The document provides an analysis of asset allocation and economic dynamics over the last three months, highlighting the divergence between Germany and other European Union countries. It discusses the implications of monetary policies and quantitative easing, particularly the European Central Bank's strategies amidst rising unemployment and inflation rates. The document also reviews financial market performance and asset allocations, suggesting a strategic shift in investment towards equities and specific sectors amidst current economic challenges.

1. A sset A llocation over last 3 months
Content C ash
F ixed Inco m e
100.0%
Equities
Page 1 75.0%
The current economic environment 50.0%
70.1%
29.9%
74.5%
25.5%
59.0%
40.4%
0.0%
0.0%
0.7%
25.0%
Page 2 0.0%
Okt 10 N o v 10 D ez 10
Asset class analysis
Page 3
Current asset allocation Contagion : Made in Germany
Looking at the global economic dynamics and its The macro-economic environment is clearly
regional evolution one of the most extreme cases dominating investors`mood. Most bad news
Page 4 of divergence is taking place in the European seems to be in the market already. We believe
Monetary Union. As much as the system is a that the European central bank will be eventually
Perfomance analysis political union, there are extreme contrasts in its mandated by Germany to resolve the market
economic reality. Germany just announced that stress in a consistent way for all the members and
the unemployment rate sank to an 18 year low. At markets will look at the fundamentals once again.
the same time the total unemployment in the
European Union increased to a 10 year high. Due The inflation level in both the US and Europe is at
to the Euro weakness, the export driven German a level that allows (and even begs) for more
economy is on a roll. As such, a cynic may call the stimulus in the short to medium term. The core
behavior of Germany towards the PIIGS as self- CPI in the US hit historic record lows. All the fears
Our opinion benefitting. After Greece, which was more of a about inflation risks because of quantitative
credibility crisis, Ireland now faces a banking easing seem to be unfounded at the moment. The
crisis. language from the central bankers has moved
Due to forced buying of PIIGS towards more inflationary measures. As much as
bonds, the ECB will have to This crisis has been sped up by the political the investors were blaming them for taking the
print sooner or later. This retorics of German chancelor Angela Merkel and «wrong» decisions by launching QE2, the
could make the EUR drop her French counterpart Sarkozy. Her remarks in numbers are evidence to the opposite.
even further. late October, that as of 2011 investors in
sovereign bonds would have to bear part of the In the meantime, at the start of a global economic
Corporate bonds yielding less risk, sent the risk premium for these bonds pick-up, the Asian countries are braking down the
than government bonds is not upwards in a dynamic that caused many speed of their growth due to inflationary
a normal situation. countries in a direction of having to accept help. pressures. If these economies are already in
What happened in effect is that the only buyer of auto-feeding modus, this should be fine. We
German economic Greek and Irish bonds was the ECB. This was a believe this is not fully the case yet and could slow
«colonisation» of Europe will position the Central Bank did not want to be in as down the demand for western goods going
come to an end once German they already wanted to fade out bond purchases. forward. This could be offset by the better mood of
banks show full PIIGS The ECB strategy of monetary immunisation is the US consumer who has started to spend
exposure on their balance not sustainable because the purchased assets again. This could not come at a better moment
sheets. (mainly Greek and Irish bonds) are declining with the crucial end of year sales season ahead.
rapidly in value, deteriorating the ECB`s balance
German banks are very sheet. This has a braking effect on the economy
exposed towards the PIIGS. unless it is compensated with new money.
Given that they need to
EFSF :European Financial Stability Facility is a special purpose vehicle agreed by the 27 member states of the European Union on 9 May
refinance 30% of their bonds 2010, aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The Facility is
next year, this could cause headquartered in Luxembourg City, and the European Investment Bank provides treasury management services and administrative
some friction at the core. support to it through a service level contract. The Facility may be combined with loans up to €60 billion from the European Financial
Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to €250 billion
from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.
ESM: European Stability Mechanism. The permanent rescue facility that is to replace the EFSF after its expiration in June 2013. The ESM
should make the EFSF permanent, with the difference that ESM loans will be senior to sovereign bonds, while EFSF loans are not. As a
first step to providing support a debt sustainability analysis will be conducted by the commission, the IMF and the ECB. If considered
insolvent, it will have to negotiate a restructuring plan with its creditors. A system of collective action clauses (CACs) will allow a qualified
majority of creditors to make a proposed debt restructuring legally binding to all. An aggregation clause will be introduced so that all
outstanding government bonds are included in the negociations. After the sustainability analysis a unanimous decision of the Eurogroup
ministers will be needed to approve assistance. A final decision on the mechanism should be taken at the EU council meeting on
December 16th, 2010.
