Regulatory risk metrics and the independent risk function (IRF)

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1 Measuring risk and performance in multi asset investment This document is for Professional Clients only and is not for consumer use There are three key risk management functions in our multi asset approach. First is on-desk risk management, which is about the risk of individual ideas and the risk of combining the ideas - working alongside the fund managers. Second is the stress testing of the portfolio for possible future scenarios. Third is a combination of regulatory risk metrics, which look at historic periods of market stress, and the independent risk function (IRF), which provides oversight and governance. On-desk risk management Stress testing Regulatory risk metrics and the independent risk function (IRF)

2 On-desk risk management The Invesco Perpetual Global Targeted Returns Fund is a fund of ideas and every idea must have the correct risk characteristics to earn its place in the portfolio. Before investing in any idea, the team will carry out pre-trade risk analysis to see the impact each idea is likely to have on the overall volatility of the fund. The fund targets 3-month LIBOR plus 5% over a rolling three-year period but aims to achieve that return with less than half the volatility of global equities over the same rolling three-year period. 1 The key is that when all of the ideas are brought together in a single portfolio, because different asset types have different correlations with each other, the overall volatility of the fund is expected to be lower than that of global equities. This is a potential benefit of diversification within a multi asset portfolio. 1 There is no guarantee that the fund will achieve a positive return or its target. Risk and exposure data for the Invesco Perpetual Global Targeted Returns Fund Independent risk of ideas The fund has to have a minimum of five investment ideas and can have up to a maximum of around 50. The independent risk of one idea cannot be more than 25% of the sum of the independent risk of all the ideas in the fund. Idea 1 Idea 2 Idea 3 Idea 4 Idea 5 Idea 6 Idea 7 Idea 8 Idea 9 Idea 10 Idea 11 Idea 12 Idea 13 Idea 14 Idea 15 Idea 16 Idea 17 Idea 18 Idea 19 Idea Measuring risk and performance in multi asset investment

3 To ensure that each idea has enough risk to generate the fund s target return, the first step is to look at the independent risk of each idea i.e. how volatile is the idea in isolation based on its historic standard deviation of returns? Once this has been measured, the crucial next step is to look at what impact the idea is expected to have on the risk profile of the portfolio. Some ideas will reduce overall volatility, others will increase it. This is calculated by looking at the marginal risk of each idea how the risk of the fund changes if you increase exposure to an individual idea. This is calculated through the use of a third-party risk system APT. APT estimates the portfolio s current level of risk using weekly data for the past threeand-a-half years. The current level of risk is calculated using a combination of historic volatility and the correlation between the different asset types in the portfolio at any point in time. The final step is to analyse the exposure of the fund, using the independent risk of each idea, to individual asset types and geographies, as well as, calculate its overall market exposure. Asset type exposure Ideas are grouped by asset type. The total independent risk for each asset type cannot be more than 50% of the total independent risk of the ideas of the fund. Equity Currency Volatility Credit Interest Rates Inflation Geographical exposure Ideas are monitored across geographical regions. This helps mitigate unintended levels of exposure to a particular country or region. 32% 22% 18% 12% 9% 7% UK 22% Europe 22% Global 12% US 12% Asia 6% China 5% Japan 4% Australia 4% Germany 3% India 3% Norway 2% Korea 2% Canada 2% Market exposure Each idea is labelled as Risk on, Partial Risk on, Neutral, Partial Risk off, or Risk off, to determine how correlated the total portfolio of ideas is with equities. Risk on is a correlation above 0.2 with global equities. An idea is labelled risk off if the correlation with global equities is below RiskOn PartialRiskOn Neutral PartialRiskOff RiskOff 47% 10% 4% 3% 35% 03 Measuring risk and performance in multi asset investment

