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TRANSCRIPT
Vanguard Symposium meetings
– Light at the end of the tunnel?
November 2012
Peter Westaway
Chief Economist Europe,
Vanguard.
Vanguard Investments Switzerland GmbH
For institutional investors only. Not for public distribution.
The information on this presentation does not constitute legal, tax, or investment
advice. You must not, therefore, rely on the content of this presentation when making
any investment decisions. The value of investments and the income from them may fall
or rise and investors may get back less than they invested.
2
1. The Global outlook
• current risks
2. Europe
• The challenges
• The risks
• Alternative scenarios
3. Implications for Investors
• The benefits of a diversified portfolio
Light at the end of the tunnel?
VANGUARD INVESTMENTS SWITZERLAND GMBH
3
Global growth to remain subdued for some time
Main growth comes from developing world
Extracted 25/10/12 VANGUARD INVESTMENTS SWITZERLAND GMBH
4
Equities recovering..but Europe still well down
Extracted 25/10/12 VANGUARD INVESTMENTS SWITZERLAND GMBH
5
Global yield curves are flat..
Policy rates expected to stay low for long
Extracted 25/10/12 VANGUARD INVESTMENTS SWITZERLAND GMBH
6
1. US growth and the fiscal cliff
2. A hard landing in China
3. Europe
The macro risks
VANGUARD INVESTMENTS SWITZERLAND GMBH
14%
16%
18%
20%
22%
24%
26%
1990 1995 2000 2005 2010 2015 2020
CBO Spending Range CBO Revenue Range
Potential deficit
reduction scenarios
– Default
– Grow your way out
– Belt tightening
– Inflate your way out
– Financial repression
Fiscal adjustment
2012-13?
– Full reversal
..3.9% of GDP
– CBO “more likely”
alternative.. 0.9%
U.S. fiscal deficit: Looming fiscal cliff could harm growth
Short-term deficit projections
% o
f G
DP
Total
deficit
9%
Structural
deficit 3–4%
Sources: The Vanguard group, Inc.'s Investment Strategy Group based on Congressional Budget Office The Budget and Economic Outlook: Fiscal Years 2012 to
2022.. The CBO Spending Range in made up of spending under the Alternative Scenario (upper limit) and Baseline/Current Law Scenario spending (lower
limit). The CBO Revenue Range is made up of revenue under the Alternative Scenario (lower limit) and Baseline/Current Law Scenario revenue (upper limit). 9%
deficit was that realized in 2011 and the Structural Deficit represents the average of the deficit under the Alternative Scenario and Baseline/Current Law Scenario
over the next 10 years. $1.2 trillion in spending cuts attributed to automatic sequestration procedure as of June 2012, allocated based on CBO analysis in Budget
and Economic Outlook: An Update, 2012.
7 VANGUARD INVESTMENTS SWITZERLAND GMBH
8
Will China slow down sharply? Monetary policy attempting to engineer soft landing with growth around 7-8%
Extracted 25 Oct. 2012
VANGUARD INVESTMENTS SWITZERLAND GMBH
A history of EMU in one chart! The past 20 years divide into three periods
Source: Bloomberg generic sovereign 10-year yields
Note: Weak periphery is the average of Greek, Irish and Portuguese yields where available for each country
Sovereign 10-year yields, %
9
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
30/06/1993 30/06/1997 29/06/2001 30/06/2005 30/06/2009
Italy
Spain
Germany
France
Weak periphery
Convergence
Honeymoon
Crisis
Extracted 09/10/12
VANGUARD INVESTMENTS SWITZERLAND GMBH
The crisis was prompted by mounting debt problems
10
• Debt had been increasing
for years in Greece and
Portugal
• But the banking crisis
caused problems for
Ireland and Spain
• Even with austerity, debt
ratio levels don’t turn for
some time
• Debt ratios for euro area
as a whole not markedly
high
• And even lower for
Germany
VANGUARD INVESTMENTS SWITZERLAND GMBH
11
• The challenges
• The risks
• The long-run outcomes
Europe: How does it play out?
