Certitude Global Investing Insights - May 2013

certitudeglobal.com.au
May 2014
CERTITUDE GLOBAL INSIGHTS
HIGHLIGHTS THIS QUARTER:
10 Reasons for Global Equity Income
Breaking the Bad News Cycle
Watch Capital Flows for the Central Bank's Next Move
Easy Eurozone Trades are Running Out of Road

Letter from Certitude CEO, Craig Mowll
Another financial year is fast approaching the end!
2014 has presented some volatility (both market and AUD currency) on the back of
strong global equity markets last year. Whilst returns are still very good Australian
investors have continued to express concerns around the Australian economy, the
Middle East, Russia and Ukraine crisis, China economy and Japan….all for good
reasons.
That said; the global markets are still providing quality investment opportunity and we continue to witness
an increase in interest in investing in various asset classes throughout the global landscape. Global
equities, particularly global equity income is getting the greatest attention and no far behind is global
equity long short. Both strategies support the feelings described in the first paragraph.
Whilst global fixed income has taken a certain backseat in investor’s minds it certainly has not been
forgotten at Certitude and we do see this strategy playing a stronger role in 2015…so watch this space!
Don’t forget the Certitude Global Investing Intentions Index (CGIII) which is produced monthly and
measures Australian investors’ current appetite for investing in overseas assets. The index is based on:
actively engaged Australian investors (investors who have assets in addition to home and compulsory
super); The relative proportion of investors intending to increase their exposure to overseas assets over the
next quarter, relative to those intending to decrease overseas exposure; and figures above 100 indicate
more prospective ‘buyers’ than ‘sellers’ of overseas assets.
This survey data is collected monthly via an online method with ~1,000 respondents.
Certitude tracks the Index and releases the findings monthly at http://cgiii.certitudeglobal.com.au/
Please enjoy this edition of Certitude Global Insights and would be happy to receive your feedback,
questions or comments via email to globalinsights@certitudeglobal.com.au or by contacting our Investor
Services team on 1300 30 90 92.
We look forward to working with you in 2014.
Yours sincerely
Craig Mowll
Chief Executive Officer
Certitude Global Investments
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CERTITUDE GLOBAL INSIGHTS
CONTENTS
Certitude CEO’s letter Page 1
From the Desk - Stephen Thornber Page 3
About Threadneedle Investments Page 7
Threadneedle Investments - Highlights Page 8
Threadneedle Investments – Investment outlook Page 9
Threadneedle Investments – Ten Reasons for Global Equity Income Page 11
Threadneedle Investments – Investments themes Page 25
About Lighthouse Partners Page 27
Lighthouse Partners - Quarterly outlook (summary) Page 28
Lighthouse Partners – First quarter 2014 review Page 29
Lighthouse Partners – Second quarter 2014 outlook Page 30
About GaveKal Capital Limited Page 32
GaveKal - Quarterly outlook Page 33
GaveKal Research – Breaking The Bad News Cycle Page 34
GaveKal Research – Watch Capital Flows For The Central Bank's Next Move Page 36
GaveKal Research – Easy Eurozone Trades Are Running Out Of Road Page 39
Why Certitude? Page 41
Certitude's funds Page 44
Quarterly fund performance summary Page 46
Certitude contact Page 47
Threadneedle Investments – Is Europe heading for Japanese-style deflation? Page 16
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Stephen Thornber, Portfolio Manager, Threadneedle Global Equity Income Fund
Whilst 2013 was a difficult environment for dividend
strategies (mainly because of fears that the US Federal
Reserve would reduce its program of quantitative easing),
we continue to believe dividend strategies are a powerful
strategy – primarily because they grow over time your
purchasing power becomes stronger. We believe by
identifying companies with really robust growth potential,
they will be able to perform strongly even when the market
penalises quality companies and income stocks.
Looking forward on consensus estimates, the Fund’s portfolio
is expected to grow earnings 8.3% and dividends 8.2% this
year (2014). This doesn’t mean revenue has to go up 8%...
earnings generally rise faster than revenue due to leverage.
The Fund’s portfolio has a current running dividend yield of
4.5% and the Fund yield is a 79% premium to the World
Index (source: Threadneedle, as at 31 March 2014). The
MSCI All Country Index (MSCI AC) has a current dividend
yield of around 2.5% (as at 31 March 2014). Valuations
are still attractive and we expect the improved economic
background to lead to useful corporate earnings growth this
year, which will result in continued attractive payouts to
shareholders.
We continue to believe that Income strategies will
outperform and that the companies within the Fund’s
portfolio, which all have attractive yields and strong growth
prospects and strong balance sheets will continue to
maintain and grow their distributions.
There are no signs of an income bubble. After several years
of good stock performance, and with bond yields at historic
low levels, one could be forgiven for thinking that dividend
stocks must have reached expensive levels. However, when
we look at the valuations of high-dividend paying
companies globally, they are still trading at a discount to the
broader market.
Valuations of high dividend companies
Source: MSCI index data as at 31 March 2014
We remain of the view that investors can expect attractive
earnings growth in 2014, and that this is likely to provide a
supportive backdrop for capital gain; while the high
dividend-yield we expect from all of our stocks provides a
high income stream. We expect global economic growth to
continue to strengthen this year and this, together with an
acceleration in company profitability should provide a
supportive backdrop for equity markets. The continuing
economic recovery in the US, Japan and Europe are likely to
provide a supportive backdrop for earnings growth and
capital gain; while the high dividend-yield we expect from
all of our stocks provides a compounding income stream to
bolster returns. We continue to focus on companies that offer
rewards on both fronts, while operating with a robust
financial structure.
Equity markets have clearly performed extraordinarily well
over the last couple of years; the S&P 500 is up by 50%,
the FTSE All-Share by more than 33% and the MSCI World
index by over 40% (as at 31 December 2013). Although
corporate profits have grown, this growth has been nowhere
near as strong as equity markets have been, and so the
return from equities has been driven by a rerating fuelled by
increasing confidence and ongoing central bank stimulus
and liquidity provision. However, we are now beginning to
see signs of corporate growth come through, and this we
feel will provide an additional supportive backdrop to
dividend paying stocks.
12.4
9.7
11.1
14.7
13.9
11.8
13.3
15.7
Europe inc UK Asia Pacific AC ex Japan Japan USA
High dividend yield index Regular Index
Forward PE ratios
FROM THE DESK
May 2014
3

Currently we’re overweight Europe and the UK. We’re
positive on the UK, we see the growth there accelerating
and we do think it’s a good area for equity markets. We
think valuations are reasonable. Europe is a little more
difficult because it’s really still very much a two-speed
market. We’re beginning to see some recovery from the
austerity measures that Spain, Portugal, Greece and Ireland
have put in, but big economies like France and Italy are still
struggling. Possibly Europe as a region may well struggle
because a couple of the larger economies are still
struggling. But that doesn’t mean that we can’t find
opportunities. We’re really focused on Germany,
Switzerland and Scandinavia where we can see good
valuations, good corporate profits and more robust
economies. The US is around a third of the Fund but we’re
actually thinking of taking money out because whilst we are
confident on economic growth there we think the market is
looking a little bit, not overvalued, but fully valued. We think
there are better opportunities, partly in Europe where we’ve
been adding to, partly in Japan where we do see
‘Abenomics’ beginning to have some positive effects.
The underlying strategy has a very unique set of criteria that
sets the Fund apart from competitors. What do we look for
in a stock? An ideal stock for us will meet three factors;
 A yield over 4% - no exceptions
 Earnings and dividend growth greater than 5%.
 Robust balance sheet – gearing less than 75% and
dividend cover greater than 1.25x (payout ratio of less
than 80%).
The three factors are designed to identify ‘Quality Income’ –
a high, growing and sustainable income stream. ALL
companies must be able to demonstrate good growth and
healthy balance sheets so that the companies do not come
under pressure even in weak markets. Earnings and dividend
growth are to ‘embedded’ growth in the portfolio – We
want the income stream from the portfolio to grow over
time. Balance sheet strength is required to ensure dividend
payments are sustainable into the future; we want to make
sure companies are not over-distributing their income, and
may have to cut their dividend in the future. The portfolio in
aggregate has these characteristics, but the Fund manager
will flex the second and third factors for individual stocks if
he can convince himself self that the quality and potential
return of the company is good enough.
Due to the “income sustainability” and “growth” elements of
the Fund, we believe that the Fund’s portfolio of companies
will continue to grow their dividends even when the market
penalises quality companies. Please see a few examples
below that help demonstrate just some of the quality
companies within the Fund. There are a number of themes
running throughout the portfolio.
EM CONSUMER- Despite the obvious challenges that the
world’s emerging economies face, we are still positive on
emerging market consumers. We are looking for high-quality
companies that are benefiting from rising consumption and
demographic growth without being too reliant on the local
economy, so we often obtain exposure to emerging markets
through Western companies.
We are very positive on consumer brands, and Hugo Boss
is a good example of this. This German company performed
extremely well for the Fund last year, even in the second-half
rotation out of high-quality stocks. We own it for its exposure
to Asian consumers rather than to a European recovery. The
company has had long-running problems in Europe, but is
restructuring its supply chain and its stores base. What
excites us most about it, however, is the growth that we see
coming from Asia. The company missed the first phase of
Asian expansion undertaken by peers such as Gucci,
Swatch, Burberry and Mulberry. Having missed that, Hugo
Boss is obviously playing catch-up, but that in itself entails
growth. It has also been able to learn from the mistakes
made by other Western brands when they first went into
Asia. The company should enjoy 12-15% earnings growth
over the next few years, and its management has committed
to increasing the dividend in line with this. And all this from
a stock that’s already yielding around 4.5%.
Las Vegas Sands, a casino operator, which is benefiting
from very strong revenue growth in Macau. Although Las
Vegas Sands is a US company, 80% of its revenues come
from Asia, and 80% of its casinos are in Hong Kong and
Macau. The Asia gambling theme is a very strong one - The
growing spending power of the Asian consumer is a theme
that we also play through our holding in Cambodian casino
company NagaCorp, which also performed extremely well
over the year. Both companies continued to outperform in
the second half of the year, despite the general move away
from high-quality stocks. These 2 stocks get exposure to the
EM consumer which is one of the key themes in the Fund.
4

We also like Asian telecoms companies and currently own
Australian, Singapore, Malaysian and Thai operators. These
offer us attractive exposure to growing economies and
positive demographic trends, and also give the Fund
exposure to the early stages of mobile adoption, 3G
adoption and data consumption. In the US and Europe, the
telecoms industry is very competitive; rates are being cut,
and the sector is highly regulated. In Asia, however, we’re
getting in at an early stage of the industry’s development,
and so we’re getting growth – and a lot of these companies
are paying very good dividends.
DEFENSIVE GROWTH - Another theme in our portfolio is
defensive growth. Defensive growth was not too badly
beaten up last year so we see good value.
We invest in tobacco and consumer staples, including food
companies such as Nestlé and Unilever. We also favour
large pharmaceutical firms like Roche, Merck and
GlaxoSmithKline. These companies have had a difficult four
or five years, as patent expiries have come through, but they
all have attractive pipelines, two to three years out, which
have significant potential to drive earnings and dividend
increases.
US ENERGY REVOLUTION - We are very positive on the
US energy revolution, as we have been for the last four or
five years. We see huge, long-term cost advantages in US
shale gas. In the US, companies are paying $4 or $5 per
million British thermal units for their natural gas; in Europe,
firms are paying $10 or $12; in Asia, they’re paying
$15+. That’s a huge cost advantage, particularly for
chemical companies and refiners. We also own pipeline
companies – the infrastructure – a long term theme.
DIVERSIFIED FINANCIALS - are another portfolio theme.
Blackstone was a standout performer for us last year and
we feel that it has very strong potential for 2014.
We own a couple of private-equity firms and a hedge-fund
operator. Strong contributors to performance last year -
What we’re looking for here are companies in
advantageous niches. We see upside from looking at
banks’ struggles as regulators pressurise them into selling
their assets and reducing risk. As banks take this risk off their
balance sheets, who is taking on this risk? Private-equity firms
continue to perform extremely well, as they start to realise
profits on the investments they made in the depths of the
recession. Blackstone has taken the Hilton chain public,
while Merlin has floated Madame Tussauds and is looking
to do the same with the London Eye.
We remain positive on global dividend-paying stocks.
Global dividend stocks provide not only a compelling source
of income via yield but also the opportunity for valuation
expansion, driven in part by growth. In our view, there is not
better combination of return drivers than the one available
from global dividend equities.
This document was prepared from the views of Stephen Thornber, Portfolio Manager for the Threadneedle Global Equity Income
Fund the underlying fund for the Threadneedle Global Equity Income Fund (Unhedged).
6
5

