It is known Albert Einstein claimed thatcompound interests are "the eighthwonder of the world, and the mostpowerful force of the universe".

The characteristic of compound interests(capitalizing on interest) is that the capitalinvested changes exponentially dependingon the duration of the investment and theinterest rate. This "snowball" effect isgenerally associated with the bond market.The simple rule of "72", which goes back tothe Renaissance, allows to estimate thetime required for an investment to doubleaccording to its interest rate. We simplydivide 72 by the interest rate. If it's 3%, itwill take 24 years. When interest rates arenegative across the entire yield curve, as inSwitzerland, Germany or Japan, investorsnaturally turn to equities to find income.

The combination of political, sovereign andmonetary risks creates particularlyunfavorable conditions for investment inEuropean equities. The search for a stablereturn for the shareholder makes itpossible to combine solidity and convexity.The European market is particularlyattractive as companies have pursued aconservative financial policy. Unlike theUnited States, European companies haveresisted the temptation to go into debt tobuy back their shares. Debt ratios inEurope are close to the cycle lows, whilethey are well above the highs in the UScycle. There is therefore a real room forimprovement in terms of pro shareholderpolicy in Europe, unlike in the UnitedStates.

The strong exposure to global growth isalso an undeniable asset of the Europeanmarket. Exposure to the national economyrepresents only 50% of the turnover of theMSCI Europe index, the remainder beingdistributed between the United States andAsia.

Investors can easily diversify domestic riskand build a portfolio combiningshareholder yield and exposure to dynamicglobal growth. A portfolio based on theprinciples of risk-adjusted Income has beenas performant as US equities since 2009.The compound interest strategy applied toEuropean equities therefore still has abright future, regardless of theuncertainties of Europe.

EDITORIAL

Stock picking in Europe according to Albert Einstein

JUNE 2019

Focus

PAGE 6 – 7

Emmanuel FerryCIO+41 22 316 02 16emmanuel.ferry@parisbertrand.com

Pauline FroissartEditor-in-chief+41 22 316 02 45pauline.froissart@parisbertrand.com

NEWSLETTER

Market Performance and Agenda

PAGE 2

Convictions

PAGE 3

AssetAllocation & Ideas

PAGE 4 – 5

Ground Swell, Edward Hopper (1939)

MARKETS PERFORMANCE

AGENDA

PAGE 2

MONTHLY LETTER| JUNE 2019

Source: Banque Pâris Bertrand Index Performances in local currency

An

nu

al Pe

rform

ances b

y Asse

t Class

The month of May saw a risk-off episode, with a 5.9%drop in Global Equities and a rebound in Government Bonds (+3.0% for US Treasuries). The S & P500 fell 6.4%, the thirdworst month in 92 months (after September and December2018). It is also the second worst month of May since the1960s, with USD 4T of market capitalization being wiped out.The stock market correction focused particularly on theriskiest segments of the market (Russel 2000: -7.8%, MSCI EM-7.3%) but also the technological sector (-8.2%). The Europeanmarket outperformed with a decline of 4.9% for theSTOXX600. The US High Yield debt bucket loses 1.2% and oilcorrects by 11.4%.

The long-duration and safe-haven assets recorded positiveperformances: US Govies duration 20+ years + 6.8%, 7-10years + 3.05%, Gold + 1.7%, EM debt + 0.4% and REITS arealmost unchanged (- 0.2%).

This is the first time that a decline in Equities above 5% istaking place with such a low volatility (VIX less than 20). Theorderly reduction of risk is probably because investors had avery defensive positioning in April. The factors that weighed(extension of the trade war, bad macro figures, and supplychain disruption in the Tech) intensified the Fed's monetaryeasing expectations. The 2-year interest rate in the UnitedStates reached 1.80% at the end of the month while thecurrent rate of Fed Funds is 2.50%. The dollar has only slightlyincreased over the month (+ 0.3%) despite the risk-off context.

Several macro catalysts are expected in June, including theFed (June 19) and the G20 (June 28/29).

