10 key trends changing investment management

Employed by a non-US affiliate of HSBC Securities (USA) Inc and is not registeredqualified pursuant to FINRA regulations

By Garry Evans

We are in an unusual investment world of ultra-low interest rates swings between risk-on and

risk-off and investors demanding yield low fees and limited risk

This raises big challenges for the investment management industry We identify 10 trends that

are shaping the industry ndash from the decline of hedge funds and the growth of multi-asset

funds to the relentless rise of ETFs and the stirring interest in ESG

These trends should be positive for credit high-yielding equities and alternative assets (such as

long-term debt financing and structured derivatives products)

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix and with the Disclaimer which forms part of it

The 10 key trends changinginvestment managementhellipand how they will affect asset prices

Multi Asset Strategy

September 2012

Garry Evans

Global Head of Equity Strategy

The Hongkong and Shanghai Banking Corporation Limited

+852 2996 6916

garryevanshsbccomhk

Garry heads HSBCs equity strategy team worldwide His previous roles at HSBC include Asia Pacific Equity Strategist Head of

Pan-Asian Equity Research and Japan Strategist Garry began his career as a financial journalist and was editor of Euromoney

magazine for eight years before joining HSBC in Tokyo in 1998 Garry is based in Hong Kong

1

Multi Asset Strategy Global September 2012

abc

The 10 trends shaping the investment world We are in a very unusual investment world Interest rates are at historical lows equities more volatile

than normal different assets classes abnormally correlated and demographics are altering savings patterns

in rich countries

These developments have already caused big shifts in investment flows over the past five years Investors

have switched massively from equities into bonds moved their money into index funds and ETFs and

searched for new ways to achieve return without too much risk

In this report we look at how investor behaviour is changing and what this means for investment

management businesses We identify 10 themes that we believe will shape the future of the industry over

the coming years Not only is an understanding of these important for strategy planners at investment

management firms (and we held discussions with many CEOs and CIOs of investment firms in the

preparation of this report) we think these trends will affect asset prices too Will the search for income

push down yields on credit to ridiculous levels Will investors completely abandon equities because of

their volatility Will demand for alternative assets (infrastructure financing distressed debt derivative

structures) push up their prices

We believe that understanding these sorts of deep underlying trends in investment is important for asset

allocation It is too easy to get caught up in the day-to-day movements of the economic cycle Thinking

about long-term drivers such as demographics changes in wealth or market micro-dynamics can help

improve investment decision-making We believe the ideas and copious data in this report will prove

thought-provoking for anyone interested in understanding these shifts

After an introductory section which analyses the macro background and describes the state of the

investment management industry today ndash including projections for its future growth ndash each chapter of this

report details one of the trends with our assessment of its implications of each for asset prices

There are some common threads running through the trends In brief these are the struggle to produce

income in a low interest-rate world (via credit high dividend yield equities or illiquid investments) the

desire to tailor risk (though risk-minimising products and absolute return multi-asset funds) and the shift

to passive investments such as index funds and ETFs which has begun to hurt hedge funds too

Summary

How is a world of low interest rates risk aversion and unusually high correlations affecting the investment management industry We identify 10 trends changing how investors invest and assess their impact on the price of assets

2


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Our 10 trends are

1 Average US BBB-rated five-year corporate bond

0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

The search for yield With risk-free rates so

low investors are desperate for income They

have already piled into bonds Credit remains

in a sweet spot though issuers are attracted

by the low interest rates but for investors

spreads over government bonds remain

decent (Chart 1) We think dividend yield

stocks remain attractive too Many investors

argue itrsquos too late to buy them but in the US

in particular income funds still comprise only

3 of equity mutual funds 3 Source Bloomberg

2 Total return indexes (log scale) since 1988

45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash

The death ndash or rebirth ndash of equities Bill

Gross of Pimco says the cult of equity is

dead But equities have actually outperformed

bonds over the past 10 years although

admittedly with high volatility (Chart 2)

Perhaps a bigger risk ndash which bond houses

are worrying about ndash is the bursting of the

bond bubble could 2014 be another 1994 At

the very least with cash yielding zero and

high-quality government bonds 15 it

seems likely that equity returns will beat

these over the next 10 years Page 17 Source Bloomberg MSCI (Equity=MSCI ACWI TR Gross Bonds=JP Morgan

Aggregate Bond Index TR Unhedged USD Cash=3-month T-bills)

Risk minimising strategies Investors ideally would like equity-style returns with bond-like

volatility Thatrsquos rarely possible But fund managers are developing products that offer different

combinations of risk and return Such strategies include multi-asset funds longshort equity

strategies risk parity products minimum volatility equity funds and using options to target a level of

risk Page 20

The growth of multi-asset The fastest growing type of risk minimising strategy especially in the

UK is the absolute return fund most famously Standard Lifersquos GARS Such funds target Libor-plus

absolute returns with bond-like volatility and costs lower than hedge funds They have their

detractors (do they really create alpha or are they just leveraged bond funds) but look likely to grow

further even in the US where they have yet to take off Page 22

3


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3 Cumulative net inflows into mutual funds worldwide (USDbn)

-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

The shift to passive A third of active equity

money has shifted into passive funds in the

past 10 years (Chart 3) We think passive

encroachment is likely to continue since

active funds empirically underperform on

average (with higher costs) But indexing

strategies are likely to get smarter some

indexes outperform others for example the

equal-weighted SampP500 has beaten the

regular (market cap weighted) SampP500 by

37 in the past decade Page 24 Source EPFR

4 Assets of exchange-traded funds (USDbn)

0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other

The relentless rise of ETFs ETFs have

reached USD15trn (up from USD105bn in

2001 ndash Chart 4) But there are issues with

these too Are ETFs suitable for bonds

Some overly sophisticated ETFs have blown

up spectacularly will this invite the

regulatorsrsquo attention The two keys for future

growth are (1) whether active ETFs take off

and (2) the trend of retail financial advisors

being remunerated by fees rather than

commissions on the products they sell (ETFs

donrsquot pay a commission) Page 28 Source Blackrock (end-Jun)

5 Cumulative performance of hedge funds

100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12

HF indexLS equityMacro HFs

The decline of the hedge fund Hedge funds

have struggled to perform recently (Chart 5)

The average hedge fund is up only 25 so

far this year The underlying problem is that

the hedge fund community has become so big

that it has arbitraged out most of the alpha

Like active equity funds hedge funds in

aggregate cannot by definition outperform

Moreover ldquotraditionalrdquo fund managers are

increasingly converging with large hedge

funds ndash and they donrsquot charge fees of 2 and

20 Page 31

Source Bloomberg EurekaHedge

4


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6 Illiquidity premium estimate by asset class

0

100

200

300

400

500

Equity Corporate

bonds

Gov ernment

bonds

Cov ered

bondsbp

Harvesting the illiquidity premium Most

investors have a strong preference for

liquidity But some ndash notably pension funds

and insurers ndash donrsquot always need it and may

be overpaying for it Amid the desperate

search for income they may see the attraction

of the extra yield available in illiquid assets

(Chart 6) such as infrastructure real estate

finance and ldquoprivate debtrdquo (structured like

private equity but providing debt financing)

Page 34 Source Adapted from Barrie amp Hibbert (wwwbarrhibbcomdocumentsdownloadsLiquidity_Premium_Literature_REviewpdf)

7 Global pension assets (USDtrn)

0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Autonomous pension funds Pension insurance

Other managed funds

Where will the money come from Defined

benefit pensions are dwindling (Chart 7) The

growth areas for investment management

companies in the next few years will be

personal pensions Asian high net worth

individuals and sovereign wealth funds But

each of these will demand more sophisticated

products and solution-based services Page 36

Source OECD

8 SRI assets under management (USDtrn)

0

2

4

6

8

10

2005 2007 2010

US SRI AUM ($tn) Europe SRI AUM ($tn)

The challenge of ESG Plan sponsors

particularly public pension funds in Europe

are increasingly focusing on environmental

social and governance issues So far most

fund managers pay only lip-service to this

But momentum is building (Chart 8) and

companies with superior ESG policies and

disclosure might start to outperform After

all who wants to buy a company with poor

corporate governance which pollutes or treats

its staff badly Page 42 Source US SIF Eurosif (definitions differ slightly)

5


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Implications for asset prices

The search for yield should be positive for credit and for high dividend yield stocks both of which remain

attractive in our view Equities in general may struggle for a few more years as global economic growth

remains low but the basic concept that equities have a risk premium ndash and therefore generate greater

returns in the long run ndash will not disappear If investors become more willing to buy illiquid assets to

boost yield the pricing of long-term loans commercial real estate and infrastructure finance should be

positively affected The development of multi-asset funds should aid the development and liquidity of

more esoteric asset classes and derivatives products We believe the further growth of passive funds and

ETFs will keep inter-market and intra-market correlations high

6


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Introduction an unusual world 7 Cyclical or evolutionary 7

The search for yield 13 hellipin credit and dividends 13

The death ndash or rebirth ndash of equities 17 Problem is volatility not return 17

Risk-minimising strategies 20 Tailoring risk not return 20

The growth of multi-asset 22 GARS and all its friends 22

The shift to passive 24 Itrsquos hard to beat an index 24

The relentless rise of ETFs 28 Attractive ndash but problems too 28

The decline of the hedge fund 31 Is there any alpha left 31

Harvesting the illiquidity premium 34 Do you really need liquidity 34

Where will the money come from 36 The sources of growth 36

The challenge of ESG 42 Unavoidable momentum 42

Disclosure appendix 46

Disclaimer 48

Contents

7


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Cyclical or evolutionary We are in a very unusual investment world

Interest rates are at historical lows equities more

volatile than normal different assets classes

abnormally correlated (the ldquorisk on-risk offrdquo

phenomenon) and demographics are altering

savings patterns in rich countries

These developments have already caused a big

shift in investment flows over the past five years

Investors have

Sold equities and bought bonds in huge

volumes in the US since end-2007 bond

mutual funds have seen inflows of USD920bn

and equity funds outflows of USD430bn

Loaded up on risk-free assets But the supply

of these has shrunk (according to the BIS

AAA-rated government paper now totals only

USD12trn compared to USD26trn in early

2011 ndash Chart 1) This has pushed down their

nominal yields to below zero in some cases

Increasingly understood that active equity

fund managers in aggregate underperform

benchmarks (even before fees) and so moved

heavily into index funds and ETFs

Searched for new ways other than equities to

achieve a decent return without too much risk

This has led to the development of absolute

return (or diversified beta) funds and risk-

minimising strategies

1 Credit risk of pool of government debt

0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11

AA to below AA+AA+ to below AAAAAA

Source BIS (Ratings used are the simple averages of the long-term foreign currency sovereign ratings from Fitch Moodyrsquos and SampP)

Is this a permanent structural change or will we

eventually go back to the old normal Probably a

bit of both The side-effects of the 2007-9 Global

Financial Crisis will eventually wear off (though

Introduction an unusual world

Low rates high volatility high correlation ndash the world has changed

Fund managers are struggling to cope how to find returns without

too much risk and provide solutions to investors with new needs

We indentify three threads the search for income tailoring risk

and the continuing shift from active to passive

Garry Evans Strategist The Hongkong and Shanghai Banking Corporation Limited +852 2996 6916 garryevanshsbccomhk

Employed by a non-US affiliate of HSBC Securities (USA) Inc and is not registered qualified pursuant to FINRA regulations

8


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this may take a few more years) with interest

rates volatility and correlations returning to their

historical norms

But there has been some evolution too Investorsrsquo

behaviour is likely to have changed permanently

Investors will increasingly question whether

hedge funds can generate alpha and whether

they deserve fees of 2 and 20 even if

they can

Retail investors will demand access to the sort

of absolute return strategies that hedge

funds previously specialised in ndash and at a

reasonable cost

There will be more demand for solutions

whether liability-matched investments for a

defined benefit (DB) pension fund that is

winding down or a ldquoto-and-throughrdquo

personal pension plan for an individual due

to retire in five years who wants to fix

post-retirement income

Interest in buying stocks in companies with a

strong ESG (environmental social and

governance) record will increase This is not

idealistic green talk ndash after all who wants to

own a company with poor corporate

governance or which treats its staff badly

Many of these themes are fairly obvious and have

been under way for a number of years But how

the fund management industry will be affected by

them is not yet at all obvious Like any business

an investment management firm has to pick a

strategy should it rush into all these new areas

(ETFs absolute return funds pension solutions

ESG) or should it decide to focus Is it better to

be a large global investment house or a focused

boutique ndash or hedge onersquos bets by becoming a

multi-boutique umbrella organisation

These trends will affect asset prices too If

investors abandon equities for a generation PE

multiples would contract further as they did in the

1970s or after the Great Depression Further

growth in ETFs and index products could push

correlations up further A rise in demand for

alternative assets (infrastructure financing

distressed debt derivative structures) could shift

the prices of these assets As banks in Europe

deleverage infrastructure lending leasing and

other forms of long-term finance could pass to

institutional investors in a form of

disintermediation which could bring down

borrowing costs

2 Demographic trends of population aged 35-54 in DM 3 Demographic trends of population aged 35-54 in EM

20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging

Source HSBC UN Population Division NB MSCI World markets Source HSBC UN Population Division

