risk-adjusted return: q2 2014

R Rf

Rf

RISK- ADJUSTED RETURN: QUARTERLY UPDATE (2014 - Q2)

www.redington.co.uk T. 020 7250 3331 R

1 YEAR

30/06/2013

30/06/2014

Over the last twelve months, European High Yie ld cont inued to be a top per former, wi th a Sharpe Rat io of 6.46, and a volat i l i ty of 2.1%. However, low spreads indicate repet i t ion of th is per formance could be di f f icul t . US High Yie ld per formed wel l on a r isk-adjusted basis over the past quar ter with a Sharpe rat io r is ing f rom 1.48 to 4.01, th is was largely due to a r ise in excess return f rom 7.3% to 11.5% per annum. Macro Hedge Funds were the only asset c lass to post negat ive excess returns dur ing the 12-month per iod. Compared to Q2 2013, volat i l i t ies are largely lower and excess returns higher leading to higher Sharpe Rat ios: for example European High Yie ld, a lso the top per former in Q2 2013, had a Sharpe Rat io of 3.38. A l though useful for evaluat ing per formance on a shor t - term basis , p lease note that one year is a shor t t ime frame over which to assess the r isk and return character ist ics of d i f ferent asset c lasses and strategies.

R ISK - ADJUSTED RETURN (2014 Q2)


3 YEAR

30/06/2011

30/06/2014

Over a three-year per iod, Risk Par i ty has maintained i ts posi t ion as the best per forming asset c lass on a r isk-adjusted basis with a Sharpe Rat io of 1.56, up f rom 1.38 last quar ter. I t a lso cont inues to have the highest excess return of 14.5% per annum. UK Government Bonds were the only asset c lass to exper ience a reduct ion in r isk adjusted return over the quar ter, wi th Sharpe Rat ios for nominal Gi l ts fa l l ing f rom 0.84 to 0.77 and index- l inked Gi l ts fa l l ing f rom 0.90 to 0.76. Commodit ies, Macro Hedge Funds, and Emerging Market Equit ies have posted consecut ive negat ive three-year per formances over two quar ters.



5 YEAR

30/06/2009

30/06/2014

Over a f ive-year per iod, US High Yie ld has remained the top per forming asset c lass on a r isk-adjusted basis with a Sharpe Rat io of 2.01, down from 2.11 last quar ter. European High Yie ld cont inued to produce the highest excess return of 14.8% per annum. Risk Par i ty and nominal UK Government Bonds are the only asset c lasses to show an improvement in f ive-year r isk adjusted return over the quar ter. Macro Hedge Funds cont inue to post negat ive excess returns, for the eighth consecut ive quar ter, of -3.0%, an improvement f rom -4.2% per annum last quar ter.



10 YEAR

30/06/2004

30/06/2014

Over a ten-year per iod, Risk Par i ty is the top asset c lass on a r isk-adjusted basis with a Sharpe Rat io of 0.98. Both Risk Par i ty and Emerging Market Equit ies have generated the highest excess return, over 10 years, at 9.9% per annum. On a r isk-adjusted basis Emerging Market Equit ies have not per formed as wel l , wi th a Sharpe rat io of 0.41 and a volat i l i ty of 24.3%, approximately 2.5x higher than Risk Par i ty. Macro Hedge Funds and Commodit ies both cont inue to post negat ive excess returns over the 10-year per iod ( though both doing better than Q1 2014) at -1.5% and -1.2% per annum respect ively. This analys is over the 10-year per iod includes the impact of the f inancial cr is is , as a result volat i l i t ies are not iceable larger and excess returns smal ler compared to the 5-year analys is .



Here we look at the r isk-adjusted per formance across asset c lasses for the past one, three, f ive and ten years. The calculat ions that under l ie th is analys is use monthly data sourced from Bloomberg. Excess return is taken to be the annual ised return of the asset c lass for the relevant per iod above the r isk f ree rate which is calculated using the UK 3 Month LIBOR total return index. Volat i l i ty is the standard deviat ion of monthly excess returns. For a l l asset c lasses apar t f rom Investment Grade Credit and High Yie ld Bonds, total return indices are used to calculate the absolute returns. For Investment Grade and High Yie ld, interest rate hedging is assumed and the excess return over swaps is used for the excess return.

