Investing is simple

Investing is simple
9th Annual Modern Wealth Management Forum
22 May 2014, Jurmala
Marius Čiuželis, MC Wealth Management
T +370 698 40 095
E marius.ciuzelis@mcwealth.lt

2 | Copyright © 2014 All rights reserved
Content
> Who we are
> Investing is simple; but not easy
> Clients’ preferences
> Alternative investments
> Uncovering unusual investments

MC Wealth Management
Multi family office
> We serve local HNWIs – full scale private wealth management.
> We trade EU Government bonds for our local corporate and institutional clients.
Fund distribution
> We are keen to alternatives ranging from multibillion HF houses to the niche
market players.
> B2B market segment.
> Global focus with existing clientele in Moscow, Singapore, Hong Kong, Riga,
prospective clients in Estonia, India, Monaco, Sweden, Switzerland, UAE, UK etc
Private investments
> Local private equity.
> Aircraft leasing.

„Investing is simple;
but not easy“

What is your edge?
> B. Graham / W. Buffett style value investing
> MPT / diversification based investing
> High frequency / active trading
> Trend following investing
> Contrarian investing
> Sale of stuctured products
> You name it…

MPT based investing
> 8-12% long term annual return expectations
> Buy and Hold
> Diversification is the most important

S&P 500 performance (as of the end of 1999)
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: Yahoo Finance, MC Wealth Management

S&P 500 performance (as of the end of 2013)
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: Yahoo Finance, MC Wealth Management
-45,8% (2000/03 – 2002/09)
+88,3% (2002/09 – 2007/10)
-56,1% (2007/10 – 2009/03)
+175,3% and growing (2009/03 – ?)
+23,1% (2000/03 – 2014/03)

10 years annualized performance
Source: Yahoo Finance, MCSI, MC Wealth Management
-5%
0%
5%
10%
15%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
MSCI World USD S&P 500 MSCI World EUR