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2. General Market Returns (November 2010) Asset Allocation (December 2010)
Market Month-to-date Year-to-date Cash (0.6%,+0.6%):small allocation increase. The short term yields
are beginning to pick up in yield.
Performance Performance
3M Treasury Bill 0.0% 0.1% Bonds (59%, -15%): As the impact of QE2 (Quantitative Easing)
Barclays US Treasury 1-3Y Index-0.2% 2.6% seems to be fading out after the announcement of the US to start up
Barclays US Treasury 7-10Y Index -0.8% 13.3% another 600 billion, the allocation to bonds have been reduced
Barclays US Treasury +20Y Index1.3%
- 13.6% substantially. In the allocation we increased the 1-3 years by 5% and
the 20+ years by 18%. The 7-10 years has been reduced by 11% and
Barclays Corp.Inv.Grade Index -0.8% 10.0%
the corporate bonds have been liquidated. We believe that the sell-off
Dow Jones World Index -1.9% 5.4% on the long end has been overdone and that the QE, which is still
ongoing and might even start in Europe, will also focus on longer
Top 5 perform ing sectors duration bonds, where most of the economic stimulus can be
Sector Return (Nov 2010) Allocation (Nov 2010) delivered. This is a dynamic reweighting and needs to be seen in the
Energy 1.35% 0.00% light of the reduction of the fixed income allocation by 15%.
Basic Materials 0.56% 11.23%
Industrial 0.30% 0.00%
The duration in the model increased from 9 to 10.5 this month.
Consumer Services -0.57% 5.88% Equity (40%, +15%): Most of the bad macro-economic news from the
Consumer Goods -0.75% 1.62% sovereign side in Europe seems to be in the markets. The Emerging
markets saw a serious correction in November and so did the
Flop 5 perform ing sectors developed countries, with Europe suffering the most. With the earning
Sector Return (Nov 2010) Allocation (Nov 2010) season behind us, it is clear that the companies are in good shape,
Technology -1.44% 6.06% with plenty of cash and EBITDA margins not seen in over a decade.
Healthcare -3.37% 0.00% This has not really shown up in the equity prices which were dominated
Financials -5.07% 0.00% by macro themes. We continue to have little exposure to the financial
sector (banks and insurances) which is clearly carrying the biggest risk
Telecoms -5.52% 0.40%
in the sovereign crisis.
Utilities -5.63% 0.00%
European CDS spreads and EUR/USD (Oct-Nov 2010) Sector Allocation
B ilateral agreement between M erkel and Sarko zy saying 1.44
500 that private secto r sho uld be invo lved in risk sharing. The main overweights and underweights of last month remain or were
increased: Basic materials (11.3%, -0.6%), consumer goods (10%,
1.42
+8.3%) and consumer services (7%, +1.5%.) Biggest underweights are
400
in Oil&Gas (0.7%, +0.7%), financials (2.6%, +2.5%) and utilities (0.9%
1.4 +0.9%). The weight in Technology was reduced by -4.2% to 1.9%.
CDS Spread (% points)
EUR/USD rate
1.38 The biggest overweight we have is in the basic materials. There is a
300
large wave of consolidation taking place in the sector. There seems to be
1.36 more and more resilience in commodities versus the evolution of the
USD. Once this decoupling becomes clearer, there could be a second
200 1.34 bull wave in the commodity sector.
1.32 Geographical Allocation
100
1.3
A clear increase in the allocation to Japan, which at 16.9% is the biggest
geographical exposure. Japan did very well in the previous month and
has room to recover as it has underperformed this year. furthermore the
0 1.28
01 0
.1 08.10 1 0
5.1 22.10 29.10 05.11 1 1
2.1 1 1
9.1 26.11 recent weakening of the Yen versus its main trading partners will help. All
P o rtugal Spain Italy B elgium Germany EUR/USD (right scale) other countries are underweight versus the index, except for a neutral
So urce : B lo o mberg, Nautilus weight to the United States which will continue to benefit from QE.
The above graph illustrates the European misery made in Germany. It Europe, Latin America and Asia Pacific remain underweight due to
shows the market reaction to the bilateral talks between Germany and macro-economical factors such as sovereign debt and capital flow
France that the bondmarket should carry the pain of countries in taxing. The exposure to Europe would change for the positive once a
distress being bailed out. This was seen as very negative by the new QE is introduced in Europe and a more inflationary stance would be
market and made investors focus on other countries than Greece and taken by the ECB. This will most probably happen in the months to
Ireland. Even the core countries (such as Belgium) saw their spreads come.
against Germany increasing fast. This statement has been revised in
the meantime, but the damage has been done...Euro lower will make
the German economy even stronger.