APPENDIX

1 yearAsset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio High Yield Europe ML EUR High Yield TR 13.3% 2.1% 6.46High Yield US ML US High Yield TR 11.5% 2.9% 4.01Leveraged Loans US S&P US LL index TR 5.3% 1.4% 3.88Risk Parity Salient Risk Parity Index 25.8% 7.1% 3.64IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 5.1% 1.5% 3.42IG Credit US ML US Corp Master - excess swap rtn 4.6% 1.5% 3.18Developed Market Equities MSCI Daily TR Net World USD 23.8% 9.6% 2.48EMD Hard Currencies JP Morgan EMBI 10.8% 6.9% 1.56Emerging Market Equities MSCI EM TR Index 14.1% 12.3% 1.14Commodities DJ-UBS Commodity Index TR 8.0% 8.8% 0.91UK Government Bonds Index-Linked FTSE actuaries uk index linked gilts TR all 3.3% 3.9% 0.83UK Government Bonds FTSE actuaries uk gilts TR all 1.7% 3.3% 0.53Hedge Fund-Macro HFRX Macro Index -1.6% 1.8% N/A

3 yearsAsset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio Risk Parity Salient Risk Parity Index 14.5% 9.3% 1.56High Yield US ML US High Yield TR 8.9% 6.4% 1.40High Yield Europe ML EUR High Yield TR 10.4% 9.1% 1.14Leveraged Loans US S&P US LL index TR 5.1% 4.7% 1.09EMD Hard Currencies JP Morgan EMBI 7.3% 8.1% 0.90Developed Market Equities MSCI Daily TR Net World USD 11.5% 13.8% 0.83IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 3.0% 3.6% 0.83UK Government Bonds FTSE actuaries uk gilts TR all 4.1% 5.3% 0.77UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 5.8% 7.6% 0.76IG Credit US ML US Corp Master - excess swap rtn 2.6% 4.0% 0.64Emerging Market Equities MSCI EM TR Index -0.7% 19.7% N/AHedge Fund-Macro HFRX Macro Index -2.4% 2.8% N/ACommodities DJ-UBS Commodity Index TR -5.5% 15.2% N/A

5 yearsAsset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio High Yield US ML US High Yield TR 13.6% 6.8% 2.01Risk Parity Salient Risk Parity Index 14.7% 7.9% 1.85High Yield Europe ML EUR High Yield TR 14.8% 9.5% 1.55Leveraged Loans US S&P US LL index TR 8.1% 5.5% 1.47EMD Hard Currencies JP Morgan EMBI 10.1% 7.3% 1.38IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 3.6% 3.5% 1.03IG Credit US ML US Corp Master - excess swap rtn 3.8% 3.8% 1.00Developed Market Equities MSCI Daily TR Net World USD 14.6% 14.7% 1.00UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 6.7% 6.9% 0.96UK Government Bonds FTSE actuaries uk gilts TR all 4.0% 5.3% 0.75Emerging Market Equities MSCI EM TR Index 8.9% 19.1% 0.46Commodities DJ-UBS Commodity Index TR 1.6% 15.2% 0.11Hedge Fund Macro HFRX Macro Index -3.0% 3.7% N/A

10 yearsAsset Class Benchmark Index Excess Return (% p.a) Volatility(% p.a) Sharpe Ratio Risk Parity Salient Risk Parity Index 9.9% 10.1% 0.98EMD Hard Currencies JP Morgan EMBI 7.4% 9.1% 0.82High Yield US ML US High Yield TR 6.8% 10.6% 0.64UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 3.9% 7.2% 0.54High Yield Europe ML EUR High Yield TR 6.8% 12.6% 0.54UK Government Bonds FTSE actuaries uk gilts TR all 2.4% 5.2% 0.47Emerging Market Equities MSCI EM TR Index 9.9% 24.3% 0.41Leveraged Loans US S&P US LL index TR 3.2% 8.9% 0.36Developed Market Equities MSCI Daily TR Net World USD 5.2% 16.5% 0.31IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 0.5% 4.4% 0.12IG Credit US ML US Corp Master - excess swap rtn 0.4% 6.0% 0.06Commodities DJ-UBS Commodity Index TR -1.2% 18.4% N/AHedge Fund-Macro HFRX Macro Index -1.5% 7.2% N/A


4 Members

Investment Consulting

7

5

7

Manager Research

ALM & Investment Strategy

Technology

Operations Education &Communication

54 AMAZING EMPLOYEES

W E W E R E T H E F I RST C O N S ULTA N C Y TO B R I N G R I S K M A NAG E M E N T

Named after the visionary actuary Frank Redington, the developer of Immunisation Theory, Redington was founded in May 2006 by Dawid Konotey-Ahulu and Robert Gardner.

