Commodities, Currencies and Non-correlated Returns

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1 Commodities, Currencies and Non-correlated Returns Dave Nadig, Moderator Director of Research IndexUniverse.eu Tyler Mordy, Panelist Director of Research HAHN INvestment K. Geert Rouwenhorst, Panelist Professor of Finance Yale University Matthew Carr, Panelist EasyETF Specialist Sales UK & Northern Europe BNP PARIBAS EasyETF Nicholas Brooks, Panelist Head of Research and Investment Strategy ETF Securities

2 Commodities, Currencies and Non-correlated Returns K. Geert Rouwenhorst, Panelist Professor of Finance Yale University

3 First Commodity Bond Excerpt from the Bond: Both Principal and Interest to be paid in the then current money ( ) as Five Bushels of CORN, sixty-eight Pounds and four-seventh parts of a pound of BEEF, Ten pounds of SHEEPSWOOL, and sixteen pounds of SOLE LEATHER shall then cost.

4 Facts and Fantasies (updated) Commodity Correlations with Stocks Bonds and Inflation Data /1 Inflation Correlation of Stocks, Bonds, and Commodities Data /1 50% 50% 25% 25% 0% -25% 0% -50% Monthly Quarterly Annual 5 Year Stocks Bonds Inflation Bonds Stocks Inflation -25% Monthly Quarterly Annual 5 Year Stocks Bonds Commodities Bonds Stocks Commodities Benefits of Commodities: Low correlation with traditional asset classes Better inflation correlations than traditional asset classes

5 Has Intra-Commodity Correlation Increased? 100% Diversification Among Commodities Rolling Correlation of Monthly Returns with an Equally-Weighted Index Averaged Across all 21 Commodities 75% Correlation 50% 25% 0% year 3-year 5-year 2010 K. Geert Rouwenhorst

6 Has Diversification of Commodities Changed? 75% Commodity Correlations with Stocks and Bonds 3-year rolling correlations of monthly data through 2010/1 50% 25% 0% % -50% Stocks Bonds

7 Inventory & Risk Premiums Cumulative Returns Inventory Sorted Portfolios Performance of Equally-weighted Portfolios 12/ /2006 EW Index High Inventories Low Inventories Annualized Return 8.98% 4.62% 13.34% Volatility 8.93% 11.27% 10.80% Sharpe Ratio EW Index High Inventories Low Inventories 7

8 The Basis and Inventory Fundamentals 50% Moving Average Oil Futures Basis versus Oil Inventories 13-month centalized Moving Averages 400,000 25% 375, ,000 Basis 0% Jun Jun Jun Jun Jun Jun Jun Jun Jun ,000 Jun ,000 Inventories -25% 275,000-50% 250,000 Basis Inventories 2010 K. Geert Rouwenhorst

9 Commodities, Currencies and Noncorrelated Returns Tyler Mordy, Panelist Director of Research HAHN Investment

10 Unprecedented Correlations Have Been Revealed Due To Recent Global Financial Crisis Average 24-Month Correlations Between S&P 500 and 11 Financial Markets* Global Financial Crisis Asian Crisis, LTCM Rising Correlations *Financial Markets = Equity Indexes (Canada, Germany, Japan, Hong Kong, United Kingdom, EM Latin America, EM Asia, EM Europe), U.S Investment Grade Corporate Bonds, U.S High Yield Bonds, and U.S. Small Caps Equities. Sources: MSCI index, Citi U.S. Broad Investment Grade Bond Index, Citi U.S. High Yield Bond Index, and Russell 2000.

11 Markets Now More Prone to Systemic Risks Progressively Interconnected Financial System: Increasingly aligned monetary authorities, accelerating cross-border capital flows, etc. Increased Macro Volatility: Heightened government intervention, bi-polar economic world, global multi-polarism, etc. Active, tactical, top-down portfolio approach necessary antidote to an unstable, globally imbalanced era Exchange-traded funds (ETFs) supply access to a multitude of investment classes the perfect macro tool for top-down approaches to investing paradigm shift for global asset allocators! Portfolio Prescriptions: Seek non-correlated assets to improve returns and reduce risk Forward-looking risk analysis should drive asset mix decisions (not conventional classifications or narrow definitions of risk)

12 Active Currency Management Can Reduce Systemic Risks and Increase Returns Currencies can become over and under-valued similar to stocks What drives currency returns? Take action at the extremes... e.g. USD in late types of decisions: Currency ETFs, foreign bonds, internal hedging

13 Commodities Not Stocks! Commodity ETFs can protect against inflation and monetary malfeasance yet active approach required. Broad-based, passive vehicles are unlikely to be successful. Current Risks? Deteriorating diversification benefits Contango drag (i.e. negative roll) Investment versus industrial demand speculative activity? Economic weakness and global de-leveraging trends *Morgan Stanley: Investment Perspectives Commodities: Friend or Foe?, February 2010.