VANGUARD INVESTMENTS SWITZERLAND GMBH
12
• Fiscal consolidation
• Growth
• Competitiveness
• Structural reform
• Banking repair
The 5 Challenges
VANGUARD INVESTMENTS SWITZERLAND GMBH
Challenge 1: Fiscal consolidation Achieved/required/forecast structural primary balance improvement (% GDP)
Source: IMF World Economic Outlook, October 2012
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2010–11
2012–13
2014–15
•Considerable fiscal
adjustment challenges
remain especially in
Greece, Ireland, Spain and
Italy
•Greece has already done
a lot, contrary to popular
opinion
•Portugal has done a lot of
the work
13 VANGUARD INVESTMENTS SWITZERLAND GMBH
Challenge 2: Growth Periphery in recession until 2014 and core is sluggish
Euro area, core and periphery GDP growth,
past and forecast (IMF), 2010-2015
14
• GDP continues to fall in
the periphery, through
2013 in Greece, Portugal
and Spain, maybe Italy
• French growth stays
below 1% until 2014.
• German growth is
modest, averaging around
1% through 2015
• Euro area growth
continues below trend
VANGUARD INVESTMENTS SWITZERLAND GMBH
Challenge 3: Competitiveness Correction is well under way but the gap with Germany is still considerable
• Credit boom led some
periphery countries to
lose competitiveness
• Some are clawing back,
notably Ireland, but
Greece too
• But Germany’s
performance is almost
“too good”.
• In absence of nominal
exchange rate flexibility,
“internal depreciation” is
only option.....
• Euro area
competitiveness boosted
by euro depreciation
during crisis
15
Notes: Figure displays the cumulative percentage difference from the Eurozone average in unit labour costs since Q1 2000. Data from Q1 1995 through latest available as of 31 October 2012.
Source: Eurostat, via Thomson Reuters Datastream.
Real exchange rate defined in terms of unit labour costs,
relative to Eurozone Average
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1998 2000 2002 2004 2006 2008 2010 2012
Cu
mu
lati
ve
Dif
fere
nc
e f
rom
E
uro
Are
a A
ve
rag
e L
ab
ou
r C
os
ts S
inc
e Q
1 2
00
0
France Germany Greece Ireland Italy Portugal Spain
VANGUARD INVESTMENTS SWITZERLAND GMBH
Challenge 4: Structural reform Europe faces a legacy of many too-long-ignored problems.....
• Structural policies are
weak in Greece, Portugal,
and Spain and Italy:
– This spans labour, product,
and service markets; and
– Institutions, human capital,
infrastructure, and innovation
also show weakness
• Ireland’s policies, by
contrast, are markedly
better.
• The corollary is that the
reforms being enforced
have much scope:
– However they will take time
to have an effect.
16
‘Heat map’ of structural reform gaps – selected euro area
economies and comparators
Note: the darker the shading the greater the weakness
Source: IMF (2010) Lifting Euro Area Growth: Priorities for Structural Reforms and Governance
Structural reform gaps
Selected euro area economies Selected others
GRE ITA POR SPA AUS FRA BEL FIN GER IRL NED JAP US SWE UK DEN
Labour market inefficiency
Business regulations
Network regulation
Retail sector regulation
Professional services regulation
Institutions and contracts
Human capital
Infrastructure
Innovation
VANGUARD INVESTMENTS SWITZERLAND GMBH
Challenge 4: Structural reform Some progress is being made
• Most progress made in
“programme” periphery
countries
• Encouraging, but those
are places where most
work to do
17
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
% C
han
ge i
n O
EC
D r
efo
rm r
esp
on
siv
en
ess
ind
icato
r
OECD structural reform process from 2008/9 to 2010/11
Notes: Figure shows the percentage change in the OECD’s reform responsiveness indicator, which is based on a scoring system for identifying
progress on structural reform policies. For details see Chapter 1 of the OECD’s Going for Growth Report, available at:
http://www.oecd.org/eco/productivityandlongtermgrowth/49711014.pdf
Source: OECD (2012), Economic Policy Reforms 2012: Going for Growth, OECD Publishing. http://dx.doi.org/10.1787/growth-2012-en
VANGUARD INVESTMENTS SWITZERLAND GMBH
Challenge 5: Repair the banks Banks play a crucial role in the euro area transmission mechanism
Bank fortunes intertwined with sovereigns
• Greece: sovereign exposure has sunk
banks
• Ireland: bank travails have undermined
sovereign
Regulatory agenda compounds need to
recapitalise and deleverage
Bank balance sheets vulnerable to
macroeconomic weakness (eg Spain)
Bank credit is typically the engine of growth
in euro area
Banking union still lacking.
