Endowment Investing for Your Portfolio

New Model Adviser Conference

January 2012

2

Our Objectives Today

• Evaluate the investment philosophy and success of the US University endowment funds

• Assess the underlying investment theory that supports their investment philosophy

• Determine how this investment philosophy can be applied to an investor’s portfolio

• Understand the benefits of providing a globally diversified, low cost multi-asset solution as part of your investment proposition

3

Frontier Investment Management Overview

• Frontier Investment Management (“Frontier”) specialises in advanced indexation strategies to provide a range of low-cost multi-asset investment funds

• The firm was founded in 2004 as an independent, privately owned business that has grown to 20 partners/employees with an AUM of $600m

• The asset allocation of Frontier’s multi-asset funds draws inspiration from the large US University Endowment Funds, including Harvard and Yale

• Frontier’s investment philosophy is “Evidence-Based” and is supported by 100 years of empirical evidence and academic research

• Frontier has attracted a diversified, high-quality client base comprising leading financial planning businesses, wealth managers, charities and institutions

4

What is an Endowment Fund?

• A non-taxable investment vehicle that contributes towards the future funding of colleges and universities

• Funding is derived from a combination of legacies, gifts and investment returns

• Over 750 endowment funds in the US; average AUM $520m, largest $27billion

• Cambridge and Oxford are the largest Endowment Funds in the UK with AUM of £4.3 billion and £3.3 billion respectively

• Long term investment time horizons – up to 100 years

5

Why Focus on Endowment Funds?

• Leaders in diversified multi-asset investing for two decades with a significant allocation to alternative asset classes

• Have achieved attractive annual returns with moderate risk

• Investors can benefit from applying Endowment investment principles to achieve risk-adjusted returns that are superior to:

– traditional equity/bond portfolios

– most balanced investment funds

6

Endowments: Innovative Multi Asset PortfoliosMulti asset portfolios with high historical risk adjusted returns

Source: NACUBO 2010; Annual reports (various); Frontier Investment Management. Accompanying notes are an integral part of this presentation.

Top 5 Endowments (Assets > $10bn)

28%

13%

9%13%

16%

20%

1%

Equities

Fixed Income

Real Estate

Commodities

Hedge Funds/Managed Futures

Private Equity

Cash

7

Innovative Portfolios & Exceptional Returns• Innovative portfolios with exposure to multiple asset classes; large allocations to

alternatives

• Significantly higher returns than traditional equity/bond portfolios

• Allocation to alternative assets has been a key performance driver

Alternative

Assets Allocation

10Y Annualised

Return

Equity / Bond Portfolio (60/40) 0% 2.1%

Average Endowment 26% 3.4%

Greater than $1bn 56% 5.0%

Top 5 Endowments 58% 6.4%

Havard & Yale 67% 8.0%

10 Year Returns by Endowment Fund Size to June 2010

8

Emulating Endowment Funds: How?

• Endowment portfolios are characterised by key investment principles that can be incorporated into any portfolio:

1. Long term investment time horizon

2. Strategic asset allocation

3. Highly diversified multi-asset portfolios, incorporating alternative asset classes

However: The average investor is likely to have a shorter time horizon and a lower risk profile than the Endowments so should focus on liquid investments.

Following an Endowment style approach to investing can benefit your business not just with your investment proposition, but also with your client proposition

EMULATING ENDOWMENT FUNDS:1. LONG TERM INVESTMENT TIME HORIZON

10

1. Long Term Investment Time Horizons

• Asset classes generate long run “real returns” – Historical returns have been significantly higher than cash and inflation– The return above cash is known as the “Excess Return” or “Risk

Premium”– Return embedded in asset class (index); fund manager not required

Returns are GBP hedged. Multi Asset Portfolios are equally weighted and rebalanced annually on December 31. Accompanying notes are an integral part of this presentation.

Asset Class Returns Above InflationJanuary 1973 to December 2010

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%7.9%

6.2%

4.8%

7.6%

8.4%

UK Equities UK Bonds

UK Real Estate

Commo-dities

4 Asset Class Portfolio

Inflation = 4.4%

0%

2%

4%

6%

8%

10%

12%

14%

6.1% 6.4%

11.5%

12.7%

8.4%

3.8%

6.0%

7.4%

9.0%

Inflation = 2.3%

Global Equities

Global Fixed

Income

Emerging Equities

Emerging Bonds

Global RealEstate

Commo-dities

Hedge Funds

Managed Futures

8 Asset Class

Portfolio

Asset Class Returns Above InflationJanuary 1991 to December 2010

11

Probability of Return Capture Increases with Time

Number of rolling periods included in calculations: 1 Year = 445, 3 Year = 421, 5 Year = 397, 10 Year = 337. Accompanying notes are an integral part of this presentation.

