solutions GBP’. The Firm claims compliance with the Global Investment Performance Standards (GIPS ®). The benchmarks shown for comparison purposes are the RPI +4.5% per annum, and CPI + 5% per annum, & 3 month LIBOR +4% per annum. Each monthly return for the CPI/RPI is calculated on an average of the monthly rate over the prior 12 months. A complete list and description of all composites and/or a presentation that adheres to the GIPS standards is available on request by sending an e-mail to Three portfolios run according to Baring Asset Management’s Multi Asset: GBP Inflation / Cash Targeted Solutions: High Return strategy have, on occasion, used equity index futures for the purpose of adjusting asset exposure and liquidity. Leveraged strategies have not been employed. 7
  8. 8. FOR FURTHER INFORMATION PLEASE VISIT IMPORTANT INFORMATION For Institutional Investors Only. This document is issued by Baring OR CONTACT Asset Management Limited and in jurisdictions other than the UK it is provided by the appropriate Baring Asset Management company/affiliate UK Institutional Sales whose name(s) and contact details are specified herein. This is not an offer to sell or an invitation to apply for any product or service of Baring Asset Management and is by way of information only. Before investing Jonathan Cunningham in any product we recommend that recipients who are not professional investors contact their financial adviser (+44) (0)20 7214 1293 All relevant documents relating to the product, such as reports and E-mail: accounts and prospectus (which specify the particular risks associated with a product, together with any specific restrictions applying and the basis of dealing) should be read. The information in this document does Claire Glennon not constitute investment, tax, legal or other advice or recommendation +44 (0) 20 7214 1763 or, an offer to sell or an invitation to apply for any product or service of Baring Asset Management. The value of any investments and any income generated may go down Eirene Chow as well as up and is not guaranteed. Past performance is not a guide +44 (0) 20 7214 1243 to future performance. Quoted yields are not guaranteed. Changes in rates of exchange may have an adverse effect on the value, price or Email: income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact on income and capital value. Telephone calls may be recorded and monitored. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth. We reasonably believe that the information contained herein from 3rd party sources, as quoted, is accurate as at the date of publication. The information and any opinions expressed herein may change at any time. This document may include internal portfolio construction guidelines. As guidelines the fund is not required to and may not always be within these limits. These guidelines are subject to change without prior notice and are provided for information purposes only. This document may include forward-looking statements which are based on our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available in respect of any offshore fund. Shares in the Funds are not available in any jurisdiction in which the offer or sale would be prohibited; in particular the Fund may not be sold directly or indirectly in the US or to a US person. Subscriptions will only be received and shares issued on the basis of the current Prospectus. For data sourced from Morningstar: © Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any Baring Asset Management Limited damages or losses arising from any use of this information. 155 Bishopsgate, London EC2M 3XY Authorised and Regulated by the Financial Services Authority Version 03/2009 Complied (London): 26th May 2010 Follow us on