“Agreement” to use ESM funds to
recapitalise banks is a crucial step.
18
Source: BIS, through Bloomberg (incl. public sector, banks, private sector)
Peripheral debt held by European and US banks (total claims as
% of tangible common equity, end-2011)
0%
10%
20%
30%
40%
50%
Greece Italy Ireland Portugal Spain
US Banks European Banks
VANGUARD INVESTMENTS SWITZERLAND GMBH
19
• Market scepticism
• Lack of policy commitment/bailout fatigue
• Austerity fatigue
The risks
VANGUARD INVESTMENTS SWITZERLAND GMBH
Eventually, private markets must finance euro area countries Beyond the weak periphery, financing needs are considerable
Given ongoing needs for the
strong periphery (Italy,
Spain) and the weak core
(France, Netherlands), it is
vital market access is
retained at reasonable
interest rates
It is possible that the firewall
of €500 from the ESM will
need to be bolstered by
more European funds or
from the IMF.
20
Estimated euro area sovereign issuance needs (€ bln)
Note: Number at top of bars shows financing needs for each country for the remainder of 2012 and 2013. Number in
brackets show estimated financing needs to the end of 2015.
Source: Bloomberg and IMF
0
50
100
150
200
250
300
350
400
450
500
2012 (rem.)
2013
2014
2015
221 (562)
132 (357)
235(581)
65(189)
Extracted 09/10/12 VANGUARD INVESTMENTS SWITZERLAND GMBH
If they don’t, policymakers must (continue to) bridge the gap Policy response from EU governments and ECB may need to step up
Considerable funds have
already been promised to
weak periphery under
existing programmes.. But
“firewall debate” suggests
appetite is dwindling
ECB have stepped in with
support for sovereigns and
banks.. But ECB have
made clear that it is not
their responsibility alone to
save the euro.
The fix?...ECB OMTs linked
to ESM funds with
conditionality is potentially
decisive step
21
0
20
40
60
80
100
120
140
Greece (1)
Greece (2)
Ireland Portugal
EU/IMF funds committed under lending
programmes (€ bln)
Source: European Commission Website
Extracted 25 Oct. 2012
VANGUARD INVESTMENTS SWITZERLAND GMBH
In the end, political will matters most EMU was borne out of politics and could fail if commitment falters
22
Greece: Rejection of austerity measures could cause coalition to collapse>>Grexit?
Negotiations over easing of bailout package critical..but no more money on table
Ireland: Good progress but questions over treatment of banks?
Portugal: Market access in 2013 possible..PSI or more EU funds?
Spain: Austerity/reform fatigue and regional tensions may derail efforts
Italy: Political vulnerabilities may undermine fiscal/structural challenges
France: President Hollande’s tax-heavy budget may harm the economy
Netherlands: Like Belgium, fractious coalition but fiscal challenge manageable
Germany: Will euro paymaster run out of patience? Benefits from crisis too
VANGUARD INVESTMENTS SWITZERLAND GMBH
What does it take to “fix” the euro area?
• Short-term measures to ensure countries stay on track
–ECB OMTs and ESM provide financing if markets lose faith
–Subject to conditionality on continuing fiscal consolidation and
structural reform
• Long-term roadmap of how institutions need to evolve
–Roadmap set out by EU Presidents in June 2012
–Fiscal/economic/banking/political union
–Eurobonds
23
:Note: OMTs are “Outright monetary transactions” involving ECB sterilised purchases of periphery sovereign bonds
VANGUARD INVESTMENTS SWITZERLAND GMBH
All eyes are now on Spain Yields in Spain and Italy lower since September on expectation of ECB/ESM action
24
Extracted 17/10/12
(%)
VANGUARD INVESTMENTS SWITZERLAND GMBH
25
1. Benign scenario (15%?)
– Short-term: ESM-ECB bring yields down
– Medium-term: Fiscal consolidation and reforms on track, growth recovers
– Long-term: Fiscal/banking/political union/eurobonds
2. Muddle-through scenario (65%?)
– Short-term: Temporary respite but sustainability questions persist
– Medium-term: Stuttering progress on fiscal, structural reform; OSI on
Greek debt, eventual growth recovery
– Long-term: Slow adherence to fiscal compact, move to eurobonds
3. Malign scenario (20%?)
– Short-term: Adverse events prompts Grexit, deposit runs elsewhere
– Medium-term: Countries leaving EMU suffer deep recession, banking
sector credit crunch in Europe, global recession
– Long-term: Euro only survives in stronger union of northern Europe
Europe: Possible scenarios?
