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