9


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Why this matters

This is a topic that HSBCrsquos strategy team has

tackled before We believe that understanding the

deep underlying trends in investment are

important for asset allocation It is too easy to get

caught up in the day-to-day vicissitudes of the

economic cycle Thinking about long-term

drivers such as demographics changes in wealth

or market micro-dynamics can help improve

investment decision-making

Earlier this year for example we published a

report (Who will buy by Daniel Grosvenor 3

February 2012) which argued that demand for

equities is likely to remain structurally weak due

to prolonged risk aversion regulatory changes and

deteriorating demographics In particular ageing

populations in the developed world (Chart 2) will

tend to own fewer equities This the report

argued could keep DM valuations depressed but

EM should be immune (partly because of its

better demographics ndash Chart 3)

We also described the growing importance of

emerging markets investors in Asia buys Asia by

Herald van der Linde and Devendra Joshi June

2012 Asian equity markets have traditionally been

dominated by foreign investors or speculative local

individuals But this is changing as Asians diversify

their wealth into financial assets and pension

systems develop across the region

Our colleagues in quantitative strategy have also

looked at the risk on-risk off phenomenon (their

latest report is Risk On ndash Risk Off Fixing a

broken investment process by Stacy Williams

Daniel Fenn and Mark McDonald April 2012)

They suggest ways in which fund managers can

adapt their investment process to cope with the

phenomenon and take advantage of it

For this present report we met with CEOs chief

investment officers and senior business managers

at almost 20 investment firms in the US and

Europe These ranged from niche long-only equity

specialists to opportunistic macro hedge funds

from major ETF providers to large global multi-

asset investment managers Naturally most of the

senior managers had a bias based on what they

specialised in equity houses tend to believe that

actively managed equity will come back and

passive specialists argue that in future everything

will be indexed

But our conversations gave us a good idea of the

sort of concerns investment managers have when

they are being candid Bond houses worry about

how to cope with the crash in bond prices that we

believe is inevitable in the future Active

managers worry whether itrsquos too late to enter the

index ETF business ndash or whether they should try

to structure their active funds as ETFs Many

managers are struggling to create innovative

products ndash risk-hedged funds absolute return

strategies pension-friendly structures ndash in a world

where their revenues have stagnated and so RampD

budgets have been cut

The global investment industry today

Before we try to draw out some threads from the

10 trends in investment management we have

identified some background

4 Assets under management (USDtrn end-2010)

Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26

Source TheCityUK estimates

How big is the global investment industry

Conventional assets (pension funds mutual funds

10


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and insurance) total about USD80trn split

roughly evenly between the three (Chart 4) The

AUM of these institutions has doubled since

2000 Hedge funds manage around USD2trn and

private equity funds a little more than that Add to

this sovereign wealth funds which in their pure

form have assets of about USD5trn include FX

reserve managers and other sovereign institutions

(such as national pensions or development funds)

and the total reaches about USD20trn ETFs

comprise another USD15trn or so Private wealth

is harder to figure out various estimates put it at

between USD26trn and USD120trn At the top

end of estimates the total amount of money

available for investment firms to manage exceeds

USD200trn ndash almost 3x global GDP

The US is still the largest source of funds with

USD35trn out of the USD79trn in conventional

assets globally (Chart 5) That is 224 of US GDP

The UK though much smaller in absolute terms at

USD65trn is the biggest in proportion to GDP with

conventional funds representing 257 of GDP

(although some of that comes from money

domiciled in the UK but not from UK nationals)

5 Source of conventional assets by country (USDtrn)

05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er

Pension funds Insurance assets Mutual funds

Source TheCityUK estimates based on OECD Investment Company SwissRe and UBS data (Figures are for domestically sourced funds regardless of where they are managed No reliable comparisons are available for total funds under management buy country)

hellipand the chances of it growing

There is no reason to suppose that the rate of

growth of institutional assets will slow over the

coming years Over the past decade conventional

assets have grown at a compound annual rate of

71 While it is likely in our view that global

economic growth will be lacklustre in coming

years as the after-effects of the Global Financial

Crisis are worked off this does not mean that

global savings will be stagnant Indeed quite the

opposite Households and companies are likely to

increase their savings as they stay risk averse (and

governments are likely to reduce fiscal deficits

albeit slowly)

The IMF projects that US and UK gross national

savings which have already improved modestly

since 2009 (to 129 of GDP from 115 in the

case of the US) will continue to increase over the

next five years with the US reaching 178 by 2017

(Chart 6) China meanwhile is unlikely to reduce its

savings rate much despite efforts to get households

to spend Australia has already made some headway

in raising its savings rate since its bubble in the early

2000s Japan is the only major economy where the

ratio may fall as retirees start to eat into their

savings All this suggests that the savings glut which

drove the fall in interest rates and strong equity

performance in 2003-7 will not disappear

6 Gross national savings rate selected countries ( of GDP)

0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF

And at the same time as savings grow companies in

the developed world are unlikely to need to raise

much money for the next few years Corporate cash

holdings are at record highs especially in the US

and companies are being cautious about capex

11


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Dividend payout ratios are very low (31 in the US

last year for instance) This suggests that large listed

companies at least will not need to raise much

capital either debt or equity for the next few years ndash

although capital-hungry emerging markets

companies of course will

As countries get richer they tend to increase the

amount of institutional assets under management

and increase the amount invested in equities and

bonds (rather than placed in bank deposits) as

shown in Charts 7 and 8

7 Increasing wealth brings growth in institutional assets

0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany

of household w ealth in institutional assets

Bubble size = per capita GDP (PPP)

Source HSBC CEIC

8 hellipamid withdrawals from bank deposits

0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany

of household w ealth in bank deposits


Source HSBC CEIC

This suggests that as long as emerging markets

continue to develop (which in most cases we think

likely) then not only should the pool of potential

savings grow but the proportion of the pool

available for international investment institutions

to manage should grow even faster Not that this

will be without challenges how do London or

New York-based investment managers get access

to wealth held in China or India which is still

highly restricted in where it can invest and mostly

off limits to them

Indeed a well-read report by the McKinsey

Global Institute The emerging equity gap Growth

and stability in the new investors landscape

December 2011 argued that the growth of

international securities ownership by emerging

market investors will be essential if the role of

equities in the global financial system is not to be

reduced in the coming decades In particular

emerging market investors will need to triple their

allocation to equities if companies in these

countries are not to be starved of equity capital

Common threads

In this report we highlight the 10 trends that we

think will drive the investment management industry

over the next few years Understanding these trends

ndash and considering their implications ndash will be

important both for investment institutions in

planning their strategies and for investors interested

in the impact of these trends on asset prices

12


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Inevitably there are some overlaps between the

10 trends Broadly we see three threads running

between them

The search for income With interest rates so

low investors are desperate to generate

income This has triggered demand for credit

and high dividend yield equities which we

expect to continue It is also forcing investors

to consider whether they are overpaying for

liquidity and to look at harvesting a premium

for investing in illiquid instruments such as

infrastructure and ldquoprivate debtrdquo funds

Tailoring risk Modern derivative techniques

make it possible to tailor risk to an extent

Investors scared of drawdowns can hedge fat-

tail risk Fixing a return is not possible (except

for a very low return) tailoring a level of risk

may be easier This concept has spawned the

development of risk parity funds and a boom in

multi-asset absolute return funds

A continuing shift from active to passive

Academic evidence strongly suggests that

active equity fund managers in aggregate

underperform their benchmarks That has

pushed investors over the past decade from

active to passive funds especially ETFs ndash a

trend we expect to continue It is also forcing

a rethink of the role of hedge funds which

have grown so large that in aggregate they no

longer seem to be able to produce superior

performance either

In the following sections we describe in detail the

10 trends we have identified and analyse their

implications for asset prices

13


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hellipin credit and dividends With cash yielding zero and top-quality

government bonds little more than 15 it is

unsurprising that investors are scrambling to pick

up yield Indeed one could even say that the

market has become obsessed with income

1 Cumulative net flows to bond funds worldwide by type

-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther

Source EPFR (ldquoOtherrdquo includes muni funds MBS funds total return bonds and funds able to invest in a mix of bond types)

Look at flows into bond mutual funds recently It

is well known that these have been very healthy

totalling USD580bn over the past three years

according to EPFR But for the past 12 months at

least bonds flows have been predominantly into

credit funds (for example corporate high yield or

EM bond funds) with even a small net outflow

from government bond funds (Chart 1)

The sort of funds selling well is clear from the list

of the largest fund launches year-to-date The top

20 new US-based funds ranked by assets under

management now (Table 2 overleaf) include 10

bond funds two asset allocation funds and only

eight with an equity focus (remember this is for

the heavily equity-centric US market) Three of

the best-selling funds include the word ldquoincomerdquo

in their names

Credit is in a sweet spot Interest rates at which

corporates can issue are at historic lows But at

the same time spreads over US Treasuries are

quite high making the bonds attractive for

investors too

In the US for example BBB-rated five-year

corporate bonds currently yield only about 28 ndash

the lowest for decades ndash but that represents a spread

over Treasuries of around 200bp well above the

average of 130bp from the 2003-7 period (Chart 3)

The same is true in emerging markets The HSBC

Asian Dollar Bond Index (Chart 4) currently has a

record low yield of 37 but the spread over

Treasuries is a still attractive 300bp

This is why lots of bonds have been issued this

year August for example with over USD120bn

of issuance according to Dealogic was the highest

August on record and more than double the

USD58bn average for August Sub investment

The search for yield

With risk-free rates so low investors are desperate for income

Credit is in a sweet spot with issuers enjoying record low

borrowing costs but investors finding decent spreads

We think dividend yield stocks remain attractive too

14


abc

grade issuance in August totalled USD27bn up

from USD13bn the same month in 2011


0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg

Investors are clearly now having to take more risk

to get yield Fund houses report that investors who

20 years ago would not have touched BBB credits

will now buy almost anything for yield One

example is bonds from riskier emerging markets

Ten-year paper from the Philippines a BB-rated

issuer now yields only 25 Investors have been

buying bonds from countries such as Gabon

Belarus Nigeria and Vietnam But five-year

bonds even from Gabon (BB-rated) now yield

only 38 You have to stretch to Belarus (B-) to

get a decent yield just over 10

4 HSBC Asian US Dollar Bond Index

0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

This could all go very wrong Credit spreads are

supposed to compensate investors for the

probability of default At the investment grade

part of the credit spectrum defaults are rare but at

the sub-investment grade end they are less so At

present the combination of low rates on high

quality government bonds and relatively wider

credit spreads combined with very low default

rates places credit in a sweet spot compared to

some other assets classes However in an

2 Largest mutual funds launched in the US this year

Ticker Name Manager Inception date

Asset class Objective AUM (USDbn)

TGIRX US Intl Value Fund Thornburg 512012 Equity International Equity 265 OIBIX US Intl Bond Fund Oppenheimer 1272012 Debt International Debt 126 WAPRX US Core Plus Fund Western Asset 512012 Debt GovtCorp Intermediate 96 OSIIX US Global Strategic Income Fund Oppenheimer 1272012 Debt GovernmentCorporate 86 OGLIX US Global Fund Oppenheimer 1272012 Equity Global Equity 83 PSTQX US Short Term Corp Bond Fnd Pridential 322012 Debt CorporatePreferred-Inv Grade 80 AEMSX US Emerging Markets Fund Aberdeen 2272012 Equity Emerging Market-Equity 75 OIGIX US Intl Growth Fund Oppenheimer 4272012 Equity International Equity 62 MSKHX US Mid Cap Growth Portfolio Morgan Stanley 6152012 Equity Growth-Mid Cap 60 MSFKX US Total Return Fund MFS 612012 Asset Allocation Balanced 58 PEFAX US EM Fundamental IndexPLUS Pimco 5312012 Debt Index Fund-Debt 54 CMCPX US Active Portfolios Multi-Manager Core

Plus Bond Fund Columbia 4202012 Debt GovernmentCorporate 47

OBBCX US Mortgage Backed Securities Fund JP Morgan 722012 Debt Asset Backed Securities 41 JQLAX US Life Aggressive Fund John Hancock 312012 Asset Allocation Flexible Portfolio 37 OEIIX US Equity Income Fund Oppenheimer 4272012 Equity Value-Large Cap 33 MIDLX US Intl New Discovery Fund MFS 612012 Equity International Equity 32 JIPPX US Strategic Income Opportunities Fund John Hancock 312012 Debt Global Debt 31 WABRX US Core Bond Fund Western Asset 512012 Debt GovtCorp Intermediate 30 MFBKX US Bond Fund MFS 612012 Debt GovernmentCorporate 28 JDVPX US Disciplined Value Fund John Hancock 2292012 Equity Value-Large Cap 28

