Investing is simple

Investing is simple9th Annual Modern Wealth Management Forum22 May 2014, Jurmala

Marius Čiuželis, MC Wealth ManagementT +370 698 40 095E [email protected]

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Content

> Who we are> Investing is simple; but not easy> Clients’ preferences> Alternative investments> Uncovering unusual investments


MC Wealth Management

Multi family office > We serve local HNWIs – full scale private wealth management.> We trade EU Government bonds for our local corporate and institutional clients.

Fund distribution> We are keen to alternatives ranging from multibillion HF houses to the niche market players.> B2B market segment.> Global focus with existing clientele in Moscow, Singapore, Hong Kong, Riga, prospective clients in Estonia, India, Monaco, Sweden, Switzerland, UAE, UK etc

Private investments> Local private equity.> Aircraft leasing.


„Investing is simple;but not easy“


What is your edge?

> B. Graham / W. Buffett style value investing> MPT / diversification based investing> High frequency / active trading> Trend following investing> Contrarian investing> Sale of stuctured products> You name it…


MPT based investing

> 8-12% long term annual return expectations> Buy and Hold> Diversification is the most important


S&P 500 performance (as of the end of 1999)

0100200300400500600700800900

1000110012001300140015001600170018001900

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1952

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1956

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1960

1962

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1968

1970

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1974

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1990

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2008

2010

2012

Source: Yahoo Finance, MC Wealth Management


S&P 500 performance (as of the end of 2013)

0100200300400500600700800900

100011001200130014001500160017001800190019

50

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

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1978

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1984

1986

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1990

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1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: Yahoo Finance, MC Wealth Management

-45,8% (2000/03 – 2002/09)+88,3% (2002/09 – 2007/10)-56,1% (2007/10 – 2009/03)+175,3% and growing (2009/03 – ?)

+23,1% (2000/03 – 2014/03)


10 years annualized performance

Source: Yahoo Finance, MCSI, MC Wealth Management

-5%

0%

5%

10%

15%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

MSCI World USD S&P 500 MSCI World EUR


Diversification is the most important. Really?

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000USA AUS HK GER ESP JAP FRA GER UK HK HK HK JAP SUI ESP SUI ITL JAP SUI

22.1% 56.1% 47.0% 136.5% 123.2% 43.2% 38.7% 47.1% 10.3% 49.5% 32.3% 116.7% 21.6% 45.0% 41.3% 44.8% 53.2% 61.8% 6.4%NDL NDL ESP ITL ITL ESP AUS NDL HK AUS SUI SUI NDL USA HK ITL ESP HK CAN

16.6% 38.4% 41.7% 133.8% 109.4% 37.9% 38.1% 37.3% 9.2% 35.6% 18.1% 46.7% 12.7% 38.2% 33.1% 36.4% 50.6% 59.5% 5.6%GER CAN JAP SUI JAP UK JAP FRA NDL USA USA NDL ITL ESP CAN USA FRA CAN ITL

10.2% 33.5% 17.1% 107.5% 99.7% 35.1% 35.5% 36.8% -2.0% 31.3% 7.4% 36.6% 12.1% 31.2% 29.3% 34.1% 42.1% 54.4% -0.8%UK FRA NDL FRA FRA CAN HK USA USA NDL NDL AUS AUS NDL NDL ESP USA FRA NDL

9.4% 33.2% 11.6% 83.2% 79.1% 28.1% 31.4% -2.1% -5.4% 19.1% 3.4% 36.6% 6.5% 28.9% 28.5% 26.2% 30.7% 29.7% -3.6%SUI JAP ITL NDL HK AUS GER SUI SUI FRA FRA GER GER HK UK GER GER USA FRA

3.5% 24.9% 9.3% 61.5% 56.1% 14.7% 21.4% 27.2% -8.9% 18.5% 3.4% 36.3% 5.1% 22.6% 27.4% 25.1% 29.9% 22.4% -4.1%CAN GER USA ESP AUS NDL CAN CAN GER ESP UK ESP SUI UK USA NDL SUI GER AUS2.5% 24.1% 6.0% 57.0% 43.9% 10.4% 18.0% 25.3% -12.2% 17.0% -3.7% 31.2% 4.2% 21.3% 24.1% 24.5% 24.1% 20.5% -9.1%JAP USA UK UK NDL USA USA UK CAN SUI GER ITL USA CAN FRA UK NDL AUS UK