Certitude Global Investments Limited ABN 25 082 852 364, AFSL 246747 (Certitude) is the issuer of units in the Threadneedle Global Equity Income Fund (Unhedged) ARSN 161 086 497 (the
Fund). Certitude is the responsible entity of the Fund and has selected the Threadneedle Global Equity Income Fund (the Threadneedle Fund) as the underlying fund. The investment
management of the Threadneedle Fund is provided by Threadneedle Asset Management Limited (Threadneedle). The investment performance of the Fund may not necessarily reflect the
performance of the Threadneedle Fund. Every effort has been made to verify the accuracy of the detail contained within this report. To the extent permitted by law, no liability is accepted
for any loss or damage as a result of any reliance on this information. The information contained in this document is not personal financial product advice, it does not constitute an
investment offer and has been prepared without taking into account the objectives, financial situation or needs of any particular person. All investments carry risk. Before you make an
investment decision you should consider, with the help of a qualified professional, whether to acquire, or retain units in the Fund. You can obtain a copy of the Product Disclosure
Statement (PDS) for the Fund at www.certitudeglobal.com.au/pds or by contacting Certitude on 1300 30 90 92. Past performance and asset allocation is not indicative of future
performance or asset allocation. Neither Certitude or any of its officers, employees, representatives or affiliates guarantee the repayment of capital, payment of income or the Fund’s
performance. Source: Threadneedle.
Name Region Contact telephone Mobile
Hector Ortiz National +61 (0)7 3218 6212 +61 (0)488 585 534
Paul Burbidge New Zealand +61 (0)7 3218 6287 +61 (0)409 723 990
Michael Akele NSW and ACT +61 (0)2 8302 3326 +61 (0)401 994 973
Jennifer Savedra Victoria and WA +61 (0)3 9225 5036 +61 (0)429 038 946
Geoff Koudelka Victoria, SA and TAS +61 (0)3 9225 5035 +61 (0)417 309 844
Paul Burbidge Queensland +61 (0)7 3218 6287 +61 (0)409 723 990
6

CERTITUDE BRINGS THE WORLD TO YOU
Threadneedle Investments forms part of the Ameriprise
Financial Group and is one of Europe’s most successful
asset managers. Threadneedle’s ideas are shared
across a single investment platform encouraging
debate across all asset classes and teams to ensure
a rigorous examination of economies, markets and
securities. Threadneedle is the third largest UK based
retail asset manager with US$126.6 billion*
assets
under management. Certitude has partnered with
Threadneedle Investments to provide Australian and
New Zealand investors with exclusive access to their
investment capabilities and global reach.
*
Source: Threadneedle, 30 June 2013
7

THREADNEEDLE INVESTMENTS
Highlights
 Mark Burgess (CIO) – Economic and market commentary
 Stephen Thornber (Portfolio Manager) – Ten Reasons for Global Equity Income
 Martin Harvey – Is Europe heading for Japanese-style deflation?
 Threadneedle – Investment Themes Summary
8

Investment strategy
May 2014
T16531 Issued May 2014 | Valid to end August 2014
Mark Burgess
Chief Investment Officer
Economic and market commentary
Global equity markets were largely unchanged in April, although this masked a fairly wide dispersion in
returns at the sector level. In early April, for example, technology stocks came under pressure and
triggered a general slide in equities due to fears that valuations were overstretched. Tensions between
Russia and the West also undermined investor sentiment. However, equity markets subsequently rallied
strongly on the back of encouraging US data and some easing of geopolitical tensions before some
disappointing earnings releases in the US, a deterioration in the Ukraine crisis, and fresh concerns over
the economic outlook in China weighed on risk assets in the final days of the month.
Treasury yields fell with the 10-year benchmark yield ending April at 2.66%, compared with the 2.72%
level seen at the end of March. At the end of the month, and as expected, the Federal Reserve continued
to reduce its monthly bond buying by US$10bn to US$45bn. The central bank said that growth in
economic activity had picked up recently, having slowed sharply during the winter. The Federal Reserve
also repeated its ambition of keeping interest rates at very low levels saying it would maintain interest
rates "below levels the committee views as normal in the longer run" even after the US economy has
improved enough to hit target levels of unemployment and inflation.
In the eurozone, Portugal returned to the bond market for the first time in three years, holding a
successful auction of €750m. The auction was three times oversubscribed and 10-year government debt
yields fell sharply to an eight-year low of 3.58%. Greece also returned to the bond market for the first time
since 2010. It sold €3bn of five-year bonds at a yield of 4.95% and said the issue was eight times
oversubscribed. At the end of the month, the yield on the Portuguese 10-year bond had fallen to 3.64%,
while that of the Greek equivalent was down to 6.64%. Eurozone bonds in general gained over the month
on speculation that concerns over deflation could cause the ECB to adopt new stimulus measures.
The J.P.Morgan EMBI+ Index (on a total-return basis) delivered a positive return as emerging market
bonds continued to recover. Russia proved an exception, however, with tensions between the West and
Moscow over the Ukrainian crisis hurting investor confidence in the country’s bonds. Moreover, the credit
rating agency Standard & Poor's cut Russia to BBB- with a negative outlook, placing it on the brink of
junk status. Meanwhile, the MSCI Emerging Markets Equity Index (total return, local currency) was
largely unchanged over the month.
We made no changes to our investment strategy over the month. We remain overweight equities as
valuations are largely reasonable, although less compelling than was once the case. We also remain
underweight Asian equities on concerns over China, while we are overweight Japan as valuations are
attractive versus developed world peers. Although we remain overweight equities, it would be fair to say
we are less optimistic than we have been, although the recent pick-up in M&A activity in areas such as
pharmaceuticals should prove supportive.
Within fixed income, core yields are going to grind higher, and there is much less value in credit given
how far spreads have tightened. Only emerging market debt appears to offer any real value, but given the
risks in terms of China, geopolitics and the macroeconomy, we are wary of increasing our weighting at
present. The good news is that the current environment is likely to continue to provide opportunities for
stock pickers, which we should be able to exploit.
9

Investment strategy | May 2014
Important information: For use by investment professionals only (not to be passed on to any third party). Past performance is not a guide to future performance. The
value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not
get back the amount invested. The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management
activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject
to change without notice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any
specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited (“TAML”). Registered in England and Wales,
No. 573204. Registered Office: 60 St Mary Axe, London EC3A 8JQ. Authorised and regulated in the UK by the Financial Conduct Authority. TAML has a cross-border licence
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the Threadneedle group of companies. www.threadneedle.com
10

Viewpoint
Global Equity Income – May 2014
Stephen Thornber
Portfolio Manager
Ten reasons for Global Equity Income
1) Dividends act as a signal of a company’s investment quality
Dividends are quite simply a distribution of profit by well-established businesses,
which are able to generate cash in excess of capital spending and investment
needs. They provide a clear sign that a company has a good business model, and
that management is dedicated to shareholder returns. Moreover, dividends are a
continuing commitment, and they thus highlight the management’s confidence in
the future of the company. Dividend stocks are also more reliable and are likely to
prove better long-term investments than growth stocks, which can deliver
spectacular gains but also big disappointments.
2) Dividends lower agency costs, and improve capital allocation
Regular dividends reduce corporate cash balances and thereby lessen the
likelihood of management squandering shareholder funds through pet projects or
ill-conceived M&A deals. They promote the efficient use of capital and the
prioritisation of investment into the most attractive projects. This has the benefit of
setting a steady long-term growth culture, and reducing business risk.
3) Income strategies stand up on a total return basis
Income strategies have a proven record of outperforming other approaches over
the long term. Moreover, analysis covering the past 20 years (figure 2), shows that
not only have dividend stocks outperformed, the higher the yield the stronger the
performance. Thus, the evidence suggests that the investment quality and
disciplined capital allocation that characterises these stocks has translated into
superior total returns.
Figure 1: Dividend-paying stocks outperform over the long term
Source: CLSA, FactSet Alpha Tester as at 31 December 2013.
Note: Backtest based on MSCI universe with more than 3 analyst coverage. MSCI weighted US-dollar total return (monthly rebalancing).
Cumulative performance since 1995
0
200
400
600
800
1000
1200
Dec 94 Dec 96 Dec 98 Dec 00 Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12
Index
First quintile dividend yield Second quintile dividend yield MSCI AC World
11

Viewpoint – Global Equity Income
4) Equity income investors take a long-term perspective
Dividend-paying companies are regarded as dull. Moreover, since news headlines and market participants favour
‘what is hot’, the market often ignores the positive characteristics of dividend-paying companies in favour of higher
risk/reward opportunities. Income investors also tend to avoid the latest investment fads. Consequently, price
anomalies can occur that dividend investors can exploit to generate superior performance.
5) Dividends are a significant component of total returns
Shifts in market sentiment, which affect valuations, can have a significant upon impact short-term performance. But
valuations tend to be mean reverting. Consequently, earnings growth is the most important influence over total
returns over the long term, with dividends and their reinvestment proving very significant. By targeting high dividend
stocks, reliance on uncertain earnings growth is reduced.
Figure 2: Contribution to annualised total return since 1970
Source: Source: MSCI, Factset, CLSA Asia-Pacific Markets March 2013. MSCI total return and price return index are used. Currency effects are ignored.
6) Income strategies can deliver a high income stream and protection against inflation
We have lived through one of the largest monetary policy experiments of the last 300 years – Quantitative Easing.
Whilst its longer-term implications are difficult to predict, QE is a powerful inflationary force. Although economies are
not currently operating near full capacity, we would expect inflation to increase should economic growth continue to
improve. For investors concerned with preserving purchasing power, even modest dividend growth of 5% per year
offers excellent protection – and we believe there are many attractive companies that can grow dividends by at least
5% over the next few years.
Figure 3: Yield choices available to investors
Source: Bloomberg as at 31 December 2013. Equity dividend yields are consensus FY14. Expected medium-term dividend growth of a representative portfolio.
3.0 3.0
1.9
0.7
4.1
4.8
5.6
4.6
4.3
3.5 3.7
4.2
3.4
4.5
5.1
5.5 5.3 5.3
5.8
4.7
6.6
4.8 4.7
0
1
2
3
4
5
6
7
8
9
10
US
UK
Germany
Japan
Mexico
Brazil
Indonesia
Russia
Vodafone
GlaxoSmithKline
TotalS.A.
Blackstone
AT&T
Vodafone
GlaxoSmithKline
TotalS.A.
Blackstone
AT&T
BOCHongKong
DiGi.com
RadiantElec.
NagaCorp
ValidSolucoes
%
Equities (FY14)Investment Grade (10yr)Government Debt (10yr) Emerging Market Debt (USD 10yr)
Zero income growth
5-10% annual income growth1
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
UK USA France Germany Australia Canada Japan
Multiple expansion Earnings growth Dividends (reinvested) Total return
12