Source Bloomberg

15


abc

environment of low growth rates credit quality is

at risk of deterioration and if default rates begin

to rise the credit spreads sought by investors

could widen significantly

Income from equities

The other obvious place to turn for yield is

equities With the dividend yield on global

equities currently averaging 32 the spread over

government bonds is the highest since the 1950s

Investors have been buying into this theme

enthusiastically over the past two years There

have been almost USD80bn of flows into

dividend funds over this time (Chart 5) making it

the most popular of the themes tracked by EPFR

Oddly the theme has not been so popular in the

US Maybe there are definitional differences but

US income funds tracked by ICI have seen net

outflows of about USD11bn over the past two

years (Chart 6) Income funds comprise only 3

of outstanding US equity mutual funds (compared

to 33 for growth and aggressive growth funds)

5 Cumulative net flows into mutual funds by theme

-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn

Div idendBalancedmulti assetGoldCommodity

Source EPFR

There are a number of explanations for the lack of

interest in dividend funds in the US The dividend

yield in the domestic market is quite low (26

compared to for example 43 in Europe) since

companies prefer buy-backs which are more tax

efficient The tax on dividends (currently 15) is

due to rise next year as part of the ldquofiscal cliffrdquo to

an investorrsquos marginal tax rate ie as high as

40 this is causing uncertainty It may be simply

that investors are just too nervous of equities to

touch even ones with good income

6 Cumulative net flows into US equity mutual funds by type

0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc

Many CIOs argue that it is just too late to buy

dividend stocks since they have already

performed well We disagree The global dividend

yield has not fallen much it peaked at 44 in

early 2009 at the market trough but has been

fairly steadily around 3 for the past three years

High dividend stocks have not outperformed that

much yet either For example the global MSCI

High Dividend Yield Index has beaten MSCI

World by only 7 over the past three years

(ignoring the dividends paid) And the MSCI

USA High Dividend Yield Index (launched in

January this year) has performed just in line with

the headline MSCI US year-to-date


The search for yield will continue if as we expect

risk-free government bond yields remain low for

some time to come That suggests to us that both

credit and high dividend equities will see further

inflows and therefore a contraction in bond

spreads and rise in equity prices

17


abc

Problem is volatility not return Bill Gross Co-CIO of Pimco famously

announced this August that ldquothe cult of equity

is deadrdquo

But the truth is not that simple Indeed many

bond fund managers are worrying more about the

crash in the bond market that we believe is

coming and thinking about how to position

themselves for it

Certainly over the past few years investors have

switched massively away from equities and into

bonds Since the end of 2007 USD920bn has

flowed into bond mutual funds in the US and

USD430bn out of equity funds (Chart 1)

This is not only because of the equity bear market

of 2007-9 The trend has been accelerated by

demographics in developed economies (older

people hold fewer equities) and by regulation as

regulators especially in Europe pushed pension

funds and insurers to derisk their portfolios

1 Cumulative net flows into US mutual funds (USDtrn)

00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Equity fundsBond funds

Source ICI

But have equity returns really been that bad

Many investors talk about the past 10 years as

having been a ldquostructural bear marketrdquo for

equities But the fact is that over that period the

total return from global equities (a compound

annual rate of 80) has been better than the

return from global bonds (52)

Of course the picture is a little more complicated

than that The return depends greatly on the

starting-point the 10-year return for equities is

flattered by the fact that August 2002 was close to

the bottom of a bear market

The death ndash or rebirth ndash of equities

Bill Gross says the cult of equity is dead

But equities have actually outperformed bonds over the past 10

years although admittedly with high volatility

A bigger risk is the bursting of the bond bubble could 2014 be

another 1994

18


abc

And equities have been particularly volatile over

the past decade or so (Chart 2) In the bull market

of 1992-9 equities produced a much smoother

annual return of 16 with volatility of 13

compared to a 6 return for bonds with a

volatility of 5 Over the past 10 years the

volatility of bonds has been pretty steady at 6

but the volatility of global equities has risen to

19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash

Source Bloomberg MSCI (Equity=MSCI ACWI TR Gross Bonds=JP Morgan Aggregate Bond Index TR Unhedged USD Cash=3-month T-bills)

3 Compound return from different asset classes

Equity Bond Cash

1 year 98 14 02 2 years 81 52 02 5 years -09 64 11 10 years 80 67 21 20 years 71 64 35 1992-1999 16 6 5 Since 1988 72 71 43

Source Bloomberg MSCI

4 Annaulised volatility of different asset classes

Equity Bond Cash

1 year 20 4 0 2 years 18 5 0 5 years 24 6 0 10 years 19 6 0 20 years 17 6 0 1992-1999 13 5 0 Since 1988 17 6 0


That volatility explains a lot Retail investors and

regulators have been made very nervous by the

big swings in stock prices It will take a lot for

them to get confident in equities again Many

equity fund managers worry that one more crisis

or another nasty bear market in the near future

would put investors off equities for a generation

as happened after the 1929 stock market crash

The high volatility also explains the big flows into

passive funds in recent years (discussed in a later

section) volatility makes it hard for active or

thematic fund managers to perform well

But there are issues for bond markets too

valuations for a start The interest rates on top-

rated government bonds are at unprecedently low

levels the 10-year US Treasury yield for

example fell below 14 this summer the lowest

since at least the late 19th century (Chart 5)

5 10-year US Treasury bond yield ()

0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000

Source Robert Shiller

Meanwhile equity valuations while not

exceptionally low are certainly well below long-

run averages the forward PE on the SampP500 for

instance is currently about 125x compared to a

140-year average of 136x (Chart 6)

19


abc

6 One-year forward PE SampP500 (x)

0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010

Source Robert Shiller IBES MSCI

Indeed the best way for investors to regain

confidence in equities would be if bond prices were

to crash This might be caused by a rise in inflation

or signs that the Fed and other central banks were

looking to begin unwinding their unothodox

monetary easing measures Some CIOs have started

to worry whether 2014 could be another 1994 (when

the Fed raised rates unexpectedly and sent bonds

crashing) How could bond houses stay relevant in a

rising rate environment

Indeed several we spoke to have begun to prepare

for this eventuality and started to consider how

they might enter the equity business Grossrsquos

Pimco set up four equity funds for the first time in

2010 and others are starting to address this also

Other traditional bond houses told us they were

looking at specialising in equity tactical asset

allocation using ETFs to execute country and

sector bets

They key question then is whether the recent

volatility in equities and the shift in investorsrsquo

preferences to bonds are structural or cyclical

The answer is that it is surely a bit of both With

the debt overhang in the developed world likely to

hold down growth for a few more years policy

uncertainty and low inflation will probably keep

interest rates low and equity markets on edge But

this will not last forever

And in the meantime investors will struggle to

make decent returns from bonds at current levels

The financial textbooks may dictate that as an

individual nears retirement he or she should sell out

of equities and own only bonds That might have

worked when interest rates on government bonds

were 7 and a 65-year-old could expect to live

only 10 years But it certainly doesnrsquot work with

bond yields at 15 and life expectancy of 80-85


Our conclusion is that equities are likely to

struggle for a few more years with economic

growth in the developed world anaemic But the

basic concept that equities have a risk premium

should not disappear And we would have a high

degree of conviction that the total return from

equities over the next 10 years will be higher than

that from cash or government bonds (admittedly

not a big hurdle)

The problem to solve is investorsrsquo perception that

equities are risky But there might be ways to

reduce the riskiness of equities without sacrificing

too much of their return We examine the idea of

risk-minimising strategies in the next section

20


abc

Tailoring risk not return What all investors would ideally like is a good

return with low risk Of course that is impossible

but fund managers are increasingly designing

products that give at least a decent return (or

income) with some downside protection or

reduced volatility

The key insight here is that while it is impossible

to fix return it is possible to tailor risk to a

degree One could for example buy an equity

index together with a put option thus giving up

some income in return for a pre-determined limit

to drawdown Investors have a reduced tolerance

for drawdown after the upheaval of 2008 fund

managers can structure their offerings with the

aim of avoiding an outlier outcome

Such products are not new (private banks have for

at least 20 years sold capital guaranteed equity

indexes where the dividend stream is used to buy

downside protection) But in a world where

investors are hungry for yield but nervous of

equity risk (as we saw in the previous two trends)

they are increasingly popular They are also

becoming more sophisticated and nuanced

There are many such structures around

The fastest growing especially in the UK are

multi-asset funds (aka diversified beta or

diversified growth) which we discuss in

detail in the next section These aim at

absolute returns in a range of assets with a

targeted level of volatility Essentially they

intend to provide a nice return but with low

correlation to equities

ldquoRisk aware equity servicesrdquo such as

longshort or market-neutral strategies

have for long been the territory of hedge

funds but are increasingly being used by

conventional fund managers

Balanced funds (with a mix of equity and

bonds typically 6040) have long been a

mainstream of retail fund management houses

But they have often produced poor returns

mainly because the vast proportion of the risk

lay in the equity portion A recent

development is risk-parity products where

risk between the asset classes is equalised for

example by leveraging the bond portion

Risk-minimising strategies

Investors want equity-style returns with bond-like volatility

Fund houses are developing products that tailor a level of risk in

return for giving up or boosting return

Strategies include diversified beta risk parity min vol call writing

21


abc

Minimum volatility equity funds focus on

low-beta stocks in an index often using a

quants model They are based on the finding

in some academic research that beta does not

produce the outperformance in the long-run

that it should These funds it is claimed can

produce at least as good performance as a

major index but with significantly reduced

volatility

Using options to target a level of risk For

example a fund could write calls and buy

puts to an equal value to specify acceptable

downside risk at the expense of upside This

could also be done simply and relatively

cheaply to eliminate extreme tail risk

Similarly a strategy of passive-plus with call

writing allows a fund to boost the return on

an index in return for capping the upside

Again the level of the cap can be tailored

Some funds have experimented with the idea

of hanging a coupon off an equity fund

This might look more attractive than a simple

dividend fund since the coupon as long as it

was relatively low (for example 2) could be

fixed for a period since shortfall is unlikely

Any dividend payment in excess of that

would be reinvested This hybrid of bond and

equity characteristics may be attractive to

some investors

Not that such tailored products are without

problems It may be hard to explain their

characteristics and attractiveness to retail

investors as one CIO told us ldquoYou canrsquot sell a

Sharpe ratiordquo

The products can be quite expensive too Some

highly risk-averse investors may end up giving

away too much upside to buy insurance With

implied volatility for equities still high (though

lower this year than for a while) the cost of

options protection is high The lack of

transparency on costs may leave some retail

investors wondering whether the investment bank

selling them the structured product is offering a

good deal

But for both sophisticated retail investors with

astute advisers to guide them through the

complications and for institutions with strong risk

consciousness for example insurance companies

products that minimise ndash or at least tailor ndash risk

might be a wise investment


If risk-minimising products grow further this

should be positive for the growth of options

markets and for liquidity in the sort of assets that

multi-asset funds typically target

22


abc

GARS and all its friends Standard Lifersquos Global Absolute Return Strategies

(GARS) Fund has been causing a stir in the UK

Since its inception in 2008 it has gathered assets

of GBP117bn It aims to produce an annual

return of cash plus 5 with an investment time-

horizon of three years (and to have a positive

return over any 12-month period) by investing in

a range of assets and derivative strategies (see

Table 1 for example of its positions) Over five

years it has produced a compound annual return

of 7 putting it in the 99th percentile of its peers

(with volatility over the past year of only 5)

The GARS Fund has spawned a raft of

competitors in the UK but not yet in the US

although by all accounts GARS has started to gain

traction there

It is the leader of a growing category of multi-

asset absolute return funds known also as

diversified growth diversified beta or diversified

return funds These funds typically target Libor

plus 4 or 5 (or sometimes inflation plus say

3) with volatility lower than equities and often

targeted to be similar to US treasuries (ie 4-6)

They usually use leverage to achieve the targeted

return In a sense they are similar to hedge funds

but fees are lower (GARS charges 75bp a year

with no performance fee) and many are offered to

retail as well as institutional investors

1 GARS fund selected positions July 2012

Market return strategies High yield credit Russian equity Korean equity Global index-linked bonds FX hedging Directional strategies US forward-start duration Long USD v CAD Mexican rates v EUR Long BRL v AUD Long equity volatility European swaption steepener Relative value strategies Relative variance income US tech stock v small cap European financials capital structure Hang Seng v SampP volatility HSCEI v FTSE variance Broad v financial sector equity Financial sector v broad credit