VANGUARD INVESTMENTS SWITZERLAND GMBH
Summary on European crisis
Even three years into the crisis, we still are uncertain as to
which scenario will unfold.
Our modal scenario is still one where the euro survives,
most likely with its current membership....
But a highly disruptive disintegration of the euro area is still
possible...
....with adverse consequences for the European and global
economy if it were to happen.
26 VANGUARD INVESTMENTS SWITZERLAND GMBH
27
Diversified work well portfolios for long-run investors
• Equity returns are likely to recover
• Bond returns likely to be below historical average
• But bonds provide valuable diversification
• Especially global bonds
So how should investors react to this uncertainty?
VANGUARD INVESTMENTS SWITZERLAND GMBH
PE ratios in the UK suggest a positive outlook for equities…
Perspective on starting valuation and return -
Equities
Notes: Figure displays Price over 12-month trailing earnings for the MSCI UK index from Jan.1970 to Jan.1993 and for the FTSE All
Share index. Data through 31 Oct. 2012.
Source: MSCI and FTSE, via Thomson Reuters Datastream.
0
5
10
15
20
25
30
35
1970 1975 1980 1985 1990 1995 2000 2005 2010
Pri
ce
ove
r 1
2-m
on
th T
rail
ing
Ea
rnin
gs
Average since 1970 = 14
As of 31 October 2012 = 12
28 VANGUARD INVESTMENTS SWITZERLAND GMBH
Strong relationship over longer horizons ..suggests equity returns will improve
Perspective on starting valuation and return --
Equities
Notes: Figure displays the realised 120-month annualised returns ended Dec. 1979 through Oct. 2012, relative to the initial price over 12-month trailing earnings from Dec.1969 through Oct.2002. UK equity index defined as MSCI UK from Dec.1969 through Dec.1985 and the FTSE All Share thereafter. Returns are in local currency terms, with income reinvested. Data as of 31 Oct. 2012. Source: MSCI and FTSE, from Thomson Reuters Datastream.
UK Equity Returns vs. Initial Valuation 1970-2012
-5
0
5
10
15
20
25
30
35
0 5 10 15 20 25 30 35
Re
ali
sed
10-y
ear
An
nu
ali
sed
Re
turn
on
U
K E
qu
itie
s
Initial P/E Ratio
P/E as of 31 October 2012
29 VANGUARD INVESTMENTS SWITZERLAND GMBH
Perspective on starting valuation and return --
Bonds
Low current yields correlate with low expected returns
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Reali
sed
10-y
ear
An
nu
ali
sed
Retu
rn o
n
UK
Fix
ed
In
co
me
Initial Yield on 10-year Gilt
UK Fixed Income Returns vs. Initial Yield 1976-2012
Yield as of 31 October 2012
Notes: Figure displays the realised 120-month annualised returns ended Jan. 1986 through Oct. 2012, relative to the initial yield on the 10-year UK zero coupon gilt from Jan.1976 through Oct.2002. UK fixed income index defined as FTSE UK Government Index Feb.1976-Feb.2000; Barclays Sterling Aggregate Index thereafter. Returns are in local currency terms, with income reinvested. Data as of 31 Oct. 2012. Source: FTSE, Barclays, and Bank of England.