7) There are no signs of an income bubble
After several years of good stock performance, and with bond yields at historically low levels, one could be forgiven
for thinking that dividend stocks must have reached expensive levels. However, when we look at the valuations of
high-dividend paying companies globally, they are still trading at a discount to the broader market.
Figure 4: Valuations of high dividend companies
Source: MSCI index data as at 31 March 2014.
8) An active approach to divided investing has delivered superior returns
While we believe that companies with high-dividend yields offer an attractive opportunity set we certainly do not think
every dividend stock is a good investment. By focusing on companies with robust financial positions and good growth
prospects we avoid false bargains or value traps, when an apparently high dividend may simply be a warning of
trouble ahead, including the possibility of an impending cut in the dividend.
Figure 5: An active approach has been rewarded while passive investment has struggled in recent years
Source: Threadneedle Investments, CLSA, FactSet Alpha Tester as at 31 December 2013.
Note: Backtest based on MSCI universe with more than 3 analyst coverage. MSCI weighted US-dollar total return with monthly rebalancing.
12.4
9.7
11.1
14.7
13.9
11.8
13.3
15.7
Europe inc UK Asia Pacific AC ex Japan Japan USA
High dividend yield index Regular Index
Forward PE ratios
Cumulative performance since fund launch
20
40
60
80
100
120
140
Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13
Index
Global Equity Income Fund First quintile dividend yield MSCI AC World MSCI High Dividend
13

9) Dividend payouts are sustainable because corporates are in good health
In contrast to governments, corporates have done a good job of repairing their balance sheets in recent years,
although the experience of the 2008 financial crisis means that many corporates remain cautious even now, and
reluctant to commit to large-scale capital expenditure (we expect this to change as economic growth slowly returns).
Meanwhile, companies can use their free cash in a multitude of shareholder-friendly ways, such as dividend
increases, special dividends and share buybacks. We like ordinary dividend growth as long as companies aren’t
‘playing to the crowds’ (i.e. the dividend has to be comfortable to be sustainable). Special dividends act like a release
valve and are preferable to mechanical share buybacks when equity valuations in general have re-rated.
Perhaps the most crucial aspect of the relatively good health of the corporate sector is that dividend payout ratios are
sustainable because cash generation has been so good. We do not expect to see any major challenges to this given
that the majority of company managements remain relatively cautious in terms of their capex and spending plans.
10) Global dividend investors have a wider opportunity set
By adopting a global approach, investors can gain exposure to underlying economies, which may be growing much
faster than their domestic economy, and to a different mix of sectors and themes. In addition, selecting companies on
a global basis provides a much wider set of opportunities from which to select the most attractive ideas, and enables
the construction of a much more efficiently diversified portfolio.
While a regional investor has a limited number of companies to invest in, a global dividend investor has a good
choice of companies in all sectors.
Figure 6: A wide opportunity set of high dividend stocks
Source: Bloomberg as at 31 December 2013. Market cap measured in USD.
World
All companies, Market Cap > $1 billion and dividend yield > 4% 1224
Sector breakdown:
Financials 460
Utilities 137
Industrials 133
Energy 123
Consumer discretionary 87
Telecommunications 81
Materials 78
Consumer staples 77
Technology 37
Healthcare 11
14

Important information: For use by investment professionals only (not to be passed on to any third party). Past performance is not a
guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected
by exchange rate fluctuations. This means that an investor may not get back the amount invested. The research and analysis included in this
document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to
publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change
without notice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The
mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited
(“TAML”). Registered in England and Wales, No. 573204. Registered Office: 60 St Mary Axe, London EC3A 8JQ. Authorised and regulated in the
UK by the Financial Conduct Authority. TAML has a cross-border licence from the Korean Financial Services Commission for Discretionary
Investment Management Business. Issued in Australia by Threadneedle International Limited (“TINTL”) (ARBN 133 982 055). To the extent that
this document contains financial product advice, that advice is provided by TINTL. TINTL is exempt from the requirement to hold an Australian
financial services licence under the Corporations Act in respect of the financial services it provides. TINTL is regulated by the Financial Conduct
Authority under UK laws, which differ from Australian laws. Issued in Hong Kong by Threadneedle Portfolio Services Hong Kong Limited 天利投
資管理香港有限公司 (“TPSHKL”). Registered Office: Unit 3004, Two Exchange Square, 8 Connaught Place Hong Kong. Registered in Hong
Kong under the Companies Ordinance (Chapter 32), No. 1173058. Authorised and regulated in Hong Kong by the Securities and Futures
Commission. Authorisation does not imply official approval or recommendation. The contents of this document have not been reviewed by any
regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of
this document you should obtain independent professional advice. This document is distributed by Threadneedle Portfolio Services Hong Kong
Limited Dubai branch, which is regulated by the Dubai Financial Services Authority (“DFSA”). The information in this document is not intended as
financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a
Professional Client under the DFSA Rules. Issued in Singapore by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07
Winsland House 1, Singapore 239519. License Number: CMS100182-2. This document is being issued in Singapore to and is directed only at
persons who are either institutional investors or accredited investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) in
Singapore. This document must not be relied or acted upon by any persons in Singapore other than an institutional or accredited investor. Issued
in the US by Threadneedle International Limited (“TINTL”), a UK-based investment management firm that provides financial services to individual
and institutional investors. TINTL is registered as an investment adviser with the U.S. Securities and Exchange Commission and is authorised and
regulated in the conduct of its investment business in the UK by the UK Financial Conduct Authority.Threadneedle Investments is a brand name
and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies.
www.threadneedle.com.
15

Perspectives
T16363 Issued April 2014| Valid to end July 2014
Is Europe heading for Japanese-style deflation?
In this White Paper Martin Harvey says that the parallels between the current situation in Europe and Japan’s
deflationary experience are sufficient for policymakers and indeed investors to be concerned. Martin
believes that although there are many differences that should ensure that the eurozone does not follow
Japan‘s fate, policymakers will need to act forcefully if downside risks intensify.
 There are many parallels between the euro area today and Japan in the 1990s
 The euro area appears to be on track to avert deflation in the short term
 However, many euro countries are ‘one crisis away from deflation’
 The European Central Bank (ECB) claims to be ahead of the game, but policy needs to be more pro-active
 Longer term, demographic considerations and high debt levels will pose problems both in the euro area and
elsewhere
The recent decline of headline and core inflation measures across the eurozone has heightened fears of a spiral into
deflation akin to that which has blighted the Japanese economy for the past 20 years. Indeed, the ‘Japanification’
question is now a regular fixture at the monthly ECB press conference, leading European Central Bank president
Mario Draghi to point out the various differences between the two situations. In this note, we will assess these
differences as well as the parallels in order to gauge the extent of the risk and potential implications for markets.
The Japanese experience
In order to find the ultimate source of the Japanese deflation spiral, one must go back to the asset bubble of the
1980s, which peaked at the end of 1989. Following a fall of more than 50% in the stock market over the next two
years, stock prices remained subdued for the remainder of the decade. Land prices (figure 1) fell in value from 1992
onwards, and have been in the doldrums ever since.
The real economy did not feel the most severe effects of the burst of the asset bubble immediately, despite a swift
collapse in money supply growth. Indeed, nominal GDP continued to grow until 1997, unemployment did not exceed
3% until 1995, and CPI ex-food and energy remained above zero until September 1998 (figure 2), before remaining
below or close to zero until 2013 when the Bank of Japan began aggressive quantitative easing (QE).
Figure 1: Japanese land prices have not
recovered from the collapse
Source: Reuters EcoWin, December 2013.
Figure 2: Inflation in Japan remained negative
from 1998 to 2013
Source: Bloomberg, February 2014.
There are a number of reasons why this process was something of a slow death for the Japanese economy, and
many of these reasons have been highlighted as differences with the current situation in the eurozone. The key
question for the ECB to answer is whether the differences are sufficient to dismiss the possibility of deflation, as the
Japanese experience proves that once the process is underway, it is difficult to reverse.
Progress report for Europe
In contrast to Japan, Europe’s asset price crash was part of an international phenomenon. Although there were
property bubbles in some euro area countries, such as Spain and Ireland, this was generally not a concern. Initially, it
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
80 83 86 89 92 95 98 01 04 07 10 13
Japan land price, %yr
-4.0
-2.0
0.0
2.0
4.0
6.0
90 93 96 99 02 05 08 11 14
Japan CPI % yoy Japan CPI ex-food and energy % yoy
16

Perspectives | April 2014
T16363 Issued April 2014 | Valid to end July 2014
was Europe’s exposure to global trade that caused a steep drop in economic activity in the wake of the Lehman
collapse, while the onset of the sovereign debt crisis later played a part.
The scale of the initial drop in the Eurostoxx index was similar to that seen in Japan in the early 1990s (figure 3).
Even with the recent rebound stock prices are currently around 30% below the peak of 2007. It is fair to use
December 2007 as the starting point for the comparison, as this marks the moment when spare capacity began to
build in the euro area economy.
On the surface, it appears that the Europeans are adopting correct policies as the Eurostoxx index has surged over
the past year, and broken above the levels reached prior to the debt crisis. Some regional indices, such as the
German DAX, have made new highs since 2008. This mirrors the divergence in economic fortunes across the
eurozone, where so-called peripheral countries such as Greece remain in significant economic difficulty while
Germany is in good shape. Of course, certain countries will have a higher deflation risk than others, adding another
layer of complexity to the situation. The ECB will be primarily concerned with the average situation across the euro
area.
Figure 3: Relative experience of equity prices
from the peak of the bubble
Source: Bloomberg, March 2014. Note: t represents months before and after peak.
Figure 4: Relative experience of nominal GDP
from the peak of the cycle
Source: Bloomberg, December 2013. Note t represents years before and after peak.
Comparing the macroeconomic experience, Europe’s economic correction was more abrupt than Japan’s. The level
of nominal GDP has moved slowly higher since 2009 (see figure 4), while the Japanese economy continued to
expand at the beginning of the nineties. Furthermore, unemployment increased much more quickly in the euro area
than in Japan (figure 5).
Figure 5: Relative experience of unemployment
Source: Bloomberg, February 2014. Note t represents months before and after peak.
Figure 6: Relative experience of core inflation
Source: Bloomberg, March 2014. Note t represents months before and after peak.
The international nature of the 2008 crisis and subsequent slow global recovery goes some way to explaining the
abruptness of Europe’s decline. Cultural factors also contributed to the gradual pace of Japan’s economic demise.
Specifically, within the banking system, bad loans were not realised in a timely fashion in Japan and were simply
rolled over, leading to the build-up of so-called ‘zombie companies’ which continued to operate unprofitably.
Consequently, as banks were not realising losses in a timely fashion, the subsequent recapitalisation that should
have occurred was absent. Although this meant that unemployment did not rise as quickly as it might have done if
more companies were allowed to fail, it also reduced the probability of new companies being set up, new loans being
granted, and new jobs being created.
20
70
120
t-50 t-25 t-0 t+23 t+48 t+73 t+98
Eurostoxx 50, 2002 - present (Dec07=100)
Nikkei 225, 1985-2000 (Dec 1989=100)
60
80
100
120
140
t-10 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12 t+14
Eurozone annual nominal GDP (2007=100)
Japan Annual Nominal GDP (1989=100)
6
7
8
9
10
11
12
13
0
1
2
3
4
5
6
t-60 t-40 t-20 t t+20 t+40 t+60 t+80 t+100 t+120
Japan unemployment rate (Dec1989=t)
Eurozone unemployment rate,RHS (Dec2007=t)
-1.0
0.0
1.0
2.0
3.0
4.0
t-24 t-12 t t+12 t+24 t+36 t+48 t+60 t+72 t+84 t+96 t+108t+120
Eurozone Core CPI, (t=Dec2007)
Japan Core CPI (t=Dec1989)
17

