allocator nautilus jan2011
DESCRIPTION
In the new decade active asset allocation will be even more important. The safe havens of the past are dead. In this allocator we go in more detail in the remaining asset classes to hide and protect your wealthTRANSCRIPT
Page 1 of 4
Page The current economic environment
Page Asset class analysis
Page Current asset allocation
Page Perfomance analysis
Our opinion
Asset A llocation over last 3 months
0.0
%
0.7
%
0.6
%
74.5
%
59.0
%
40.9
%
25.5
%
40.4
%
58.5
%
0.0%
25.0%
50.0%
75.0%
100.0%
No v 10 Dez 10 Jan 11
Cash
Fixed Inco me
Equities
P fo Duratio n: 4.83 P fo Duratio n: 5.92 P fo Duratio n: 4.33
January-2011
Content 1
2
3
4
2011: Redefining risk Looking back at 2010, it proved to be a very difficult investment year. Throughout the year there was a continuous on/off of risk and economic forecasts. Whereas everything looked very rosy at the beginning of the year, the mood turned quickly as the risk of an economic double dip increased. Simultaneously, the sovereign debt crisis in Europe became alive again and a lot of potential negative consequences with it. Most of these risks faded away towards the end of the third quarter 2010. The low Euro clearly helped the export focused biggest economies in Europe. The emerging market compensated the lack of western consumption and the Central bank measures in the Anglo-Saxon world helped to pump up the mood.
We see the bi-polar approach to the crisis, from deflationary fiscal austerity in Europe to the inflationary quantitative easing in the US, converging again in 2011. At the start of the year the positive momentum will continue to swing. Global growth forecasts are revised upwards. The inflation picking up in the Emerging countries can be seen as a strength of internal demand underpinning the growth pick-up even more. In the meantime, many companies have used the recession to clean up making them much leaner. Employment costs in the US came down at the fastest pace over the last 40 years. The cash levels on balance sheets of S&P500 companies have levels not seen in the last 60 years.
Given the low yields cash is still offering, we believe that investors will demand from companies to either put the cash at work, at much higher operational margins, or to return part of it to the investors. This will show as a pick up in dividend yields and mergers and acquisitions. This trend has already started in the cash rich sectors, such as IT and pharma and will spill over to other sectors.
On the fixed income side the traditional macro-economic drivers will have very little influence on bond yields. We believe short-term rates will not be increased given the weakness of western economies and low inflation. Nevertheless, that will not be the case for bond yields, which given an increase in their risk premium will be pushed higher steepening the yield curve. As long as the solution to the sovereign debt crisis is by issuing more debt, and structural debt repayment is not well defined, it will perpetuate peripheral European debt volatility as well as in the Euro. This situation will only stabilize once Germany is willing to accept higher yields and an increase in the Euro.
Some of the AAA-rated government bond investments, formerly perceived risk-free, are currently seen in the market as holding higher risks than some lower rated corporate bonds. As the core of Europe will take more and more risk exposure to support the periphery, we believe the credit quality of strong European sovereigns will deteriorate. We believe that sovereign defaults are a real risk and investors should not underestimate the financial impact of such an event on both the local economy and international banks. These events have not been seen in the industrialized world for generations. The asset classes that are traditional safe havens will not function. Cash on the balance sheet of the bank will be at risk, governments will run out of cash if they want to intervene and save the system (again). As such owning a company at higher dividend yields contains less risk.
Due to economic globalization, many factors, such as inflation, foreign exchange rates and even bond yields, are out of our direct control, but still have direct impact. This will create irrational moments. Risk free investing is dead. What is the alternative?
Risk-free investing as we used to know it is dead.
Active geographical reallocation of portfolios will be crucial in 2011. Economic activity divergence will increase throughout the world. Strong versus weak is the new paradigm, scrapping west-east, developed-emerging clichés.
Government bonds of «safe» countries will cease functioning as hiding place in 2011.
AAA-government bond ratings will come under pressure due to support of weak countries.
High yield will shift to high dividend in a first phase as equities are more resilient against inflation than any fixed income.
Decoupling of the emerging production from the restructuring consumption needs to prove itself ... fast.