30 VANGUARD INVESTMENTS SWITZERLAND GMBH
Why fixed income makes sense in any macro environment
Diversification benefits act as a hedge against macro uncertainty, despite low yields
-12% -12%
-11% -0.11
-0.20
-0.11
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
-25%
-20%
-15%
-10%
-5%
0%
US Fixed Income Euro Area Fixed Income UK Fixed Income
Mo
nth
ly C
orr
ela
tio
n t
o G
lob
al
Eq
uit
y M
ark
et
Dif
fere
nce i
n A
nn
ualised
Vo
lati
lity
R
ela
tiv
e t
o t
he G
lob
al E
qu
ity M
ark
et
Volatility Reduction from Global Equities Correlation to Global Equities
Notes: Displays the difference in annunalised monthly volatility for each fixed income market relative to the global equity market, and the correlation of
monthly returns relative to the global equity market over the period Jan. 2000 – Sept. 2012. Global equity market defined as the FTSE All World, US
fixed income defined as the Barclays US Aggregate, Euro Area fixed income defined as the Barclays Euro Aggregate, UK fixed income defined as the
Barclays Sterling Aggregate. All returns are measured at a monthly frequency, in local currency terms, with dividends reinvested.
Sources: Vanguard, based on data from FTSE and Barclays. 31 VANGUARD INVESTMENTS SWITZERLAND GMBH
Why fixed income makes sense in any macro environment
Fixed income provides downside protection to equities, no matter which direction yields move
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Global Equities Global Bonds Global Equities Global Bonds
During Worst Months of Equity Returns During Worst Months of Bond Returns
Dis
trib
uti
on
of
Mo
nth
ly R
etu
rns
Clear downside protection
during equity market downturns Downside protection,
even when yields are
increasing
Notes: Displays the 5th/25th/median/75th/95th distribution of monthly returns for both global equities and global bonds, during a 10 th percentile or worse
month for either the global equity market or global fixed income market. Global equity market defined as the FTSE All World and global bond returns
are defined as the Barclays Global Aggregate. All returns are measured with currency impact removed, assuming income is reinvested.
Sources: Vanguard, based on data from FTSE and Barclays.
32 VANGUARD INVESTMENTS SWITZERLAND GMBH
Maturity extension to increase yield?
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1-3yr 3-5yr 5-7yr 7-10yr 10+ yrs
An
nu
alised
Vo
lati
lity
UK Fixed Income Euro Area Fixed Income US Fixed Income
Upward-sloping yield curves reflect interest rate risk
Average volatility, 2001-2012
Notes: Displays the average annualised volatility of monthly returns for each maturity band across each market. Each market is represented by:
Barclays Sterling Aggregate, Barclays Euro Aggregate, and Barclays US Aggregate. Returns are measured in local currency terms, with income
revinvested.
Sources: Vanguard, based on data from Barclays.
33 VANGUARD INVESTMENTS SWITZERLAND GMBH
EM/Credit Tilt to increase yield?
EM bonds are not a substitute for diversified fixed income exposure
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
EM Fixed Income Global Corporate Fixed Income Diversified Global Fixed Income
Av
era
ge M
on
thly
Co
rrela
tio
n t
o
Glo
bal E
qu
ity M
ark
et
Correlation to global equities, 2001-2012
Notes: Displays the average correlation of monthly returns for each fixed income sector to the global equity market. Global equity market is defined as
FTSE All World index, EM Fixed Income is defined as the JP Morgan Emerging Markets Bond Index, Global corporate fixed income is defined as the
Barclays Global Aggregate Corporate index, and Diversified global fixed income is defined as the Barclays Global Aggregate index. All returns are in
US dollars with income reinvested, and the Global allocations are in hedged terms (the EM index covers only USD issues, so hedging is not applicable).
Sources: Vanguard, based on data from Barclays, JP Morgan, and FTSE.
34 VANGUARD INVESTMENTS SWITZERLAND GMBH
Be wary of a focus on yield
Focusing on yield alone ignores the risk impact on a portfolio
Volatility,1990-2012 Beta to UK Stocks, 1990-2012
Notes: Left-hand figure displays the annualised standard deviation of monthly returns from Jan.1990 - Oct.2012. Right-hand figure displays the slope coefficient of a
regression of the returns of the stated asset class on the returns of the broad UK stock market from Jan.1990 t-Oct.2012. UK stocks defined as the FTSE 350 index, Lower
Yield stocks defined as the FTSE 350 low yield index, higher yield stocks defined as the FTSE 350 high yield index, UK REITs defined as the FTSE EPRA/NAREIT UK
Index, UK Bonds defined as the FTSE UK Government Index Jan. 1990-Feb.2000; Barclays Sterling Aggregate Index thereafter. 50/50 portfolio is defined as 50% FTSE
350, 50% UK bonds, rebalanced monthly. All returns displayed in local currency with income reinvested.