In Europe, there have been repeated attempts to avoid the same situation, via stress tests and forced
recapitalisations, although the efficacy of such programmes has sometimes been questionable. In the crisis countries,
“bad banks” have been created to remove bad loans from bank balance sheets, and in the most part this has proved
successful. Indeed, the formulation of the banking union, and the subsequent asset quality review (AQR), aim to
solidify the situation further. Given that the European banking sector remains large relative to the economy, there is
probably more work to do on this front.
It is possible that such actions have had a detrimental effect on lending growth, as banks have been more concerned
with getting their house in order. Indeed, the headline data shows that private sector lending continues to contract
across the eurozone (figure 7). A recovery in this metric will play a vital role in averting a situation similar to that
experienced in Japan, where credit growth was non-existent or in contraction from 1995 to 2013 (figure 8). This will
be one of the key data points on the ECB’s radar, indeed it may even become a policy target.
Figure 7: Japanese credit growth remained
positive until the late 1990s
Source: ECB, BoJ, Japanese cabinet office to 2005, December 2005.
Figure 8: Euro area credit growth has been in
contraction since 2012
Source: ECB, Bloomberg, February 2014.
The Asian crisis of the late 1990s increased the stress in the Japanese financial system and led to corporate failures
and a surge in unemployment from an already vulnerable position. This, alongside the ill-fated increase in the
consumption tax rate, was the final straw that sparked the descent into 15 years of deflation. Despite the current
relative economic optimism in Europe, given the euro area’s current weak position an exogenous shock could push
the economy into a similar deflationary abyss.
One could argue that the sovereign debt crisis has already provided that shock and the recent trend in inflation would
support this theory, particularly in stressed countries such as Greece. The speed and durability of the nascent
recovery should help the situation in the coming quarters, but any shocks to growth would be very damaging,
especially considering the additional debt burdened upon Europe since the beginning of the crisis. The potential
consequences of slowing growth in China should also be considered, as this development has the potential to exert
an added disinflationary impulse.
Policy response
Monetary policy: When he is quizzed about the similarities between the current eurozone situation and Japan’s
lost decade, Mario Draghi is quick to point out that the ECB reacted much more quickly than the Bank of Japan (BoJ)
in the early 1990s. Given that inflation was running higher in Japan at that time, the policy rate was not cut to below
1% until 1995 when headline CPI was first flirting with zero.
As figure 9 shows, the policy rate remained higher than CPI throughout the 1990s, leaving real rates too high during
the period. Conversely, on this measure at least, real rates have remained negative in the euro area since 2009
(figure 10). It is however, now getting too close for comfort, and the ECB will be keen to avoid a situation where CPI
is entrenched below the level of interest rates, the so-called liquidity trap where policy is rendered impotent.
This analysis does not account for the transmission mechanism to the real economy, which is more challenging in
Europe due to the lack of fiscal union. Undoubtedly, real rates in the periphery have remained too high in recent
years, although the ECB is hoping that the recent improvement in financial markets and in economic sentiment
should help to ease this situation.
-10
-5
0
5
10
15
20
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
AnnualPercentChange(%)
Japan credit to the private sector,% yoy
-4
-2
0
2
4
6
8
10
12
14
05 06 07 08 09 10 11 12 13 14
Euro Area lending to the private sector, %yoy
18

Figure 9: Japanese interest rates remained above
the inflation rate throughout the 1990s
Source: Bloomberg to 2004, December 2003.
Figure 10: Euro area interest rates have been
below inflation until now
Source: Bloomberg, March 2014.
QE was eventually introduced in Japan in 2001 and was judged in hindsight as half-hearted due to its limited impact.
Given that deflation had been embedded in the system for many years, it took an extremely aggressive QE policy
from the BoJ in 2013 to give the Japanese economy a chance of redemption. The ECB stands ready to ramp up
policy initiatives if inflation undershoots expectations from here, and early reports suggest that it is prepared to be
aggressive. However, the ECB faces many institutional impediments that could hinder the process. It is likely that any
QE attempt will be aimed towards the aforementioned transmission mechanism, in order to target policy in the places
where it is most required. The preferred option is private asset purchases, but the problems of ‘one-size-fits-all’
monetary policy will remain a challenge. Striking a balance where policy is accommodative enough for the periphery
and not too accommodative for Germany is a very tough proposition. The ECB has some way to go if it plans to rival
the aggressive policies of other nations since 2008 (figure 13). To rival the scope of the UK QE policy for example,
up to €1trn will be required.
Figure 13: Central banks’ balance sheets have
been inflated by QE programmes
Source: Reuters EcoWin, Bloomberg, February 2014.
Figure 14: Relative experience of fiscal balances
Source: Bloomberg, IMF, December 2014. Note t represents years before and after peak.
-2
0
2
4
6
8
90 91 92 93 94 95 96 97 98 99 00 01 02 03
CPI Policy rate
-1
0
1
2
3
4
5
07 08 09 10 11 12 13
%
Policy rate Headline CPI
50
100
150
200
250
300
350
400
450
500
08 09 10 11 12 13 14
ECB Fed BoE
BoJ SNB
Index (Jan 08 = 100) Central Bank Assets
-10
-5
0
5
t-9 t-7 t-5 t-3 t-1 t+1 t+3 t+5 t+7 t+9 t+11 t+13
Japan govt balance, % GDP
Euro Area govt balance, %GDP
19

Fiscal policy: Although monetary policy was arguably too tight in Japan, fiscal policy was being utilised to boost
demand throughout the 1990s (figure 14). Over many years of nominal GDP stagnation, this drove the government
debt stock to unsustainable levels, and although some commentators claim that this was a necessary policy, the full
consequences remain to be borne. This is a classic case of crowding out, whereby bank balance sheets are devoted
increasingly to government debt at the expense of the real economy, and the additional government spending
eventually becomes a negative influence on growth.
In Europe, by contrast, a strong effort has been made to limit the build-up of government debt following the early
years of the crisis. However, this determination has ebbed of late, and the sharp drop in economic activity caused by
aggressive fiscal consolidation has meant that debt ratios have risen sharply in some countries. European
policymakers should continue to prioritise fiscal consolidation to avoid a situation where deficits are maintained but
with no discernable positive impact on the economy. Southern European banks have been investing heavily into
government debt in recent years (figure 16), which is reminiscent of the Japanese experience. As yields decline, the
incentive for this trade should be reduced, but this will continue to be a key trend to monitor.
Comparing inflation rates to other developed markets
 Given the influence of global factors such as food and energy prices, inflation rates have been
subsiding across the major developed markets, including the US and UK, where economic recovery
has been uninterrupted for some time.
 The ECB has highlighted these similarities to justify inaction.
 Core CPI in Europe has undershot the US and UK in the past couple of years as growth has
diverged.
 Curiously, the IMF’s estimate of the output gap is currently larger in the US than in the eurozone,
although price trends suggest otherwise.
 High unemployment makes deflation a more legitimate concern in the euro area
Figure 11: Core CPI in the US, the UK and the
Eurozone
Figure 12: The output gap in the US, the UK
and the eurozone
Source: Bloomberg February 2014. Source: Bloomberg, IMF, December 2013
20

Figure15: Bank balance sheets are shrinking in
Europe
Source: Reuters EcoWin, February 2014.
Figure 16: Banks have increased holdings of
government bonds
Source: Reuters EcoWin, February 2014.
Structural reform: European policymakers are right to emphasise supply-side reforms as vital to improving the
long-run growth potential of the economy. Indeed, some of the disinflationary pressure already evident in countries
such as Spain is a direct result of these policies bringing down cost pressures in an attempt to boost productivity.
One must bear in mind however that the growth benefits of such policies are only felt in the long term and are in
many cases relatively small. In an ideal world, inflation would pick up in Germany, allowing Spain to continue to gain
competitiveness without outright deflation. This re-iterates the challenge of a ‘one-size-fits-all’ monetary policy. A key
component that will define the success of Japan’s new push to leave deflation is structural reform, the so-called third
pillar of Abenomics. Although progress on this front is much slower than monetary expansion, the determination is
there to move forward. Euro area policymakers have been emphasising the importance of supply-side policies
throughout the crisis and will continue to try to improve the overall growth potential of the economy. Once the added
benefit of monetary stimulus ceases, this is what will matter.
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
10
15
20
25
30
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
EUR trn (LHS) % of nominal GDP (RHS)
0
2
4
6
8
10
12
00 02 04 06 08 10 12 14
Spain Italy
% of bank assets Bank holdings of government
bonds
Impact of low inflation on government debt
 Peripheral governments, particularly in Spain, are specifically targeting so-called ‘good deflation’ to
improve competitiveness.
 How do you separate good deflation from bad?
 The scenarios below assume a swift move to fiscal surplus and solid GDP growth, alongside an
average interest cost of 3%.
 The figures show how difficult it becomes to stabilise debt in a deflationary scenario.
 Against this backdrop in Japan, domestic banks loaded their balance sheets with government debt, a
process that has already begun in Spain and Italy.
 This ‘crowding out’ added to the drain of funds from the private sector.
Figure 17: Italy Government debt/GDP scenarios Figure 18: Spain government debt/GDP scenarios
Source: Threadneedle, IMF December 2013. Source: Threadneedle, IMF December 2013.
21

The demographic consideration: The lack of population growth contributed in no small way to the demise of
Japan’s growth potential and consequent stagnation. Figure 19 shows a striking correlation between the growth in
the labour force and core CPI. Europe faces some of the same problems as Japan, in particular in Germany where
the working age population peaked in 1998. France shows up favourably on this scale due to a high birth rate, but
the rest of the euro area is more in line with Germany (figure 20). As populations subside, spare capacity naturally
rises as aggregate demand is reduced, leaving a heavy deflationary influence.
Projections for the growth of the labour force remain positive across the major eurozone countries in the coming
years, so this is not an obvious concern, but should remain on the radar. Indeed, this is a concern for all developed
nations over the coming years, as an ever-smaller percentage of the population will be expected to provide for the
remainder.
The challenge for governments is enacting policies that encourage more of the working age population to work,
which is something that has been a struggle for Japan and which Abenomics is attempting to address. Germany has
been much more successful in this area and the focus on structural reforms in the euro area should be generally
positive. However, the headwind that this trend produces in the medium term should not be ignored.
Figure 19: Japanese population decline
contributed to deflation
Source Bloomberg, OECD, December 2013.
Figure 20: Japanese population declining much
more quickly than in Europe
Source: Barclays, UN, January 2014.
What the market is saying
The recent surge in equity prices suggests that investors are confident that the euro area economy, with a bit of help
from the ECB, can avert deflation as the debt crisis of 2011/12 becomes a distant memory. However, with inflation at
low levels, equity investors will remain sensitive to any exogenous shocks that could put further pressure on the
outlook for inflation and growth.
German bond yields have remained low despite aggressive sell-offs in the other major developed bond markets over
the past year. Partly this is justified by the divergence in policy stance, with the US and UK moving towards rate
hikes and the ECB still threatening rate cuts. However, the extreme suppression of the term premium suggests that
some expectation of persistent low inflation is embedded, which again contrasts with the US and UK where recent
low inflation prints are brushed off.
Compared with the experience in Japan (figure 22), where yields did not fall below 2% until 1997, risk-free yields are
very low in Europe, but this has been the case for much of the last few years. If low inflation persists, it is still hard to
argue that bunds offer much capital appreciation potential, although they may be attractive on a relative basis versus
other assets. If the ECB can convince market participants that Europe is more like the US than Japan, then yields
could rise significantly, but this seems a distant prospect at present.
82
86
90
94
98
102
-20 -16 -12 -8 -4 0 4 8 12 16 20
France 2077 UK 2071 EA ex Ger&Fra 2011
Germany 1998 Japan 1995
Index= 100 at peak year
(next to country name)
Years from peak
Working age population (14-65)
22

