nautilus allocator dec2010

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Page The current economic environment

Page Asset class analysis

Page Current asset allocation

Page Perfomance analysis

Our opinion

Due to forced buying of PIIGS bonds, the ECB will have to print sooner or later. This could make the EUR drop even further.

Corporate bonds yielding less than government bonds is not a normal situation.

German economic «colonisation» of Europe will come to an end once German banks show full PIIGS exposure on their balance sheets.

German banks are very exposed towards the PIIGS. Given that they need to refinance 30% of their bonds next year, this could cause some friction at the core.

Contagion : Made in Germany

[email protected]

Asset A llocation over last 3 months

0.0

%

0.0

%

0.7

%

70.1

%

74.5

%

59.0

%

29.9

%

25.5

%

40.4

%

0.0%

25.0%

50.0%

75.0%

100.0%

Okt 10 No v 10 Dez 10

Cash

Fixed Inco me

Equities

December-2010

Content 1

2

3

4

EFSF :European Financial Stability Facility is a special purpose vehicle agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The Facility is headquartered in Luxembourg City, and the European Investment Bank provides treasury management services and administrative support to it through a service level contract. The Facility may be combined with loans up to €60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to €250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.ESM: European Stability Mechanism. The permanent rescue facility that is to replace the EFSF after its expiration in June 2013. The ESM should make the EFSF permanent, with the difference that ESM loans will be senior to sovereign bonds, while EFSF loans are not. As a first step to providing support a debt sustainability analysis will be conducted by the commission, the IMF and the ECB. If considered insolvent, it will have to negotiate a restructuring plan with its creditors. A system of collective action clauses (CACs) will allow a qualified majority of creditors to make a proposed debt restructuring legally binding to all. An aggregation clause will be introduced so that all outstanding government bonds are included in the negociations. After the sustainability analysis a unanimous decision of the Eurogroup ministers will be needed to approve assistance. A final decision on the mechanism should be taken at the EU council meeting on December 16th, 2010.

Looking at the global economic dynamics and its regional evolution one of the most extreme cases of divergence is taking place in the European Monetary Union. As much as the system is a political union, there are extreme contrasts in its economic reality. Germany just announced that the unemployment rate sank to an 18 year low. At the same time the total unemployment in the European Union increased to a 10 year high. Due to the Euro weakness, the export driven German economy is on a roll. As such, a cynic may call the behavior of Germany towards the PIIGS as self-benefitting. After Greece, which was more of a credibility crisis, Ireland now faces a banking crisis.

This crisis has been sped up by the political retorics of German chancelor Angela Merkel and her French counterpart Sarkozy. Her remarks in late October, that as of 2011 investors in sovereign bonds would have to bear part of the risk, sent the risk premium for these bonds upwards in a dynamic that caused many countries in a direction of having to accept help. What happened in effect is that the only buyer of Greek and Irish bonds was the ECB. This was a position the Central Bank did not want to be in as they already wanted to fade out bond purchases. The ECB strategy of monetary immunisation is not sustainable because the purchased assets (mainly Greek and Irish bonds) are declining rapidly in value, deteriorating the ECB`s balance sheet. This has a braking effect on the economy unless it is compensated with new money.

The macro-economic environment is clearly dominating investors`mood. Most bad news seems to be in the market already. We believe that the European central bank will be eventually mandated by Germany to resolve the market stress in a consistent way for all the members and markets will look at the fundamentals once again.

The inflation level in both the US and Europe is at a level that allows (and even begs) for more stimulus in the short to medium term. The core CPI in the US hit historic record lows. All the fears about inflation risks because of quantitative easing seem to be unfounded at the moment. The language from the central bankers has moved towards more inflationary measures. As much as the investors were blaming them for taking the «wrong» decisions by launching QE2, the numbers are evidence to the opposite.

In the meantime, at the start of a global economic pick-up, the Asian countries are braking down the speed of their growth due to inflationary pressures. If these economies are already in auto-feeding modus, this should be fine. We believe this is not fully the case yet and could slow down the demand for western goods going forward. This could be offset by the better mood of the US consumer who has started to spend again. This could not come at a better moment with the crucial end of year sales season ahead.