2018 2019May

2017 2019YTD

MSCI ACWI24.0%

US IG6.4%

US Gvt Bds2.6%

Gold13.1%

S&P50021.8%

MSCI EM37.3%

EM Debt Local15.2%

EM Debt Hard10.5%

Real Estate11.4%

Stoxx60010.6%

Commo1.7%

Cash (USD)1.1%

US High Yield7.5%

Russell 200014.6%

SPI19.9%

MSCI Japan19.7%

Gold-1.6%

Stoxx600-10.8%

Commo-11.2%

MSCI ACWI-9.4%

US Gvt Bds0.9%

S&P500-4.4%

Russell 2000-11.0%

US IG-2.5%

Real Estate-4.7%

US High Yield-2.1%

MSCI EM-14.6%

EM Debt Hard-5.2%

EM Debt Local-6.2%

SPI-8.6%

MSCI Japan-15.1%

MSCI ACWI9.1%

US IG7.2%

US Gvt Bds5.5%

Gold1.9%

S&P50010.7%

MSCI EM4.1%

EM Debt Local3.0%

EM Debt Hard8.0%

Real Estate13.2%

Stoxx60011.5%

Commo2.3%

Cash (USD)1.1%

US High Yield7.5%

Russell 20009.3%

SPI17.4%

MSCI Japon2.8%

MSCI ACWI-5.9%

US IG1.4%

US Gvt Bds3.0%

Gold1.7%

S&P500-6.4%

MSCI EM-7.3%

EM Debt Local0.3%

EM Debt Hard0.4%

Real Estate-0.2%

Stoxx600-4.9%

Commo-3.4%

Cash (USD)0.2%

US High Yield-1.2%

Russell 2000-7.8%

SPI-1.6%

MSCI Japon-6.4%

1 China Tarrifs USA 25 ECB Governing Council 1 BOE Monetary Policy Comittee

6 ECB Governing Council 31 Fed FOMC 7 ECB Governing Council

19 Fed FOMC

20 EU European Council

28/29 Japan G20 Summit

17 Fed FOMC 24 ECB Governing Council 13 USA Auto Tariffs

19 BOE Monetary Policy Comittee 29 Fed FOMC

31 EU Brexit

June 2019 July 2019 August 2019

September 2019 October 2019 November 2019

PAGE 3

MONTHLY LETTER| JUNE 2019

Investing in Gold in a whole new way

CONVICTIONS

Gold becomes a promising driver of portfolioperformance again. Generating returns on Gold makes fora comprehensive strategy.

The argument in favour of Gold in a portfolio has neverbeen so compelling. In a context characterised by macro-economic and financial uncertainties (inflation, growth,solvency of countries, credibility of central banks,sustainability of the international monetary system in itscurrent state), Gold seems like an attractive option forinvestors looking for protection in the face of over-valuation of the major asset classes (equities and bonds),the erosion of asset value due to inflation and thestructural depreciation of the dollar.

Including Gold in a diversified asset allocation seemsobvious today. It is one of the rare assets which diversifiesEquity risk as well as Credit risk and Interest rate risk.Equities have entered a bear market. The process ofdeclining valuations is a reaction to the downward revisionof growth expectations after a phase of very highexpectations. As regards Credit, there is an increasingsearch for liquidity in the face of tight financial conditions.Gold reacts positively to these two risks insofar as it isaccompanied by a switch in monetary policy (cut in realinterest rates) and a fall of the dollar. The Interest rate riskis more remote but it could eventually materialise ifinflationary pressures intensify. Gold is therefore aprotection against the extreme scenarios of deflation andstagflation.

The diversifying role of Gold in the current market situationis amplified by the lasting resurgence of political risk(populism, protectionism, geopolitics).

Warren Buffet has always been highly sceptical about Goldas an investment. "Gold gets dug out of the ground inAfrica, or some place. Then we melt it down, dig anotherhole, bury it again and pay people to stand aroundguarding it. It has no utility. Anyone watching from Marswould be scratching their head".