Figure 21: European equity markets, regional
indices rebased to 2007
Source Bloomberg, March 2014.
Figure 22: Relative experience of bond yields
Source Bloomberg, March 2014 Note t represents months before and after peak.
One curiosity that inspired the ECB to step up its rhetoric and mention the possibility of QE is the strength of the euro.
There are a number of reasons why the euro has continued to strengthen in spite of the divergence in interest rates
mentioned above, most notably the return of investment capital and the continued retrenchment of the European
banking sector. There are some further parallels here with Japan, where years of currency strength undermined
attempts to break away from deflation, even though exports were noticeably harmed.
However, when putting the two situations in parallel, the euro’s move pales into insignificance. Indeed, the
appreciation over the past 12 months is in the region of 5%, compared with 15-20% gains in the yen in 1999 (figure
23).
Figure 23: Relative experience of trade-weighted
exchange rates from the peak of the cycle
Source Bloomberg, March 2014 Note t represents months before and after peak.
Summary
There are enough parallels between the current situation in Europe and Japan’s deflationary experience for
policymakers and indeed investors to be concerned. It seems however, that at this point, the euro area economy’s
fate is in the hands of those policymakers. Recent commentary suggests that the ECB, the only institution with
enough firepower to act aggressively, is wary of these risks and ready to react to further downside as and when it
emerges. Draghi has always been keen to warn investors not to question the ECB’s firepower, and until now they
have not. If downside risks do emerge in the coming months and quarters, the fight against deflation could prove to
be his toughest test yet.
20
40
60
80
100
120
140
03 05 07 09 11 13
Dax Cac IBEX FTSE MIB
80
100
120
140
160
180
t-36 t-12 t+12 t+36 t+60 t+84 t+108
Trade-weighted Euro, Dec 2007=100
Trade-weighted Yen, Dec1989=100
23

Important information: For use by investment professionals only (not to be passed on to any third party). Past performance is not a guide
to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by
exchange rate fluctuations. This means that an investor may not get back the amount invested. The research and analysis included in this
document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to
publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change
without notice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The
mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited
(“TAML”). Registered in England and Wales, No. 573204. Registered Office: 60 St Mary Axe, London EC3A 8JQ. Authorised and regulated in the
UK by the Financial Conduct Authority. TAML has a cross-border licence from the Korean Financial Services Commission for Discretionary
Investment Management Business. Issued in Australia by Threadneedle International Limited (“TINTL”) (ARBN 133 982 055). To the extent that
this document contains financial product advice, that advice is provided by TINTL. TINTL is exempt from the requirement to hold an Australian
financial services licence under the Corporations Act in respect of the financial services it provides. TINTL is regulated by the Financial Conduct
Authority under UK laws, which differ from Australian laws. Issued in Hong Kong by Threadneedle Portfolio Services Hong Kong Limited 天利投
資管理香港有限公司 (“TPSHKL”). Registered Office: Unit 3004, Two Exchange Square, 8 Connaught Place Hong Kong. Registered in Hong
Kong under the Companies Ordinance (Chapter 32), No. 1173058. Authorised and regulated in Hong Kong by the Securities and Futures
Commission. Authorisation does not imply official approval or recommendation. The contents of this document have not been reviewed by any
regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of
this document you should obtain independent professional advice. This document is distributed by Threadneedle Portfolio Services Hong Kong
Limited Dubai branch, which is regulated by the Dubai Financial Services Authority (“DFSA”). The information in this document is not intended as
financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a
Professional Client under the DFSA Rules. Issued in Singapore by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07
Winsland House 1, Singapore 239519. License Number: CMS100182-2. This document is being issued in Singapore to and is directed only at
persons who are either institutional investors or accredited investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) in
Singapore. This document must not be relied or acted upon by any persons in Singapore other than an institutional or accredited investor. Issued
in the US by Threadneedle International Limited (“TINTL”), a UK-based investment management firm that provides financial services to individual
and institutional investors. TINTL is registered as an investment adviser with the U.S. Securities and Exchange Commission and is authorised and
regulated in the conduct of its investment business in the UK by the UK Financial Conduct Authority.Threadneedle Investments is a brand name
and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies.
www.threadneedle.com
24

Investment themes
April 2014
Investment themes
Theme Thesis Investment conclusions
Income growth  Improving economic outlook and QE tapering
will increase focus on growth rather than yield
per se
 Growth in revenues and/or cash flow underpin
income growth as well as investment in
business to fuel future growth
 Tapering of QE will lead to rising bond yields
 Growing yields being paid by businesses
with stable earnings and cash flows will
remain in demand
 High yield alone may be a value trap
 Opportunities in dividend initiators or those
giving surplus cash back to shareholders
 Risks in bond proxies as yields rise
M&A activity  Corporates are in good financial health and
have the cash to do M&A
 Equity is no longer as cheaply valued as in
recent past so discrimination is vital
 Opportunities to add value through M&A to
supplement growth
 Beneficiaries of consolidation
 Improved operational and financial
management
 Opportunities to increase capacity without
building
 Low valuation of weak companies
Long term growth
from
“compounders”
 Challenging economic and market environment
favours ‘strong’ businesses with robust models
 The ability to re-invest cash flow at attractive
rates of return is is a key driver of value creation
 Favour high return on investment with
strong and stable cash flow
 Well-financed companies with strong
management will take share and create
value in the long term
Structural Growth
opportunities
 Even in a low growth world there are growth
areas
 Innovation creates growth opportunities (3D
printing?)
 Outsourcing growth will continue
 Health and well-being a growing issue
 Clean technology
 Opportunities in developing world
 US industrial renaissance
Growth from
economic
recovery
 Global recovery is underway
 Cyclical opportunities from improving activity
 Huge variations in activity even within regions
so focus required
 Tapering will present challenges
 Recovering housing market and domestic
consumption
 Growth opportunities in EM
 Risks in current account deficit parts of EM
 Financial sectors emerging from crisis
Emerging inflation
theme
 Rising labour costs in EM reducing competitive
advantage
 Risks of a tightening oil market or disruption to
supply
 Abundant liquidity everywhere distorting
behaviours and boosting asset prices
 Risk in bond proxies
 Pricing power is valuable, beware price
takers.
 Capacity tightness
 Real asset owners benefit
The views expressed above reflect our position as at 27 March 2014.
25

Investment themes | April 2014
Important information
For Investment Professionals use only, not to be relied upon by private investors. Past performance is not a guide to the future. The value of investments and any
income from them can go down as well as up.
This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment
advice or services. The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may
have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change
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26

Lighthouse is an innovative global absolute return
manager with a strong reputation in the marketplace.
At Lighthouse, they are dedicated to managing funds
of hedge funds with US$7.4 billion*
assets under
management. The Lighthouse investment process utilises
a proprietary managed account platform that provides
portfolio transparency, improved liquidity and robust
asset control. Certitude’s partnership with Lighthouse
Partners enables it to provide Australian and New
Zealand investor’s exclusive access to their capabilities
and unique management of investment risk.
*
Source: Lighthouse, 30 September 2013
27

LIGHTHOUSE PARTNERS
Quarterly outlook
 LHP believes that fundamentals have started to matter more in the current investing
environment.
 Macroeconomic concerns do exist which is driven by central banks that have the
largest influence over monetary conditions around the globe.
 LHP is excited about their emerging markets exposure.
 LHP remains bullish on the long-term opportunity set in China and elsewhere in Asia,
which they believe currently, lacks investor capital.
28

Past performance is not necessarily indicative of future results April 15, 2014
FIRST QUARTER, 2014 REVIEW
EXECUTIVE SUMMARY
In just the first three months of 2014, it feels as though we have already had more volatility-inducing global events than we
had in all of 2013. While concern about slowing growth in China was nothing new, the combination of this worry with
Russian-Ukrainian tensions, new leadership at the U.S. Federal Reserve and renewed emerging market concerns all conspired
to send global equities as measured by the MSCI World down 4.0% in January. Of course, some of that weakness may have
just been profit-taking after a strong 2013, but it is clear volatility increased. Equity markets staged a mild recovery to finish
positive for the quarter with the MSCI World +1.2% and the S&P 500 +1.8%.
As we commented in our last letter, fundamentals have started to matter more in the current investing environment – which is
a positive for us. Yet, the first quarter was a reminder that macroeconomic concerns exist, as demonstrated by the global
tensions described above and the fact that central banks remain the biggest drivers of monetary conditions around the globe.
As evidence of our view that fundamentals are driving a larger share of returns, the Lighthouse funds produced quarterly
results that were highly uncorrelated with broader markets. January was a particularly strong month for Lighthouse, with all
funds and strategies positive despite the market sell-off. Contributions in January were led by equities, with healthcare a
notable winner, as well as event-driven strategies and fixed income. Most market indices rebounded in February, and we
were again able to generate positive performance across all strategies. March saw significant market rotation and volatility
that challenged equity managers, leading to the give-back of some year-to-date gains. While March was negative overall for
the Lighthouse funds, our credit and fixed income strategies were both positive – as they were each month of the quarter.
Some of the key drivers of Lighthouse fund performance over the quarter by strategy:
 Equity strategies were the largest contributor. In a reversal of the fourth quarter of 2013, when Asia and Europe led
the way, the best performance for the quarter came from U.S. focused investments. Alpha generation in the U.S. was
strong across most sectors with healthcare, consumer and industrials among the standouts. Despite some volatility in
March, most equity managers finished the quarter in positive territory. The few negative performers were
predominantly focused on China and Japan, two markets that experienced meaningful losses in the quarter.
 Credit was a steady performer each month with gains largely driven by liquidations and event-driven distressed
situations. Despite the perceived risk in distressed investing, we have actually seen many of our credit investments
hold up better in the recent down markets as these positions tend to trade on their own merits and less on broader
perceptions of global growth or lack thereof.
 Relative value strategies were strongest in February, and most of our relative value managers were positive each
month of the quarter. Further, we saw broad participation across sub-strategies. While event-driven led the way, we
also saw positive attribution from capital structure arbitrage, convertible bond arbitrage and options, as these strategies
were able to monetize market volatility in a hedged manner.
 Fixed income had its best performance since the third quarter of 2012. Agency mortgage strategies were the largest
contributors, and we continue to increase our exposure to this sub-strategy. Gains were also recorded by non-agency
mortgage, CMBS and municipal strategies – although each of those sub-strategies is likely to remain underweight.
This underweight reflects the fact that, while we are finding some niche trading opportunities, our forward-looking
expectations for those asset classes are below average in the near-term.
 Global trading was positive – a notable accomplishment given that most managed futures indices and large CTAs have
suffered losses so far in 2014. Our focus in CTA and macro strategies is to create a portfolio that is not overly
dependent on strong trends in equities or bonds to generate returns. This has led us to overweight short-term managers
relative to long-term trend followers. This move has been a significant contributor to our outperformance year-to-date
relative to CTA indices.
29