12 Month vs 10 Year Rolling Returns vs Inflation +3%December 1982 – December 2010 (337 periods)

12

Probability of Return Capture Increases with Time

Number of rolling periods included in calculations: 1 Year = 445, 3 Year = 421, 5 Year = 397, 10 Year = 337. Accompanying notes are an integral part of this presentation.

12 Month vs 10 Year Rolling Returns vs Inflation +3%December 1982 – December 2010 (337 periods)

75% of 12 month periods are over inflation +3%

13

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Multi Asset Portfolio (1Y Annualised)Inflation + 3% (10Y Annualised)Multi Asset Portfolio (1Y Annualised)

Probability of Return Capture Increases with Time

Number of rolling periods included in calculations: 1 Year = 445, 3 Year = 421, 5 Year = 397, 10 Year = 337. Accompanying notes are an integral part of this presentation.

12 Month vs 10 Year Rolling Returns vs Inflation +3%December 1982 – December 2010 (337 periods)

75% of 12 month periods are over inflation +3%

100% of 10 year periods are over inflation +3%

Worst 10 year period 5.2% over inflation

14

Long Term Asset Class Returns & Your Business

• Multi-asset portfolios generated an “Excess Return” of 6.7% p.a. over the past 20 years

• Adopting a longer term horizon maximises the probability of achieving “real returns” above inflation in line with the client’s financial plan (cash flow model)

• Clients that understand the importance of time will be less reactive to adverse movements in the market resulting in fewer phone calls and meetings to discuss market volatility

Value of Initial 250,000 Investment (11.3% growth pa)

5yrs

8 Asset Class Portfolio

Cash

6.2 million

0.9 million

5.3 million

6.7% annual return above cash

5yrs 25yrs20yrs15yrs 30yrs10yrs

Accompanying notes are an integral part of this presentation.

EMULATING ENDOWMENT FUNDS:2. STRATEGIC ASSET ALLOCATION

16

Strategic Asset Allocation as a Portfolio Driver

• Research shows us that asset allocation is the principle driver behind portfolio return and risk

94%2%

2%2%

Strategic Asset Allocation Security Selection Market Timing Other Factors

Brinson, Hood, Beebower, Journal of Finance (1986)

17

Strategic Asset Allocation as a Portfolio Driver

• Asset class performance determines the majority of the return and risk of the portfolio

• Therefore, ASSET CLASS selection and strategic allocations are the MOST IMPORTANT drivers of multiple asset class portfolio returns and risk

Research: Brinson Brinson Ibbotson - Ibbotson -

(1986) (1991) Mutual Pension

Percentage 94% 92% 81% 88%

Active Return -1.1 -0.1 -0.3 -0.4

Percentage of Return Explained by Asset Allocation

18

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Private Equity

Hedge Funds /Managed Futures

Real Estate

Commodities

Fixed Income

Equities

Cash

Large Endowments: Stable Asset Allocations• Top 5 Endowments average annual change only 7% pa

• Most of this small change is due to asset class movement, not tactical decisions

Top 5 Average Asset Allocation

Estimated average asset allocation of the top 5 endowments is calculated by Frontier. The lagged impact of returns uses Frontier asset benchmark indices and the estimated average asset allocation of the Top 5 endowments. Accompanying notes are an integral part of this presentation.

19

Emulating Endowment Funds• Brinson et al research indicates that 80-90% of portfolio performance is driven by

asset allocation

• Frontier Question: if we create an index portfolio with a similar asset allocation, can we achieve a similar risk/return profile to the Endowments

• Portfolio was designed to be liquid and low cost

– Private Equity excluded (pro-rated across other alternative asset classes)

– Representative index selected for each asset class

• Results indicates that an “Indexed” Endowment portfolio achieves excellent resultsRelative Performance of Super Endowments to June 2010

10Y Return (Ann.)