Source: FTSE, Barclays, via Thomson Reuters Datastream.
0
5
10
15
20
25
UK REITs Lower Yield
Stocks
Higher Yield
Stocks
Broad UK Stocks
50/50 Portfolio
UK Bonds
An
nu
alised
Vo
lati
lity
(%
)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Lower Yield Stocks
Broad UK Stocks
Higher Yield
Stocks
UK REITs 50/50 Portfolio
UK Bonds
Beta
to
Bo
rad
UK
Sto
ck M
ark
et
35
VANGUARD INVESTMENTS SWITZERLAND GMBH
Balanced portfolio performance since October 2007
Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to GBP), the FTSE All World index (un-hedged in GBP), the FTSE All Share index, and the Barclays SterlingAggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in sterling terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital, FTSE,
A balanced global approach has fared well (GBP)
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct-2012
Cu
mu
lati
ve R
etu
rn S
ince 3
1 O
cto
ber,
2007
60% Global Stocks / 40% Global Bonds 60% UK Stocks / 40% UK Bonds 100% UK Stocks
36 VANGUARD INVESTMENTS SWITZERLAND GMBH
Balanced portfolio performance since October 2007
Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to EUR), the FTSE All World index (un-hedged in EUR), the Eurostoxx equity index, and the Barclays Euro Aggregate. Portfolio is re-balanced to target allocation monthly, at month end. Returns are in euro terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital, FTSE.
A balanced global approach has fared well (EUR)
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct-2012
Cu
mu
lati
ve R
etu
rn S
ince 3
1 O
cto
ber,
2007
60% Global Stocks / 40% Global Bonds 60% Euro Stocks / 40% Euro Bonds 100% Euro Stocks
37 VANGUARD INVESTMENTS SWITZERLAND GMBH
A balanced global approach has fared well (GBP)
Balanced global portfolio performance since October 2007
Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to GBP), and the FTSE All World index (un-hedged in GBP). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in sterling terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital and FTSE.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct-2012
Cu
mu
lati
ve R
etu
rn S
ince 3
1 O
cto
ber,
2007
30% Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks
38 VANGUARD INVESTMENTS SWITZERLAND GMBH
A balanced global approach has fared well (EUR)
Balanced global portfolio performance since October 2007
Notes: Reflects the cumulative return of various allocations to the Barclays Global Aggregate index (Hedged to EUR), and the FTSE All World index (un-hedged in EUR). Portfolio is re-balanced to target allocation monthly, at month end. Returns are in euro terms, with income reinvested, through 31 Oct.2012. Source: Vanguard, based on Barclays Capital and FTSE.
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Oct-2007 Apr-2008 Oct-2008 Apr-2009 Oct-2009 Apr-2010 Oct-2010 Apr-2011 Oct-2011 Apr-2012 Oct-2012
Cu
mu
lati
ve R
etu
rn S
ince 3
1 O
cto
ber,
2007
30% Stocks / 70% Bonds 50% Stocks / 50% Bonds 70% Stocks / 30% Bonds 100% Stocks
39 VANGUARD INVESTMENTS SWITZERLAND GMBH
Tactical strategies are difficult (UK Perspective)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Europe ex
Euro ex UK
Equity
UK Equity
North
America
Equity
Euro Equity Emerging