SECOND QUARTER, 2014 OUTLOOK
Below are some of the investment themes we will be pursuing in the coming months:
 Global equity markets underperformed the S&P 500 in the first quarter, in what has become a common occurrence. In
fact, since January 1, 2010, global markets (as measured by the MSCI World) have managed barely half the return of
the S&P 500 (7.9% versus 15.4% annualized), and emerging markets have fared even worse (2.7% annualized for the
MSCI EM index). While there are many legitimate concerns about investing in emerging markets, correlations among
these markets are near an eight-year low, which we believe allows for prudent long/short investing. We remain
pleased with our emerging markets exposure and expect to selectively add on further signs of weakness.
 The largest emerging market of all – China (to the extent that the world’s second largest economy can still be
considered “emerging”) – was again in the spotlight as a crop of weak data frightened investors in March. China’s
stock market has been notoriously fickle since 2009 and, yet, it has been a strong source of alpha generation for our
funds. Recently, we have observed that valuations are a bit stretched in the few sectors that have performed well,
including internet, gaming and certain consumer sub-sectors. Our net exposure has already been reduced in some of
these names, and we are likely to make further reductions in areas where the upside has become more limited. Despite
this near-term move, we remain bullish on the long-term opportunity set in China and elsewhere in Asia, and we
continue to benefit from a lack of investor capital in the region.
 With respect to U.S. equities, part of the regime shift we experienced in March was a momentum reversal as equity
investors took profits in companies and sectors – largely growth-oriented – that had performed well over the past year.
With cautious optimism about 2014 GDP growth, we believe investors no longer feel compelled to overpay for growth
companies since they can ride the wave of a broader cyclical rebound. While March was not easy, we continue to
observe that sector specialists in the U.S. seem better-equipped to manage these transitions than generalists – not only
because we believe they know their companies better but also because they typically are running smaller assets and
can reposition their portfolios more adeptly.
 We admit that we were a bit surprised that interest rates declined as much as they did to start 2014, with the
benchmark 10-year U.S. Treasury note yield falling from 3.01% to 2.72% for the quarter. While we still expect rates
to rise over time, this only reinforces our long-standing view that making macroeconomic calls on the direction of
rates should not be our objective. We have long sought to manage our duration-sensitive strategies of credit, fixed
income and relative value to have an expected interest rate beta near zero. Even investments that we like in part
because they will do well as long-term rates rise must have other factors working in their favor. As an example, our
agency mortgage-related investments performed quite strongly in the first quarter, despite lower rates, as refinancing
activity declined and prepayments remained below recent trends.
 We are often asked about “activists.” While we typically do not allocate to these funds, this decision is more a
function of our desire to avoid large, directional generalist managers than any rejection of the merits of activism. In
fact, we would categorize a large number of our investments across many strategies as catalyst-driven, and sometimes
these catalysts need to be helped along by an outside party. Our style of investing very much favors managers who
can identify favorable conditions and then create opportunities, and likewise we believe we have created a structure in
our funds that allows us to overweight the most compelling of these opportunities.
As we write this letter, April is again testing the mettle of investors. JP Morgan Asset Management recently published a
research piece discussing how the highly volatile financial crisis and recovery (2008 to 2011) gave way to a period of easy
money, with above-average equity returns and below-average volatility (2012-2013). JP Morgan forecasts a return to more
modest equity performance and higher volatility going forward – something we have seen so far in 2014. Whether this holds
true or not, we do know that we continue to see strong alpha opportunities and will continue to seek to position the portfolios
to take advantage of the conditions we face.
As always, we welcome your comments and inquiries.
Best regards,
LIGHTHOUSE PARTNERS
30

IMPORTANT NOTICE & DISCLAIMER:
Lighthouse Investment Partners, LLC (“Lighthouse”) manages investment vehicles, considered funds of hedge funds (the "Lighthouse Funds“),
that invest directly in other hedge fund investment vehicles or through accounts owned by Lighthouse Funds, which are managed by third-
party managers (collectively, “Alternative Investments”). Alternative Investments can be highly illiquid and may engage in leveraging and
other speculative investment practices, which may involve volatility of returns and significant risk of loss, including the potential for loss of the
principal invested. No assurances can be given that the investment objectives of the Lighthouse Funds will be achieved, and investment
results may vary substantially over time. Investors should be aware that there is no secondary market currently available for interests in the
Lighthouse Funds, and that there are restrictions on transferring interests in the Lighthouse Funds. Additional information can be found in a
confidential private placement memorandum. Alternative Investments are not suitable for all investors. Investing in Alternative Investments
is intended for experienced and sophisticated investors only who are willing to bear the high economic risks of the investment. Investors
should carefully review and consider potential risks before investing. These risks may include: losses due to leveraging, short-selling, and
other speculative practices, lack of liquidity, absence of information regarding valuations and pricing, counterparty default, complex tax
structures and delays in tax reporting and less regulation. Diversification from traditional market investments does not guarantee a profit or
protect against a loss.
Lighthouse Funds that allocate capital to accounts owned by such funds and managed by third-party managers are referred to herein as
Managed Account Funds, for which the risks above continue to apply. The Managed Account Funds’ investments in such accounts generally
will be made indirectly through investment companies managed by Lighthouse or its affiliates. These investment companies are generally
comprised of various segregated portfolios (each, a “Portfolio” and, collectively, the “Portfolios”). Generally, each Portfolio represents a
separate managed account. The investment companies invest primarily in separate prime brokerage accounts and sub-accounts held in the
name of each Portfolio, over which a third-party manager will have discretionary trading authority. In certain circumstances a single Portfolio
may be further sub-divided into separate accounts, each of which represents a managed account. In such a case, each separate account may
be advised by a separate third-party manager. The assets and liabilities of the separate accounts of a Portfolio will not be considered
segregated from one another. Rather, the assets and liabilities of all separate accounts of any Portfolio will be considered on an aggregate
basis. As a result, liabilities of one separate account of a Portfolio may be enforced against another separate account of the same Portfolio.
Increased transparency into trading activity in the Portfolios may not mitigate or prevent losses or fraud by third-party managers. Although
Lighthouse may monitor trading activity in these accounts, Lighthouse does not expect to direct any trading decisions or have access to live
recommendations from third-party managers. Due to the volume of trading activity in a Portfolio, there is no guarantee that Lighthouse can
monitor all such activity. As noted, the Investment Advisory Agreement which governs the managed account relationship with the manager
generally allows Lighthouse (but not in all instances) very broad authority to revoke a manager’s trading authority over an account at any
time. However, Lighthouse’s ability to revoke a manager’s trading authority may cause a Portfolio to incur termination penalties or ongoing
management or performance fees beyond the revocation of a manager’s trading authority. If a manager’s authority is revoked, Lighthouse
may not be able to liquidate investments held in Portfolios in a timely manner or may only do so at prices which Lighthouse believes do not
reflect the true value of such investments, resulting in an adverse effect on the return to investors. Certain Lighthouse Funds described herein
as “100%” Managed Account Funds may have some nominal direct fund investments for the purpose of structuring seeding transactions,
which include funding commitments by a Lighthouse Fund that be may be characterized as a limited redemption restriction. In limited
circumstances, Lighthouse may utilize third-party intermediaries to access underlying managers via managed account investments. In such
instances, Lighthouse will not enjoy the full benefits of asset ownership; however, transparency and liquidity terms are equivalent to that of
direct managed account investments. Liquidity in a Managed Account Fund may vary widely based on the managers’ trading strategies. The
enhanced liquidity provided by a Managed Account Fund does not mean that an end investor in a Lighthouse Fund will receive the benefit of
such liquidity with respect to his or her investment in a Lighthouse Fund. Although underlying managers of Managed Account Funds may not
impose lock-ups, gates or other similar restrictions, Lighthouse retains the right to impose such restrictions upon all investors at the
Lighthouse fund level. Performance data, if any, presented herein includes reinvestment of all dividends and other earnings and is net of all
management fees and performance fees. Certain results noted herein may be unaudited and subject to adjustment following an audit of the
Lighthouse Funds. Past performance is not necessarily indicative of future results. The information contained herein is neither an offer to sell
nor a solicitation of an offer to purchase any securities. Such an offer will only be made to Qualified Purchasers by means of a private
placement memorandum and related subscription documents.
This presentation has been prepared to provide general information about certain types of investment products to a limited number of
sophisticated prospective investors, in order to assist them in determining whether they may have an interest in the types of products
described herein. When considering whether to purchase any financial instrument, no reliance should be placed on the information in this
presentation. Such information is preliminary and subject to change without notice and does not constitute all the information necessary to
evaluate the consequences of purchasing any financial instrument referenced herein. In addition, this presentation includes information
obtained from sources believed to be reliable, but Lighthouse does not warrant its completeness or accuracy. Accordingly, any decision to
purchase any financial instrument referenced herein should be based solely on the final documentation related to such financial instrument,
which will contain the definitive terms and conditions thereof.
Nothing in this presentation should be construed as tax, regulatory or accounting advice. Any prospective investor must make an
independent assessment of such matters in consultation with his or her own professional advisors.
This presentation is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use is prohibited by
law or regulation. This presentation may contain confidential or proprietary information and its distribution, or the divulgence of its contents
to any person, other than the person to whom the presentation was originally delivered, is prohibited. Additional information for investors
meeting suitability requirements is available upon request. ©2014
31

GaveKal Capital Limited offers investment products
which combine their knowledge of the Asia-Pacific
region alongside innovative portfolio construction and
disciplined risk processes. Certitude partners with
GaveKal to provide Australian and New Zealand
investors exclusive access to their capabilities, access
to the greater investment opportunities of Asia and
their successful management of the inherent risks.
*
32

GAVEKAL
Quarterly outlook
GaveKal believes there are a few key trends for the second quarter of 2014 around which
portfolios can be oriented:
1. The first and foremost is that with the Fed starting to taper we can expect to see
fixed income strategies outperforming. GaveKal has now started to see bonds
no longer underperforming – which makes sense as back to back years of losses
on bonds are very rare.
2. Asia now trades at a discount almost similar to that which prevailed at the time
of SARS.
3. The US is not exporting enough US$ to fuel global trade needs which has led to
central bank reserves shrinking – and whenever central bank reserves shrink,
someone (either highly levered or running large negative cash flows) goes bust.
Fortunately, Asia is not really in the line of fire and is actually in a pretty good
shape when looking at Asia’s fiscal and current account positions.
4. GaveKal also believes that Japan should be a source of capital for Asian
financial markets in 2014. Japan is fundamentally a mercantilist country.
GaveKal therefore believes that Japan will print and devalue aggressively until
the trade balance closes down. This puts pressure on the Yen weakening which
leads to the Japanese moving their savings from cash into other assets. Where
will Japanese savings go could be the big driver of 2014 performance.
Highlights for 2014
 Louis Gave - Breaking the Bad News Cycle
 Chen Long – Watch Capital Flows For The Central Banks Next Move
 Charles Gave – Easy Eurozone Trades Are Running Out Of Road
33