-0.5% 22.0% 5.7% 53.0% 42.4% 3.9% 15.9% 21.9% -12.8% 16.8% -9.7% 39.5% 2.0% 19.1% 21.8% 22.6% 23.9% 18.7% -11.5%FRA SUI FRA HK GER HK NDL ITL ESP UK AUS JAP UK GER AUS CAN UK UK USA

-4.1% 19.3% 5.1% 51.7% 35.9% -4.1% 15.6% 20.4% -13.4% 16.0% -9.8% 25.7% -1.6% 17.0% 17.8% 13.3% 17.8% 12.5% -12.5%ITL UK GER JAP SUI SUI ESP AUS FRA CAN CAN UK CAN FRA GER FRA AUS NDL HK

-18.8% 17.4% -5.1% 43.4% 34.3% -8.8% 14.3% 10.9% -13.4% 12.0% -11.5% 24.4% -2.4% 14.8% 14.1% 12.4% 7.1% 7.4% -14.7%AUS ITL CAN USA UK FRA ITL ESP AUS JAP ESP FRA ESP AUS ITL AUS JAP ESP GER

-22.5% 3.9% -7.6% 32.8% 27.0% -13.4% 12.5% 10.6% -15.0% 9.1% -20.8% 21.6% -3.9% 12.5% 13.4% -9.5% 5.3% 5.3% -15.3%ESP HK SUI AUS USA ITL SUI HK ITL GER JAP CAN FRA ITL SUI HK HK ITL ESP

-29.0% -2.9% -11.1% 21.0% 17.5% -20.7% 7.1% 8.4% -18.4% 8.8% -21.3% 18.4% -4.7% 1.7% 2.8% -23.3% -2.9% 0.2% -15.5%HK ESP AUS CAN CAN GER UK JAP JAP ITL ITL USA HK JAP JAP JAP CAN SUI JAP

-44.4% -4.7% -12.6% 16.0% 10.8% -24.3% 6.0% 1.8% -36.0% -0.7% -21.3% 10.1% -28.9% 0.9% -15.4% -23.6% -5.7% -6.6% -28.1%

2001 2002 2003 2004 2005AUS AUS GER ITL CAN2.7% -0.3% 64.8% 34.0% 28.8%ESP ITL ESP AUS JAP

-11.0% -6.3% 59.2% 32.0% 25.6%USA SUI CAN ESP AUS

-12.0% -10.0% 55.4% 29.6% 17.5%UK JAP AUS HK SUI

-14.1% -10.1% 51.4% 25.0% 17.1%HK CAN FRA CAN FRA

-18.6% -12.8% 41.0% 22.8% 10.6%CAN ESP ITL UK GER

-20.1% -14.9% 39.0% 19.6% 10.5%SUI UK HK FRA HK

-21.1% -15.2% 38.1% 19.2% 8.4%NDL HK JAP GER UK

-21.6% -17.8% 36.2% 16.7% 7.4%GER NDL SUI JAP USA

-22.0% -20.3% 35.0% 16.0% 5.7%FRA FRA UK SUI ESP

-22.1% -20.8% 32.1% 15.6% 4.9%ITL USA NDL NDL NDL

-26.1% -22.7% 29.3% 13.3% 3.2%JAP GER USA USA ITL

-29.3% -32.9% 29.1% 10.7% 3.1%

All countries but France had the highest and the lowest ranking in the annualperformance contest

Source: MCSI, MC Wealth Management


„Wide diversificationis only requiredwhen investors

do not understandwhat theyare doing“


Clients preferences before and after the crisis

BC

> Mandate: discretionary („take my money and don‘t bother me with details“)

> Performance expectation: 30%+ per annum without a risk

> Sales process: commissiondriven

> Products: the more fancy, thebetter

AC

> Mandate: advisory – clients became control freaks („if I want loosing money I'd rather do it myself“)

> Performance expectation: 10%- per annum still without a risk

> Sales process: performance drivendkn

> Products: back-to-basics or assimple as possible


Investment habits in Lithuania

Nominal GDP – LTL120b (as of the end of 2013)

> Deposits and cash take LTL28b (23% vs GDP)

> Investment funds take LTL1,2b (1% vs GDP, 4% vs deposits)

> Structured notes estimate LTL5b (4,2% vs GDP, 17,9% vs deposits)

> Real estate − ?


Our solution – Alternatives investments

> There is a great need to embrace alternative investments as the new glide path in portfolio construction.> For example, as clients move closer to retirement, instead of increasing the fixed-income allocation, a greater allocation to alternatives strategies as a component of risk management might be suggested.> We do not seek the returns only, but the character of those returns. We look both at global multi billion hedge fund houses with a proven track record as well as the niche market players who utilize a unique edge that has the potential to remain consistent over time.> Our due-diligence process takes a careful look at return-to-risk as we aim to understand the real sources of both parameters. We don‘t just follow pure statistics but aim to understand the business model.