It is the fact that Gold does not generate income for theowner that feeds this scepticism. During the period ofnegative Interest rates, Gold implicitly generated apositive nominal carry. 2018 marked the confirmation of areturn of US real interest rates into positive territory, whichcould reduce Gold's relative appeal from a returnperspective.

The Pâris Bertrand Systematic AM teams have developedan innovative approach that generates a positive carry onGold via the systematic sale of Gold options. Such astrategy, efficiently implemented, can offer a Gold investoran additional return of about 3/5% per year on average.Over a decade, this would double Gold's performance, byoutperforming during bull phases and containing thedecline during bear phases, and thus give convexity to theasset class. With this strategy, Gold becomes acomprehensive asset: capital protection, capitalappreciation and return.

Source : Banque Pâris Bertrand

Jérôme Chagneau +41 22 316 02 27

jerome.chagneau@parisbertrand.com

500

700

900

1100

1300

1500

1700

1900

2100

2300

06/09 06/10 06/11 06/12 06/13 06/14 06/15 06/16 06/17 06/18

Gold Carry Bloomberg Gold Subindex TR

Comparative performance of Gold and Gold with systematic sale of options

PAGE 4

Equities

Switzerland

U.S.

Europe

Japan

Emerging Markets

Global equities surged by 16% in the first four months of the year, thus clawingback all the losses they suffered during the September-to-December slump. Thiswas the S&P 500’ sbest start to a year since 1987. It is always hard to saywhether a rally has legs. For the time being, the bear market rally scenario isintact. The Fed will first have to lower its key rates, and the growth outlook willhave to stop worsening. The lack of consistency in the rally was striking, withvery little participation by investors, disconnection with falling bond yields,downgraded earnings and growth prospects, a collapse in volumes and a poormarket depth. The correction in May was not a big surprise: less favorableseasonality, tight technical factors and poor macro. Ro om for a short termrebound in June (oversold conditions, Fed, G20).

Interest rates

Switzerland

U.S.

Europe Core

Japan

EM hard

EM local

The Fed’ s radical shift in course (putting quantitative tightening on hold,revising its economic forecasts, and putting out new forward guidance) droveother major central banks (the ECB, Canada and Australia) into a dovish bias,thus pointing to a new global monetary easing cycle. If so, the yield curve willsooner or later re-steepen, driven by an actual decline in short-term interestrates. The Fed has realised that its to-date monetary tightening (+225bp in FedFunds hikes and the equivalent of +300pb from the QE inversion) has gone wellbeyond monetary neutrality. Ultimately, the real question is how able the Fedwill be to manage a soft landing. It will be necessary to wait for the FOMC ofJune to have a more accommodating signal.

Credit

IG U.S.

IG EU

HY U.S.

HY EU

EM corp.

Extreme valuations and wide dispersion in balance sheet quality. Net leverageis high, but interest cover is excellent. The credit cycle is mature. Defaults wouldnot rise unless there was an economic downturn and an increase in volatility. Inthe US, the Fed has flagged its normalization process properly, and that processhas been smoothly priced into spreads. The EM crisis (Turkey and Argentina),the Sovereign crisis in Europe (Italy) and the likelihood of corporate fallen angels(GE, AT&T) are early warnings of the fragile environment inherited from themanagement of the financial crisis. Contagion into the most fragile bondsegments is a significant threat. In corporate bonds the risk is in the largeweighting of BBB-rated bonds that could tip over into HY.

Real Assets

Swiss real estate

Intl. real estate

TIPS

Commodities

Gold

The output gap in developed markets is near zero. It points to a comingacceleration in inflationary pressures, which would result in a prolongation inthe business cycle and monetary cycle. REITs now have more value in the USthan in Europe, which is still waiting for interest rates to catch up. Exposure toCommodities is more of a contrarian tactical play after the 2018 correction.More specifically, Gold is gradually becoming attractive once again, withdiversification in equity and dollar risk, convexity vs. the inflation risk, and thereturn of the political factor. Strong preference for liquid assets at the currentstage of the cycle.

AlternativesRa ise non-directional exposures (i.e. global macro, Long/Short Equity MarketNeutral and CTA).