Page 2 of 4
Nautilus Capital AG www.nautilusag.com
January-2011
Market Month-to-date Year-to-date
Performance Performance
3M Treasury Bill 0.0% 0.1%
Barclays US Tr. 1-3Y Index -0.2% 2.4%
Barclays US Tr. 7-10Y Index -3.4% 9.4%
Barclays US Tr. +20Y Index -3.7% 9.4%
Barclays Corp.Inv.Grd. Index -0.9% 9.0%
Dow Jones World Index 7.5% 13.4%
Sector Ret. Dec 2010 Alloc. Dec 2010
Basic Materials 11.02% 10.71%
Oil & Gas 10.11% 0.66%
Financials 9.03% 2.56%
Industrials 8.91% 3.81%
Technology 6.35% 1.86%
Sector Ret. Dec 2010 Alloc. Dec 2010
Cons. Goods 6.01% 10.01%
Telcos 5.44% 1.13%
Health Care 5.22% 1.35%
Utilities 4.91% 0.88%
Cons. Services 4.40% 7.40%
Top 5 performing sectors
Flop 5 performing sectors
General Market Returns December 2010)
Source : US Federal reserve Bank, Nautilus
The above graph illustrates the liquid assets held at non-financial corporations in the US. Even if one would take into account the total value of the inventories, this is an impressive number and one needs to go back to to the 50's in order to see this. The consequence will be that investors demand either dividend increases, cash buybacks or take overs in order to increase the profit margins even more. We believe this is very stimulative for equities, an asset class linked to risk after two consecutive equity crises.
Asset Allocation January 2011)
Cash (0.6%,-0.1%):small allocation decrease.
Bonds (41%, -18%): The shift away from fixed income into equity continues. In the allocation the main reduction was taken into the 7-10 year bonds. The long end of the duration curve was kept at a level of 17.2% (-3.3%). What we have seen is that as soon as market volatility returns there is a flight to the safety of government bonds and the long end benefits from it. One should consider this relatively high exposure as a built-in equity hedge. However, we are convinced that long duration is a risk. The overall portfolio duration has been reduced from 5.92 to 4.33. Corporate bonds are increased by 3.4%.
Looking back at 2010, it is clear to us that the 2010 fixed income performance, whereby both the corporate and the longer duration government bonds performed equally well, will not be repeated over 2011.
Equity (58.5%, +18.1%): December was an exceptionally good month for the world equity market (+7.5%!). Both the regional and sectorial performance showed major differences, however, at the end of December all the sectors did end up with positive returns.
Sector Allocation
The main overweights of last month remain or were increased with the extra weight that has been put into equities : Basic materials (20.1%, +9.4%), consumer goods (19%, +6.01%) and consumer services (5.6%, -1.8%.) Biggest underweights remain in Oil&Gas (0.4%, -0.2%), financials (3.1%, +0.9%) and utilities (1% +0.1%).
The biggest overweight we still have is in the basic materials. The overweight grew even more in January. This sector lagged other sectors exposed to emerging-market growth in 2010. The sector overweight provides a good hedge against upcoming inflation. It was the biggest overweight in December 2010 and proved to be the best performing sector with a clear margin over the other sectors.
Second biggest overweight is still allocated to consumer goods. Geographical Allocation
The overweight we had in December 2010, Japan, is being increased to 25.1%. Japan did very well in the previous month and has room to recover as it has lagged global equities in 2010. Japan performed extremely well in the last quarter of 2010. We believe exchange rates will be vital for Japan as overseas sales are an important earnings driver for most companies.
Europe remains underweight due to macro-economical factors such as sovereign debt. The emerging countries are remaining underweight with 0% exposure to Brazil and «only» 3.6% exposure to Asia/Pacific ex-Japan. This region has not performed very well lately as everyone seems to be weighing the reasons and impact of the interest rate increases in this region and the inflation numbers coming out. As long as the countries are trying to get a grip on the local inflation, this will be negative for equity.
