Absolute return: The search for positive returns in changing markets

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1 Absolute return: The search for positive returns in changing markets Tuesday, 7 June 2011 Portfolio Manager for Global Fixed Income and Absolute Return Funds

2 Topics for discussion What is absolute return? Why are absolute return strategies needed? What are types of absolute return strategies? Have absolute strategies worked? Global Fixed Income Seminar

3 What is absolute return? A fund or mandate whose strategy is to preserve capital and consistently achieve positive returns Absolute returns: Generally measured against cash Can be measured against a real return objective or against a nominal return target Performance should be positive in all market environments Global Fixed Income Seminar

4 Absolute return is not the same as total return Total return performance is generally relative to a market benchmark or against a universe of similar managers Total return will give investors market returns plus a margin. Over a cycle this can be negative necessarily a hedge or leveraged fund, but most hedge funds employ absolute return strategies a guarantee of specific returns Global Fixed Income Seminar

5 Examples of absolute return strategies Descriptions illustrate a wide range of strategies: Absolute return strategies aim to deliver a specified target return above the risk-free rate, while protecting against capital losses in any short sub-period Absolute return strategies aim to deliver a specified target return above the risk-free rate, while protecting against capital losses over the short- to medium-term Target returns above risk-free rate are to be achieved in the long-term. Short- to medium-term negative returns can occur Global Fixed Income Seminar

6 Characteristics of absolute return strategies A fund or mandate that separates alpha from beta Uses well-diversified investments Ability to take long and short positions May be able to use limited leverage (UCITS 3 funds) Neutral cash position* Rigorous risk controls High level of transparency * Neutral positions for real and nominal return targets should also be a risk free rate normally cash Global Fixed Income Seminar

7 Why are absolute return strategies needed? Interest rates (and short dated bond yields) are low Investors in cash/short bonds are looking for higher returns, without taking substantial beta risk Demand for solutions/strategies that work in all environments and are not dependent on a single strategy Investment alternative if rates and yields start rising Used in asset allocation, absolute return strategies can dampen overall risk Global Fixed Income Seminar

8 Who uses absolute return strategies? Pension funds Central banks Asset managers/allocators Fund of fund managers Private clients Hedge funds Global Fixed Income Seminar

9 Who manages absolute return strategies? Traditional asset managers Hedge funds Proprietary trading desks Global Fixed Income Seminar

10 What do absolute return strategies use? Sources of alpha Macro Duration Yield curve Inflation breakeven Country and credit spread Micro Investment-grade credit High yield credit Emerging markets Currencies Securitized assets Equities Commodities Instruments Up to 100% in physical cash plus additional 100% in derivatives (long or short) (UCITS 3 rule) Long positions Short positions Futures Forwards Swaps CDS (single name and index) Global Fixed Income Seminar

11 Types of absolute return strategies Funds using all asset classes on an opportunistic basis Pure fixed income related funds (no equities, commodities or convertibles) Funds with measured risk goals, rather than return objectives Directional strategies Relative value strategies Yield curve strategies Sector strategies Multi-strategy Global Fixed Income Seminar

12 How do absolute return strategies achieve returns? Efficient use of capital Ability to identify multiple investment opportunities Identification of alpha against beta Use of derivatives Focus on risk Focus on transparency Global Fixed Income Seminar

13 What does an absolute return manager need? Investment process that has strong investment disciplines and transparency Full spectrum of investment ideas large team resources Specialist investment skills derivatives, risk Coverage of all areas of markets government, credit, EM, FX Extensive research of key drivers Ability to design correct product Global Fixed Income Seminar

14 What to look for in a absolute return manager Checklist of manager attributes: Investment process Manager s experience in both long and short strategies Manager s performance/volatility track record Approach to leverage Risk management culture Return objectives Global Fixed Income Seminar

15 Performance of managers has varied Absolute return manager performance: July 2008 to May 2011 Index=100 on 7/1/ Manager A Manager B Manager C Manager D Manager E Manager F Manager G Manager H Manager I Manager J Source: Bloomberg June For illustrative purposes only. Past performance is no guarantee of future results Global Fixed Income Seminar