Source Standard Life public website

The track records of GARS and of many of its

later-established competitors have been

impressive But multi-asset funds have their

detractors too (and not only among houses late to

the game)

The growth of multi-asset

Funds that target Libor-plus absolute returns with bond-like

volatility and costs lower than hedge funds look attractive to us

The success of Standard Lifersquos GARS has spawned competitors

Multi-asset funds are likely to grow further even in the US where

they have yet to take off

23


abc

Some argue that Standard Life has been lucky to

achieve such good returns (or maybe has done so

only because its fund managers are particularly

talented) and wonder whether similar funds would

be able to replicate the returns Wonrsquot multi-asset

funds in aggregate underperform their

benchmarks just as active equity managers do

and (as we describe in the section below The

decline of the hedge fund) hedge funds may have

begun to do too That may happen eventually but

for now the asset class is still so small that it does

not yet face a zero-sum game

Other critics wonder whether multi-asset funds

are really an alpha product or simply take beta

risk with leverage In our view the answer to this

is that even if part of the return that multi-asset

funds achieve is beta timing the beta and

managing asset allocation can be forms of alpha

A final doubt is that leverage may work with

interest rates so low but what happens when the

cost of the leverage goes up

It is also somewhat of a puzzle why multi-asset

funds in the US have failed to take off yet

Certainly most CIOs at US funds we talked to

were aware of the GARS phenomenon but few

have tried to market anything similar One

problem is that required returns in the US are too

high pension funds typically assume a return of

close to 8 Setting up a multi-asset fund with a

target of Libor+7 or Libor+8 would in the view

of most fund managers involve taking too much

risk Retail investors in the current environment

also tend to be wary of anything that isnrsquot yield

oriented Would there be a way to set up income

multi-asset funds


The obvious attraction of multi-asset funds

(decent yield with low volatility at a reasonable

cost) means that in our view they should

continue to grow rapidly and develop more

diverse structures Eventually their flourishing

may push down returns but for now they are rare

enough that there is still plenty of alpha to be

picked up

As multi-asset funds grow they should aid the

development and liquidity of more esoteric asset

classes (look at the sort of things that Standard

Life holds in Table 1) Most multi-asset funds

implement their strategies through index futures

and other derivative instruments these should see

improved liquidity too

24


abc

Itrsquos hard to beat an index There has been a massive shift of investment

flows from actively managed funds to passive

(indexed) funds over the past 10 years

According to EPFR data (Chart 1) passive equity

funds worldwide have seen inflows of about

USD660bn over the past 10 years and active funds

outflows of USD543bn (one-third of their assets

under management at the start of the period)


-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR

In the US according to the Investment Company

Institute inflows to passive mutual funds have

totalled USD427bn over the past 10 years bringing

the total size of such funds at the end of last year in

the US to USD11trn There have been particularly

big flows into bond funds over the past three years

(Chart 2) these now total USD242bn

TowersWatson estimates that global assets managed

passively totalled USD7trn in 2010

2 Annual flows into US indexed funds by type 1997-2011

-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn

Domestic equity World equity Bond amp hy brid

Source ICI

This is unsurprising in our view Almost all

academic studies find that in aggregate active

funds underperform their benchmark particularly

once fees are taken into account This logically

must be so since before fees and trading costs the

average investor must by definition perform in

line with the index But the turnover of an active

fund is almost always higher than that of an index

So even before fees the average active investor

must underperform (The only question is

underperform what ndash a subject we return to

later) Index funds also typically charge lower

annual expenses for example usually 20-30bp for

The shift to passive

A third of active money has shifted to passive in the past 10 years

Passive encroachment is likely to continue since active funds

empirically underperform on average (and have higher costs)

But indexing strategies will need to get smarter which index

25


abc

an SampP500 index fund compared to 80-150bp for

a traditional actively managed US equity fund

Data from Standard amp Poors suggest that over the

past 10 years on average only 40 of large-cap

US funds and 38 of small cap funds

outperformed their benchmarks (Chart 3)

3 of mutual funds outperforming their benchmark

0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Large cap funds Small cap fundsS i 3

Source Standard amp Poors (Large cap funds were compared with SampP500 small cap funds with SampP SmallCap 600)

Will the shift to passive continue In our view

almost certainly Passive funds still comprise only

164 of US equity mutual funds (up from 10

ten years ago) International equity funds run

passively in the US total only USD120bn Index

funds are still relatively small outside the US

With interest rates and expected returns from all

assets very low investors will focus more and

more on minimising expenses Going passive is

the best way to do this Sophisticated investors

such as institutions or high net worth individuals

will also increasingly separate beta and alpha

They will do this for example through so-called

8020 solutions where they have 80 of their

assets in passive market-linked beta assets and a

20 alpha tranche aggressively managed in

alternative assets (with the market risk hedged

out) They will want to buy the beta portion as

cheaply as possible

Fans of active investment have a number of

arguments against this Many claim that while the

average investment manager may underperform

the benchmark their firm has superior investment

processes that allow it to outperform consistently

Unfortunately academic research shows little

evidence of sticky outperformance

Others argue that if an increasing portion of the

investor universe turns passive there should be

more merit in picking stocks since they would be

increasingly mispriced That is an appealing

argument but not well grounded in logic Think

of it like this if there were 98 passive investors in

an asset class and only two active managers then

after fees and trading costs the two active

investors would still in aggregate underperform

the index

Bond houses argue indexing might not make

sense for bonds Bond indexes are unlike equity

indexes in that they include many more securities

which change frequently (for example when their

credit ratings downgraded) and most of which

have a finite life They are usually weighted by

the total outstanding debt of the issuers which

means highly indebted and risky borrowers

represent a large part of the index Many active

bond managers claim it is not hard to outperform

bond indexes for these reasons Standard amp Poorrsquos

data does not bear this out though almost no

category of US-based bond funds has

outperformed its benchmark in aggregate over the

past decade (Chart 4)

26


abc

4 of bond funds outperforming their benchmarks

0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11

Source Standard amp Poors

It may be possible to outperform an index when a

large group of investors hold the securities for

non-investment reasons An example is Japan in

the 1990s when many foreign investors

outperformed the Topix index simply by

underweighting (or owning no) banks Bank

stocks were mainly owned by Japanese corporates

for relationship reasons

But which index

This all begs the question of which index Some

perform better than others A traditional large-cap

market cap-weighted stock index such as the

SampP500 may not be the best choice That is

because empirically smaller cap stocks

outperform large caps in the long run Moreover

when using market capitalisation expensive

stocks are overweighted It is well accepted that

value stocks also outperform in the long run

(There is a possibility though that both these

phenomena may just be capturing the greater

illiquidity and higher transaction costs of small-

cap and value stocks)

So in the US for example the SampP500 index has

risen by 50 over the past 10 years while an

equal weighted index of the same stocks has risen

by 105 (Chart 5)

A further problem is that when stocks are added

to a popular index they tend to rise on the

announcement (but before they actually join the

index) similarly deleted stocks fall before their

removal A less well-followed index with similar

characteristics might outperform

5 Performance of SampP500 market cap and equally weighted

0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg

Many passive investment managers understand

these reservations and have moved to index-plus

or passive-plus strategies Fundamental indexes

where stocks are weighted by sales or book value

(or even the number of employees) rather than by

price or market cap have also grown


If we are correct to believe that passive

encroachment has years to go there are many

important implications for asset prices

6 Average correlation of MSCI country indexes with ACWI

00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage


Correlations between markets and between stocks

in a market have risen consistently over the past

decade The average correlation between MSCI

27


abc

country indexes and the overall MSCI All

Country World Index (Chart 6) for example has

risen from 30-40 in the early 2000s to 60-70

by 2010 ndash although they are some signs of it

declining recently perhaps as flows into equity

funds whether active or passive have stagnated

At the stock level the implied correlation between

individual stocks in the SampP500 index (Chart 7)

rose to a peak of 80 late last year from 40-50

in 2007 (when the correlation contract was first

launched on the Chicago Board Options

Exchange)

7 Implied correlation of SampP500 stocks ()

010203040506070

8090

07 08 09 10 11 12

Implied correlation

Source Bloomberg CBOE

Further growth of passive funds is likely to push

correlations up further or at least keep them at the

current elevated level

If bond funds grow in popularity a similar rise in

correlations may happen between different bond

classes or issuers

The growth of index-plus strategies or

fundamental indexes might also offer some

arbitrage opportunities in securities lying just

outside the major indexes or which are large but

underrepresented

28


abc

Attractive ndash but problems too Closely linked to the rise in passive funds (see

previous section) has been the growth of

exchange-traded funds (ETFs) There are

currently over 3200 ETFs around the world with

assets of USD15trn up from only USD105bn in

2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other

Source Blackrock (end-Jun)

ETFs have a number of advantages which explain

their popularity (trading volumes represent around

one-quarter of US stock market turnover) They

can be traded intra-day giving investors a way to

take (or remove) exposure quickly to a country

sector or asset class Their liquidity means that

they are often used by institutions to execute asset

allocation changes Some participants estimate

that as much as 60 of ETFs are owned by

institutional rather than retail investors The way

ETF units can be created and redeemed by

authorised participants such as market-makers

usually means that they generally trade close to

net asset value (NAV) For retail investors the

ability to see live prices and trade any ETF via a

discount broker (rather than having to use the

proprietary platforms of various fund management

houses) make ETFs particularly easy to use

But they also have their detractors Common

criticisms include

They are sub-optimal for long-term

investors Why would these investors want to

trade intra-day when they could buy an

equivalent mutual fund that guaranteed they

could buy or sell at end-of-day NAV This

can only encourage short-term speculation

unsuitable for most retail investors Moreover

since ETFs pay exchange fees and have a

bidoffer spread they should fundamentally

cost a little more than a similar mutual fund

The relentless rise of ETFs

ETF assets have grown to USD15trn

But there are issues are ETFs suitable for bonds Will overly

sophisticated ETFs blow up and invite regulatorsrsquo attention

Key to future growth is whether active ETFs take off

29


abc

They are still very much a US phenomenon

US ETFs have AUM of USD11trn but

Europe only USD273bn and the rest of the

world just USD169bn Regulatory difficulties

still make it hard to set up an ETF in Europe

The range of available ETFs and their

liquidity is very limited in many countries

ETFs are best suited to equity index

products They work much less well for

bonds or other assets Equity ETFs globally

total USD12trn but fixed income ETFs have

reached only USD308bn and commodity

ETFs only USD35bn Fixed income is trickier

because of the problems inherent in bond

indexes described in the section on passive

funds above It is also much harder to

replicate a bond index because of the lack of

liquidity in many of its components

Moreover the transparency requirement of

ETFs (in the US they have to publish their

full holdings daily ndash essential for market-

makers to create new units) means that traders

can see their positions and trade against them

A number of ETFs have backfired

spectacularly Some have failed to mirror the

returns on the underlying security or index

they claimed to match This has been

especially true of gold ETFs More

sophisticated ETFs that promised a multiple

or the inverse of the return on the underlying

have diverged dramatically The Proshares

Ultrashort MSCI Emerging Markets ETF

(Code EEV) is one of the most notorious It

seeks double the inverse of the return on the

MSCI EM index But when the index fell

49 in the second half of 2008 ndash and so the

ETF should have risen 98 ndash the ETF

actually fell by 30 It has failed in the past

12 months too falling by 15 when MSCI

EM fell by only 8

The defenders of ETFs say that the resilience of

the industry despite these blow-ups (and others

such as the flash crash of 2010 which was

partially blamed on ETFs) demonstrates the

productrsquos fundamental attractiveness The chances

are though that regulators may clamp down

particularly on exchange-traded products (ETPs)