www.gavekal.com
GavekalDragonomics The Daily
Tuesday, April 15, 2014
Page 1
Global Research
© Gavekal Ltd. Redistribution prohibited without prior consent. This report has been prepared by Gavekal mainly for distribution to market professionals and institutional investors. It should not be
considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not
be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Alarm bells have been ringing over China for a while, and there have been
plenty of Quasimodos to sound them. With a poorly-understood “shadow
financing” system that accounts for 20% of total credit, an overbuilt real
estate market, deficit-ridden local governments and under-capitalized
banks, China’s financial system has been looking shaky. Financial stress,
along with the relative tightness of central bank policy since last May,
helps explain why most Chinese banks now trade below book value, and
why Shanghai is the only stock market still close to its 2008 lows.
Is it time for the bell-ringers to take a rest? Arguably yes, thanks to the
past weekend’s well-telegraphed announcement that four Chinese banks
are set to boost their capital by issuing 290bn renminbi (US$47bn) in
preferred shares, with more lenders expected to follow. This move
reinforced a huge reversal in global equity markets. Until recently, no
piece of bad news could stop the US equity markets from making new
highs, while no good news could get in the way of the Chinese bear
market (see It’s All Good In America And All Bad In China). That
changed three weeks ago when the Chinese government announced it
would let big Shanghai-listed firms issue preferred shares, a policy
obviously aimed at the banks (see Due Like Yesterday’s Bills).
Since then, the situation has been turned on its head and Chinese equities
have not looked back. More generally, emerging-market stocks have
outperformed (Brazil and Turkey even more dramatically than China). So
investors should ask themselves whether they have just witnessed an
important turning point. As we discussed in our recent London and Paris
seminars (see presentation here), capital-raising by Chinese banks should
be reflationary for emerging markets, since many remain dependent on
Chinese demand.
Plans for Chinese banks
to raise fresh capital...
...reinforces a big turnaround
in global equity markets
Louis Gave
lgave@gavekal.com
Arthur Kroeber
akroeber@gavekal.com
Global Research
Breaking The Bad News Cycle
Checking The Boxes
Fact Consensus belief Our reaction
US retail sales rose 1.1% MoM
in Mar, from 0.7% in Feb; ex
auto & gas rose 1.0%
Both better than expected 0.9% &
0.4% respectively
US consumption is likely to
remain strong as pent-up
demand unleashes
US business inventories rose
0.4% MoM in Feb, from 0.4% in
Jan
Lower than expected 0.5%
As weather improves,
inventories should get worked
off in the coming months
Eurozone IP rose 1.7% YoY in
Feb; figure for Jan revised lower
to 1.6% from 2.1%
Better than expected 1.5%;
recovery continuing to firm up
Positive IP trend offset by
disinflationary trends; pressure
on ECB to act still strong
China new bank loan and
aggregate financing totaled
CNY 1.1tn and 2.1tn in March
Both were slightly above
consensus; while M2 missed
The growth of aggregate
financing slowed to 16.3% due
to high base in 1Q13
Our short take on the latest news
34

Page 2
www.gavekal.com
There are of course reasons to be skeptical. One could argue that the
amount of new capital is far too small to restore the banks to health. The
80bn renminbi to be raised by ICBC, China’s largest bank, represents just
0.4% of total assets—scarcely enough to placate pessimists who think
Chinese banks’ true non-performing loan ratios are 5-10% rather than the
currently reported 1-2%. Or one could worry that boosting bank capital
does little to address the risks in the rapidly growing “shadow” financial
system, much of which does not even show up on bank balance sheets.
But these concerns may miss the point. Chinese stocks were priced for
general catastrophe, with the nature of the supposed calamity changing
more often than rationales for the invasion of Iraq (property prices will
collapse; the banks will collapse; the shadow lenders will collapse; the
economy will slow to 3%, China will move to a trade deficit). Stocks could
easily re-rate as investors conclude a) none of these catastrophes will
occur any time soon, and b) Chinese regulators want to ensure the system
is well-capitalized as they push ahead with potentially destabilizing
reforms. If the market has indeed made this psychological move, Chinese
stocks might even be able to withstand the bad news flow that is likely in
the coming months (more corporate defaults, slower GDP growth, etc.).
The point is that a marginal improvement after a long downturn can be
powerful enough to trigger large rallies in undervalued stocks. The
question non-China minded investors should ask themselves is whether
this will be enough to support a continued rally in over-sold and under-
owned deep cyclicals not just in China, but all over the world.
Reasons to be skeptical...
...may be missing the point
3435

Ideas
www.gavekal.com
Wednesday, April 23, 2014
Page 1
GavekalDragonomicsChina Research
How will China’s central bank respond to the country’s slowing growth?
Speculation about the next move from the People’s Bank of China has been
rising as economic indicators continue to be tepid, credit growth continues
to slow and the currency remains weak. Similarly, in early 2012 GDP
growth was also weak, credit was cooling and the RMB was depreciating—
and shortly afterward the central bank cut banks’ reserve requirements and
credit growth rebounded. But we do not think the policy response in 2014
will be a repeat of that in 2012. A cut in reserve requirements is certainly
not imminent, and if one comes it would be a signal less of a major change
in policy than of a shift in the balance of capital flows.
First of all, the central bank has been quite active in damping expectations
of further monetary easing. On Tuesday it announced a policy change that
takes longer to describe than its importance really warrants: a cut in the
reserve-requirement ratio (RRR) for rural commercial banks at the county
level and for rural credit cooperatives. The announced intent was to free up
more funds for banks to support agriculture and rural development. But as
a similar cut in rural banks’ RRR in April 2012 was shortly followed by a
cut in reserve requirements for the entire banking system in May 2012, this
move could be interpreted as preparation for broader easing of monetary
policy. The People’s Bank however made clear it does not want markets to
expect this; in a statement afterward, it said the cut is “a structural
adjustment policy to increase funding for agriculture, and does not mean
While capital inflows remain strong,
there is little reason for the central bank
to cut reserve requirements
The central bank has been actively
discouraging markets from expecting
more monetary easing
Watch Capital Flows
For The Central Bank’s Next Move
Chen Long
lchen@gavekal.com
36

Ideas
www.gavekal.com
Page 2
GavekalDragonomics
that the direction of monetary policy has changed...it will not affect overall
liquidity in the banking system.” Such a direct statement by PBOC is quite
unusual, and it echoes numerous recent comments from central
government officials that economic policy will only be fine-tuned and that
massive stimulus is not an option.
Second, one of the reasons that the central bank is talking down additional
easing is that monetary policy has already loosened—perhaps more than
some observers appreciate. Credit growth is indeed slowing: total credit,
including bank loans, corporate bonds and shadow financing, grew about
16% YoY in March, down from 18% in December. But much of this
slowdown in YoY terms reflects a high base from the rapid credit growth in
1Q13, and in fact sequential credit growth has been picking up. Interbank
liquidity is already much looser than it was during the credit crunches of
mid- and end-2013, and money market rates are pretty low.
Even if the central bank did want to further boost lending, a cut in the RRR
may not help much. Formal bank lending is increasingly constrained by
the regulatory cap on banks’ loan-to-deposit ratio (see The Rocky Road To
Market Rates). So an RRR cut would do more to encourage bond issuance
shadow financing—when in fact PBOC has been working to contain the
scale of shadow financing. And compared to 2012, the central banks has
more tools with which it can adjust interbank liquidity: it has introduced
the standing liquidity facility (SLF) and short-term liquidity operations
(SLO). These were in fact the tools deployed during the episode of capital
outflows in mid-2013, which means the RRR cut will probably be the policy
of last resort even if the PBOC really does decide to inject more liquidity.
Finally, and most importantly, the behavior of capital flows is now very
different from 2012. China had sustained capital outflows from 4Q11 to
3Q12, which was mainly triggered by the end of quantitative easing in the
Though headline credit growth has been
slowing, new credit has been stronger
than market expectations
The central bank has already eased by
allowing short-term interbank to come
down to relatively low levels
An RRR cut might work against the
central bank’s desire to contain growth
in shadow financing
37

Ideas
www.gavekal.com
Page 3
GavekalDragonomics
US, and that led to the depreciation of the RMB in early 2012. The outflow
of capital took liquidity out of the domestic banking system, which
required the central bank to compensate by injecting more liquidity—
hence the cuts in reserve requirements.
By contrast, the RMB depreciation in early 2014 has been a move
completely driven by PBOC policy, and the market has not yet followed it
(see RMB Limbo: How Low Can It Go?). Capital flows have remained
robust: China’s foreign exchange reserves grew by US$130 bn in the first
quarter of 2014, while they fell by US$13 bn from February to May 2012.
And significantly, monthly capital inflows, as proxied by banks’ purchases
of foreign exchange, stayed strong in March even after February’s sharp
change in currency policy. This suggests that the private sector was neither
causing the RMB depreciation nor fully convinced that the recent
depreciation means a big change in the RMB’s longer-term appreciation,
since they continue to buy RMB and sell foreign currencies. Simply put,
capital inflows into China remain very strong, and in its recent history the
central bank has only cut the RRR when there are capital outflows.
Even as the central bank pushes the
currency down, the private sector still
seems quite happy to buy RMB
38

www.gavekal.com
Page 1
Global Research
Investor enthusiasm for government debt from the eurozone’s southern
periphery persists unabated. Last week the yield on Spanish 10-year bonds
dropped to its lowest level since September 2005. Before too long,
however, I believe investors will find themselves bumping up against some
hard truths imposed by simple accounting identities. In this I find myself
taking a somewhat different view to the one recently expressed by
François (see Believe In The ECB).
As some of our readers will know I have never been a great fan of the
national accounting equation: gross domestic product equals
consumption plus investment plus government spending plus the net
external balance—GDP = C + I + G + (X-M). I never understood why
having a bigger government should make me feel richer. Nor could I ever
figure out why taking the goods and services I labor to produce and
exchanging them with a bunch of foreigners in return for their promise to
pay me at some point in the future should contribute to my wellbeing.
The only people who believe that a current account surplus is the sign of a
well managed economy are called “mercantilists”. They confuse the
current account with a profit and loss statement and always end up broke.
To my simple mind the only thing that matters is the consumption plus
investment element of the equation. That’s because consuming today
makes me feel good today, while investing facilitates more consumption
for my nine grand children.
In this spirit, let’s have a look at consumption plus investment in Spain,
always remembering that the results would be much the same for Italy.
Since its peak in 2007, consumption in Spain has declined by -12.5%
relative to GDP and by -18% in absolute terms (see the chart overleaf).
In a depression, the current account always improves since returns on
invested capital collapse. Capital flees and because the balance of
All that really matters is consumption
plus investment
The current account always improves in
a depression
Charles Gave
cgave@gavekal.com
Global Research
Easy Eurozone Trades
Are Running Out Of Road
Checking The Boxes
Our short take on the latest news
Fact Consensus belief Our reaction
US leading index rose 0.8%
MoM in Mar, from 0.5% in Feb
Better than expected 0.7%
Encapsulates evidence that the
US economy is bouncing back
from a cold winter decently well
Japan trade deficit rose to JPY
-1.4tn in Mar, from –JPY0.8tn;
exports rose only 1.8% YoY
Deficit bigger than expected -1tn
as imports jumped & exports
disappointed (expected +6.5%)
Deficit to shrink as imports fall
after tax hike; but weak exports
= weak growth; expect more QE
Italian industrial orders rose
2.8% YoY in Feb, from 2.6% in
Jan
N/A; 3m moving average losing
momentum, but recently
announced tax cuts may help
Tax cuts should boost consumer
spending & lift growth; but
significant reform still needed
39

