In association with€¢ Momentum investing Confidential – A Member of Mirae Asset Financial...

For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices. 1

In association with

23rd October 2014 | ASX Auditorium

For Financial Professionals. Not for Public Distribution. PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.

Speaker:

David Bassanese

Betashares

Tactical Strategies Using ETFs

Tactical Strategies using ETFs David Bassanese, Chief Economist

Confidential – may not be distributed without the consent of BetaShares Capital A Member of Mirae Asset Financial Group

4

Disclaimer

The information contained in this document is general information only and does not constitute

personal financial advice. It does not take into account any person’s financial objectives, situation

or needs. It has been prepared with all reasonable care by BetaShares Capital Limited (ABN 78

139 566 868, Australian Financial Services Licence No. 341181) (“BetaShares”). The information

is provided for information purposes only and should not be construed as a recommendation to

invest in any particular strategy or financial product. Past performance is not indicative of future

performance. Investments in BetaShares Funds are subject to investment risk and investors may

not get back the full amount originally invested. Any person wishing to invest in BetaShares Funds

should obtain a copy of the relevant PDS from www.betashares.com.au and obtain financial

advice in light of their individual circumstances. Future results are impossible to predict. This

presentation may include opinions, estimates and other forward-looking statements which are, by

their very nature, subject to various risks and uncertainties. Actual events or results may differ

materially, positively or negatively, from those reflected or contemplated in such forward-looking

statements. Opinions and other forward-looking statements are subject to change without notice.

Any opinions expressed are not necessarily those of BetaShares.


5

Agenda

• The case for tactical strategies

• Valuation based tactical asset allocation

• Equity/Bond Sector Rotation

• Buy/write income strategies

• Momentum investing


6

Agenda







7

Tactical Strategies

• ETFs/Index funds provide extra choice in terms of which sources of “alpha” you can

concentrate on

• Traditional long-only equity managed funds concentrate on stock selection

• ETFs allow you to concentrate on sector/country and/or tactical asset allocation exclusively

• ETFs just replace certain decision rules (buy low PE stocks) with others (low PE ETFs and/or

ETFs with better relative performance).


8

Macro approach & 80/20 rule

Company return

Sector Return

Market return

Share of Returns Share of research effort

10-15%

15-30%

70-85% 10-15%

70-85%

15-30%


Significant tactical opportunities with ETPs

•Broad

•Small Cap

•Large Cap

•Financials

•Resources

•REIT

•Other sectors

Equity – Domestic

•High Interest Cash

•Corporate Bond

•Government Bond

•Semi-Government

•Inflation Linked

Cash & Fixed Income Commodities

•Gold (A$ Hedged)

•Gold (Unhedged)

•Silver

•Platinum & Palladium

•Crude Oil

•Agriculture

•Copper

•Diversified Basket

Currencies

•US Dollar

•British Pound

•Euro

International

•Broad world & region

•Country Specific

•Emerging Markets

•Global Sector

Strategy

•High Dividend

•Value

•BEAR

•Geared

9


10

Agenda







11

A simple equity valuation model

0

50

100

150

200

250

Mar-74 Mar-82 Mar-90 Mar-98 Mar-06 Mar-14

Real Share Prices vs.. GDP

Real Share Prices

Real GDP

Long-run average = 100

*MSCI Australia Equity Index

deflated by national output prices

Sep qtr '87

Sep Qtr' 07

Mar Qtr

' 09

Source: Thomson Reuters


12

Expected equity returns favourable

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%-5

-4

-3

-2

-1

0

1

2

3

4

5

Mar-74 Mar-82 Mar-90 Mar-98 Mar-06 Mar-14

Equity Market Returns Model

Share price to GDP Ratio [LHS]

% Std dev. from average



13

Bonds: interest rates very low

0

1

2

3

4

5

6

7

8

9

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Australian Interest Rates

UBS Composite Bond IndexYield

%

Source: RBA, PennyWise Financial


14

Expected bond returns low

0

1

2

3

4

5

6

7

8

9

10

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Bond Returns Model*

Actual

Predicted

*5-year rolling

annualised returns for

UBS Composite Bond Index

%

Source: PennyWise Financial

5-yr projection

if yields

return to 5%

"fair-value"