which replicate an index or assets through

derivatives rather than by owning (at least some

of) the underlying securities There are

USD182bn of ETPs in addition to the numbers on

ETFs quoted above

The keys for further growth

We expect ETFs to continue to grow But there

are two key questions that will determine their

rate of growth

The first is whether active ETFs can take off

These are somewhat problematical The

transparency rules mentioned earlier make it hard

to structure say a 30-stock high-alpha equity

fund as an ETF since competitors and traders

would be able to see daily changes in the fundrsquos

holdings Some investment houses notably Eaton

Vance claim they have found a way to report

daily holdings that would get round the

transparency problem But so far the Securities

and Exchange Commission hasnrsquot approved these

ETFs and indeed has been reluctant to approve

many innovative ETF structures

Perhaps the highest profile active ETF launch

recently was Pimcorsquos Total Return ETF (Code

BOND) listed in March this year In six months

it has grown AUM to USD25bn The ETF aims

to mimic the Pimco Total Return mutual fund

both are managed by Bill Gross But the two have

performed rather differently in the past six

months the ETF has risen 66 and the mutual

fund 32 One reason for this is apparently is

that the larger size of the long-established mutual

fund (total assets USDUSD270bn) means it

cannot move in and out of positions so quickly

30


abc

One answer may be quants funds which rather

than being managed in accordance with the

managerrsquos judgement chose stocks on the basis of

a model For example the largest ETF provider

Blackrockrsquos iShares is focusing its marketing

efforts currently on minimum volatility equity

ETFs These use an MSCI Barra model that

optimally chooses low volatility stocks from an

index Its promoters claim that this allows

investors to keep most of the upside with

significantly lower volatility And indeed over

the past five years the MSCI US Minimum

Volatility Index has outperformed the regular

MSCI US by 17 with volatility of 18

compared to 23

The second key question is how financial advisers

are remunerated Until recently FAs were

reluctant to recommend ETFs to their retail

investor clients even though this might have been

the wisest course since unlike mutual funds

ETFs do not pay commissions But the trend is

increasingly for FAs to charge an annual fee of 1-

2 of assets for their advice and to take nothing

from the investment products they put their clients

into This makes them more impartial In the US

the number of Registered Investment Advisers

(RIAs) has soared as investment professionals

have left wire houses to set up on their own

estimates from Cerulli Associates suggest assets

overseen by RIAs have tripled over the past 10

years to USD17trn

In the UK the Retail Distribution Review which

takes effect next January will ban financial

advisers (including private banks and wealth

managers) from accepting commissions for

recommending investment products to UK retail

investors Similar moves are afoot in Australia

and Asia This might all make it more common

for FAs to recommend an ETF-heavy investment

strategy to retail investors and spur the growth of

the product

Bad news for mutual fund managers

This is good news for the ETF industry but wonrsquot

help conventional fund managers The ETF

business is largely sewn up by three providers ndash

iShares State Street and Vanguard ndash which

between them manage 68 of outstanding ETFs

Other firms have struggled with whether it makes

sense to enter the business but the only space left

for new entrants is in increasingly esoteric

products or in low-cost ETFs on plain-vanilla

stock indexes Both are hard to make profits from

and ETFs from smaller providers are often

illiquid making them unattractive to investors

Indeed some smaller providers have begun to pull

out Scottradersquos FocusShares for example

liquidated its 15 ETFs in August and Russell

Investments announced it would scale back its

offering currently 26 funds A total of 71 ETFs

have closed in the US this year


As with the move to indexation (described in the

previous section) the rise of ETFs raises intra-

and inter-market correlations

ETFs make it easy even for large institutional

investors to change weighting rapidly A fund that

decided to raise its weighting in Brazil for

example could buy a Brazil index ETF

immediately and then ask its fund managers to

slowly build up a portfolio of their favoured

Brazilian stocks So far this has mainly been

limited to equities But if bond ETFs and style

ETFs (min vol value high dividend yield) take

off the same effect could be seen within and

between other asset classes

31


abc

Is there any alpha left Earlier this year the assets under management of

hedge funds finally regained their previous peak

from 2007 around USD22trn But that was one

of the few pieces of good news for an industry

that has struggled in recent years In the five years

to the end of 2007 AUM grew at an annual

compound rate of 29 Since the end of 2008 the

CAGR has been only 12 (Chart 1)

1 Hedge fund assets under management

0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)

Source TheCityUK and HSBC estimates (end-Jul)

The reasons are not hard to find Performance has

been unimpressive in the past couple of years

Hedge funds tend to do best in absolute terms

during economic expansions and equity bull

markets such as 2003-7 and in relative terms

during market collapses like the Global Financial

Crisis of 2007-9 (Chart 2)


100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12



But they may struggle during the trendless risk

on-risk off type of market we have seen recently

This year for example as of end-July the average

hedge fund monitored by EurekaHedge was up

only 25 y-t-d The performance of longshort

equity funds (+19) and funds of funds (+17)

was even poorer By contrast global equities have

The decline of the hedge fund

Hedge funds have struggled in the recent trendless market

The underlying problem is that the hedge fund community has

become so big that it has harvested most of the alpha

Large hedge funds and ldquotraditionalrdquo fund managers are likely

to converge

32


abc

risen 75 (MSCI ACWI) and global bonds (JP

Morgan Global Aggregate Bond Index TR) 24

so far this year Itrsquos not exactly worth paying two-

and-20 (a 2 management fee and 20

performance fee) for that sort of performance

Macro funds have particularly struggled in the

past couple of years They have been one of the

strongest growth areas since the Global Financial

Crisis (when they performed well) with 10

growth in AUM in the four years to end-2011

(compared with a 5 decline for the hedge fund

universe as a whole) ndash see Chart 3 But this year

so far macro funds on average have returned only

11 ndash and macro funds of funds -05 Last year

too return was poor -12 There have been a

relatively small number of consensus macro

trades (for example betting on a rise in Bund

yields) that many macro funds put on but which

were unsuccessful The biggest problem is that

these funds are essentially making calls on the

actions of politicians and central banks something

that is hard to do

Many macro funds take an opportunistic attitude

to investing switching from one strategy to

another as they spot profit-making trades But this

lack of a consistent investment approach has in

the view of some CIOs we spoke to turned some

institutions away from macro funds

Why should hedge funds outperform

The fundamental problem is that as with active

equity fund managers in theory hedge funds

should not be able in aggregate to out-perform

When the universe of hedge funds was small

enough there was still alpha for them to harvest

In essence they were getting their alpha from

traditional long-only fund managers But once

hedge funds became a USD1trn-plus community

they increasingly had to get their alpha from each

other Many investors believe that hedge funds are

charging alpha fees simply for beta

So the expensiveness of hedge fund fees is

increasingly an issue Two-and-20 (or even one-

and-a-half and 15) is much higher than traditional

fund managers charge Standard Lifersquos GARS

Fund for example has a management fee of

75bps despite aiming for a hedge-fund-like return

(see the section on The growth of multi-asset

above for details) More vehicles are becoming

available to allow retail investors to access alpha

hedge-fund-like UCITS in Europe dubbed

ldquoNewcitsrdquo can short and use leverage for

example These trends will inevitably put

downward pressure on hedge fund fees

3 Growth in hedge fund AUM by category of fund end-2007 to end-2011

8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM

Change in AUM 2007-11

Source Barclay Hedge

33


abc

Hedge fund managers are responding Some

larger ones have admitted that their size makes

alpha generation hard and have returned funds to

their investors or closed to new money Moore

Capital for example returned USD2bn in July

Others have started to tailor their funds so that

they can sell them to retail investors AQR Capital

Management for instance markets a number of

retail funds with active strategies such as

momentum risk parity diversified arbitrage and

managed futures KKR best known for its private

equity business in July registered with the

Securities and Exchange Commission two hedge-

fund-like mutual funds which will invest in

special situations such as distressed debt in

Europe and Asia Under the 2012 JOBS Act US

hedge funds may soon be able to advertise for the

first time


Hedge funds are in our view unlikely to shrink

never mind disappear After all the industry still

represents only about 2 of the total of USD82trn

in retail and institutional assets worldwide

But the more conventional strategies such as

longshort equity or multi-asset macro will be under

increasing pressure from traditional fund houses

which will run this money for much lower fees We

believe that large hedge funds will increasingly

converge with ldquotraditionalrdquo investment managers in

terms of style fees and remuneration There will

though be room for small hedge funds concentrated

on unusual asset classes or with a particular talent

for digging out alpha

The growing universe of investors looking at

hedge-fund-like strategies ndash including pairs

trades multi-asset arbitrage illiquid debt ndash should

aid price discovery making capital markets

increasingly efficient As long as smaller hedge

funds continue to be able to gather funds

alternative asset classes (distressed debt

foreclosed mortgages art volatility) should

become more mainstream

34


abc

Do you really need liquidity In the desperate search for yield one way of

finding it has been largely ignored up to now

being rewarded for illiquidity

During the global financial crisis so many

investors rushed for the exits that investment

managers have since had an almost pathological

preference for liquidity buying assets that they

can liquidate quickly in volume if necessary

But does this make sense Pension funds or

insurance companies with liabilities that have an

average duration of 10 or 20 years do not need

much liquidity Individual investors particularly

for their pension savings should preferably have

limited ability to sell their holdings since this

would tempt them to invest speculatively or to

use the savings for purposes other than post-

retirement income

Moreover liquidity comes at a price Investors may

be overpaying for something they donrsquot need (or

need for only a portion of their portfolio) A survey

of academic research on this topic (ldquoLiquidity

Premium Literature review of theoretical and

empirical evidencerdquo September 2009) by risk

consultancy Barrie amp Hibbert (Table 1) suggests

investors may receive 350-550bp lower returns from

liquid equities compared to similar more illiquid

ones and 40-200bp less from bonds depending on

their credit rating

1 Illiquidity premium estimate

Illiquidity premium estimate (bp)

No of studies

Equity 450 2 Government bonds 39 5 Covered bonds 18 2 Corporate bonds 50 9 AAA 11 2 AA 15 3 A 30 3 BBB 31 3 Investment grade 53 1 BB 110 2 B 173 1 CCC 420 1 Speculative grade 180 1

Source Adapted from Barrie amp Hibbert (wwwbarrhibbcomdocumentsdownloadsLiquidity_Premium_Literature_REviewpdf)

Gradually though investors are starting to look at

harvesting this illiquidity premium Many complain

however that this is an under-researched area Few

investors have a good answer to the question where

am I paid most for illiquidity

Harvesting the illiquidity premium

Most investors have a strong preference for liquidity

But some ndash notably pensions and insurers ndash donrsquot always need

liquidity and may be overpaying for it

They may start to see the attraction of the extra yield available in

illiquid assets such as infrastructure and ldquoprivate debtrdquo funds

35


abc

We found fund managers actively looking at the

following asset classes with potentially attractive

returns because of their illiquidity

Private debt Everyone is familiar with the

concept of private equity where a fund raises

a significant lump-sum in a big launch and

then invests it for five to 10 years with

investors locked into the fund during this

period Why not apply the same concept to

debt While private placements are not new ndash

insurance companies use them for their buy-

and-hold portfolios especially in the US ndash

they look increasingly attractive in a low-

yield world since they allow creditors to

invest in a tailor-made instrument to suit their

needs in terms of maturity yield and

covenants The downside is that it is very

difficult to exit a position should

circumstances or investment criteria change

prior to maturity

Infrastructure investment With

governments fiscally strapped and banks

deleveraging and constrained by tighter

capital rules (especially in Europe) there

should be opportunities for institutional

investment managers to step in Such deals

could be structured as publicprivate

partnerships (PPPs) with the investors

choosing which part of the capital structure to

participate in Some of these deals could be

low-risk as long as they focused on income

generating assets with utility-like returns ndash

but at a premium because the money was

locked in

Replacement for bank lending

Creditworthy companies may also struggle to

get long-term funding because of banksrsquo

troubles Could investment institutions step in

Such deals could be structured as closed-end

funds collateralised loan obligations (CLOs)

Real estate finance Commercial real estate

has an obvious requirement for long-term

funding at different levels of the capital

structure Obviously this is a traditional area

for insurance companies and other long-

duration investors But many fund managers

are looking at the area afresh

There are hurdles too Many investors are

restricted from buying illiquid assets This is

particularly true of defined contribution (DC)

pensions which might actually benefit from

owning some Defined benefit (DB) pensions are

able to buy illiquid securities but their

outstanding assets are likely to shrink over

coming years as many such plans are wound

down European banks have been slow to unwind

their loan books hedge funds looking to expand

exposure to corporate loans have been

disappointed by the slow speed at which such

assets have come onto the market

Illiquid assets also entail risk rather like selling

an option Essentially an investor garners a

premium each year until there is a market crash

and the investor pays out by being unable to exit a

losing position The danger is that after illiquid

assets gain in popularity one day they will blow

up causing regulators to clamp down


If long-dated debt funds were to take off this

could have a significant impact on the pricing of

loans commercial real estate and on the returns

available from infrastructure projects

36


abc

The sources of growth The changing needs and dynamics of different

investor groups ndash the decline of defined benefit

(DB) pensions for example or the growing

wealth of Asian high net worth individuals ndash have

major implications for the investment

management industry and offer the best sources of

growth In this section we discuss these changes

and look at how the industry is responding

Liability constrained investors

Liability driven investment (LDI) has become one of

the biggest buzz-words in the investment

management industry over the past few years DB

pensions and insurance companies need to worry not

just about the risk and return of their investments

but even more importantly about matching these to

what sits on the liability side of their balance-sheets

In the past decade they have become even more

constrained than before as regulators have pushed

them to derisk Low interest rates and longer life

expectancy have made it very hard for pension

funds in particular to produce sufficient return to

match projected liabilities

The struggle of DB pensions

Over the past two decades companies have

increasingly closed their DB pensions and shifted

their employees into defined contribution (DC)

plans (where the employee takes the investment

risk but benefits from some advantages such as

the ability to take the pension pot with them to a

new job) In the UK for example only 18 of

DB pensions are still open to new members (down

from 35 in 2006) 54 are closed to new

members but allow existing members to continue

to make contributions 26 are closed even to

contributions and 2 are being wound up

Nonetheless DB pensions still represent the major

proportion of the total pension industry (about

USD19trn out of a total of USD29trn in the

OECD in 2010 for example) as shown in Chart

1 That is partly because public-sector pensions

are almost all DB and because in many major

pensions markets (Japan the Netherlands

Switzerland for example) DC funds are still rare

In the US DB pensions have shrunk to 61 of the

total and in the UK 67

Where will the money come from

Defined benefit pensions are dwindling

But personal pensions Asian high net worth individuals and

sovereign wealth funds are areas of growth for fund managers

But each of these will demand more sophisticated products

37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD

The biggest issue DB pensions face is their

increasing underfunding caused mainly by recent

poor returns and the fall in interest rates A study

by pension consultant Towers Watson found that

last year pension funds in 11 major economies

had on average a 25 gap between assets and

liabilities (compared to a 4 gap 10 years ago)