10 Y Volatility (Ann.)

Return / RiskRatio

Harvard and Yale (Average) 8.0% - -

Endowments with AUM > $1bn 5.0%

Endowment Index Portfolio (GBP) 6.6% 9.5% 0.7

UK Equities 1.6% 15.4% 0.1

UK Equity/Bond Portfolio (60/40) 3.6% 8.8% 0.4

IMA Balanced Managed 2.1% 11.9% 0.2Source: Bloomberg; Investment Management Association; Frontier Investment Management. NB 10 Year Volatility is not available for Harvard and Yale.

EMULATING ENDOWMENT FUNDS:3. Multi Asset Portfolios Incorporating Alternatives

21

Endowments: Innovative Multi Asset PortfoliosMulti asset portfolios with high historical risk adjusted returns

Source: NACUBO 2010; Annual reports (various); Frontier Investment Management. Accompanying notes are an integral part of this presentation.

Top 5 Endowments (Assets > $10bn)

28%

13%

9%13%

16%

20%

1%

Equities

Fixed Income

Real Estate

Commodities

Hedge Funds/Managed Futures

Private Equity

Cash

22

Modern Portfolio Theory

• Harry M. Markowitz developed MPT in 1952 with the publication of a paper : “Portfolio Selection” for which he received the Nobel Laureate in Economics in 1990

• Markowitz identified that combining investments with less than perfect correlation produced portfolios with higher risk-adjusted returns

• The key principle was that different investments can be un-correlated to each other over various periods of time - the lower the correlation, the greater the benefit derived

23

Multi Asset Performance During Bear Markets

Returns in USD

Alternative Asset Class Performance During Largest Equity Drawdowns Over 31 years

Global Equities

Global Real Estate

Commodities Hedge FundsManaged Futures

Nov-07 - Feb-09 -50% -64% -45% -23% 16%

Sep-00 - Mar-03 -46% 20% -1% 0% 29%

Jan-90 - Sep-90 -28% -20% 50% 15% 24%

Sep-87 - Nov-87 -21% -16% 2% -8% 8%

Dec-80 - Jul-82 -24% 0% -20% NA 17%

-34% -16% -3% -4% 19%

Date

Average

24

Expec

ted R

etur

n (%

)

Risk/Volatility (%)

Benefits of Alternative Asset Classes

• Diversification and portfolio enhancement– Moderate to high returns vs. traditional asset classes– Low volatility relative to other asset classes– Varied correlations to other asset classes– Addition creates overall large improvement in portfolio efficiency

• Hedge Funds and Managed Futures should be considered a “strategic” allocation

For illustrative purposes only.

Bonds

Stocks

Increasing Alternatives allocation

HF/MF

HF/MF

*

Risk

Retu

rn

-30%

-20%

-10%

0%

10%

20%

30%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Annual Performance of Hedge Funds

Annual Performance of Managed Futures

Annual Performance

• Attractive annual returns, few negative years

Annual Returns from 1991 to 2010

Source: Bloomberg, Frontier Investment Management LLP

PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3 PORTFOLIO 4 PORTFOLIO 5 PORTFOLIO 6Current MAP

AllocationGlobal Equities 100% 60% 50% 40% 30% 25% 12%

Global Fixed Income 30% 30% 30% 30% 25% 20%

Global Real Estate 10% 10% 10% 10% 10% 8%

Commodities 10% 10% 10% 10% 10%

Emerging Equities 5% 5% 5% 5%

Emerging Bonds 5% 5% 5% 5%

Hedge Funds 10% 10% 20%

Managed Futures 10% 20%

TOTAL 100% 100% 100% 100% 100% 100% 100%

Annualised Return 8.5% 9.3% 9.4% 10.1% 10.1% 10.2% 10.2%

Volatility (Ann Std Deviation) 14% 9% 9% 9% 8% 7% 6%

Maximum Loss -49% -35% -34% -33% -30% -26% -20%

Avg Top 3 Maximum Losses -36% -22% -20% -19% -16% -14% -11%

Return/Volatility Ratio 0.6 1.0 1.1 1.2 1.3 1.4 1.6

Return/Maximum Loss Ratio 0.2 0.3 0.3 0.3 0.3 0.4 0.5

Return/Top 3 Max Loss Ratio 0.2 0.4 0.5 0.5 0.6 0.7 0.9

Multi Asset Investing improves risk-adjusted returns

Combining asset classes with variable correlations significantly decreases risk

Returns above use major benchmark indices for each asset class and assume annual rebalancing (Jan 1991 – Dec 2010). Returns are hedged into GBP. Accompanying notes are an integral part of this presentation.