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General Market Returns (November 2010)

The above graph illustrates the European misery made in Germany. It shows the market reaction to the bilateral talks between Germany and France that the bondmarket should carry the pain of countries in distress being bailed out. This was seen as very negative by the market and made investors focus on other countries than Greece and Ireland. Even the core countries (such as Belgium) saw their spreads against Germany increasing fast. This statement has been revised in the meantime, but the damage has been done...Euro lower will make the German economy even stronger.

Asset Allocation (December 2010)

Cash (0.6%,+0.6%):small allocation increase. The short term yields are beginning to pick up in yield.

Bonds (59%, -15%): As the impact of QE2 (Quantitative Easing) seems to be fading out after the announcement of the US to start up another 600 billion, the allocation to bonds have been reduced substantially. In the allocation we increased the 1-3 years by 5% and the 20+ years by 18%. The 7-10 years has been reduced by 11% and the corporate bonds have been liquidated. We believe that the sell-off on the long end has been overdone and that the QE, which is still ongoing and might even start in Europe, will also focus on longer duration bonds, where most of the economic stimulus can be delivered. This is a dynamic reweighting and needs to be seen in the light of the reduction of the fixed income allocation by 15%.

The duration in the model increased from 9 to 10.5 this month.

Equity (40%, +15%): Most of the bad macro-economic news from the sovereign side in Europe seems to be in the markets. The Emerging markets saw a serious correction in November and so did the developed countries, with Europe suffering the most. With the earning season behind us, it is clear that the companies are in good shape, with plenty of cash and EBITDA margins not seen in over a decade. This has not really shown up in the equity prices which were dominated by macro themes. We continue to have little exposure to the financial sector (banks and insurances) which is clearly carrying the biggest risk in the sovereign crisis.

Sector Allocation

The main overweights and underweights of last month remain or were increased: Basic materials (11.3%, -0.6%), consumer goods (10%, +8.3%) and consumer services (7%, +1.5%.) Biggest underweights are in Oil&Gas (0.7%, +0.7%), financials (2.6%, +2.5%) and utilities (0.9% +0.9%). The weight in Technology was reduced by -4.2% to 1.9%.

The biggest overweight we have is in the basic materials. There is a large wave of consolidation taking place in the sector. There seems to be more and more resilience in commodities versus the evolution of the USD. Once this decoupling becomes clearer, there could be a second bull wave in the commodity sector.

Geographical Allocation

A clear increase in the allocation to Japan, which at 16.9% is the biggest geographical exposure. Japan did very well in the previous month and has room to recover as it has underperformed this year. furthermore the recent weakening of the Yen versus its main trading partners will help. All other countries are underweight versus the index, except for a neutral weight to the United States which will continue to benefit from QE.

Europe, Latin America and Asia Pacific remain underweight due to macro-economical factors such as sovereign debt and capital flow taxing. The exposure to Europe would change for the positive once a new QE is introduced in Europe and a more inflationary stance would be taken by the ECB. This will most probably happen in the months to come.

Nautilus Capital AGLandstrasse 60 •FL-9490 Vaduz • Liechtenstein • www.nautilusag.com

T +423 232 1540 • [email protected]

Market Month-to-date Year-to-date

Performance Performance

3M Treasury Bill 0.0% 0.1%

Barclays US Treasury 1-3Y Index-0.2% 2.6%

Barclays US Treasury 7-10Y Index-0.8% 13.3%

Barclays US Treasury +20Y Index-1.3% 13.6%

Barclays Corp.Inv.Grade Index -0.8% 10.0%

Dow Jones World Index -1.9% 5.4%

Sector Return (Nov 2010) Allocation (Nov 2010)

Energy 1.35% 0.00%

Basic Materials 0.56% 11.23%

Industrial 0.30% 0.00%

Consumer Services -0.57% 5.88%

Consumer Goods -0.75% 1.62%

Sector Return (Nov 2010) Allocation (Nov 2010)

Technology -1.44% 6.06%

Healthcare -3.37% 0.00%

Financials -5.07% 0.00%

Telecoms -5.52% 0.40%

Utilities -5.63% 0.00%

Flop 5 performing sectors

Top 5 performing sectors

European CDS spreads and EUR/USD (Oct-Nov 2010)