And the true situation would be even worse if

pension funds used realistic return assumptions In

the US for example both public-sector and

company DB pension schemes use an assumed

return of about 7frac34 That sounds bizarre when the

yield on a 10-year BBB-rated bond is only 37

(and even the 2002-2011 average only 60) But

auditors insist on sticking to the long-run historical

return in calculating assumed returns

Investment managers are increasingly offering

holistic ldquopensions solutionsrdquo to plan sponsors

faced with this sort of dilemma The sort of risk-

minimising return-maximising strategies

described in an earlier section of this report are

often attractive to DB pensions although their

need to make a return of Libor plus 7 or 8ppt

means they have to take large amounts of risk

In the UK at least the shift to liability matching

has meant that pension funds have moved a lot of

their assets into fixed-income instruments (which

they assume ndash wrongly in our view ndash have a better

duration match with pension liabilities) This

move was propelled by the Pensions Act of 1995

and other regulatory changes Equities have fallen

to 42 of assets from 82 in 1993 (Chart 2)

2 UK pension fundsrsquo asset allocation

0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010

Cash amp short term Debt Equities

Source ONS

The US has not yet seen the same phenomenon

Equities are a smaller share of assets than before

the 2007 crash but at 63 they are still higher

than at any time in the 1974-95 period

3 US private pension fundsrsquo asset allocation

0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10


Source Federal Reserve

The reason US investors still hold such a high

proportion of assets in equities is their return

assumption After all it is almost impossible to

make a 7 or 8 return from bonds This is also

pushing US DB funds into a wide range of

alternative assets The California State Teachers

Retirement System (CalSTRS) with USD152bn

in assets for example has been looking to invest

in a range of oddities including covered calls

infrastructure leases senior secured debt royalty

38


abc

streams and distressed debt to try to get high

returns outside of equities (although it still has

50 of its assets in equities)

In the end the dilemma for DB funds is whether

they should rerisk in order to achieve the sort of

returns they need to reduce their growing excess

liabilities The problem is that by doing so they

could face a blow-up that would make

matters worse

Insurers and Solvency II

Insurance companies face similar liability

constraints to pension funds but in Europe

especially have been pushed even harder by

regulators to reduce risk (meaning lower their

equity weightings)

The proportion of equities held by insurers differs

significantly from one region to another US

insurers have significantly raised their equity

holdings over recent years equities now comprise

27 of assets up from less than 10 in the early

1990s (Chart 4)

4 Life insurers equities as of total assets

0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010

US Japan UK Eurozone

Source Federal Reserve Bank of Japan ONS ECB

By contrast UK insurers have cut their weighting

to roughly the US level 31 last year down from

over 50 in 2000 Data for Eurozone insurers

does not go back far but latest data show they

have only 19 in equities

The new European insurance capital solvency

directive Solvency II which comes into force in

2014 will require capital to be held against asset-

side as well as insurance risks equities will carry

a higher capital requirement than other assets

Given that Solvency II has been discussed for

years it is tempting to think that insurers must

have already adapted their portfolios for this But

the lack of any decline in equity holdings in the

past five years suggests this is not the case Many

believe that the insurance companies spent the

time lobbying against the new rules not preparing

for them It seems likely then that insurers will

have to reduce equity holdings from now to boost

capital efficiency under the new rules However

with bond yields so low this may be exactly the

wrong time to make this move German insurers

for example (which already have very low equity

allocations) are reportedly asking their regulators

for the new rules to be relaxed

Will US regulators follow the European lead and

tighten regulation on pension fundsrsquo and insurersrsquo

equity holdings It is a risk that many US

investment institutions are aware of Probably the

ingrained equity culture in the US will see off this

risk But another big fall in stock prices could be

the trigger for regulators to force a cut in the

assumed return and tell liability constrained

investors to derisk

The institutionalisation of retail

As retail investors increasingly take more

responsibility for their own pension provision

their needs ndash and the opportunities for investment

managers ndash are developing

DC pensions are growing as we saw above In

OECD countries their assets have doubled over

the past 10 years to USD6trn But governments

knowing that many people have failed to save

enough for their retirement are increasingly

ldquonudgingrdquo workers to set up DC pensions In the

UK for example the National Employment

Savings Trust (NEST) which begins operations in

39


abc

October this year will automatically enrol all

employees without an existing company pension

(unless they opt out) Employers must contribute

1 (3 in future) and can contribute more

The attraction of DC plans to investment

managers is that since no liabilities are attached

there is much greater freedom in the types of

investment products that can be offered One of

the most popular has been target-date or

lifestyling plans which automatically shift asset

allocation as people near retirement (financial

textbooks state that investors should have

maximum equity holdings until the age of about

50 then wind that down to 0 by the time they

retire at 65) In some countries target-date plans

represent as much as 70 of the products sold to

individual pension holders

Increasingly retail investors with DC plans are

demanding the sort of sophisticated products that

previously were offered only to DB pensions

plans and other institutions This would include

access to hedge funds (or hedge-fund-like

absolute return products) and risk-aware funds A

challenge for investment managers in coming

years will be to provide such services to retail

investors at reasonable cost while making sure

that their clients understand the risks

Post-retirement

With a large cohort of retirees over the next few

years investment managers also sniff a big

opportunity in post-retirement products providing

annuities or other regular income-yielding

strategies for people whose DC pensions reach

maturity In the US for example 19 million

people will turn 60 between 2011 and 2015

compared to 13 million a decade ago (Chart 5)

Increasingly investment managers are selling ldquoto-

and-throughrdquo products where holders of DC

pensions are automatically tipped into a post-

retirement roll-over product

5 No of Americans turning 60 each five years (mn)

0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0

Source United Nations

One of the key issues here is that with bond

yields at such low levels annuities in bonds no

longer work The concept that in retirement you

should stick to bonds for income and avoid risky

assets such as equities is a non-starter Moreover

life expectancy has improved a US male aged 60

can expect to live at least another 20 years In

1971 he would have expected to live only to 76

Increasingly fund managers are telling retirees

not to cash in all their growthy assets Could there

even be a market for longevity insurance

Wealth management

It is very hard to know exactly how much private

wealth there is out there (and it depends on how

you define it) Estimates put the total at between

USD26trn and USD120trn

What is clear though is that the wealth is

growing rapidly (mainly in emerging markets)

and that the wealthy are becoming more

demanding about the sort of investment products

they want

We will not run through here all the data for the

number of high net worth individuals around the

world Suffice it to say that Wealth-Xrsquos World

Ultra Wealth Report 2012-2013 estimates the

total wealth this year of ultra high net worth

individuals (UHNWI) at USD258trn Of that

USD89trn is in the US and USD34trn (13) in

40


abc

emerging markets (Chart 6) But over the next

five years wealth in emerging market is expected

to grow faster that that in developed countries at

an annual rate of 79 a year in Asia and 121

in Latin America according to the report At these

growth rates by 2017 emerging markets will

represent 16 of global UHNWI wealth or

USD55trn out of USD339trn

6 Estimated ultra high net worth individual wealth by region

0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017

Source Wealth-X World Ultra Wealth Report 2012-2013

Increasingly that wealth will be held in securities

and managed by professional fund managers The

usual pattern is that as individuals in emerging

markets first achieve wealth they typically buy

real estate and leave the rest of their money in the

bank deposit Only when their wealth grows and

they became more sophisticated do they gain the

confidence to start to buy stocks and to go to a

private bank In the US for instance almost 70

of household wealth is held in financial assets (as

opposed to non-financial assets such as real

estate) the corresponding percentage in China is

22 in India 5 and Indonesia 2 (Chart 7)

Over the next few years high net worth

individuals will also demand the sort of products

institutions have previously been offered They

tend to be relatively risk-averse and so want risk-

minimising investments that nonetheless offer a

decent return They too are looking to separate

alpha from beta for example by placing a portion

of their portfolio with hedge funds and leaving the

rest in equity index funds

While this market offers juicy prospects for

investment managers it is not easy to access this

wealth Setting up private bank offices in Hong

Kong Singapore or Miami is all very well but

that misses a lot of the potential wealth The

Chinese and India domestic markets are still very

hard for foreign investment institutions to enter

Those who have done so via joint ventures have

on the whole not seen great success But given

the potential size of assets to be gathered they

will not stop trying

7 Household wealth distribution by country

0

10

20

30

40

50

60

70

80

90

100

USA Taiw an UK Japan Singapore Germany China India Indonesia

Non-Financial assets as total assets Financial assets as total assets

Source ldquoThe World Distribution of Household Wealthrdquo by James B Davies Susanna Sandstrom Anthony Shorrocks and Edward N Wolff University o9f Ontario New York University UNU-WIDER (2006) HSBC

41


abc

Sovereign wealth funds

Sovereign wealth funds (SWFs) have been one of

the big growth areas for investment managers in

recent years The total assets of sovereign funds

broadly defined have grown to an estimated

USD20trn at the end of last year up from

USD16trn only four years ago Pure SWFs

constitute only USD48trn of this but FX reserve

managers and other sovereign investment vehicles

such as pension reserve funds are increasingly

important clients for international money

managers (Chart 8)

This is a particularly attractive area since the

money is stable these funds often have a fairly

broad mandate (including the ability to buy into

illiquid positions) and they are not liability

constrained Some CIOs argued to us that SWFs

have been the main buyers of developed market

equities over the past dew years

8 Assets of sovereign wealth funds and similar (USDtrn)

Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21

Source TheCityUK estimates (includes development funds pension reserve funds state-owned companies reserve investment corporations)

But SWFs face similar issues to other types of

investors How do they continue to generate

returns with interest rates so low Reserve

managers ndash which traditionally bought only high-

quality liquid fixed income securities in major

currencies (such as US Treasury bonds) ndash are

more and more being forced to look at other

currencies and even at credit Some central banks

have split their reserves into a ldquoliquidity trancherdquo

and an ldquoinvestment trancherdquo with the latter aiming

to generate higher returns over the long run

Some of the pure SWFs have very adventurous

asset allocation At the conservative extreme

Chilersquos Economic and Social Stabilization Fund

has 20 of its assets in cash and 80 in bonds

(Chart 9) But a number of funds have high equity

allocations (Norwayrsquos USD525bn fund for

example 60) And several (for example

Irelandrsquos National Pensions Reserve Fund) have a

significant allocation to alternative assets Of

course we do not know the allocation of more

secretive funds such as the Abu Dhabi

Investment Authority or Government of

Singapore Investment Corp

9 Selected SWFs asset allocation end-2010

0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a

Cash Equities Fix ed income Alternativ e assets

Source IMF

But it is not all good news for investment

managers The more sophisticated SWFs are

bringing more funds back in-house figuring they

can manage the money more cost effectively by

hiring experienced fund managers on attractive

salaries They may leave some money with

external managers only to provide a benchmark to

compare their internal managers against

There are also questions over how quickly SWFs

can grow in future Their rapid expansion of the

past few years was due to high oil prices and to

currency management by non-commodity

producers notably China These conditions may

not continue

42


abc

Unavoidable momentum ESG (environmental social governance) and SRI

(socially responsible investment) are buzzwords

that have a lot of investment managers scratching

their heads They know that plan sponsors ndash

particularly for public pension funds in Europe ndash

increasingly take these concepts seriously but

many investment managers donrsquot quite know how

to respond


0

2

4

6

8

10

2005 2007 2010


Source US SIF Eurosif (definitions differ slightly)