Cash USD Cash competes with Bonds (inverted yield curve) and Equities (>DY).

ASSET ALLOCATION

Asset Class Tactical and strategic allocation View on the strategic allocation

Change - = +

MONTHLY LETTER| JUNE 2019

PAGE 5

Core

Multi asset: 3 layers of defense1/ Diversification should be at its highest level across all asset classes. 2/ Active management: Central banks liquiditywithdrawal will trigger valuations adjustements. 3/ Risk management: including the ability to disinvest according to adisciplined process.

Commodities: Optimized exposure on GoldSystematic options selling is a source of additional return for Gold. The dollar stabilization and a more stable USmonetary policy will unleash the appreciation potential of Gold.

Thematic

Risk Adjusted Income : European Equities with an Income approach

The European Equity risk is weak structurally. Consequently, investors should favor convexity and robustness in theirstock picking criteria. It is a unique opportunity to combine growth and income for investors. The income componentguarantees high convexity in case of financial stress (sovereign, banking or corporate).

China: domestic reflation

OW EM vs DM, with focus on China. Chinese policy response is stepping up. Chinese policy easing should arrest thegrowth slowdown. P/E multiples have derated and now appear cheap. Investors are U/W China. Fed dovish bias shouldhelp.

Opportunist

Equity Long / Short with balance sheet quality focus: Exposure to a Credit cycle U-turn

The strategy expects the outperformance of financially less risky companies in the event of credit risk deterioration.Such a strategy would generate a significant absolute performance during prolonged credit stress periods.

An opportunistic approach to income: yield enhancement option selling strategies

Investors can generate returns through exposure to various asset classes, including bonds (coupon payments) andequities (dividend payments). In a more rangy market environment with more frequent market stress, carry strategies–via options selling– are one way of generating income, thanks to implied volatility spikes.

Global Risk

There is a deterioration in the growth mix (-) / inflation (-). To watch for: credit conditions (US), reflation (China),deflation (Europe). The dominant macro factors are the exhaustion of the cycle, the threat to profits, the impossibletiming of an impending recession, the lack of fundamental supports and hopes for a new cycle of monetary easing. Thelessons of 2018 are the increase in the cost of Equity risk, the structural derisking, the fragility of the credit market andthe return of cash. The market downside is limited by the Fed (-20%) but the upside is limited by mediocrefundamentals.The main risks: negative repercussion of the inversion of the yield curve, liquidity trap, more frequent volatility shocksin response to excesses of complacency and valuation, return of large macro (debt) and extra-financial risks (policies),less counter-cyclical room for maneuver.

Currencies

The lack of conviction on foreign exchange markets points towards a neutral position in FXrisk. The dollar couldresume a downward trend due to a mature business cycle, a narrowing in spreads, the return of the twin deficits, and abelated fiscal stimulus. Any rally in the dollar is an opportunity to reduce exposure. The euro has been penalized byBrexit and the Italian crisis. In level, it is largely undervalued. EM currencies are benefiting from positive carry. The CHFis once again a risk-off currency. The GBP is still under pressure (Brexit and political instability) but has now anasymetric pay-off. The yen is the best hedge against financial stress.

MONTHLY LETTER| JUNE 2019

IDEAS

PAGE 6

FOCUS

Be Different as Yale

MONTHLY LETTER| JUNE 2019

9%7%

6%6% 5%

3%

What is an Endowment Fund?

An endowment fund is an investment fund established bya foundation that makes consistent withdrawals frominvested capital. The capital in endowment funds, oftenused by universities, nonprofit organizations, churches andhospitals, is generally utilized for specific needs or tofurther a company’ soperating process. Endowment fundsare typically funded entirely by donations that aredeductible for the donors. Financial endowments aretypically structured so the principal amount investedremains intact, while investment income is available forimmediate funding for use to keep a nonprofit companyoperating efficiently.