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3. Current Asset Allocation
Asset Allocation Historical Asset Allocations Cash
Cash
(Last 5 years) Fixed Inco me
80.0% Fixed Inco me
Equity
Equity
100.0%
60.0%
75.0%
40.0%
50.0%
20.0% 25.0%
0.7% 59.0% 40.4%
0.0%
0.0%
Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10
A sset Classes
Fixed Income Allocation: Sector Fixed Income Allocation: Duration
40.0%
40.0%
30.0% 30.0%
20.0% 20.0%
10.0% 10.0%
2.9% 35.6% 20.5% 0.0% 2.9% 35.6% 20.5%
0.0% 0.0%
UST 1 Year UST 7-1 Year UST 20+ Year
-3 0 US Co rp.Inv <3 Years 7-1 Years
0 10-20 Years
Equity Allocation: Regions Equity Allocation: Industries
0% 4% 8% 12% 16% 20% 0% 2% 4% 6% 8% 10% 12%
United Kingdom 2.2% B asic M aterials 10.7%
Co ns. Go o ds 10.0%
No rth A merica 14.5%
Co ns. Services 7.4%
Latin A merica 0.0% Financials 2.6%
Health Care 1.3%
Japan 16.9%
Industrials 3.8%
Europe, Ex-UK (Eme) 0.0% Oil & Gas 0.7%
5.1% Techno lo gy 1.9%
Europe, Ex-UK (Dev)
Telco s 1%
.1
A sia/P acific, Ex-Japan 1.6% 0.9%
Utilities
Equity Allocation: Under/Over Regions Equity Allocation: Under/Over Industries
Europe, Ex-UK (Eme) -87.1% B asic M aterials 166.0%
Co nsumer Go o ds 105.3%
Europe, Ex-UK (Dev) -28.3%
Co nsumer Services 91.7%
United States 1%
.1 Financials -69.2%
Health Care -49.0%
United Kingdom -3.0%
Industrials -30.4%
Latin A merica -100.0% Oil & Gas -83.2%
Techno lo gy -44.1%
Japan 435.6%
Telco s -44.8%
A sia/P acific, Ex-Japan -64.3% Utilities -52.5%
-50% -25% 0% 25% 50% -50 -25 0% 25 50 75 100 125 150 1 200
75
% % % % % % % % % %
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4. Performance Analysis
DRM US 3M US Aggregate Benchmark** Dow Jones
Treasury
Agg. World Bond Index
Return Currency USD USD USD USD USD
Month Return (Nov-10) -0.8% -1.2% -1.9%0.0% -0.6%
Year-to-date Return 3.1% 6.6% 5.4%0.1% 7.7%
Last 12 Months Return 3.9% 6.7% 7.6%0.1% 6.0%
Last 24 Months Return 3.7% 12.8% 20.1%0.1% 8.8%
Total Annual Return * 8.9% 5.3% 4.9%2.1% 5.7%
Standard Deviation (Volatility) * 7.5% 8.4% 16.9%0.5% 3.8%
Semi-Standard Deviation (<0) * 7.1% 9.9% 19.2% NM 3.8%
Sharpe Ratio * ( rf = 2.07% ) 0.91 0.38 0.17 NM 0.97
Sortino Ratio * ( rf = 2.07% ) 0.96 0.33 0.15 NM 0.97
Positive Months * 67.3% 64.5% 99.1%
58.9% 69.2%
Average Monthly Return * 0.7% 0.4% 0.4%0.2% 0.5%
All figures are annualized measures of returns.
* Period: Jan-02 to Nov-10.
** Benchmark = 5% UST 3M + 22.5% UST 1-3Y + 9% UST 7-10Y + 5.4% UST 20+Y
+ 8.1% US Corp. Inv. Grade Bonds + 50% Dow Jones Aggr. World Equity Index.
Cummulative Performance
250 Cummulative Outperformance
100%
DRM
200
B enchmark 75%
150 50%
25%
100
0%
50
-25%
Dez Dez Dez Dez Dez Dez Dez Dez Dez
Dez Dez Dez Dez Dez Dez Dez Dez Dez
01 02 03 04 05 06 07 08 09
01 02 03 04 05 06 07 08 09
Current Month Performance Attribution Cash
Rew ard to Risk Analysis of Returns
vs. Benchmark Fixed Inco me 12.5%
Equities
To tal 10.0%
Realized Return
5.0% 5.0% DRM
(Reward)
7.5%
2.5% 2.5%
5.0% US Ag Bd Benchmark
Dow Jones
0.0% 0.0% Index Agg. World
2.5% Index
3M -Treasury
-2.5% -2.5%
0.0%
0% 5% 10% 15% 20% 25%
-5.0% -5.0%
A sset A llo catio n Secto r Ro tatio n To tal Value A dded Incurred Volatility (Risk)
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