15

Agenda







16

Separating Alpha from Beta using ETFs

Cash 20%

Bonds 20%

Equity Fund 1

20%

Equity Fund 2

20%

Equity Fund 3

20%

Traditional Equity Allocation

Cash 20%

Bonds 20%

Equity ETF 45%

Equity Fund 1

5%

Equity Fund 2

5%

Equity Fund 3

5%

Core/Satellite Equity Allocation

Source: PennyWise Financial

Illustrative only, not a recommendation to adopt any particular investment strategy


17

Resource Sector

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0

20

40

60

80

100

120

140

Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Resources Sector & Commodity Prices

RBA Non-Rural Commodity Price Index (SDR terms) [LHS]

Ratio: S&P/ASX 300 Material Index to S&P/ASX 300 Index [RHS]

Index



18

Financial Sector

0

2

4

6

8

100.2

0.7

1.2

1.7

2.2

2.7


Financial Sector & Interest Rates

Ratio: S&P/ASX 200 Financials ex A-REITs to S&P/ASX 200 [LHS]

180 day bank bill yield [RHS] - inverse axis

%

Source: UBS, Thomson Reuters


19

Small Caps

25

50

75

100

125

0

100

200

300

400

500

600

Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13

Small Caps Relative Total Return Performance

S&P/ASX 200 [LHS]

ASX Small Ord. [LHS]

Small vs Large Relative Index [RHS]

Index Dec'95=100

Source: UBS, Thomson Reuters Source: UBS, Thomson Reuters


20

Income strategies in weak markets

In range trading equity market, investors might opt to seek

enhanced yield through various income strategies

•High dividend yield ETFs

•Buy/write option based ETFs


21

Global Equities

0.6

0.8

1

1.2

1.4

1.6

1.8

40

60

80

100

120

140

160


World vs. Australian Equity Performance

$A-terms - unhedged [LHS]

Local currency-hedged [LHS]

World vs $A exchange rate index [RHS]

Index Dec'95 = 100 MSCI All Country Index vs. S&P/ASX 200



22 Source: Bloomberg

Example: Asset Class Exposures

Commodity ETFs (QCB) - hedged


23 Source: Bloomberg

Example: Asset Class Exposures

Agriculture ETFs (QAG) - hedged


24

Source: UN Food and Agriculture Organisation (FAO)

Past performance is not an indicator of future performance

FAO Food Price Index (Monthly January 1990 – April 2014)

0

50

100

150

200

250

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Food Price Index


25

Credit Spreads

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60


Interest Rate Spread over UBS Treasury Bond Index

UBS Semi-Govt Bond index

UBS Composite Bond Index

%

Source: UBS, Thomson Reuters Source: UBS, Thomson Reuters


26

Indexed Bonds

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00


Implied Market Inflation Expectation %

Yield difference between the UBS Non-indexed and Indexed Government Bond Index

Source: UBS, Thomson Reuters


27

Agenda




• Income strategies



28

A simple market timing rule Equities vs. Cash

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jul-05 Jul-07 Jul-09 Jul-11 Jul-13

S&P/ASX 200 Index

S&P/ASX 200200-day moving average

Source: Thomson Reuters, BetaShares


29

Helps mainly during downturns

60

80

100

120

140

160

180

200

Jul-05 Jul-07 Jul-09 Jul-11 Jul-13

Relative Performance - 200 day moving average signal

S&P/ASX 200

Timing Portfolio

Relative performance

Source: BetaShares


30

Asset Momentum Strategies

0

100

200

300

400

500

600

Asset Allocation Trend & Momentum Models

Equal weighted buy & hold

Trend filter

Momentum filter

Trend & momentum filter

Index Sep'96=100


Performance Indices

Rotation between Cash, Bonds, Aust. Equities & Gold


31

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