On the surface assets managed under SRI

principles are big over USD8trn in Europe

(notably USD26trn in France) and around

USD3trn in the US at end-2010 (Chart 1) But the

definition of what comprises SRI is vague 76 of

the European SRI assets are ldquobroad SRIrdquo which is

defined as a simple screening of companies (for

example excluding some on ethical grounds)

integrating SRI principles into the fund managerrsquos

processes and engaging with management Most

fund managers would claim they do that ldquoCore

SRIrdquo which includes positively screening for best-

in-class companies or running an SRI thematic

fund totals USD17trn

And the SRI principles themselves ndash as defined by

the United Nationsrsquo ldquoPrinciples for Responsible

Investmentrdquo (PRI) ndash are hardly earth-shattering

(Table 2) Most prudent fund managers would

find they follow them without consciously having

an SRI focus

But there is no doubt that ESG is becoming more

important Broad SRI assets in Europe have

grown from almost zero in 2005 to USD8trn

Another estimate suggests that institutions

managing funds totalling USD30trn have signed

up to the UNrsquos PRI Public pension funds

increasingly demand ESG compliance when

putting out mandates for tender One European

investment manager told us that the firm already

pays 20 of broker commission based on ESG

service and expects this to rise to 40

The challenge of ESG

Pension plan sponsors especially in Europe are increasingly

focusing on environment social and governance issues

So far most fund managers pay only lip-service to this

But momentum is building and companies with superior ESG

policies and disclosure might start to outperform

43


abc

US investment managers are more ambivalent

ESG is growing much more slowly in the US ndash

although some labour unions are pushing for it in

company pension schemes Non-US clients often

ask questions about ESG policies when offering

mandates and a number of US fund managers

have signed up for the SRI principles without

substantially changing their investment processes

More cautious ndash or perhaps more punctilious ndash

US investment managers have set up internal

committees to see what they need to do to adhere

wholeheartedly to the principles

But the momentum is building Pension

consultancy firm Mercer will include its

proprietary ESG ratings of investment managers

in client reports related to manager searches and

performance by the end of 2012 Mercer ranks

investment firms from 1 (the highest rating) to

4 based on their incorporation of ESG factors in

the generation of investment ideas construction of

portfolios and implementation of active ownership

practices Ratings are currently dismal among

equity managers worldwide only 2 score a 1

and 7 a 2 with 44 rated 3 and 47 4

Another pension consultant TowersWatson

also recently published a major report on

sustainable investment

Most investment managers take the view that ESG

is a positive force as long as it is about adding

value for example engaging with companies on

improving their policies on pay governance

environmental compliance corruption or

treatment of employees Which fund manager

after all wants to buy a company that has

problems in these areas But many especially in

the US worry that taken too far ESG can get in

the way of making good investment returns

Exclusion is a step too far for many avoiding

investment in tobacco companies or arms

manufacturers for example could damage

performance Increasingly though the trend in

ESG is towards integration and governance (and

in all asset classes not just equities) with

exclusion and environmental factors lagging

A further difficulty is that it is not easy to invest

along SRI lines using passive strategies There are

only a few SRI indexes for example Dow Jones

Sustainability World Index (W1SGI) Calvert

Social Index (CALVIN) iShares MSCI USA ESG

Index (KLD US) and MSCI World ESG Index

2 United Nationsrsquo Principles for Responsible Investment and examples of possible actions

1 We will incorporate ESG issues into investment analysis and decision-making processes Address ESG issues in investment policy statements Support development of ESG-related tools metrics and analyses Assess the capabilities of internal investment managers to incorporate ESG issues 2 We will be active owners and incorporate ESG issues into our ownership policies and practices Develop and disclose an active ownership policy consistent with the Principles Exercise voting rights or monitor compliance with voting policy (if outsourced) Engage with companies on ESG issues 3 We will seek appropriate disclosure on ESG issues by the entities in which we invest Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative) Support shareholder initiatives and resolutions promoting ESG disclosure 4 We will promote acceptance and implementation of the Principles within the investment industry Include Principles-related requirements in requests for proposals (RFPs) Align investment mandates monitoring procedures performance indicators and incentive structures accordingly (for example ensure investment management processes reflect long-term time horizons when appropriate) 5 We will work together to enhance our effectiveness in implementing the Principles Supportparticipate in networks and information platforms to share tools pool resources and make use of investor reporting as a source of learning 6 We will each report on our activities and progress towards implementing the Principles Disclose how ESG issues are integrated within investment practices Disclose active ownership activities (voting engagement andor policy dialogue) Report on progress andor achievements relating to the Principles using a Comply or Explain1 approach

Source wwwunpriorg

44


abc

(GSIN) There are also a number of specialist

funds such as the Domini Social Equity Fund

(DSEFX US) and managers such as Zurich-based

Sustainable Asset Management

But the performance of the SRI indexes has been

lacklustre relative to their comparable main

market indexes (Table 3) How much performance

are investors or plan sponsors willing to give up in

return for the satisfaction that their investments

are doing no harm

3 Performance of SRI indexes

Relative perf Index Compared

to 1Y 2Y 5Y

Dow Jones Sustainability World Index

MSCI ACWI -32 -58 -112

Calvert Social Index MSCI US 15 -02 19 iShares MSCI USA ESG Index

MSCI US -37 -41 na

MSCI World ESG Index MSCI World -10 -19 na

Source HSBC Bloomberg MSCI (Total gross return inUSD)


In our view ESG is a concept that will expand

further Retail investors like the idea that they

hold only ldquohonourablerdquo companies So do

governments and other public fund sponsors

Fund management firms will increasingly adjust

their processes to take these preferences into

account Pressure will also increase on companies

to be become more transparent on their ESG

performance the Hong Kong Stock Exchange for

example recently announced that it will oblige

listed companies to make certain ESG disclosures

(or explain why they cannot) from 2015 with a

recommendation that they do so from next year

The European Union has also published proposals

for ESG disclosure by investment managers

With a recent focus on poor governance (notably

in China) we think it likely that investors will

start to focus more on ESG issues in the

investment decision-making process This may

mean that companies with strong ESG disclosure

and top-quality practices will outperform This is

certainly an area that fund managers will need to

spend more time on

45


abc

Notes

46


abc

Disclosure appendix Analyst Certification The following analyst(s) economist(s) andor strategist(s) who is(are) primarily responsible for this report certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) andor any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report Garry Evans

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions which depend largely on individual circumstances such as the investors existing holdings risk tolerance and other considerations Given these differences HSBC has two principal aims in its equity research 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon and 2) from time to time to identify short-term investment opportunities that are derived from fundamental quantitative technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating HSBC has assigned ratings for its long-term investment opportunities as described below

This report addresses only the long-term investment opportunities of the companies referred to in the report As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at wwwhsbcnetcomresearch Details of these short-term investment opportunities can be found under the Reports section of this website

HSBC believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors existing holdings and other considerations Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations Investors should carefully read the definitions of the ratings used in each research report In addition because research reports contain more complete information concerning the analysts views investors should carefully read the entire research report and should not infer its contents from the rating In any case ratings should not be used or relied on in isolation as investment advice

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis

For each stock we set a required rate of return calculated from the cost of equity for that stockrsquos domestic or as appropriate regional market established by our strategy team The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon The performance horizon is 12 months For a stock to be classified as Overweight the potential return which equals the percentage difference between the current share price and the target price including the forecast dividend yield when indicated must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile) For a stock to be classified as Underweight the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile) Stocks between these bands are classified as Neutral

Our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage change of volatility status or change in price target) Notwithstanding this and although ratings are subject to ongoing management review expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change

47


abc

A stock will be classified as volatile if its historical volatility has exceeded 40 if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility However stocks which we do not consider volatile may in fact also behave in such a way Historical volatility is defined as the past months average of the daily 365-day moving average volatilities In order to avoid misleadingly frequent changes in rating however volatility has to move 25 percentage points past the 40 benchmark in either direction for a stocks status to change

Rating distribution for long-term investment opportunities

As of 26 September 2012 the distribution of all ratings published is as follows Overweight (Buy) 48 (27 of these provided with Investment Banking Services)

Neutral (Hold) 38 (26 of these provided with Investment Banking Services)

Underweight (Sell) 14 (22 of these provided with Investment Banking Services)

Analysts economists and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues

For disclosures in respect of any company mentioned in this report please see the most recently published report on that company available at wwwhsbcnetcomresearch

HSBC Legal Entities are listed in the Disclaimer below

Additional disclosures 1 This report is dated as at 26 September 2012 2 All market data included in this report are dated as at close 19 September 2012 unless otherwise indicated in the report 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business HSBCs analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBCs Investment Banking business Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential andor price sensitive information is handled in an appropriate manner

48


abc

Disclaimer Legal entities as at 8 August 2012 lsquoUAErsquo HSBC Bank Middle East Limited Dubai lsquoHKrsquo The Hongkong and Shanghai Banking Corporation Limited Hong Kong lsquoTWrsquo HSBC Securities (Taiwan) Corporation Limited CA HSBC Bank Canada Toronto HSBC Bank Paris Branch HSBC France lsquoDErsquo HSBC Trinkaus amp Burkhardt AG Duumlsseldorf 000 HSBC Bank (RR) Moscow lsquoINrsquo HSBC Securities and Capital Markets (India) Private Limited Mumbai lsquoJPrsquo HSBC Securities (Japan) Limited Tokyo lsquoEGrsquo HSBC Securities Egypt SAE Cairo lsquoCNrsquo HSBC Investment Bank Asia Limited Beijing Representative Office The Hongkong and Shanghai Banking Corporation Limited Singapore Branch The Hongkong and Shanghai Banking Corporation Limited Seoul Securities Branch The Hongkong and Shanghai Banking Corporation Limited Seoul Branch HSBC Securities (South Africa) (Pty) Ltd Johannesburg HSBC Bank plc London Madrid Milan Stockholm Tel Aviv lsquoUSrsquo HSBC Securities (USA) Inc New York HSBC Yatirim Menkul Degerler AS Istanbul HSBC Meacutexico SA Institucioacuten de Banca Muacuteltiple Grupo Financiero HSBC HSBC Bank Brasil SA ndash Banco Muacuteltiplo HSBC Bank Australia Limited HSBC Bank Argentina SA HSBC Saudi Arabia Limited The Hongkong and Shanghai Banking Corporation Limited New Zealand Branch incorporated in Hong Kong SAR

Issuer of report The Hongkong and Shanghai Banking Corporation Limited Level 19 1 Queenrsquos Road Central

Hong Kong SAR

Telephone +852 2843 9111 Telex 75100 CAPEL HX

Fax +852 2596 0200

Website wwwresearchhsbccom

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (ldquoHSBCrdquo) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers it is not intended for and should not be distributed to retail customers in Hong Kong The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong If it is received by a customer of an affiliate of HSBC its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified HSBC makes no guarantee representation or warranty and accepts no responsibility or liability as to its accuracy or completeness Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice HSBC and its affiliates andor their officers directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment) HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments) may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies HSBC Securities (USA) Inc accepts responsibility for the content of this research report prepared by its non-US foreign affiliate All US persons receiving andor accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc in the United States and not with its non-US foreign affiliate the issuer of this report In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK In Singapore this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (ldquoSFArdquo) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA This publication is not a prospectus as defined in the SFA It may not be further distributed in whole or in part for any purpose The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore Recipients in Singapore should contact a Hongkong and Shanghai Banking Corporation Limited Singapore Branch representative in respect of any matters arising from or in connection with this report In Australia this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970 AFSL 301737) for the general information of its ldquowholesalerdquo customers (as defined in the Corporations Act 2001) Where distributed to retail customers this research is distributed by HSBC Bank Australia Limited (AFSL No 232595) These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law No consideration has been given to the particular investment objectives financial situation or particular needs of any recipient This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited New Zealand Branch incorporated in Hong Kong SAR In Japan this publication has been distributed by HSBC Securities (Japan) Limited It may not be further distributed in whole or in part for any purpose In Korea this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited Seoul Securities Branch (HBAP SLS) for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (ldquoFSCMArdquo) This publication is not a prospectus as defined in the FSCMA It may not be further distributed in whole or in part for any purpose HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea In Canada this document has been distributed by HSBC Bank Canada andor its affiliates Where this document contains market updatesoverviews or similar materials (collectively deemed ldquoCommentaryrdquo in Canada although other affiliate jurisdictions may term ldquoCommentaryrdquo as either ldquomacro-researchrdquo or ldquoresearchrdquo) the Commentary is not an offer to sell or a solicitation of an offer to sell or subscribe for any financial product or instrument (including without limitation any currencies securities commodities or other financial instruments) copy Copyright 2012 The Hongkong and Shanghai Banking Corporation Limited ALL RIGHTS RESERVED No part of this publication may be reproduced stored in a retrieval system or transmitted on any form or by any means electronic mechanical photocopying recording or otherwise without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited MICA (P) 038042012 MICA (P) 063042012 and MICA (P) 206012012

[343594]


By Garry Evans




that are shaping the industry ndash from the decline of hedge funds and the growth of multi-asset








September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk




120926_50909_Garry Evans_Glossy Covers_FNormal Cover 2011 9272012 1241 AM Page 1

Front Page (Page View)

