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F:\The Zest Machine
This document outlines a portfolio management strategy for braving economic storms like hurricanes. It begins with an economic outlook analysis and then discusses portfolio allocation, backup strategies, and implementation. The backup strategy section describes using leading economic indicators to forecast disasters, value at risk analysis to estimate potential losses, and guidelines for rebalancing to limit losses. Specific holdings are then analyzed for their exposure to disasters, with recommendations to reduce exposure to financials but increase exposure to construction and metals companies expected to benefit from rebuilding. The portfolio is rebalanced to reflect these views.
F:\The Zest Machine
- 1. “Braving the Storm” THE ZEST MACHINE 1
- 2. Outline Economic outlook Portfolio Allocation Backup strategy Implementing our backup strategy 2
- 3. Economic Outlook Equity Fixed Income Commodities Markets Economic Portfolio Backup Strategy Implementation Outlook Allocation 3
- 4. Equity Selloff? Factor Fiction Dow Jones Industrial Average 840 835 830 825 820 815 810 805 Hurricane Camille 800 17/8/1969 795 DJIA 1% increase 790 Economic Portfolio Backup Strategy Implementation Outlook Allocation 4
- 5. Equity Selloff? Factor Fiction Dow Jones Industrial Average 2850 2800 2750 2700 2650 2600 2550 Hurricane Hugo 2500 22/9/1989 2450 DJIA 3% increase Economic Portfolio Backup Strategy Implementation Outlook Allocation 5
- 6. Equity Selloff? Factor Fiction Dow Jones Industrial Average 10800 10700 10600 10500 10400 10300 Hurricane Katrina 30/8/2005 10200 DJIA 2% increase Economic Portfolio Backup Strategy Implementation Outlook Allocation 6
- 7. Equity Selloff? Factor Fiction 70 18 68 16 66 14 64 12 62 10 Entergy Corp 60 8 Tetra 58 6 56 4 54 2 52 0 1/8/2005 1/9/2005 1/10/2005 1/11/2005 1/12/2005 Economic Portfolio Backup Strategy Implementation Outlook Allocation 7
- 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 YorkEconomy, 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 Wesee 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 CreatedVariance-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 Aimto 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 andRebalancing Assess the expected loss vs. transaction costs Rebalance if benefits exceed cost Economic Portfolio Backup Strategy Implementation Outlook Allocation 19
- 20. Assessing the Riskof Holdings Access exposure to disaster Estimate expected loss Economic Portfolio Backup Strategy Implementation Outlook Allocation 20
- 21. Aberdeen GEM Mainholdings 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 Highallocation 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 SingaporeBonds 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 andGeneral 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 SchroderGSC 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
- 30. Q&A 30