There are three basic components of typical endowmentfunds. The first is the investment policy. The secondcomponent is the withdrawal policy. This piece of theendowment fund establishes the amount the organizationor institution is permitted to take out from the fund ateach period or installment. The withdrawal policy is usuallybased on the needs of the organization and also takes intoaccount the amount that remains in the fund. The thirdcomponent of an endowment fund is the usage policy. Thispolicy explains the purposes for which the fund may beused and also serves to ensure all funding is adhering tothese purposes and being used appropriately andeffectively.

Yale Endowment Fund

Over the past 10 years, Yale’ sUSD 29.4bn endowment hasearned annual returns of 7.4%, outpacing its benchmarkand institutional fund indices, and adding $6.5 billion invalue. For six of the past 10 years, Yale’ s10-year record hasranked first in the Cambridge Associates universe.

How has it managed to achieve this success on a consistentlevel over the long term? No t by being like everyone else,and definitely not by being passive. A look at the assetallocation of Yale’ s endowment shows just how vastlydifferent its thinking is from other university endowments.Yale has more than three times the allocation to venturecapital and real estate than the educational institutionmean, and more than twice the allocation to leveragedbuyouts.

The heavy allocation to nontraditional asset classes stemsfrom their return potential and diversifying power.Alternative assets, by their very nature, tend to be lessefficiently priced than traditional marketable securities,providing an opportunity to exploit market inefficienciesthrough active management. The biggest differencesbetween Yale and the average endowment are in itsallocations to venture capital, real estate, domestic equity,and cash.

3%

Yale Endowment Market Value 1950 - 2018

Source : Yale

Yale University Educational Institution Mean

Cash 0.5% 3.3%

Fixed Income 4.2% 8.8%

Domestic Equity 3.5% 20.4%

Foreign Equity 15.3% 22.8%

= Liquid Assets Total 23.5% 55.3%

Absolute Return 26.1% 21.7%

Real Estate 10.3% 3.2%

Leveraged Buyouts 14.1% 6.1%

Natural Resources 7.0% 8.2%

Venture Capital 19.0% 5.5%

= Illiquid Assets Total 76.5% 44.7%

Asset Allocation as of June 30, 2018

Source : Yale

PAGE 7

MONTHLY LETTER| JUNE 2019

While the average endowment has venture capital asits third-smallest allocation at 5.5%, Yale has 19% investedin the asset class, which is the second-largest allocation inits portfolio next to absolute return at 26.1%. According toYale, venture capital investments provide compellingoption-like returns, allowing it to gain exposure toinnovative start-up companies from an early stage. Theuniversity’ s investments office said the venture capitalportfolio of the endowment is expected to generate realreturns of 16%. Over the past 20 years, the venture capitalprogram has earned an outstanding 165.9% per annum.

Over the longer term, Yale seeks to allocate approximatelyone-half of the portfolio to the illiquid asset classes ofleveraged buyouts, venture capital, real estate, and naturalresources. In addition to having vastly different allocationsthan the average endowment, Yale’s portfolio does notremain static, as it regularly adjusts its allocations overtime. Between 2014 and 2018, it boosted its absolutereturn investment from its third-largest allocation at 17.4%to its largest at 26.1%. It also increased its allocation toforeign equity by almost 40% to 19% from 13.7% duringthat time.

Over the past three decades, Yale dramatically reduced theendowment’ s dependence on domestic marketablesecurities by reallocating assets to nontraditional assetclasses, adding that in 1988, 65% of the endowment wastargeted to US stocks and bonds.

Yale’ s portfolio is structured using a combination ofacademic theory and informed market judgment. Becauseinvestment management involves as much art as science,qualitative considerations play an extremely important rolein portfolio decisions. The definition of an asset class issubjective, requiring precise distinctions where none exist.Returns and correlations are difficult to forecast. Historicaldata provide a guide, but must be modified to recognizestructural changes and compensate for anomalous periods.Such an approach should be inspiring for private andinstitutional wealth management.

Yale Asset Class Results Beat Most BenchmarksJune 30, 2008 to June 30, 2018

Source : Yale

Emmanuel FerryDirecteur des Investissements+41 22 316 02 16emmanuel.ferry@parisbertrand.com

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