27

Core Strength: Applying Endowment Investing

• The US University Endowments have been leaders in multi-asset investing for more than two decades

• By applying the investment principles behind their philosophy, investors can reduce risk and increase risk adjusted returns

• This process can be adapted to individual risk profiles through core / satellite investing with an “endowment style” core

• Core strength comes from:

– Long term, strategic asset allocation

– High diversification, including alternative asset classes

– Low cost, liquid investing

• Over the medium to long term, this approach is well positioned to outperform traditional equity bond portfolios

28

Frontier Multi Asset Funds

• Provides investors with the returns of eight asset classes in a single investment:

Traditional Asset Classes Alternative Asset Classes

Global Equities Real Estate

Global Fixed Income Commodities

Emerging Equities Hedge Funds

Emerging Bonds Managed Futures

• Asset allocation is inspired by the US University Endowment Funds, while taking into account the shorter time horizons and lower volatility targets of UK investors.

• Strategic asset allocation with annual rebalancing

• Use efficient and low cost methods of accessing each asset class

29

Frontier Multi Asset Funds

UniversityEndowments

Quantitative Analysis

FrontierExperience

Current Asset AllocationIFDS Frontier MAP Balanced

FundIFDS Frontier MAP Cautious

Fund

30

Frontier MAP Balanced Performance• The Frontier MAP Balanced fund launched in April 2009 and has returned 24% to

date

• Fully FSA Regulated, Daily Dealing UK OEIC, 0.75% Annual Management Charge

• Investment Objective: Deliver asset class index returns at low cost

December 2011 Asset Class Returns

2011 Asset Class Returns

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

2009 4.02% 4.87% 0.89% 2.11% 2.48% 1.50% 0.66% 0.99% 0.69% 19.66%

2010 -2.43% 0.47% 3.56% 0.69% -4.01% -0.30% 2.68% 0.26% 3.30% 1.88% -1.03% 2.85% 7.88%

2011 0.09% 1.15% 0.12% 1.99% -1.68% -1.20% 0.70% -2.40% -3.39% 2.96% -3.30% 1.46% -3.67%

0.0%

1.5%

-1.2%

1.3%1.1%

-1.6%

-0.4%

0.6%

-2%

-1%

0%

1%

2%

Global Equities

Global Fixed

Income

Emerging Equities

Emerging Bonds

Real Estate

Commo-dities

Hedge Funds

Managed Futures -6.3%

5.8%

-18.1%

9.6%

-3.5%

-6.9%-5.8%

-4.9%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

Global Equities

Global Fixed

Income

Emerging Equities

Emerging Bonds

Real Estate

Commo-dities

Hedge Funds

Managed Futures

31

Incorporating a Core Allocation to the MAP Funds• Incorporating the MAP Funds as a low cost, diversified core to a traditional

portfolio can reduce risk and significantly improve portfolio efficiency:

* Includes Pro Forma performance, see notes for further information.

Source: Bloomberg; Investment Management Association, Frontier Investment Management LLP

Annualised

Returns

Annualised

Volatility

Return / Risk

Ratio

UK Equities (FTSE AllShare) 1.6% 15.4% 0.1

IMA Balanced Managed Sector 2.1% 11.9% 0.2

MAP Funds * 4.7% 7.9% 0.6

With 40% MAP Allocation 3.2% 7.8% 0.4

Increase in Portfolio Efficiency: 138%

10 Year Returns to June 2010

32

Summary: Frontier Multi Asset Funds

• One fund, 8 asset classes, 15000+ securities*, ideal core investment

• Multi asset approach at very low cost

• Disciplined asset allocation with rebalancing

• Optimised portfolios for varying risk profiles

• Fully FSA Regulated, Daily Dealing UK OEIC, AUM > £100m

• Available on a wide range of fund platforms, wraps and life companies that include:

* This number represents the number of the securities within the reference asset class indices to which the Fund accesses the returns.

33

Next Steps: Working with Frontier

• Fill in a feedback form or speak to one of our team if you would like further information

• Request a demonstration of our Portfolio Analyser Tool that allows you to incorporate your asset allocation alongside the Frontier Funds to highlight the efficiency of a core solution.