14 Looking Ahead: Non-Correlation Wanted! Current Environment Massive government interventions (and monetary inflation) have buoyed almost all assets creating market distortions Risk is again expensive some measures now as stretched and expensive as before Lehman collapse, correlations still high Investment Stance Emphasis on non-correlated themes and niches (globally) that can un-tether from slow growth (low nominal GDP growth) An investment approach governed by the price of risk requires periodic portfolio shifts. Most important is price you pay for an asset (e.g. valuation risk ) risk is not just short-term volatility!

15 Commodities, Currencies and Non-correlated Returns Matthew Carr, Panelist EasyETF Specialist Sales UK & Northern Europe BNP PARIBAS EasyETF

16 Synthetic replication process ETF Counterparty Max. 10% Derivatives Inventory: Total Return Swap Transparent Inventory The ETF pays the performance of the basket 3 month US T-bills Currency: USD Mutual funds (max 5%) Futures Money market instruments Performance Swap Index Repo fully collateralised Availability upon request Swap: Maximum maturity: 6 months Limited counterparty risk (resets at 6 to 8%) The ETF get the performance of the replicated index Minimum rating for the counterparties: A1- P1 Strictly controlled counterparty list MIFID Auction (best counterparty/execution)

17 Correlation Matrix Source Bloomberg, monthly data, from April 2004 to December 2009 Euro equities US equities Japan equities Listed real estate Infra-structure Agribusiness equities Environment equities Emerging equities Euro Money market Eurozone gov bonds Europe Inv grade credit Commos Energy Agri Vol Alternative Euro equities 1,00 US equities 0,90 1,00 Japan equities 0,78 0,68 1,00 Listed real estate 0,79 0,82 0,64 1,00 Infrastructure 0,72 0,62 0,56 0,74 1,00 Agribusiness equities 0,60 0,61 0,58 0,41 0,43 1,00 Environment equities 0,82 0,78 0,71 0,58 0,53 0,78 1,00 Emerging equities 0,79 0,75 0,77 0,60 0,61 0,80 0,88 1,00 Euro Money market -0,16-0,04-0,27-0,21-0,25-0,09-0,09-0,21 1,00 Eurozone gov bonds -0,21-0,20-0,24-0,07-0,01-0,27-0,31-0,21-0,04 1,00 Europe Inv grade credit 0,09 0,10 0,18 0,18 0,23 0,32 0,17 0,24-0,27 0,63 1,00 Commos 0,31 0,28 0,37 0,22 0,27 0,48 0,48 0,51-0,05-0,23 0,02 1,00 Energy 0,29 0,25 0,33 0,20 0,27 0,40 0,43 0,45-0,03-0,21-0,02 0,99 1,00 Agriculture 0,22 0,26 0,34 0,17 0,09 0,62 0,39 0,47 0,01-0,15 0,19 0,39 0,25 1,00 Volatility -0,66-0,55-0,59-0,43-0,46-0,54-0,64-0,59 0,23 0,20-0,30-0,18-0,17-0,16 1,00 Alternatives 0,67 0,59 0,73 0,47 0,61 0,82 0,81 0,86-0,29-0,33 0,21 0,56 0,49 0,47-0,57 1,00

18 Diversification : Improving performance, snapshot «today» - February 2010 Source BNPP AM, as of end December 2009 Period April 2004-December % Euro Portfolio Geo Diversified Portfolio Geo Diversified Portfolio with Emerging Diversified Portfolio Geo and Asset Diversified Portfolio 30% 70% 30% 10% 5% 20% 40% 5% 0% 0% 30% 10% 10% 20% 30% 0% 14% 5% 5% 5%5% 5% 5% 5% 20% 50% 5% 5% 5% 5% 5% 5% 20% 7% 22% 7% 14% Euro equities US equities Japan equities Emerging equities Eurozone gov bonds Listed real estate Commodities Agriculture Infrastructure Volatility Alternatives 100% Euro Portfolio Geo Diversified Portfolio Geo Diversified Portfolio with Emerging 100% Euro Portfolio Diversified Portfolio Geo and Asset Diversified Portfolio Annualised Return 4.56% 3.59% 5.17% 4.56% 7.21% 7.65% Annualised Volatility 12.10% 12.83% 11.38% 12.10% 9.90% 9.64% Return / Risk Correlation Information Ratio VaR 95% 1 month -7.09% -6.51% -6.35% -7.09% -5.28% -4.89% Maximum loss % % % % -8.86% %