4 Once the risk impact that an idea has on the portfolio is understood, it then becomes a trade off between the risk and return of that idea: is there adequate reward for the amount of risk taken? The risk characteristics will have an impact on this. For example, a larger position might be taken where the idea increases the diversification of the portfolio, whereas a smaller position might be taken where an idea has a high return expectation but is also high risk. It is a combination of factors. This is how the fund seeks to produce targeted returns with less than half the volatility of global equities. Combining these exposures into one fund 15 Total independent risk 13.92% Total fund risk 3.76% Diversification benefit 50% of global equity risk 0 Independent risk Fund risk Aiming to achieve less than half the volatility of global equities through combining ideas Ideas Global equities Invesco Perpetual Global Targeted Returns Fund Correlation to equities (std dev) % Volatility % Source: Invesco Perpetual as at 31 January For illustrative purposes only. 04 Measuring risk and performance in multi asset investment

5 Stress testing On-desk analysis is an important aspect when looking at the contribution to risk that each idea brings to the portfolio. However, these risk measures are based on backward-looking data. The team will also look forward by stress testing the fund across a range of possible future scenarios, to see how various assets might perform both individually and in relation to each other. Examples of the types of scenarios the team models the portfolio on to see how it might perform in a particular environment are shown in the table below. Regulatory risk metrics and the independent risk function (IRF) The role of the IRF is to monitor, measure and manage the risk limits for the fund at both the pre- and post-trade stages of the investment process. The Multi Asset team work closely with the IRF to ensure that all the risk constraints for the fund are met. Economic scenario analysis Scenario Characteristics Positive Oil Shock Oil price falls (-33%), Indian rupee strengthens (+10%) China Bust HSCEI falls (-50%), HSCEI 1 yr vol spikes (to 50), Chinese yuan falls (-20%) Europe Shambles EUR falls (-15%), OAT-Bunds spread widens (+100bps) Crowded Trade Unwind S&P 500 falls (-30%), EURUSD strengthens (+10%) Cash is King S&P 500 falls (-50%), yield on US 10-yr Treasuries rises (+250bps) New World Order Oil price up (+50%), NOKEUR strengthens (+20%), Euro Stoxx 50 down (-20%) Recession 2015 S&P 500 falls to 1000, German bond prices rise (yields to 0.4%) For illustrative purposes only. Regulatory stress testing of the portfolio is also carried out by the IRF using the system StatPro, which holds historic data relating to periods of market stress - including the aftermath of the collapse of Lehman Brothers and the European debt crisis. The risk metrics produced by the IRF, along with analytics from the on-desk risk management function and economic scenario analysis are then reviewed by the Multi Asset team at least monthly. The risk management process examines how every change within the portfolio affects overall risk and return and together with strong oversight helps to ensure that the team have the right blend of ideas in a single, risk-adjusted portfolio. The aim of this part of the process is to find out if the fund could withstand these stressful situations and what the impact on the portfolio would be if something similar were to happen. The results of these tests could lead the team to: Change how they implement ideas Reweight the balance of ideas Search for new ideas Remove ideas Subjecting the portfolio to stress tests and scenario analysis is another way in which the team is kept informed on how to achieve the targeted return over a rolling three-year period, while keeping volatility less than half the level of global equities over the same time period, even through times of market turbulence. It also helps them to take advantage of future movements, by identifying and increasing exposure to ideas that have performed well in a modelled scenario, in the event that a particular scenario materialises. 05 Measuring risk and performance in multi asset investment

6 Contact us UK Retail Sales Telephone UK Institutional Sales Telephone Telephone calls may be recorded. Important information This document is for Professional Clients only and is not for consumer use. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Where Invesco Perpetual has expressed views and opinions, these may change. The Invesco Perpetual Global Targeted Returns Fund makes significant use of financial derivatives (complex instruments) which will result in the fund being leveraged and may result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment. The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. This counterparty risk is reduced by the Managers, through the use of collateral management. The securities that the fund invests in may not always make interest and other payments nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity, may mean that it is not easy to buy or sell securities. These risks increase where the funds invest in high yield or lower credit quality bonds and where we use derivatives. For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports and the Prospectus, which are available using the contact details shown. Invesco Perpetual is a business name of Invesco Fund Managers Limited and Invesco Asset Management Limited Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK Authorised and regulated by the Financial Conduct Authority 59097/PDF/ UK3542