34

Contact Details

Frontier Investment Management Berkeley Square HouseBerkeley Square, MayfairLondon, W1J 6DBUnited Kingdom

t: +44 (0) 207 317 6900 f: +44 (0) 207 317 6901 w: www.frontierim.come: info@frontierim.com

Andrew CracknellPartner, Head of Intermediary Business

t: +44 (0) 152 783 9747 m: +44 (0) 781 0484 023 e: andrew.cracknell@frontierim.com

Bruce GascoineBusiness Development Manager

m: +44 (0) 776 0263 666 e: bruce.gascoine@frontierim.com

Jacob BerryBusiness Development Manager

t: +44 (0) 207 317 6906m: +44 (0) 7590 568 781 e: jacob.berry@frontierim.com

Conor O’DonnellRelationship Manager

t: +44 (0) 207 317 6923 e: conor.odonnell@frontierim.com

35

Notes & Disclaimer

1. The Frontier Investment Management (“Frontier”) Multi Asset Platform Funds were invested on September 2nd, 2005. Prior data is pro-forma and has been calculated from the original asset allocation weights applied to the original Indices and rebalanced annually at December 31 each year. Pro-forma performance is net of 50 basis points per annum to take into account index replication costs, currency hedging and annual rebalancing costs. Performance data from September 2005 to October 2006 inclusive is based on actual fund NAVs restated to reflect current fee levels. The Plus fund was invested in July 2006.

2. While Frontier has developed methods of preparing pro-forma returns that it believes to be reasonable, fair and complete, there can be no assurances that the results derived from such methods are correct, accurate or reliable. Accordingly, the informational value of pro-forma returns is limited.

3. Non-USD index returns have been hedged into USD except for Emerging Market Equities. All returns are USD based unless otherwise stated. 4. Frontier annual cost savings are based on current asset allocation weights and published research on the total costs of active investing vs index

investing across asset classes, with management fee savings based on fund of funds investing.5. Each asset class is represented by a relevant market index. UK Equities are represented by the FTSE All Share Total Return Index. UK Bonds are

represented by the Citigroup 10-year Gilt Benchmark Index. US Equities are represented by the Standard & Poor’s 500 Total Return Index. US Bonds are represented by the Citigroup 10-year Treasury Benchmark Index. European Equities are represented by the MSCI Europe ex UK Total Return Index. European Bonds are represented by the Citigroup 10-year European Benchmark Index. Commodities are represented by the S&P GSCI Index until April 2007 and the S&P GSCI Light Energy Index thereafter. Hedge Funds are represented by the HFR Fund of Funds index (minus 1% survivorship bias) and Managed Futures by the CISDM Asset Weighted Index until October 2010, then the NewEdge CTA Index (minus 1% survivorship bias). Cash returns are UK 1 Month Libor minus 1% per annum.

6. The Frontier asset allocation process combines multiple inputs including reference to major US University endowments but also includes quantitative analysis and the inputs of the Frontier Asset Allocation Committee. Frontier does not expect similar returns to those of the endowments in the MAP Funds due to the lack of private equity exposure and a significantly lower volatility target than most endowments.

7. Endowment data is sourced from NACUBO and annual reports; calculations by Frontier Investment Management.8. Fund data is sourced from Bloomberg and assumes the reinvestment of any dividends issued at the time of their issuance. Bloomberg data has not

been checked or verified by Frontier Investment Management

DISCLAIMERThis document is issued for information purposes only by Frontier Investment Management LLP (“Frontier”) in respect of the IFDS Frontier Multi Asset Fund (“the Fund”).  Frontier is authorized and regulated by the Financial Services Authority (“FSA”).

This document does not constitute an offer by Frontier to enter into any contractual/agreement nor is it a solicitation to buy or sell any investment.  Nothing in this document should be deemed to constitute the provision of investment, financial or other professional advice in any way.  Potential investors are directed to the read the Fund prospectus and should always consult with their professional advisors.

  The contents of this document are based upon sources of information believed to be reliable.  Frontier has taken reasonable care to ensure the information stated is factually true.  However, Frontier make no representation, guarantee or warranty that it is wholly accurate and complete. 

PAST PERFORMANCE IS NOT NECESSARILY A GUIDE TO FUTURE PERFORMANCE.