19 Assets Performance Source : BNP Paribas Investment Partners, as at 12/31/2009 Ranked asset class calendar year returns (January 2001 December 2009) High BONDS COMMODITIES EQUITY REAL ESTATE COMMODITIES REAL ESTATE COMMODITIES BONDS COMMODITIES ALTERNATIVES BONDS ALTERNATIVES COMMODITIES REAL ESTATE EQUITY ALTERNATIVES ALTERNATIVES REAL ESTATE PERFORMANCE REAL ESTATE ALTERNATIVES REAL ESTATE EQUITY EQUITY CONVERTIBLES EQUITY CONVERTIBLES EQUITY CONVERTIBLES CONVERTIBLES COMMODITIES ALTERNATIVES CONVERTIBLES ALTERNATIVES BONDS EQUITY CONVERTIBLES EQUITY REAL ESTATE CONVERTIBLES BONDS ALTERNATIVES COMMODITIES CONVERTIBLES COMMODITIES ALTERNATIVES Low COMMODITIES EQUITY BONDS CONVERTIBLES BONDS BONDS REAL ESTATE REAL ESTATE BONDS Source : Bloomberg, 31 December 2009 Performance equals to zero

20 Commodity index comparison

21 Disclaimer This document is issued by BNP Paribas Asset Management (BNPP AM)*, a member of BNP Paribas Investment Partners (BNPP IP)**, and is produced for information purposes only and does not constitute an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or be taken as investment advice. This document makes reference to a fund or funds (a Fund or the Fund(s) ) authorised and regulated in its/their jurisdiction(s) of incorporation. No action has been taken which would permit the public offering of the shares in any other jurisdiction, except as indicated in the prospectus of the relevant Fund(s), where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which a Fund is registered, investors should verify which compartments and which classes of shares are authorised for public sale there, as well as any legal constraints or restrictions there may be in connection with their subscription, purchase, possession or sale of the shares of the Fund(s). The information contained in this document is provided without prior knowledge of your circumstances, including your financial position, risk profile and investment objectives, and does not constitute a personal recommendation nor investment advice. Investors are recommended to seek the advice of their usual financial adviser in order to assess the suitability of the Fund(s) as an investment. Investors considering subscribing for shares should read carefully the most recent prospectus and consult the relevant Fund(s) most recent financial reports. Applications may only be made on the terms and conditions contained in the prospectus. The prospectus and the latest semi-annual reports are available from BNPP AM, local correspondents, if any, or from the entities marketing the Fund(s). Investors should consult their own legal and tax advisors prior to investing in the Fund(s). Given the economic and market risks, there can be no assurance that the Fund(s) will achieve its/their investment objectives. Past performance is not a guide to future performance and the value of the investments in the Fund(s) may go down as well as up. Returns may be affected by, among other things, investment strategies or objectives of the Fund(s) and material market and economic conditions. Performance figures are shown net of management fees, but do not include subscription fees or taxes. Investors may not get back the amount they originally invested. Opinions included in this document constitute the judgement of BNPP AM at the time specified and may be subject to change without notice, they are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient and are not intended to provide the sole basis of evaluation of any strategy or instrument discussed herein. For further information, please contact an authorised distributor of the Fund(s). The list of authorised distributors is available from the registered office of the Fund(s) as detailed in the relevant prospectus(es). * BNPP AM is an investment manager registered with the Autorité des marchés financiers in France under number 96-02, a simplified joint stock company with a capital of 62,845,552 euros with its registered office at 1, boulevard Haussmann Paris, France, RCS Paris ** BNP Paribas Investment Partners is the global brand name of the BNP Paribas group s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.

22 Commodities, Currencies and Non-correlated Returns Dave Nadig, Moderator Director of Research IndexUniverse.eu Tyler Mordy, Panelist Director of Research HAHN INvestment K. Geert Rouwenhorst, Panelist Professor of Finance Yale University Matthew Carr, Panelist EasyETF Specialist Sales UK & Northern Europe BNP PARIBAS EasyETF Nicholas Brooks, Panelist Head of Research and Investment Strategy ETF Securities