Cash on corporate balance sheets (non-financials)in US (as % of total assets)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1954
Q1
1957
Q4
1961
Q3
1965
Q2
1969
Q1
1972
Q4
1976
Q3
1980
Q2
1984
Q1
1987
Q4
1991
Q3
1995
Q2
1999
Q1
2002
Q4
2006
Q3
2010
Q2
Page 3 of 4
Current Asset Allocation
Nautilus Capital AG
Asset Allocation
0.6% 40.9% 58.5%0.0%
20.0%
40.0%
60.0%
80.0%
Asset Classes
Cash
Fixed Income
Equity
Historical Asset Allocations
(Last 5 years)
0.0%
25.0%
50.0%
75.0%
100.0%
Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
Cash
Fixed Income
Equity
Fixed Income Allocation: Sector
2.3% 18.1% 17.2% 3.4%0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
UST 1-3 Year UST 7-10 Year UST 20+ Year US Corp.Inv
Equity Allocation: Regions
4.2%
15.9%
0.0%
25.1%
0.0%
9.7%
3.6%
0% 4% 8% 12% 16% 20% 24% 28%
United Kingdom
North America
Latin America
Japan
Europe, Ex-UK (Eme)
Europe, Ex-UK (Dev)
Asia/Pacific, Ex-Japan
Equity Allocation: Industries
20.1%
0.4%
3.1%
4.7%
1.7%
19.0%
1.7%
1.2%
1.0%
5.6%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
20
%
22
%
Basic M aterials
Oil & Gas
Financials
Industrials
Technology
Cons. Goods
Telcos
Health Care
Utilities
Cons. Services
Equity Allocation: Under/Over Industries
-61.4%
-42.7%
-65.3%
-92.3%
-41.5%
-67.2%
-74.3%
2.9%
172.6%
231.3%
-200% -100% 0% 100% 200% 300%
Utilities
Telcos
Technology
Oil & Gas
Industrials
Health Care
Financials
Consumer Services
Consumer Goods
Basic M aterials
Fixed Income Allocation: Duration
2.3% 21.5% 17.2%0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
<3 Years 7-10 Years 10-20 Years
Equity Allocation: Under/Over Regions
-45.9%
443.9%
-100.0%
26.0%
-28.9%
-7.8%
-181.9%
-300
%
-200
%
-100
%
0% 100
%
200
%
300
%
400
%
500
%
Asia/Pacific, Ex-Japan
Japan
Latin America
United Kingdom
United States
Europe, Ex-UK (Dev)
Europe, Ex-UK (Eme)
January-2011
Page 4 of 4
Performance Analysis
This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any Investment or other specific product. Although all information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice. At any time Nautilus Capital ("Nautilus") (or employees thereof) may have a long or short position, in relevant securities. Some investments may not be readily realisable at times of illiquid market circumstances. Therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Futures and options trading is considered risky and past performance of an investment is not a guide to its future performance. Some investments may be subject to a decline in value and on realisation you may receive back less than you invested. Changes in FX rates may have an adverse effect on the price, value or income of an investment. Each investment needs to be seen in the context of your particular investment objectives, financial situation and needs and we would recommend that you take financial advice as to the tax implications of investing in any of the products mentioned herein.
Nautilus Capital AG [email protected]
Cummulative Outperformance
-25%
0%
25%
50%
75%
100%
Dez
01
Dez
02
Dez
03
Dez
04
Dez
05
Dez
06
Dez
07
Dez
08
Dez
09
Dez
10
Current Month Performance Attribution
vs. Benchmark
-5.0%
-2.5%
0.0%
2.5%
5.0%
Asset Allocation Sector Rotation Total Value Added
-5.0%
-2.5%
0.0%
2.5%
5.0%
Cash
Fixed Income
Equities
Total
DRM Benchmark** US 3M US Aggregate Dow Jones
Treasury Bond Index Agg. World
Return Currency USD USD USD USD USD
Month Return (Dec-10) 1.1% 3.1% 0.0% -1.1% 7.5%
Year-to-date Return 4.2% 9.9% 0.1% 6.5% 13.4%
Last 12 Months Return 4.2% 9.9% 0.1% 6.5% 13.4%
Last 24 Months Ann. Return 3.7% 12.6% 0.1% 6.2% 22.3%
Total Annual Return * 9.0% 5.6% 2.1% 5.6% 5.7%
Standard Deviation (Volatility) * 7.5% 8.4% 0.5% 3.8% 17.0%
Semi-Standard Deviation (<0) * 7.1% 9.9% NM 3.8% 19.2%
Sharpe Ratio * ( rf = 2.05% ) 0.92 0.42 NM 0.92 0.22
Sortino Ratio * ( rf = 2.05% ) 0.97 0.36 NM 0.92 0.19
Positive Months * 67.6% 64.8% 99.1% 68.5% 59.3%
Average Monthly Return * 0.7% 0.5% 0.2% 0.5% 0.5%
All figures are annualized measures of returns.
* Period: Jan-02 to Dec-10.
** Benchmark = 5% UST 3M + 22.5% UST 1-3Y + 9% UST 7-10Y + 5.4% UST 20+Y
+ 8.1% US Corp. Inv. Grade Bonds + 50% Dow Jones Aggr. World Equity Index.
Cummulative Performance
50
100
150
200
250
Dez
01
Dez
02
Dez
03
Dez
04
Dez
05
Dez
06
Dez
07
Dez
08
Dez
09
Dez
10
DRM
Benchmark
Rew ard to Risk Analysis of Returns
DRM
3M -TreasuryBenchmark
US Ag Bd
Index
Dow Jones
Agg. World
Index
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
0% 5% 10% 15% 20% 25%
Incurred Volatility (Risk)
Realiz
ed
Retu
rn
(Rew
ard
)
January-2011