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Managing risk in a topsy-turvy world Hector Kilpatrick Chief Investment Officer PFS Q1 2017 Regional Conferences Learning Objectives: • Assess the impact of Extraordinary Monetary Policy Learning Objectives: • Assess the impact of Extraordinary Monetary Policy • Identify how to benefit from the shift to fiscal stimulus Learning Objectives: • Assess the impact of Extraordinary Monetary Policy • Identify how to benefit from the shift to fiscal stimulus • Learn how to invest to mitigate inflationary risks Learning Objectives: • Assess the impact of Extraordinary Monetary Policy • Identify how to benefit from the shift to fiscal stimulus • Learn how to invest to mitigate inflationary risks • Consider how best to manage risk at the portfolio level Market Outlook – hooked on cheap money? Negative interest rates – stimulant or sedative? Yield to maturity (% per annum) German 2-year Bund yield Time (2006 - 2016) Source: Bloomberg The problem with Extraordinary Monetary Policy Year on Year Change (%) Japanese industrial production (year on year change) Time (2001 - 2016) Source: Bloomberg, Ministry of Economy, Trade & Industry of Japan Indices (rebased 100) The problem with Extraordinary Monetary Policy Time (2008 - 2016) Source: Bloomberg, BLS, FHFA Indices (rebased 100) The problem with Extraordinary Monetary Policy S&P 500 Index Time (2008 - 2016) Source: Bloomberg, BLS, FHFA, S&P Consequences? Impact on equities – topsy-turvy world? S&P500 Index S&P 500 Index Time (July – Dec 2016) Source: Bloomberg, S&P Impact on equities – topsy-turvy world? US Bank sector performance vs S&P500 US Bank sector performance vs S&P 500 Time (2013 - 2016) Source: CAM, KBW, Bloomberg, S&P UK equities – dramatic sector rotation post Trump Selected share price moves (8/11/16 to 15/11/16) Source: Bloomberg, Cornelian The Infrastructure spend gap US Government infrastructure spend as a proportion of GDP Average spend 3.3% % Av. spend 2.6% Time (2002 – 2015) Source: CAM, Factset, US Bureau of Economic Analysis Focus on investor outcomes How to benefit from increased infrastructure opportunities Inflationary pressures building Year on year change (%) US Core CPI Time (2001 - 2016) Source: Bloomberg, BLS Inflationary pressures building Year on year change (%) Atlanta Fed Wage tracker Time (2006 – 2016) Source: Bloomberg, Atlanta Fed. Focus on investor outcomes How to protect portfolios from inflation Impact of higher interest rates Yield to maturity (% per annum) US Yield Curve 31 December 2016 30 September 2016 Time to maturity Source: Bloomberg Focus on investor outcomes Price ($) US 30 year Treasury price Time (July 2016 – Dec 2016) Source: Bloomberg, 2.5%, 15/05/46 How positive are rising interest rates really? (%) US 30yr Mortgage rate Time (2013 - 2016) Source: CAM, Bloomberg, Bankrate.com Managing risk in a topsy-turvy world Managing Risk Is your investment manager able to reduce risk? Managing risk in a topsy-turvy world Managing risk in a topsy-turvy world Managing risk in a topsy-turvy world Managing risk in a topsy-turvy world Risk Managed Funds * Net of fees, over the investment cycle. Source: Cornelian, DT, Defaqto, Scopic Core objective – consistent outcomes Annualised Total Return (%) Cornelian Risk Managed fund range – 5 year risk/returns Risk – Annualised Standard Deviation (%) Source: CAM, Morningstar, D Acc share classes – annualised return for 5 years to end December 2016 Learning outcomes: • Explain the harmful effects of Extraordinary Monetary Policy Learning outcomes: • Explain the harmful effects of Extraordinary Monetary Policy • How to invest to benefit from fiscal stimulus Learning outcomes: • Explain the harmful effects of Extraordinary Monetary Policy • How to invest to benefit from fiscal stimulus • How to protect portfolios from rising inflation Learning outcomes: • Explain the harmful effects of Extraordinary Monetary Policy • How to invest to benefit from fiscal stimulus • How to protect portfolios from rising inflation • Demonstrate the benefits of… …an unconstrained investment philosophy Learning outcomes: • Explain the harmful effects of Extraordinary Monetary Policy • How to invest to benefit from fiscal stimulus • How to protect portfolios from rising inflation • Demonstrate the benefits of… …an unconstrained investment philosophy www.cornelianam.com Risk Warning Cornelian Asset Managers Limited is authorised and regulated by the Financial Conduct Authority. This material is directed at professional financial advisers only. You should remember that the value of investments and the income derived there from may fall as well as rise and you may not get back the amount that you invest. Past performance is not a guide to future returns. Fund performance figures do not include any initial charge; if this is paid it will reduce performance from that shown. Opinions expressed whether in general or both on the performance of individual securities and in a wider economic context represent the views of Cornelian Asset Managers Limited at the time of preparation. They are subject to change and should not be interpreted as investment advice. Cornelian Asset Managers Limited and connected companies, clients, directors, employees and other associates, may have a position in any security, or related financial instrument, issued by a company or organisation mentioned in this document. Cornelian Asset Managers Limited, 30 Charlotte Square, Edinburgh EH2 4ET Authorised and regulated by the Financial Conduct Authority No 143452 www.cornelianam.com