Page 2
www.gavekal.com
payments must balance out at zero, a deficit in the capital account has to
be offset by a surplus in the current account. As a result, the Spanish
current account has moved from a deficit equal to 10% of GDP to a
surplus today of 2.5% of GDP, with unemployment going through the
roof to more than 25% and government debt soaring from 30%
of GDP in 2007 to close to 100% today. Someone has to pay all the
unemployment benefit for the 25%. Ultimately it will be children who are
not yet born. Meanwhile, today the average Spaniard has a standard of
living roughly -20% below the level ten years ago. Bravo for the euro!
Now everybody tells me that Spain has “turned the corner” and that there
is “light at the end of the tunnel” (as US general William Westmoreland
said about the Vietnam war, just weeks before the Viet Cong’s surprise Tet
Offensive). I hope there really is some light, given the beating Spain’s poor
citizenry has taken, but I am not confident.
Interest rates remain well above the nominal growth rate of the private
sector (my consumption plus investment), which is around zero.
Unemployment remains incredibly high. The budget deficit is still at 6.5%
of GDP. Bank lending continues to collapse and the bad debts in the
banking sector are constantly being revalued. I am told that young
Spanish citizens are leaving “en masse”, that the Spanish population is
falling because of a fertility rate which collapsed ages ago, and that
Catalonia is restive and could do a Crimea.
In recent years, eurozone investing has been simple. You had to invest
in convergence trades when panic reigned, and in divergence trades when
the International Monetary Fund told you everything was under control.
Over the last three years, we have played the eurozone’s markets either by
riding Portuguese debt or by being long Italy and short France.
I am not sure there is much mileage left in these two low risk strategies. It
may be time to abandon them in favor of Asia.
The easy eurozone trades are running
out of road
40

Certitude Global Investments Limited offices
Certitude’s Global Investment Partner offices
Why Certitude?
Certitude aims to be Australia’s first choice for global investments.
We provide Australian and New Zealand investors with single-point
access to active Global Fund Managers, who offer unique investment
opportunities that span the major industry sectors and geographic
regions of the world.
Investors choose Certitude because we:
• Select Global Partners with Local Knowledge
• Aim to Deliver Strong Returns with Managed Risk
• Offer Diverse and Evolving Investment Opportunities.
41

Certitude carefully selects Global Fund Managers that complement each
other, and forms exclusive partnerships with them to offer you access
to a broad and ﬂexible choice of global investment opportunities.
Each of our partners are proven experts in their region and asset class.
We continually scan the market to seek new partnerships to bring
to Australian and New Zealand investors some of the best investment
opportunities from around the world.
SELECTING GLOBAL
PARTNERS WITH LOCAL
KNOWLEDGE
42

AUD Trusts
• Threadneedle Global
Equity Fund
• Threadneedle Global
Equity Income Fund
(Unhedged)
• GaveKal Asian
Opportunities Fund
• LHP Diversiﬁed
Investments Fund
• LHP Global Long/ Short
Fund
Offshore Vehicles
• $1M minimum
investment
• Cayman, OEIC,
SICAV, Delaware
domiciles
• Equities, Fixed
Income & Absolute
Return Funds
Mandates
• $25M–$100M
minimum
investment
depending on
investment
• Equities, Fixed
Income & Absolute
Return Funds
Alternatives Platforms
• LHP Managed
Account Platform
43

CERTITUDE’S FUNDS
OVERVIEW
Key fund features
• Equity-like returns with lower volatility than traditional equity investments
• Exposure to long/short international equity strategies across multiple geographical regions and sectors
• Expertise of approximately 20–30 Underlying Managers.
LHP GLOBAL LONG/SHORT FUND
The LHP Global Long/Short Fund aims to achieve equity-like returns with lower volatility than traditional
global equity investments. The LHP Global Long/Short Fund’s strategy is to access a portfolio of equity
long/short investment managers with a low correlation to traditional equity markets. The LHP Global
Long/Short Fund’s investment exposure is through its investment in the Lighthouse Global Long/Short Fund
Limited (‘the Lighthouse Fund’), managed by Lighthouse. Each Underlying Manager of the Lighthouse
Fund is selected with the intention of creating a pool of investments which blend together to create a
diversified portfolio designed to achieve the Lighthouse Fund’s investment objective.
The LHP Diversified Investments Fund aims to achieve consistent returns with a low probability of loss over a
long term investment horizon. The LHP Diversified Investment Fund’s strategy is to access, via investment in
the Lighthouse Diversified Fund Limited, a portfolio of underlying investment managers with low correlation
and beta to traditional markets, investing in both commingled hedge funds and managed accounts.
Key fund features
• Lower levels of volatility when compared to traditional equity investments
• Exposure to a broad range of investment strategies across multiple geographic regions and sectors
• A low correlation to traditional equity markets
• Exposure to between 30–60 core underlying managers.
LHP DIVERSIFIED INVESTMENTS FUND
44

CERTITUDE’S FUNDS (cont)
For more information on Certitude’s funds visit www.certitudeglobal.com.au/products
1Source: Threadneedle, as at 30 September 2012
OVERVIEW
The Threadneedle Global Equity Income Fund (Unhedged) aims to deliver regular income distributions with
capital growth through its investment in worldwide companies that produce strong and consistent distributions.
Key features
• Exclusive access to Threadneedle Asset Management Limited (‘Threadneedle’), one of Europe’s
leading managers1
• The Fund invests in the Threadneedle Global Equity Income Fund which has delivered attractive
distributions since inception1
• Typically provides investors with exposure to 75–951of the world’s ‘quality income’ producers, as
selected by Threadneedle.
• Aims to provide Australian and New Zealand investors with income, growth and global diversification
which may complement their local portfolio.
• The Fund relies on Threadneedle’s rigorous global investment process, with the investment team visiting
over 30001 company meetings per annum.
• Short communication lines and a focus on actionable investment ideas and rapid implementation.
The Threadneedle Global Equity Fund aims to achieve above average capital growth through investment
in equities issued by companies worldwide.
Key fund features
• A disciplined, pragmatic investment process designed to identify value-creating businesses globally at
attractive prices
• Ability to pursue the best opportunities globally, irrespective of local regional benchmarks or constraints
• Consistent performance – the Threadneedle Global Equity Fund has a historical record of consistent
alpha generation driven by stock selection1
• An experienced multi-disciplined investment team – members of the Global Equities team are each
responsible for specific geographical coverage as well as having dedicated sector research
responsibilities.
• Deep-rooted culture of collaboration: Threadneedle’s global investment approach is characterised by
robust debate, with the specialist Global Equities team leveraging experienced regional resources.
The GaveKal Asian Opportunities Fund is designed to capture the long term returns of Asian equity
markets while constraining volatility through tactical asset allocation in Asian bonds, equities and cash.
Key features
• Exposure to Asia-Pacific equity and bond markets with the potential to achieve returns with a lower
volatility profile than traditional equity
• Portfolio diversification by adding an exposure to the potential benefits associated with economic and
corporate expansion in the Asia-Pacific region
• The Fund invests into the GaveKal Asian Opportunities (UCITS) Fund, which has delivered attractive
returns since inception.
THREADNEEDLE GLOBAL EQUITY INCOME FUND (UNHEDGED)
THREADNEEDLE GLOBAL EQUITY FUND
GAVEKAL ASIAN OPPORTUNITIES FUND
45

LHP Diversified Investments Fund
As of Date: 31/03/2014
Month Quarter 1 Year
3 Years
(p.a.)
5 Years
(p.a.)
7 Years
(p.a.)
10 Years
(p.a.)
Since
Inception
(p.a.)
(31/03/2001)
FYTD
LHP Diversified Investments W
HFRX Global Index 100% Hedged to AUD
-0.34
-0.04
3.77
1.67 7.33
14.15
3.63 7.03
8.75
1.81
10.40
3.23
3.30
4.93
5.20
6.58
5.61 12.97
LHP Global Long/Short Fund
As of Date: 31/03/2014
3 Years
(p.a.)
5 Years
(p.a.)
7 Years
(p.a.)
10 Years
(p.a.)
Since
Inception
(p.a.)
(31/03/2001)
FYTD
LHP Global Long/Short W
MSCI ACWI NR 100% Hedged to AUD
-1.45
0.53
1.16
1.25
14.71
18.95 12.41
9.55
19.02
9.27
4.70
6.92
8.36 6.28
8.12
17.22
6.95 10.50
GaveKal Asian Opportunities Fund
As of Date: 31/03/2014
3 Years
(p.a.)
5 Years
(p.a.)
7 Years
(p.a.)
10 Years
(p.a.)
Since
Inception
(p.a.)
(12/10/2010)
FYTD
GaveKal Asian Opportunities Fund
MSCI AC Asia Pacific GR AUD
-3.83
-2.87
-7.00
-5.06
7.06
17.64
7.77
7.26 7.88 0.00 4.13
6.63
6.67
-1.62
6.46
Threadneedle Global Equity Fund
As of Date: 31/03/2014
3 Years
(p.a.)
5 Years
(p.a.)
7 Years
(p.a.)
10 Years
(p.a.)
Since
Inception
(p.a.)
(05/09/2011)
FYTD
Threadneedle Global Equity
MSCI ACWI GR AUD
-5.00
-2.97
-4.45
-2.31
31.35
31.79 13.20 11.80 2.08 5.47
21.70
22.89
14.29
15.98
Threadneedle Global Equity Income Fund (Unhedged)
As of Date: 31/03/2014
3 Years
(p.a.)
5 Years
(p.a.)
7 Years
(p.a.)
10 Years
(p.a.)
Since
Inception
(30/11/2012)
FYTD
Threadneedle Global Equity Income Unhdgd
MSCI ACWI GR AUD
-3.09
-2.97
-3.43
-2.31
26.00
31.79 13.20 11.80 2.08 5.47
42.79
43.88
11.46
15.98
46

Certitude Contact
New South Wales
Geoff Koudelka
State Manager Global
Solutions VIC & NSW & TAS
Jennifer Savedra
Manager Global Solutions
VIC & WA
P +61 429 038 946
E jsavedra@certitudeglobal.com.au
Queensland & Northern
Territory
Paul Burbidge
State Manager Global Solutions
QLD
P +61 409 723 990
E pburbidge@certitudeglobal.com.au
Michael Akele
State Manager Global
Solutions NSW
P +61 401 994 973
E makele@certitudeglobal.com.au
Western Australia
Jennifer Savedra
VIC & WA
South Australia
Tasmania
Geoff Koudelka
VIC & NSW & TAS
P +61 417 309 844
E gkoudelka@certitudeglobal.com.au
National
Hector Ortiz
Head of Global Solutions
Family Offices and Institutions
P +61 488 585 534
E hortiz@certitudeglobal.com.au
New Zealand
Paul Burbidge
New Zealand
P +61 409 723 990
E pburbidge@certitudeglobal.com.au
This document has been prepared by Certitude Global Investments Limited ABN 25 082 852 364 (Australian Financial Services Licence No. 246747
(‘Certitude’)). Although every effort has been made to verify the accuracy of the information contained in this document, Certitude, its directors, officers,
representatives, employees, associates and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in,
or omission from the information contained in this document or any loss or damage suffered by any person directly or indirectly through relying on this
information. The information in this document is not personal financial product advice and has been prepared without taking into account the objectives,
financial situation or needs of any particular person. Before making an investment decision to invest or continue to hold units in any Certitude fund, you
should obtain and read a copy of the relevant Product Disclosure Statement (PDS) from www.certitudeglobal.com.au/pds and consider, with the
assistance of a financial or other adviser, whether the investment is appropriate having regard to those matters.
Past performance is not indicative of future performance.
This report has been prepared for use by Australian Financial Services Licensees and their representatives only. Not for onward distribution to, or to be relied
upon by, retail clients.
Geoff Koudelka
VIC & NSW & TAS
P +61 417 309 844
Victoria
P +61 417 309 844
P +61 429 038 946
E jsavedra@certitudeglobal.com.au

Certitude Global Investing Insights - May 2013

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