Equity
Un-hedged
Global
Bonds
Hedged
Global
Bonds
Hedged
Global
Bonds
Emerging
Equity
Emerging
Equity
Emerging
Equity Euro Equity
Emerging
Equity
Un-hedged
Global
Bonds
Emerging
Equity
Emerging
Equity UK Linkers
39.8% 16.7% 37.9% 37.3% 74.4% 11.3% 8.3% 10.7% 38.5% 19.3% 51.1% 21.0% 37.4% 45.1% 62.5% 23.6% 20.3%
North
America
Equity
North
America
Equity
Europe ex
Euro ex UK
Equity
Global
Growth
Equity
Developed
Asia Equity
Global Value
Equity
Emerging
Equity UK Bonds Euro Equity
Europe ex
Euro ex UK
Equity
Developed
Asia Equity
Europe ex
Euro ex UK
Equity
Euro Equity
Hedged
Global
Bonds
Europe ex
Euro ex UK
Equity
Europe ex
Euro ex UK
Equity
UK Bonds
37.5% 11.7% 36.7% 28.3% 71.0% 10.1% 5.2% 9.2% 30.3% 15.3% 36.8% 18.4% 18.5% 7.6% 30.5% 22.8% 13.5%
UK Equity Euro Equity Euro Equity
North
America
Equity
Global
Growth
Equity
Hedged
Global
Bonds
UK Bonds UK Linkers
Europe ex
Euro ex UK
Equity
Euro Equity
Europe ex
Euro ex UK
Equity
Emerging
Equity
Global
Growth
Equity
UK Bonds UK Equity Developed
Asia Equity
Un-hedged
Global
Bonds
23.9% 11.0% 27.6% 26.8% 42.4% 9.9% 4.8% 8.4% 29.4% 13.7% 34.7% 16.8% 12.1% 4.4% 30.1% 21.3% 6.4%
Global Value
Equity
Hedged
Global
Bonds
UK Equity UK Linkers
North
America
Equity
UK Bonds
Un-hedged
Global
Bonds
Un-hedged
Global
Bonds
Developed
Asia Equity UK Equity
Global Value
Equity UK Equity
Europe ex
Euro ex UK
Equity
UK Linkers
Global
Growth
Equity
North
America
Equity
Hedged
Global
Bonds
20.9% 8.6% 23.6% 19.9% 25.4% 9.2% 4.3% 5.3% 25.3% 12.8% 24.9% 16.8% 10.8% 3.5% 21.0% 19.1% 5.8%
Un-hedged
Global
Bonds
UK Bonds Global Value
Equity UK Bonds UK Equity UK Linkers UK Linkers
Emerging
Equity
Global Value
Equity
Global Value
Equity
Global
Growth
Equity
Global Value
Equity UK Linkers
Developed
Asia Equity Euro Equity
Global
Growth
Equity
North
America
Equity
20.3% 7.4% 20.1% 19.5% 24.2% 4.2% -0.9% -15.1% 21.4% 11.9% 24.0% 9.4% 8.3% -13.2% 18.4% 16.4% 1.2%
Global
Growth
Equity
UK Linkers
Global
Growth
Equity
Global Value
Equity Euro Equity
Europe ex
Euro ex UK
Equity
Global Value
Equity
Developed
Asia Equity UK Equity
Developed
Asia Equity Euro Equity
Global
Growth
Equity
Un-hedged
Global
Bonds
North
America
Equity
Global Value
Equity
Global Value
Equity UK Equity
19.9% 6.3% 19.9% 15.0% 20.8% 1.5% -6.7% -17.3% 20.9% 11.5% 22.2% 3.7% 7.6% -13.3% 18.3% 16.1% -3.5%
Hedged
Global
Bonds
Europe ex
Euro ex UK
Equity
UK Bonds UK Equity
Europe ex
Euro ex UK
Equity
Euro Equity
North
America
Equity
Global Value
Equity
Global
Growth
Equity
UK Linkers UK Equity
Hedged
Global
Bonds
Global Value
Equity
Global Value
Equity
North
America
Equity
UK Equity
Global
Growth
Equity
19.3% 4.0% 14.8% 13.8% 18.8% 1.4% -10.8% -20.9% 19.5% 8.3% 22.0% 3.3% 6.8% -15.6% 14.8% 14.5% -5.4%
Euro Equity
Global
Growth
Equity
UK Linkers
Europe ex
Euro ex UK
Equity
Global Value
Equity
North
America
Equity
UK Equity
Europe ex
Euro ex UK
Equity
North
America
Equity
Hedged
Global
Bonds
North
America
Equity
UK Linkers Developed
Asia Equity
Global
Growth
Equity
Developed
Asia Equity
Un-hedged
Global
Bonds
Global Value
Equity
17.9% 2.8% 13.9% 13.0% 16.7% -0.5% -13.3% -21.6% 16.4% 8.0% 20.2% 2.6% 6.6% -20.9% 13.6% 8.9% -6.2%
UK Bonds Global Value
Equity
Hedged
Global
Bonds
Hedged
Global
Bonds
