Nikko AM Pulse

August 2012
A monthly comment from the investment team of Nikko AMs World Series Fund Platform.

It is early August and the Olympic medal race is well underway. With China just edging ahead of the US in the medal count, it has been a few weeks of amazing human triumphs, teenage prodigies, as well as an upset or two. For most spectators and the media, all eyes are firmly on the gold medals and in recent weeks we too have seen investors behave highly selectively and increasingly focus on the golden top tier return generators, with little interest in settling for less. As ongoing uncertainty clouds the short, medium and long-term, we have seen some UK and European pension funds prioritise de-risking, while still maintaining an interest in diversifying their sources of return. Meanwhile risking remains the challenge for hedge funds and other active managers whose returns have trailed markets year to date, as volatility remains stubbornly low.

outperform and some yields on government bonds are trending into negative territory, that a widespread shift from equity into fixed income is underway or pending. While some of the equity allocation will be populated with active or long/short equity substitutes, many pension funds will shave these allocations meaningfully. Given the paucity of equity returns today, this shift may not appear to present much opportunity cost, however it may be the case that de-risked portfolios have been stripped of their investment return as well.

Going for Gold

Meanwhile, investors are increasingly applying a high bar in todays manager discussions and are displaying much more selectivity in what they are willing to look at. Perhaps it is the typical summer hiatus, the fact that many have sold in May and gone away or a willingness to sit on the fence as market uncertainty continues to churn, but skepticism has been high and interest in new strategies only lukewarm. Large institutional investors continue to pursue absolute return mandates of every description as well as particularly in the US multi-asset alternative mandates including private equity, credit and real estate. The gold standard is being applied in the choice of provider, as large blue chip names continue to win mandates at the expense of smaller boutiques.

De-risk first, ask questions later

As investment managers grapple with the challenge of capital preservation and, ultimately, return generation in the current uneven markets, financial institutions and pension funds are grappling with regulatory concerns mandating varying degrees of de-risking. In our recent conversations with UK and European pension fund investors, this requirement and process has been paramount. While these trends have been ongoing for many years, it is ironic that only now, as fixed income continues to sssss Connecting Asia Across the World

Risking the problem with not enough risk

The end of summer is a season of back to school and new beginnings, and we are continuing to see a wave of hedge fund launches with alumni from Pershing Square, Tiger Global and Citadel among the many groups starting out. There are fewer new launches among long only funds, with the focus more on asset replenishment at this juncture. Any new products tend to be either high conviction or income oriented, while in the fixed income arena, distressed European credit and real estate continue to see new product focus. The difficult trading climate has seen many managers struggle to generate interesting returns; we read an interesting comment from a large macro manager about their interest in examining managers who have blown up to see if there lurks a risk-taking talent they may wish to hire.

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Nikko AM Pulse
August 2012
The same manager commented that most people we hire only run about a third of the maximum risk we allocate them and explained that hiring a true money maker/risk taker is exceptionally hard. For many investors disenchanted with the current return environment, this will ring true. benchmarks, even if meaningful outperformance was elusive. With the S&P up more than 10% through the first seven months of the year, passive strategies are holding their own. Among hedge fund managers, trend followers performed well. Meaningful trends manifested themselves, especially in soft commodities (as noted above), select event driven strategies performed well (but notably, not in Asia, where spreads continue to widen, particularly in resource based transactions) and credit strategies had a good month. Real estate strategies whether in the form of REITS or private funds continue to perform strongly, as investor appetite for yield remains robust. July was a month which saw the passing of a stalwart of the hedge fund industry, the manager and strategist Barton Biggs, who, in 2006, famously commented on China We ride the tiger with our fingers crossed. His clear passion for investment and sometimes wry insights into the industry will be missed. As always we welcome your feedback, questions and comments. The Investment Team Nikko AM World Series Fund Platform August 2012

July Manager Positioning

Market performance in July was mixed, with solid performance in mainstream European and US equity markets and another lacklustre showing from Asia. The standout story of the month was the staggering outperformance of wheat and corn, as drought conditions in the US caused those commodities to rise by 19.9% and 20.2%, respectively. These developments fuelled concern about creeping supply side inflationary pressure alongside some strong rhetoric by Mr Draghi about the ECBs commitment to short up the Euro, as well as what one of our managers deemed a race to zero of mass quantitative easing among central banks. Market volume remained exceptionally low even by the standards of the typically slow summer period and volatility (as measured by the VIX) also continued to be subdued. This presented a challenge for the most active of managers, particularly equity hedge funds, while traditional strategies performed in line with their ssssssssssss

Further Information
Fund Managers
If you are a fund manager that can add value with specialist expertise in strategies which Nikko AM doesnt have in-house, please contact us we may be interested in appointing you as sub-advisor to a new product launch for our 300 intermediaries across Asia. E: worldseriesfundplatform-managers@nikkoam.com

Distributors
If you are a distributor and are looking for a specialist investment solution for your clients, please contact us about our worldwide third-party fund manager research.

E: worldseriesfundplatform-distributors@nikkoam.com

Important Information
This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments. This document should not be regarded as investment advice. In making any investment decision, prospective investors must rely on their own examination of the merits and risks involved. This document has been prepared and issued by Nikko Asset Management Europe (Nikko AME), on the basis of publicly available information, internally developed data and other sources believed to be reliable. While reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable, Nikko AME, nor any director, officer nor employee thereof, shall in any way make guarantee, representation or warranty of and be responsible for the accuracy or completeness of this document. Any opinions expressed in this document may be subject to change without notice. Nikko AME is authorised and regulated by the Financial Services Authority and is registered in England No. 1803699. Registered address: 1 London Wall, London, EC2Y 5AD. This information is for professional investors only. Not for redistribution. For more information, visit http://en.nikkoam.com/worldseriesfundplatform
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