Over 60 years of evolution

Source: Man


What is a hedge fund?

> A hedge fund is an actively managed, pooled investment vehicle. Returns of hedge funds are derived mostly from the skill of the hedge fund manager in executing their chosen strategy.> Long-term investment solution, eliminating the need to correctly time entry and exit from markets.> Hedge fund managers trade across a spectrum of markets and exchanges, investing in a diverse array of financial instruments including equities, bonds, currencies and derivatives. > Flexibility: May switch investment strategy very quickly and may trade on the long and short side of various financial instruments.> Alignment of interest: Funds’ managers often invest their own money.


Sharp AUM growth of hedge fund industry

Source: (1) HFR Global Hedge Fund Industry Report, 12/31/13, (2) Credit Suisse 2013 Global Survey of Hedge Fund Investors Appetite and Activity


Hedge fund industry AUM by investor type

Source: Hennessee Group LLC, FSA, The City UK estimates, May 2013


Investors are hungry for yields

Data range: 1 January 1994 to 28 February 2013Source: Bloomberg, MSCI, Man


Downside protection during market stress

Hedge funds: HFRI Fund Weighted Composite Index. World Stocks: MSCI World Net Total Return hedged to USDSource: Bloomberg, MSCI, Man


Hedge funds and diminishing returns

Source: Hedge Fund Research, Inc, Julex Capital Management, LLC


Correlation crisis


Uncovering unusual investments

> The uncertain economic outlook for at least the next five years — along with „a correlation crisis“ — should lead to increased use of unusual investments. > Financial advisers should be looking beyond traditional asset allocation models and strategies. And sometimes even beyond „mainstream“ hedge fund strategies. > Managed-futures strategies are a good example as they were one of the few bright spots from the 2008 financial crisis.> However, such non-correlated strategies are becoming increasingly difficult to uncover (Art? Classic cars? Commodity trade finance? Credits? Fine watches? Forestry? Life settlements? Litigation financing? P2P lending? Wine?)


Further enhancing traditional risks’ portfolio

We can make an initial approach to different asset classes by dividing them in:

> Equity related> Interest related> Real Estate related> Commodity related> Cash

Space for improvement

Longevity related

Life Settlements, or as is called longevity risk, has been an asset class for many years managed exclusively by Pension Funds, Insurance companies as well as some real estate investors.


Historically attractive returns


Performances by strategy

26,0%

12,7%

17,5%

5,1%

3,6%

5,5%

11,0%

4,7%

-4,3%

-10,0% -5,0% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0%

Life Settlements

Distressed debt

Credit

Event Driven

Multi-Strategy

US Long/Short

S&P 500

Macro

CTAs

2014 1st Quarter median performance Annualised performance of the past 3 years

Source: Hedge Fund Intelligence (HFI), April 2014


Alternative Investment Funds

Q1 2014 2013 2012 2011Ann. since inception

Ann. st. deviation

Credit Fund 1 (TGC) 3,00 13,80 16,01 18,09 17,50 2,04Fund 2 (GFBF) 2,37 7,31 nd nd 8,16 2,80Distressed DebtFund 3 (GEDD) 3,16 12,33 17,92 -1,62 19,97 10,66Fund 4 (PCO) 3,01 12,95 20,38 -9,25 12,76 7,80Life SettlementsFund 5 (LTGF) 5,94 28,77 31,02 22,07 27,21 4,11Market NeutralFund 6 (GMN) 2,30 10,30 18,40 0,80 14,90 14,70


Investing is simple; but not easy

> In a perfect world, investors would like to have completely uncorrelated assets, but unfortunately all assets are somewhat correlated. > Once we buy a corporate bond we are exposed at the same time to equity risk, interest rate risk, credit risk, so an analysis has to consider all the other risks as well.> One of the value added features of yet broadly uncovered strategies like Life Settlements is that they can be analyzed almost independently from the longevity risk space: credit, equity or market risks almost do not affect the asset.> From a pure perspective of portfolio optimization, it is clear longevity asset class has a big role to play in the portfolios of investors.


Summary

> Be like an entrepreneur> Be innovative – find

your edge> Don’t rely on the old

dogmas> Investment

opportunities are like buses, there’s always another one coming


Thank you. Questions?

Marius ČiuželisMC Wealth ManagementManaging PartnerT: +370 698 40 095E: [email protected]

Contacts forfurther communication

Investing is simple

Economy & Finance

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