UK Linkers UK Equity
Europe ex
Euro ex UK
Equity
UK Equity UK Linkers UK Bonds UK Linkers
North
America
Equity
Hedged
Global
Bonds
Europe ex
Euro ex UK
Equity
UK Linkers UK Linkers
Europe ex
Euro ex UK
Equity
16.5% 2.7% 11.8% 12.6% 4.3% -5.9% -18.9% -22.7% 6.8% 6.7% 9.9% 1.7% 5.8% -25.1% 6.4% 8.8% -12.0%
UK Linkers Emerging
Equity
Un-hedged
Global
Bonds
Un-hedged
Global
Bonds
Hedged
Global
Bonds
Global
Growth
Equity
Euro Equity Euro Equity
Hedged
Global
Bonds
Global
Growth
Equity
UK Bonds UK Bonds
North
America
Equity
Euro Equity
Hedged
Global
Bonds
UK Bonds Developed
Asia Equity
11.9% -2.7% 7.3% 12.0% 1.1% -17.1% -20.1% -28.3% 5.5% 4.6% 8.3% 0.6% 5.6% -26.2% 5.3% 7.9% -12.6%
Developed
Asia Equity
Un-hedged
Global
Bonds
Emerging
Equity
Developed
Asia Equity UK Bonds
Developed
Asia Equity
Global
Growth
Equity
North
America
Equity
UK Bonds
North
America
Equity
Un-hedged
Global
Bonds
Developed
Asia Equity UK Equity UK Equity UK Bonds
Hedged
Global
Bonds
Euro Equity
2.6% -5.4% -17.2% 3.1% -1.0% -20.0% -21.3% -29.5% 3.5% 4.1% 6.8% -0.2% 5.3% -29.9% 3.3% 4.8% -16.6%
Emerging
Equity
Developed
Asia Equity
Developed
Asia Equity
Emerging
Equity
Un-hedged
Global
Bonds
Emerging
Equity
Developed
Asia Equity
Global
Growth
Equity
Un-hedged
Global
Bonds
Un-hedged
Global
Bonds
Hedged
Global
Bonds
Un-hedged
Global
Bonds
UK Bonds Emerging
Equity
Un-hedged
Global
Bonds
Euro Equity Emerging
Equity
0.5% -18.4% -21.8% -23.5% -1.8% -27.2% -22.9% -32.8% 1.2% 1.9% 5.8% -6.5% 3.4% -34.8% -4.8% -0.5% -18.4%
UK equity defined as the FTSE All Share index, Euro Equity defined as the FTSE Eurobloc index, Europe ex Euro ex UK equity defined as the FTSE Europe ex Eurobloc ex
UK index, Developed Asia equity defined as the FTSE Developed Asia Pacific index, North America equity defined as the FTSE North America index, Emerging equity defined
as the FTSE Emerging index, Growth and Value equities are defined as the FTSE World Growth and FTSE World Value indices. UK Bonds are defined as the Citi WGBI UK
index from 1994-1998 and the Barclays Sterling Aggregate from 1999-2011. Hedged and unhedged global bonds are defined as the Barclays Global Aggregate. UK Linkers
are defined as the Barclays UK Inflation Linked Index. Returns are denominated in sterling and include reinvested dividends and interest. 40
VANGUARD INVESTMENTS SWITZERLAND GMBH
Conclusions
•The economic environment is more uncertain than usual.
•Benign and malign scenarios could result that make a difference
even to the long-term investor.
•.Risky to build portfolio around central case assumptions
•High-yielding alternative assets may not deliver in future as they
have in past
•Equities should deliver returns for the long term
•Bonds provide diversification benefits
Stay diversified....stay the course
41 VANGUARD INVESTMENTS SWITZERLAND GMBH
Important information
The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Investments Switzerland GmbH. The material
contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or
solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.
Issued by Vanguard Investments Switzerland GmbH.
© 2012 Vanguard Investments Switzerland GmbH. All rights reserved.
VISG-2012-11-01-0083
42 VANGUARD INVESTMENTS SWITZERLAND GMBH