OCT 2006 DEC 2006

DEC 2007

JULY 2008JUN 2008

SEPT 2008

OCT 2009JAN 2010

SEPT 2011OCT 2011

NOV 2011

SEPT 2009

Authorisation granted

Gets its client

Redington staff: 5

E u r o p e a n P e n s i o n s A w a r d s: Winner of European Breakthrough Firm of the Year

Financial News Awards:Specialist Investment Consultancy of the Year

Global Life & Pension Awards:#1 In ALM/LDI #2 in Manager Selection #3 in Strategic Advice #3 Overall Consultant

Assets under consulting of £150,000,000,000

Financial News Awards

European Pensions Awards

Best Consulting Firm of the Year

JUL 2011 Launched

Assets under consulting

Redington staff: 21

Assets under consulting: £30,000,000,000Redington moves to Mallow Street offices

Redington staff: 36Assets under consulting: £80,000,000,000

Redington expands team to 45

Best Consulting Firm (non-asset allocation issues)

Risk Management Firm of the YearLife & Pensions Risk Awards

(£200,000,000,000)

1611

JUN 2012 European Pensions AwardsRisk Management Firm of the Year 2012

Pension Consultancy of the Year 2012

MAY 2012 RedBlog was listed as one of the Guardian’s 2012 must-read finance resources.

NOV 2012 Redington implements seven step framework

N

In 2012 we also launched RedSTART, a financial literacy programme

tackling young people’s failure to save. Our consultants provide free

educational training days to students at local schools to help them prepare for

September 2012 Redingtons Co-CEO Robert Gardner abseils down the tallest

building in Europe, “The Shard” to raise 25k in support of Commando Spirit

Sean (Age-13) -Lister Community School

69 years experience as actuaries 257 years capital markets experience

OUR STAFF HAVE A WEALTH OF COMBINED EXPERIENCE INCLUDING

MAY 2013

JUN 2013

JUL 2013Assets under consulting in excess of (£270,000,000,000)

PENSION WEEK’S PENSION AND INVESTMENT PROVIDER AWARDS (PIPA)

Best Investment Consultant 2013

Global Investor / ISF

1st

A L M Development

European Pensions European Consultancy of the Year

European Risk Management Firm of the Year

Global Investor/ISF Awards

Pension Consultancy

of the year 2013

TECHNIQUES FROM INVESTMENT BANKING INTO THE WORLD OF PENSIONS.


Stay up to date with our latest thinking

www.redington.co.uk

Previous Editions

More Redington Publications

Discla imer

The informat ion herein was obtained from var ious sources. We do not guarantee ever y aspect of i ts accuracy. The informat ion is for your pr ivate informat ion and is for d iscussion purposes only. A var iety of market factors and assumptions may af fect th is analys is , and this analys is does not ref lect a l l possible loss scenar ios. There is no cer tainty that the parameters and assumptions used in th is analys is can be dupl icated with actual t rades. Any histor ical exchange rates, interest rates or other reference rates or pr ices which appear above are not necessar i ly indicat ive of future exchange rates, interest rates, or other reference rates or pr ices. Neither the information, recommendat ions or opinions expressed herein const i tutes an of fer to buy or sel l any secur i t ies, futures, opt ions, or investment products on your behalf . Unless otherwise stated, any pr ic ing informat ion in th is message is indicat ive only, is subject to change and is not an of fer to t ransact . Where relevant , the pr ice quoted is exclusive of tax and del iver y costs. Any reference to the

terms of executed transact ions should be treated as prel iminar y and subject to fur ther due di l igence.

Redington L imited is an investment consultant company regulated by the F inancial Conduct Author i ty. The company does not advise on al l impl icat ions

of the t ransact ions descr ibed herein. This informat ion is for d iscussion purposes and pr ior to under taking any t rade, you should also discuss with your

professional , tax, account ing and / or other re levant advisers how such par t icular t rade(s) af fect you. A l l analys is (whether in respect of tax, account ing,

law or of any other nature) , should be treated as i l lustrat ive only and not re l ied upon as accurate

©Redington L imited 2014. A l l r ights reserved.

Issue 1 Issue 2 Issue 3 Issue 4

If you would like more details on the topics discussed, please contact your Redington representative or email [email protected]

risk-adjusted return: q2 2014

Economy & Finance