Diversification is the most important. Really?
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
USA AUS HK GER ESP JAP FRA GER UK HK HK HK JAP SUI ESP SUI ITL JAP SUI
22.1% 56.1% 47.0% 136.5% 123.2% 43.2% 38.7% 47.1% 10.3% 49.5% 32.3% 116.7% 21.6% 45.0% 41.3% 44.8% 53.2% 61.8% 6.4%
NDL NDL ESP ITL ITL ESP AUS NDL HK AUS SUI SUI NDL USA HK ITL ESP HK CAN
16.6% 38.4% 41.7% 133.8% 109.4% 37.9% 38.1% 37.3% 9.2% 35.6% 18.1% 46.7% 12.7% 38.2% 33.1% 36.4% 50.6% 59.5% 5.6%
GER CAN JAP SUI JAP UK JAP FRA NDL USA USA NDL ITL ESP CAN USA FRA CAN ITL
10.2% 33.5% 17.1% 107.5% 99.7% 35.1% 35.5% 36.8% -2.0% 31.3% 7.4% 36.6% 12.1% 31.2% 29.3% 34.1% 42.1% 54.4% -0.8%
UK FRA NDL FRA FRA CAN HK USA USA NDL NDL AUS AUS NDL NDL ESP USA FRA NDL
9.4% 33.2% 11.6% 83.2% 79.1% 28.1% 31.4% -2.1% -5.4% 19.1% 3.4% 36.6% 6.5% 28.9% 28.5% 26.2% 30.7% 29.7% -3.6%
SUI JAP ITL NDL HK AUS GER SUI SUI FRA FRA GER GER HK UK GER GER USA FRA
3.5% 24.9% 9.3% 61.5% 56.1% 14.7% 21.4% 27.2% -8.9% 18.5% 3.4% 36.3% 5.1% 22.6% 27.4% 25.1% 29.9% 22.4% -4.1%
CAN GER USA ESP AUS NDL CAN CAN GER ESP UK ESP SUI UK USA NDL SUI GER AUS
2.5% 24.1% 6.0% 57.0% 43.9% 10.4% 18.0% 25.3% -12.2% 17.0% -3.7% 31.2% 4.2% 21.3% 24.1% 24.5% 24.1% 20.5% -9.1%
JAP USA UK UK NDL USA USA UK CAN SUI GER ITL USA CAN FRA UK NDL AUS UK
-0.5% 22.0% 5.7% 53.0% 42.4% 3.9% 15.9% 21.9% -12.8% 16.8% -9.7% 39.5% 2.0% 19.1% 21.8% 22.6% 23.9% 18.7% -11.5%
FRA SUI FRA HK GER HK NDL ITL ESP UK AUS JAP UK GER AUS CAN UK UK USA
-4.1% 19.3% 5.1% 51.7% 35.9% -4.1% 15.6% 20.4% -13.4% 16.0% -9.8% 25.7% -1.6% 17.0% 17.8% 13.3% 17.8% 12.5% -12.5%
ITL UK GER JAP SUI SUI ESP AUS FRA CAN CAN UK CAN FRA GER FRA AUS NDL HK
-18.8% 17.4% -5.1% 43.4% 34.3% -8.8% 14.3% 10.9% -13.4% 12.0% -11.5% 24.4% -2.4% 14.8% 14.1% 12.4% 7.1% 7.4% -14.7%
AUS ITL CAN USA UK FRA ITL ESP AUS JAP ESP FRA ESP AUS ITL AUS JAP ESP GER
-22.5% 3.9% -7.6% 32.8% 27.0% -13.4% 12.5% 10.6% -15.0% 9.1% -20.8% 21.6% -3.9% 12.5% 13.4% -9.5% 5.3% 5.3% -15.3%
ESP HK SUI AUS USA ITL SUI HK ITL GER JAP CAN FRA ITL SUI HK HK ITL ESP
-29.0% -2.9% -11.1% 21.0% 17.5% -20.7% 7.1% 8.4% -18.4% 8.8% -21.3% 18.4% -4.7% 1.7% 2.8% -23.3% -2.9% 0.2% -15.5%
HK ESP AUS CAN CAN GER UK JAP JAP ITL ITL USA HK JAP JAP JAP CAN SUI JAP
-44.4% -4.7% -12.6% 16.0% 10.8% -24.3% 6.0% 1.8% -36.0% -0.7% -21.3% 10.1% -28.9% 0.9% -15.4% -23.6% -5.7% -6.6% -28.1%
2001 2002 2003 2004 2005
AUS AUS GER ITL CAN
2.7% -0.3% 64.8% 34.0% 28.8%
ESP ITL ESP AUS JAP
-11.0% -6.3% 59.2% 32.0% 25.6%
USA SUI CAN ESP AUS
-12.0% -10.0% 55.4% 29.6% 17.5%
UK JAP AUS HK SUI
-14.1% -10.1% 51.4% 25.0% 17.1%
HK CAN FRA CAN FRA
-18.6% -12.8% 41.0% 22.8% 10.6%
CAN ESP ITL UK GER
-20.1% -14.9% 39.0% 19.6% 10.5%
SUI UK HK FRA HK
-21.1% -15.2% 38.1% 19.2% 8.4%
NDL HK JAP GER UK
-21.6% -17.8% 36.2% 16.7% 7.4%
GER NDL SUI JAP USA
-22.0% -20.3% 35.0% 16.0% 5.7%
FRA FRA UK SUI ESP
-22.1% -20.8% 32.1% 15.6% 4.9%
ITL USA NDL NDL NDL
-26.1% -22.7% 29.3% 13.3% 3.2%
JAP GER USA USA ITL
-29.3% -32.9% 29.1% 10.7% 3.1%
All countries but France had the highest and the lowest ranking in the annual
performance contest
Source: MCSI, MC Wealth Management

„Wide diversification
is only required
when investors
do not understand
what they
are doing“

Clients preferences before and after the crisis
BC
> Mandate: discretionary („take
my money and don‘t bother me
with details“)
> Performance expectation:
30%+ per annum without a risk
> Sales process: commission
driven
> Products: the more fancy, the
better
AC
> Mandate: advisory – clients became
control freaks („if I want loosing
money I'd rather do it myself“)
> Performance expectation:
10%- per annum still without a risk
> Sales process: performance driven
dkn
> Products: back-to-basics or as
simple as possible

Investment habits in Lithuania
Nominal GDP – LTL120b (as of the end of 2013)
> Deposits and cash take LTL28b (23% vs GDP)
> Investment funds take LTL1,2b (1% vs GDP, 4% vs deposits)
> Structured notes estimate LTL5b (4,2% vs GDP, 17,9% vs
deposits)
> Real estate − ?

Our solution – Alternatives investments
> There is a great need to embrace alternative investments as the new glide
path in portfolio construction.
> For example, as clients move closer to retirement, instead of increasing the
fixed-income allocation, a greater allocation to alternatives strategies as a
component of risk management might be suggested.
> We do not seek the returns only, but the character of those returns. We
look both at global multi billion hedge fund houses with a proven track
record as well as the niche market players who utilize a unique edge that has
the potential to remain consistent over time.
> Our due-diligence process takes a careful look at return-to-risk as we aim
to understand the real sources of both parameters. We don‘t just follow pure
statistics but aim to understand the business model.