The 10 key trends changing investment management

hellipand how they will affect asset prices

Summary


Contents Page-Hot Linked


Cyclical or evolutionary

Why this matters



Common threads


hellipin credit and dividends




Problem is volatility not return



Tailoring risk not return



GARS and all its friends



Itrsquos hard to beat an index

But which index



Attractive ndash but problems too





Is there any alpha left




Do you really need liquidity



The sources of growth





Post-retirement

Wealth management



Unavoidable momentum


Disclosure appendix

Analyst Certification


Stock ratings and basis for financial analysis


Stock ratings


As of 26 September 2012 the distribution of all ratings published is as follows

Additional disclosures

Disclaimer

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 DEU 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 ESP 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FRA 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1


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The 10 trends shaping the investment world We are in a very unusual investment world Interest rates are at historical lows equities more volatile

than normal different assets classes abnormally correlated and demographics are altering savings patterns

in rich countries

These developments have already caused big shifts in investment flows over the past five years Investors

have switched massively from equities into bonds moved their money into index funds and ETFs and

searched for new ways to achieve return without too much risk

In this report we look at how investor behaviour is changing and what this means for investment

management businesses We identify 10 themes that we believe will shape the future of the industry over

the coming years Not only is an understanding of these important for strategy planners at investment

management firms (and we held discussions with many CEOs and CIOs of investment firms in the

preparation of this report) we think these trends will affect asset prices too Will the search for income

push down yields on credit to ridiculous levels Will investors completely abandon equities because of

their volatility Will demand for alternative assets (infrastructure financing distressed debt derivative

structures) push up their prices

We believe that understanding these sorts of deep underlying trends in investment is important for asset

allocation It is too easy to get caught up in the day-to-day movements of the economic cycle Thinking

about long-term drivers such as demographics changes in wealth or market micro-dynamics can help

improve investment decision-making We believe the ideas and copious data in this report will prove

thought-provoking for anyone interested in understanding these shifts

After an introductory section which analyses the macro background and describes the state of the

investment management industry today ndash including projections for its future growth ndash each chapter of this

report details one of the trends with our assessment of its implications of each for asset prices

There are some common threads running through the trends In brief these are the struggle to produce

income in a low interest-rate world (via credit high dividend yield equities or illiquid investments) the

desire to tailor risk (though risk-minimising products and absolute return multi-asset funds) and the shift

to passive investments such as index funds and ETFs which has begun to hurt hedge funds too

Summary

How is a world of low interest rates risk aversion and unusually high correlations affecting the investment management industry We identify 10 trends changing how investors invest and assess their impact on the price of assets

2


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Our 10 trends are


0

2

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03 04 05 06 07 08 09 10 11 12

YieldSpread











3 of equity mutual funds Page 13 Source Bloomberg


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash


















risk 0






3


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-600

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01 02 03 04 05 06 07 08 09 10 11 12

USD

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Passiv e Activ e













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20 Page 31


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Equity Corporate

bonds

Gov ernment

bonds

Cov ered

bondsbp













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Source OECD


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Disclaimer 48

Contents

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Investors have





















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40

01 02 03 04 05 06 07 08 09 10 11















8


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historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


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Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

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man

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Switz

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albeit slowly)
















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80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


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0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


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1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


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between them




























performance either




13


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-100

-50

0

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07 08 09 10 11 12

USD

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Gov tCreditOther


















in their names





investors too




















14


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03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














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00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

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00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

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International

Grow th

Balanced

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Global

EM

Sector

Income

Source ICI

16


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17


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is deadrdquo





themselves for it













00

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98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


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19 (Tables 3 and 4)


45

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88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















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1880 1900 1920 1940 1960 1980 2000







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abc


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1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


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21


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volatility




















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22


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traction there




















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multi-asset funds









picked up








24


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-600

-400

-200

0

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800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

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60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

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cheaply as possible

















the index
















26


abc


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2002-2006 2007-11










But which index

















by 105 (Chart 5)








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90 92 94 96 98 00 02 04 06 08 10 12

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Source Bloomberg












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27


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Implied correlation







classes or issuers





underrepresented

28


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2001 (Chart 1)


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criticisms include
















29


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EM fell by only 8












ETFs quoted above




rate of growth


























30


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compared to 23
















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the product



































31


abc










0

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Assets (USDbn)










100

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00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


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that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

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33


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first time

























34


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their credit rating



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35


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prior to maturity














locked in







































36


abc



















































37


abc


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Source OECD


































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1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






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50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


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1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

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-198

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0













Wealth management









they want








40


abc










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USD

trn

2012 2017




































0

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100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

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100

Chi

le

Nor

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Can

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Aust

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Source IMF














not continue

42


abc








to respond


0

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2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


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are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


2


abc

Our 10 trends are


0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread











3 of equity mutual funds Page 13 Source Bloomberg


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash


















risk Page 20






3


abc


-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e













0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other














100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12













20 1


4


abc


0

100

200

300

400

500

Equity Corporate

bonds

Gov ernment

bonds

Cov ered

bondsbp













0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds









Source OECD


0

2

4

6

8

10

2005 2007 2010













5


abc










6


abc













Disclaimer 48

Contents

7


abc









Investors have





















0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11















8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


3


abc


-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e













0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other














100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12













20 Page 31


4


abc


0

100

200

300

400

500

Equity Corporate

bonds

Gov ernment

bonds

Cov ered

bondsbp













0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds









Source OECD


0

2

4

6

8

10

2005 2007 2010












its staff badly 2 Source US SIF Eurosif (definitions differ slightly)

5


abc










6


abc













Disclaimer 48

Contents

7


abc









Investors have





















0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11















8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


4


abc


0

100

200

300

400

500

Equity Corporate

bonds

Gov ernment

bonds

Cov ered

bondsbp













0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds









Source OECD


0

2

4

6

8

10

2005 2007 2010













5


abc










6


abc













Disclaimer 48

Contents

7


abc









Investors have





















0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11















8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


5


abc










6


abc













Disclaimer 48

Contents

7


abc









Investors have





















0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11















8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


6


abc













Disclaimer 48

Contents

7


abc









Investors have





















0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11















8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


7


abc









Investors have





















0

5

10

15

20

25

30

35

40

01 02 03 04 05 06 07 08 09 10 11















8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


8


abc



historical norms






they can




reasonable cost






































borrowing costs


20

22

24

26

28

30

1990 2000 2010 2020 2030 2040 2050

Dev eloped markets

20212223242526272829

1990 2010 2030 2050

Emerging


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


9


abc

Why this matters
















































will be indexed



















Insurance

funds 246

Pension

funds 299

HFs 18

SWFs 42

ETFs 13

Mutual

funds 247

PE 26




10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


10


abc


























05

10152025303540

US

UK

Japa

n

Fran

ce

Ger

man

y NL

Switz

Oth

er
















albeit slowly)
















0

10

20

30

40

50

60

80 85 90 95 00 05 10 15

UK US AU CH JP

F

Source IMF






11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


11


abc













0102030405060708090

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC


0

10

20

30

40

50

60

70

1970 1980 1990 2000 2010 2020

UK US Germany



Source HSBC CEIC











off limits to them












Common threads








12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


12


abc



between them




























performance either




13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


13


abc







-100

-50

0

50

100

150

200

250

300

07 08 09 10 11 12

USD

bn

Gov tCreditOther


















in their names





investors too




















14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


14


abc




0

2

4

6

8

10

03 04 05 06 07 08 09 10 11 12

YieldSpread

Source Bloomberg














0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Yield Spread

Source HSBC

















Source Bloomberg

15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


15


abc























-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10 11U

SDbn


Source EPFR













0

100

200

300

400

500

600

700

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

International

Grow th

Balanced

Agg grow th

Global

EM

Sector

Income

Source ICI

16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


16


abc






















17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


17


abc



is deadrdquo





themselves for it













00

05

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12


Source ICI


















another 1994

18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


18


abc









19 (Tables 3 and 4)


45

50

55

60

65

88 90 92 94 96 98 00 02 04 06 08 10 12

EquityBondCash



Equity Bond Cash




Equity Bond Cash






















0

2

4

6

8

10

12

14

16

1880 1900 1920 1940 1960 1980 2000







19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


19


abc


0

5

10

15

20

25

30

35

1870 1890 1910 1930 1950 1970 1990 2010




















sector bets




























not a big hurdle)






20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


20


abc






reduced volatility














































21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


21


abc









volatility




















some investors





Sharpe ratiordquo










good deal












22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


22


abc
















traction there




















the game)







23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


23


abc



































multi-asset funds









picked up








24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


24


abc










-600

-400

-200

0

200

400

600

800

01 02 03 04 05 06 07 08 09 10 11 12

USD

bn

Passiv e Activ e

Source EPFR











-10

0

10

2030

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011

USD

bn


Source ICI



















25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


25


abc








0

10

20

30

40

50

60

70

80

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011





















cheaply as possible

















the index
















26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


26


abc


0

10

20

30

40

50

60

Gen

eral

inte

rmed

iate

Gov

ernm

ent

long

fund

s

EM d

ebt

Glo

bal

inco

me

MBS H

Y

2002-2006 2007-11










But which index

















by 105 (Chart 5)








0

500

1000

1500

2000

2500

90 92 94 96 98 00 02 04 06 08 10 12

SPX Index SPW Index

Source Bloomberg












00

02

04

06

08

10

90 92 94 96 98 00 02 04 06 08 10 12

Av erage





27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


27


abc












Exchange)


010203040506070

8090

07 08 09 10 11 12

Implied correlation







classes or issuers





underrepresented

28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


28


abc






2001 (Chart 1)


0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

US Europe Other





















criticisms include
















29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


29


abc








































EM fell by only 8












ETFs quoted above




rate of growth


























30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


30


abc















compared to 23
















years to USD17trn










the product



































31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


31


abc










0

500

1000

1500

2000

2500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Assets (USDbn)










100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11 12















to converge

32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


32


abc






















that is hard to do

































8 12 2 13 10 5 100 6 9 2 7 11 2 13

-15

-10

-5

0

5

10

15

Mac

ro

Fixe

d in

com

e

Con

verti

ble

Arbi

trage

Mul

ti-st

rate

gy

Even

t Driv

en

Equi

ty L

ong

only

Tota

l

Sect

or s

peci

fic

Equi

ty L

ong

Bias

Mer

ger A

rbitr

age

Dis

tress

ed S

ecur

ities

Equi

ty lo

ngs

hort

Equi

ty m

arke

t neu

tral

Emer

ging

mar

kets

of total HF AUM



33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


33


abc


















first time

























34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


34


abc

















retirement income











their credit rating



No of studies














35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


35


abc




















prior to maturity














locked in







































36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


36


abc



















































37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


37


abc


0

5

10

15

20

25

30

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Other managed funds

Source OECD


































0

20

40

60

80

100

1962 1968 1974 1980 1986 1992 1998 2004 2010


Source ONS






0

20

40

60

80

100

50 55 60 65 70 75 80 85 90 95 00 05 10













38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


38


abc









matters worse






equity weightings)






1990s (Chart 4)


0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010




































investors to derisk














39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


39


abc




























Post-retirement














0

5

10

15

20

25

1976

-198

0

1981

-198

5

1986

-199

0

1991

-199

5

1996

-200

0

2001

-200

5

2006

-201

0

2011

-201

5

2016

-202

0

2021

-202

5

2026

-203

0













Wealth management









they want








40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


40


abc










0

2

4

6

8

10

12

Nor

th A

mer

ica

Euro

pe

Asia

Latin

Am

eric

a

Mid

dle

East

Oce

ania

Afric

a

USD

trn

2012 2017




































0

10

20

30

40

50

60

70

80

90

100




41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


41


abc












managers (Chart 8)









Official FX

reserv es

81

Other

sov ereign

investment

v ehicles

72

Commodity

SWFs 27Non-

commd

SWFs 21



























0

20

40

60

80

100

Chi

le

Nor

way

Can

ada

Aust

ralia NZ

Irela

nd

Chi

na

Kore

a


Source IMF














not continue

42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


42


abc








to respond


0

2

4

6

8

10

2005 2007 2010






















an SRI focus


















43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


43


abc





















































Source wwwunpriorg

44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


44


abc










are doing no harm



to 1Y 2Y 5Y


MSCI ACWI -32 -58 -112


MSCI US -37 -41 na


























spend more time on

45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


45


abc

Notes

46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


46


abc










47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


47


abc











48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


48


abc



Hong Kong SAR


Fax +852 2596 0200



[343594]


By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer



By Garry Evans












September 2012

Garry Evans



+852 2996 6916

garryevanshsbccomhk








Summary





Why this matters



Common threads
















But which index




















Post-retirement

Wealth management





Disclosure appendix





Stock ratings




Disclaimer


10 key trends changing investment management

Documents

investment flows

investment decisionmaking

investment management

investment management

unusual investment world

cios of investment firms

asset allocation

esgthese trends