0

100

200

300

400

500

01.10 08.10 15.10 22.10 29.10 05.11 12.11 19.11 26.11

CD

SS

pre

ad

(%p

oin

ts)

1.28

1.3

1.32

1.34

1.36

1.38

1.4

1.42

1.44

EU

R/U

SD

rate

Portugal Spain Italy Belgium Germany EUR/USD (right scale)

Source : B loomberg, Nautilus

Bilateral agreement between M erkel and Sarkozy saying

that private sector should be invo lved in risk sharing.

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Current Asset Allocation



Asset Allocation

0.7% 59.0% 40.4%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%

Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10

Cash

Fixed Income

Equity

Fixed Income Allocation: Sector

2.9% 35.6% 20.5% 0.0%0.0%

10.0%

20.0%

30.0%

40.0%

UST 1-3 Year UST 7-10 Year UST 20+ Year US Corp.Inv

Equity Allocation: Regions

2.2%

14.5%

0.0%

16.9%

0.0%

5.1%

1.6%

0% 4% 8% 12% 16% 20%

United Kingdom

North America

Latin America

Japan

Europe, Ex-UK (Eme)

Europe, Ex-UK (Dev)

Asia/Pacific, Ex-Japan

Equity Allocation: Industries

10.7%

10.0%

7.4%

2.6%

1.3%

3.8%

0.7%

1.9%

1.1%

0.9%

0% 2% 4% 6% 8% 10% 12%

Basic M aterials

Cons. Goods

Cons. Services

Financials

Health Care

Industrials

Oil & Gas

Technology

Telcos

Utilities

Equity Allocation: Under/Over Industries

-52.5%

-44.8%

-44.1%

-83.2%

-30.4%

-49.0%

-69.2%

91.7%

105.3%

166.0%

-50

%

-25

%

0% 25

%

50

%

75

%

100

%

125

%

150

%

175

%

200

%

Utilities

Telcos

Technology

Oil & Gas

Industrials

Health Care

Financials

Consumer Services

Consumer Goods

Basic M aterials

Fixed Income Allocation: Duration

2.9% 35.6% 20.5%0.0%

10.0%

20.0%

30.0%

40.0%

<3 Years 7-10 Years 10-20 Years

Equity Allocation: Under/Over Regions

-64.3%

435.6%

-100.0%

-3.0%

1.1%

-28.3%

-87.1%

-50% -25% 0% 25% 50%

Asia/Pacific, Ex-Japan

Japan

Latin America

United Kingdom

United States

Europe, Ex-UK (Dev)

Europe, Ex-UK (Eme)

December-2010

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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.



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

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 US 3M US Aggregate Benchmark** Dow Jones

Treasury Bond Index Agg. World

Return Currency USD USD USD USD USD

Month Return (Nov-10) -0.8% 0.0% -0.6% -1.2% -1.9%

Year-to-date Return 3.1% 0.1% 7.7% 6.6% 5.4%

Last 12 Months Return 3.9% 0.1% 6.0% 6.7% 7.6%

Last 24 Months Return 3.7% 0.1% 8.8% 12.8% 20.1%

Total Annual Return * 8.9% 2.1% 5.7% 5.3% 4.9%

Standard Deviation (Volatility) * 7.5% 0.5% 3.8% 8.4% 16.9%

Semi-Standard Deviation (<0) * 7.1% NM 3.8% 9.9% 19.2%

Sharpe Ratio * ( rf = 2.07% ) 0.91 NM 0.97 0.38 0.17

Sortino Ratio * ( rf = 2.07% ) 0.96 NM 0.97 0.33 0.15

Positive Months * 67.3% 99.1% 69.2% 64.5% 58.9%

Average Monthly Return * 0.7% 0.2% 0.5% 0.4% 0.4%

All figures are annualized measures of returns.

* Period: Jan-02 to Nov-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

DRM

Benchmark

Rew ard to Risk Analysis of Returns

DRM

3M -Treasury

Benchmark 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

)

December-2010

nautilus allocator dec2010

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