Over 60 years of evolution
Source: Man

What is a hedge fund?
> A hedge fund is an actively managed, pooled investment vehicle. Returns of
hedge funds are derived mostly from the skill of the hedge fund manager in
executing their chosen strategy.
> Long-term investment solution, eliminating the need to correctly time entry
and exit from markets.
> Hedge fund managers trade across a spectrum of markets and exchanges,
investing in a diverse array of financial instruments including equities, bonds,
currencies and derivatives.
> Flexibility: May switch investment strategy very quickly and may trade on
the long and short side of various financial instruments.
> Alignment of interest: Funds’ managers often invest their own money.

Sharp AUM growth of hedge fund industry
Source:
(1) HFR Global Hedge Fund Industry Report, 12/31/13,
(2) Credit Suisse 2013 Global Survey of Hedge Fund Investors Appetite and Activity

Hedge fund industry AUM by investor type
Source: Hennessee Group LLC, FSA, The City UK estimates, May 2013

Investors are hungry for yields
Data range: 1 January 1994 to 28 February 2013
Source: Bloomberg, MSCI, Man

Downside protection during market stress
Hedge funds: HFRI Fund Weighted Composite Index. World Stocks: MSCI World Net Total Return hedged to USD
Source: Bloomberg, MSCI, Man

Hedge funds and diminishing returns
Source: Hedge Fund Research, Inc, Julex Capital Management, LLC

Correlation crisis

Uncovering unusual investments
> The uncertain economic outlook for at least the next five years — along
with „a correlation crisis“ — should lead to increased use of unusual
investments.
> Financial advisers should be looking beyond traditional asset allocation
models and strategies. And sometimes even beyond „mainstream“ hedge
fund strategies.
> Managed-futures strategies are a good example as they were one of the
few bright spots from the 2008 financial crisis.
> However, such non-correlated strategies are becoming increasingly
difficult to uncover (Art? Classic cars? Commodity trade finance? Credits?
Fine watches? Forestry? Life settlements? Litigation financing? P2P
lending? Wine?)

Further enhancing traditional risks’ portfolio
We can make an initial approach to different asset classes by dividing them in:
> Equity related
> Interest related
> Real Estate related
> Commodity related
> Cash
Space for
improvement
Longevity
related
Life Settlements, or as is called longevity risk, has been an asset class for
many years managed exclusively by Pension Funds, Insurance companies as
well as some real estate investors.

Historically attractive returns

Performances by strategy
26,0%
12,7%
17,5%
5,1%
3,6%
5,5%
11,0%
4,7%
-4,3%
-10,0% -5,0% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0%
Life Settlements
Distressed debt
Credit
Event Driven
Multi-Strategy
US Long/Short
S&P 500
Macro
CTAs
2014 1st Quarter median performance Annualised performance of the past 3 years
Source: Hedge Fund Intelligence (HFI), April 2014

Alternative Investment Funds
Q1 2014 2013 2012 2011
Ann. since
inception
Ann. st.
deviation
Credit
Fund 1 (TGC) 3,00 13,80 16,01 18,09 17,50 2,04
Fund 2 (GFBF) 2,37 7,31 nd nd 8,16 2,80
Distressed Debt
Fund 3 (GEDD) 3,16 12,33 17,92 -1,62 19,97 10,66
Fund 4 (PCO) 3,01 12,95 20,38 -9,25 12,76 7,80
Life Settlements
Fund 5 (LTGF) 5,94 28,77 31,02 22,07 27,21 4,11
Market Neutral
Fund 6 (GMN) 2,30 10,30 18,40 0,80 14,90 14,70

Investing is simple; but not easy
> In a perfect world, investors would like to have completely uncorrelated
assets, but unfortunately all assets are somewhat correlated.
> Once we buy a corporate bond we are exposed at the same time to
equity risk, interest rate risk, credit risk, so an analysis has to consider all
the other risks as well.
> One of the value added features of yet broadly uncovered strategies like
Life Settlements is that they can be analyzed almost independently from
the longevity risk space: credit, equity or market risks almost do not affect
the asset.
> From a pure perspective of portfolio optimization, it is clear longevity
asset class has a big role to play in the portfolios of investors.

Summary
> Be like an entrepreneur
> Be innovative – find
your edge
> Don’t rely on the old
dogmas
> Investment
opportunities are like
buses, there’s always
another one coming

Thank you. Questions?
Marius Čiuželis
MC Wealth Management
Managing Partner
T: +370 698 40 095
E: Marius.Ciuzelis@mcwealth.lt
Contacts for
further communication

Investing is simple

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