16 How have absolute return strategies performed? July 2008 to May 2011 Many products have been shown to be beta products no alpha A number of failing products relied too heavily on credit and illiquid alpha sources Products relying on macro strategies have performed better, on a relative basis Volatility has been major divider between some products Some products appear to be fatally damaged in recent history Source:, June 2011 Global Fixed Income Seminar

17 Dispersion increased during the crisis Absolute return manager performance: July 2008 to Dec 2008 Index=100 on 7/1/ Manager A Manager B Manager C Manager D Manager E Manager F Manager G Manager H Manager I Manager J /7/08 1/8/08 1/9/08 1/10/08 1/11/08 1/12/08 Source: Bloomberg June For illustrative purposes only. Past performance is no guarantee of future results Global Fixed Income Seminar

18 How have absolute return strategies performed? H With low yields some were tempted into illiquid sectors Credit crunch and redemptions illustrated failings of design Many adopted highly rated ABS/MBS Even rated funds performed no better Forced liquidations meant losses were locked in Assets fell by over 75% some funds closed Source:, June 2011 Global Fixed Income Seminar

19 Manager performance rebounded in 2009 Absolute return manager performance: 2009 Index=100 on 12/31/ Manager A Manager B Manager C Manager D Manager E Manager F Manager G Manager H Manager I Manager J /12/08 31/3/09 30/6/09 30/9/09 31/12/09 Source: Bloomberg June For illustrative purposes only. Past performance is no guarantee of future results Global Fixed Income Seminar

20 How have absolute return strategies performed? 2009 Further fall in risk appetite in Q showed credit funds Overall recovery in NAV s / performance reflected asset class focus Recoveries proved that concept is successful Investors become more focused on volatility and manager disciplines Major differences are in the product designs Returns overall were positive Source:, June 2011 Global Fixed Income Seminar

21 2010 was a challenging year for managers Absolute return manager performance: 2010 Index=100 on 12/31/ Manager A Manager B Manager C Manager D Manager E Manager F Manager G Manager H Manager I Manager J Source: Bloomberg June For illustrative purposes only. Past performance is no guarantee of future results Global Fixed Income Seminar

22 How have absolute return strategies performed? has seen risk appetite decline and Euro deficit concerns Most funds have been affected NAV volatility has increased and become a focus Even well diversified products have been affected by asset class contagion Will be interesting to see how performance develops Source:, June 2011 Global Fixed Income Seminar

23 2011 continues to present challenges for managers Absolute return manager performance: Year-to-date May 2011 Index=100 on 12/31/ Manager A Manager B Manager C Manager D Manager F Manager G Manager H Manager I Manager E Manager J /12/ /01/ /02/ /03/ /04/ /05/2011 Source: Bloomberg June For illustrative purposes only. Past performance is no guarantee of future results Global Fixed Income Seminar

24 Implications for absolute return strategies Absolute return strategies will become increasingly popular as rates/yields rise Need to be very diligent in manager selection Ensure a multi-strategy, disciplined and transparent investment approach Focus on volatility as well as returns Make sure the investment target is in line with your requirements Global Fixed Income Seminar

25 Contact 1 Appold Street, Broadgate London, United Kingdom EC2A 2HE Tel. +44 (20) Global Fixed Income Seminar

26 Important information is the brand name for the institutional asset management division of Deutsche Asset Management, the asset management arm of Deutsche Bank AG. In the US this relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN ) Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services only.); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for Direct Real Estate business), and Deutsche Asset Management Hong Kong (for Real Estate Securities Business), in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No N) and in the United Kingdom, Deutsche Alternative Asset Management (UK) Limited; Deutsche Alternative Asset Management (Global) Limited, in addition to other regional entities in the., and Deutsche Asset Management (UK) Limited; in addition to other regional entities in the. This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. No further distribution is allowed without prior written consent of the issuer. Any forecasts provided herein are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Investments are subject to risks, including possible loss of principal amount invested. Certain Deutsche Asset Management investment strategies may not be available in every region or country for legal or other reasons, and information about these strategies is not directed to those investors residing or located in any such region or country. I (07/12) Global Fixed Income Seminar

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